Q. I have an interest only loan, fixed for five years, and we're not sure if we'll be staying in this house for more than five years. We have $60,000 in the bank from the sale of our old house and a $532,000 mortgage. Should we refinance (there is no prepayment penalty) and put that $60,000 toward our principal or just keep the current loan and invest the $60k somewhere else?
A. It's tough for us to give you a definitive answer because we don't know enough about your loan and finances, such as the interest rate on your first mortgage or how much other savings you have.
But here's some general guidance:
If your mortgage is for 7% or more, you should at least look into refinancing. The average rate for jumbo loans (loans greater than $417,000) is 6.41%, and if your credit is good you can do better than that, probably just a little over 6%. If, for example, your current loan is charging 7%, you'd be paying about $3,103 a month in interest. Refinancing at 6.1% would save you about $400 a month, more than enough to offset the cost of refinancing in less than a year. Probably a lot less than a year.
We don't know how much savings you have, but a critical step towards financial security is having at least three to five months worth of income in savings. The $60,000 left from the sale of your former home could provide that for you. You should have no problem finding six-month to one-year CDs paying 5% or more. Our rate tables are an excellent place to start. They allow you to compare the best rates from local and national banks.
Even if you stick with your current mortgage and put the extra $60,000 into a rainy-day fund, you will still have the opportunity to rethink your financial situation when you sell and move, or when the interest-only part of your mortgage expires and you have to begin repaying the principal. That is another natural time to consider refinancing.
By: home-equity.interest.com
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