Q: I have three years remaining on a 15-year loan with a 6 percent fixed rate. I would like a lower rate. Please advise which would be the best option. Thank you.
A: Refinancing can be a situation of diminishing returns after you reach a certain point of your mortgage. In your case, you note that have only three years remaining of an original 15 year term. With a $100,000 original loan amount at the 6 percent rate you cite, you were slated to spend about $52,000 in interest over the 15-year period. But now that you're starting year 13, you have already paid some $49,000 of interest, with only $3,000 left to go.
Certainly, you can get a lower interest rate if you refinance. However, your remaining loan balance is only about $27,000 (given the $100,000 example above), and few lenders will touch such a small loan. There's just as much paperwork for a small loan as a $400,000 loan, but a lot less interest to be made. Even if you do find a lender who will take on your loan, you'll be charged a premium on the interest rate or fees, which will eat up some of any savings you might be able to obtain. With only $3,000 left in interest cost, it will be nearly impossible to save any money once the refinance costs are paid, and even then, you'll need to obtain the shortest loan term you can and prepay the loan just to keep from increasing your costs over time.
For example, if you could obtain a 3 percent rate on a 10-year term, your $27,000 loan balance would see you spend about $4,200 in interest over the next 10 years, about $1,200 more than you presently owe, plus you'll have fees to pay on top. If you want to prepay the loan so the term isn't extended, preserving the savings of the lower interest rate, you'll need to prepay it at a rate of $500 per month. Doing so would lower the interest cost to $1,300, so you'll save $1,700 in interest, but still have the fees to obtain the loan to consider. The net benefit after all this work might be measured in only hundreds of dollars.
In short, technically yes, it can be done, but the benefits are so slight as to raise the question: "Why bother?"
You can run your particular numbers through our mortgage calculator to see for yourself.
A 25-year expert observer of the mortgage and consumer debt markets, Keith Gumbinger has been cited in thousands of articles covering a wide range of consumer finance and economic topics in outlets ranging from the Wall Street Journal to the Bottom Line newsletters. He has been a featured guest on national broadcasts for CNN, CNBC, ABC, CBS and NBC television networks and has been heard on NPR and other national and local radio programs. Keith is the primary researcher and writer for HSH.com's MarketTrends newsletter and has authored or co-authored a number of consumer guides on mortgages, home equity, refinancing and more.