Last time Sue refinanced her mortgage was six years ago. She received a 15-year fixed loan with 5.5% interest. Her monthly payment is $880, and Sue currently owes $38,000.
Sue is considering refinancing. She has been offered a 5-year fixed loan with 4.25% interest. You can check an online mortgage calculator and see that on a loan of $38,000, her monthly payments will be $700. The closing costs are $1,400. Should Sue refinance?
Seems like a no-brainer. The closing costs will be recovered in less than a year, and then the new mortgage payments will be pleasantly smaller than the old ones. In addition, the new mortgage will last five years instead of the nine years left on the old mortgage.
What is wrong with this solution? What fact about Sue’s old mortgage did I wickedly neglect to mention? You need to figure that out before you decide whether Sue should really refinance.Share: