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We want to refinance; currently at 6.75% on a 30-year fixed. We are unsure how long we will be in the house but assuming at this time we will want to move within 7 years. I am looking to retire in 3 years. We have a relatively low mortgage ( 130k remaining/16 years left on loan). I have been putting off refinancing, but want to retire with as little as I can left to be paid on this home.

I know in refinancing we will be paying off less of the principal. Would it be more advisable to do a 10-year fixed given how low the rates are now and try to pay it off more quickly (7 years)? I realize of course our monthly payments will be higher.

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Think of your mortgage this way - you have a $130K 16 year mortgage, at 6.75%.

At 4%, the same payment ($1109 or so) will pay off the loan in 12.4 years. So, I agree with littleadv, go for a 15yr fixed (but still make the higher payment) or 10 yr if you don't mind the required higher payment. Either way, a refinance is the way to go.

Edit - My local bank is offering me a 3.5% 15 yr loan with fees totaling $2500. For the OP here, a savings of 3.25% or first year interest savings of $4225. 7 months to breakeven.

It's important not to get caught up in trying to calculate savings 15-20 years out. What counts today is the rate difference and looking at it over the next 12 months is a start. If you break even to closing costs so soon, that's enough to make the decision.

  • +1. It's all about how quickly the rate savings will cover the refinancing fees. – user14446 Apr 12 '14 at 4:32
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Refinance, definitely. Go for Fixed 15 years, which will leave you with the same remaining time for the loan that you have now, but a much lower interest (you can find below 4%, if you look hard enough). You might end up with lower payments and higher portion of interest to deduct from your taxes. win-win.

If you're confident you're able to pay it off within 7 years, you can get an even better rate with an ARM 10/1 or 7/1.

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I would think it depends on when within the 7 years you're planning to move. If you want to move within a year or two, the closing costs for the new mortgage may postpone the break even until after your move date; that wouldn't be a financially smart decision.

If your plans suggest you're going to move after the break even point I'd definitely refi sooner rather than later and would try to reduce the term, either by overpaying or by choosing a 15 year mortgage that should have an even lower interest rate anyway.

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    With a potential savings of close to 3%/yr, it shouldn't take too many months to breakeven to whatever the closing costs. I've seen no point/no closing in the low 4's recently. The potential savings is too big to ignore. – JTP - Apologise to Monica Oct 25 '11 at 23:05

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