How far into a 30 year fixed-rate mortgage is too far to consider refinancing, given the historically low rates now available?

The interesting phenomenon of a 30 year fixed-rate loan is that at the beginning of the loan your payments are almost all interest and towards the end of the loan your payments are almost all principal. However there is a reason for that and that is that you pay the interest every month on the outstanding principal balance so that each month as the principal balance is reduced the interest is less which in a fixed monthly payment permits a greater payment to principal. It is a nice feeling when you start to see that more principal is being paid than interest. However if you refinance and if you have your loan have an amortization consistent with the balance of the term of your existing loan, you should still be able to amortize it based on the original maturity date and you should wind up paying less interest than you would on your current loan. The question is how much would you have to pay in closing costs in order to get the new loan. It's a numbers game. If you calculated the interest on the remaining term of your loan and how much you would save by having a reduced rate of interest you would have to further reduce that number by the closing costs. If it comes out approximately the same you would be better off not refinancing. Conversely if you would still have big savings you may wish to consider refinancing. Don't forget that interest is deductible on your federal income taxes so you need to take into account in calculating what the net after-tax savings will be.

If you have questions about this or any other real estate matter, please contact Tom Bennett at (617) 531-6574 or tvb@barronstad.com.