Should I refinance my mortgage given my current financial situation?
I have 22 years left to pay on my mortgage of $167,000 with an interest rate of 5.25%. I'm 64-years-old and I have no other outstanding debts. My FICO score is currently 827. Is it worth it to refinance? Can I refinance the remaining 22 years instead of the entire 30-year mortgage?
Actually...yes. You should. With good credit (and I'm assuming good income to support the mortgage payment) you can get a much lower interest rate and have the lender pay all your closing costs. So, you could still lower your interest rate and either keep paying the same payment and therefore accelerate the mortgage (because rate would be less) or pay less and live larger...lol.
Hope that helps. Of course, as always, general advice and it's always more circumstantial.
Whether or not it makes sense to refinance depends on your goals and timeframe.
I know that the conventional wisdom that you've read (here and probably elsewhere) is to refinance the loan. Even with recent Fed rate increases, mortgage interest rates are unchanged and you'd likley find a conventional mortgage rate somewhere between the high 3% range to mid 4% range without many or any points. Such rates are certainly less than what you're paying now.
But the bigger question is: Will you be moving within a few years? You may want to retire and downsize for example. Incurring the costs for a refinance would not make a lot of sense in that case.
Another question to consider: Are you refinancing because you're looking to increase your cash flow? Obviously, at a lower interest rate for a 20-, 25- or 30-year term, you'll probably find the mortgage payment for a new loan based on a lower original principal amount than your current loan will likely bring your payment amount down. (NOTE: Most lenders will only offer loans in increments of five years so you won't likely find a 22-year term. You may always prepay to end your loan on the same time table).
I think that you should consider an option that increases your cash flow and releases the equity locked up in your home. You may want to look into retiree equity conversion loans. These types of loans are also referred to as "reverse mortgages" because the lender "pays" you and you are not required (but always have the option) to pay back principal or interest or both while still living in the property.
Such a strategy gives you more breathing room which will allow you to stretch your household resources. And by unlocking the equity, you can continue to live where you're at without needing to relocate or downsize (that's a quality of life issue that many retirees or soon-to-be retired folks like). And an equity conversion loan also allows you to maintain your separate investment portfolio longer. You can use the equity conversion loan to pay for things instead of taking taxable withdrawals from your investment or retirement accounts.
If you refinance your current $167,000 balance for a 20-year fixed term at 4.5% (just a guess), you'll pay about $1,056 per month for principal and interest. If you do the same but for a 25-year term, your payment will be $928. Obviously, in either case, you'll be paying more interest as this is a new loan. Yes, that is tax deductible (currently but that may change). How much of a difference is that from your current loan? Only you can tell. But think about how your cash flow improves if you didn't have to make a cash outlay for either. That's the power of an equity conversion / reverse mortgage.
AARP and Investopedia have great articles on such loans if you're interested.
Congratulations on having little debt and a great credit score!
Based on what you shared, I am guessing you bought a house in the $220,000 to $250,000 range 8 years ago, and that your monthly payment is in general area of $1100 - $1250 per month, depending on a few things. If we can use those numbers as a reasonable estimate, it's possible to compare how things would look if you refinanced.
Using BankRate.com today and using your credit score and loan balance, it looks like refinance rates for 15 year mortgages are around 3.45%, while 20 year rates are around 3.75%. (These numbers are certainly subject to your application).
Refinancing your outstanding balance to a 15 year term (7 years sooner than your current loan) at a 3.45% rate would make your principal and interest payment about $1190 per month. That option would likely save you a good deal of interest, by paying off the loan earlier and by paying lower interest each year.
Refinancing to a 20 year term cuts fewer years off the loan, but at the 3.75% rate would make the principal and interest monthly payment roughly $990.
To fully answer the question as to whether refinancing makes sense in your case, we would need more information. Your decision could be influenced by how much cash you have on hand for emergencies, whether you want to stay in the home long term, what fees are involved in refinancing the loan, your current monthly payment totals and budget, etc. It would appear, on the surface, that you would have the opportunity to potentially lower your monthly payment or shorten the loan, or maybe even both.
There are loan options out there to be 22 years or so. If you just want to pay less interest you can likely get a 20 year mortgage with a much lower interest rate and likely have a similar payment.
Be consious of the fees that the mortgage your choose will charge to accomplish the refinance.
Since you are nearing retirement age I would look at a 30 year mortgage- and just pay it down like a 22 year mortgage. This will give you more flexibility in the future to pay more or less depending your financial needs.
If you can get a significantly lower rate than what you are paying, then yes. This is especially true if you are planning to live in the house for a while. You may want to run the numbers to see if it is worth it. Calculate the amount you would be saving per month net of taxes and compare that to the fees and other costs that you are likely to pay for the refinancing. Divide the latter by the former to get an idea of how long you must live in the house to break even.
Whether you should go for longer maturity or shorter maturity is a tradeoff between how much mortgage payments you can afford on one hand (Longer maturity has lower payments) and the extra interest you would be paying for longer maturity on the other hand. With shorter maturity you can pay off the loan earlier- but you should look at the opportunity cost of directing more of your dollars towards paying off your mortgage.