Are there downsides in refinancing with 5 and 1/2 yrs left?

Question

I have 5 and ½ years left on my 15yr 4.75% mortgage. I originally borrowed $200,000, and according to the amortization table, I will pay a little over $12,000 in interest on the $86,000 left. I have the chance to refinance to a 3.25% rate for a 10-year loan with no closing costs with my present mortgage company. Would it be worth it to refinance and pay extra on the principal (to equal my present payment?) The way I figured it, I would save about $4K. Are there downsides?

Answer 1

By coincidence, I am in the midst of writing an article on this very topic, refinancing when there are just 5+ year left to go.

No closing costs? Any rate lower than what you have makes the deal profitable. I calculate you save $3847 over the 66 months. My last refinance took just about 2 hours, as I had my paperwork at the ready. Your only cost is your time. For 1/8%, it may not be worth the time, but 1.5% sure is.

As you note, if you keep the payment exactly the same, you'll end it a few months sooner. If, however, you can make better use of the $600/mo extra cash, you may consider that as well. "Better" is paying off a high rate car loan or credit card, or maximizing your 401(k) or IRA deposits.