Refinance a 30 yr. mortgage to 15 yr. if paying off soon?

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Refinance a 30 yr. mortgage to 15 yr. if paying off soon?

Postby johnoutk » Thu Jan 17, 2008 10:08 am

Just wanted some opinions about this. Background: Maxing at-work tax-deferred retirement plans, have emergency funds in place, also doing a decent amount of taxable investing. Am thinking about paying off house in an aggressive time frame. We are 3 years into a 30 year mortgage. Initial loan was 290K at 5.625%. Paid down the principal last year to get rid of pesky PMI. Have paid off some more principal and was thinking about paying off the house in about 5 more years. Current principal is 220K. With the decrease in principal we have already knocked 7 years off the 30 yr.

Now, I was thinking that with an aggressive plan to pay off the house it might make more sense to refinance into a 15 yr. mortgage so that more of the monthly payment goes to the principal to help decrease it faster, since we're gunning for 5 years to pay it off. Would this likely be beneficial, or with the aggressive time frame of 5 more years would we not gain that much and be better off staying in the 30 yr.?

TIA,

John
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Postby Ted Valentine » Thu Jan 17, 2008 10:24 am

I don't think you should pay to refinance your house. That would be money down the drain. It sounds like you're already on an aggressive payoff schedule. If you want a 15 year payment just go to bankrate.com and do your own 15 year amortization. It would be no different than if you refied it except your rate might be lower (although not by much) and you save the closing costs. If there should be a job loss or your income goes down then you always have the 30 year payment to fall back on.

Congrats to you.
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Postby petercooperjr » Thu Jan 17, 2008 11:18 am

All the official length of the mortgage gives you is the minimum amount of principal you're forced to pay. Paying on a more aggressive schedule just means that you have a shorter mortgage on your own. The only reason to refinance to a shorter mortgage would be if it also came with a lower interest rate.
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Postby jhh9327 » Thu Jan 17, 2008 11:40 am

Is their a general rule about the interest rate drop needed to look at refinancing? I am in a pretty similar situation as the OP with similar goals, but have a rate of 6% of my current 30 year (about 2 years in and have $250K left on a $290K mortgage).
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Postby greg24 » Thu Jan 17, 2008 11:42 am

Dropping to a 15 year would likely lower the OP's interest rate.

But whenever I consider doing the same thing, I tell myself this: it'd be more worthwhile for me to take the $500 to $1000 costs of a refi and putting that directly towards the principal. :)
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Postby tfb » Thu Jan 17, 2008 11:57 am

Do a no-point-no-fee refi. The rate is slightly higher than a normal refi with closing cost but as long as the rate is still lower than your 30-year, you have nothing to lose. Then if the rate drops again, you repeat. I call this "stepping down the ladder." I've done this in .25% increments like four times in the last five years. I'm contacting my broker to see if I can do it again now.
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Postby Ted Valentine » Thu Jan 17, 2008 1:22 pm

tfb wrote:Do a no-point-no-fee refi. The rate is slightly higher than a normal refi with closing cost but as long as the rate is still lower than your 30-year, you have nothing to lose. Then if the rate drops again, you repeat. I call this "stepping down the ladder." I've done this in .25% increments like four times in the last five years. I'm contacting my broker to see if I can do it again now.


Even if you get no points/no fees doesn't one still have to pay 3rd party costs like title insurance, closing services, tax service, local taxes and recording costs?
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Postby Rodc » Thu Jan 17, 2008 1:36 pm

Ted Valentine wrote:
tfb wrote:Do a no-point-no-fee refi. The rate is slightly higher than a normal refi with closing cost but as long as the rate is still lower than your 30-year, you have nothing to lose. Then if the rate drops again, you repeat. I call this "stepping down the ladder." I've done this in .25% increments like four times in the last five years. I'm contacting my broker to see if I can do it again now.


Even if you get no points/no fees doesn't one still have to pay 3rd party costs like title insurance, closing services, tax service, local taxes and recording costs?


I think there are lenders that let you roll that into your refi.

**********

Seems to me that it is easy enough to simply check if refi will reduce the interest payments each month or not. You then can decide if the hassles of a refi are worth the savings.

I don't think you want to pay to refi since you might calculate that you will be savings money if you keep the house more than, oh, say 3 years, but end up refi again in 2 years because rates are down again (or you have an emergency and need to pull equity out, whatever).

One thing to keep in mind, this can be either a pro or a con depending on how you view things, but if you refi to 15 years or whatever, you are locked in. If you have a cash flow problem for a couple of months you have to make the higher payments, whereas if you keep your current mortgage and just make higher payments, you can skip the extra for a couple of months.
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Postby tfb » Thu Jan 17, 2008 2:38 pm

Ted Valentine wrote:Even if you get no points/no fees doesn't one still have to pay 3rd party costs like title insurance, closing services, tax service, local taxes and recording costs?


No. All closing costs are covered by the interest rate and the closing cost is NOT rolled into the principal owed. The only thing you have to pay at closing prepaid interest for a partial month. Basically you are getting a loan with negative point. The negative point pays for the closing cost. For the negative point, you sacrifice a little (~0.25%) on the rate. But it gives you freedom to refi again even if the rate drops just a little bit.
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No cost refi?

Postby zzzz » Thu Jan 17, 2008 3:03 pm

Any recommended companies for the no cost/no points refi?
Thanks,
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Postby AshKK » Thu Jan 17, 2008 3:24 pm

John,

I will try the mortgage professor's website for comparing two mortgages. In particular, the calculators 2a and 9c might be helpful.
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Postby tivattom » Thu Jan 17, 2008 5:08 pm

I've had luck at my credit union with a "loan modification." Basically it allowed me to modify my loan to the lower interest rate (from 8 to 6% at the time) for a $250 fee.

This move paid for itself in about 4 months. It would probably be worth a call to your mortgage company to see if they offer a similar program.

Tom
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Postby Peppe » Thu Jan 17, 2008 5:24 pm

Penfed is a popular lender on fatwallet finance.

https://www.penfed.org/productsAndRates/mortgages/mortgageRatesListing.asp

15yr fixed was at 5% no points yesterday. No closing/cost fees outside of points as long as the loan closes. Its up a little today to 5.125 w/ 0 points.

They also have a 5/5 Arm, which is an interesting product that is a 5 arm that adjusts every five years to an index or the current 5 year arm rate whichever is lower...
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Postby johnoutk » Thu Jan 17, 2008 11:11 pm

Thanks for the replies. I looked at the numbers a bit closer. Right now, roughly $525 a month goes toward the principal. My total mortgage payment is $2,340 a month.

Assuming 220K principal, a 15 year loan at 5% interest, I would start putting $823 a month toward the principal before any extra money, and I estimate my monthly payment at $2,365. It seems like refinancing may be a pretty good idea, unless I'm not doing something right?
Last edited by johnoutk on Fri Jan 18, 2008 12:19 am, edited 1 time in total.
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Lower Payment

Postby larmewar » Thu Jan 17, 2008 11:40 pm

If you refi to a 15 year loan and have a financial or employment setback, you can't go back to the lower payment.

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Same situation; refinanced from 30 year to a 10 year fixed

Postby Eric White » Fri Jan 18, 2008 12:03 am

I was in the same situation ~2 years ago. Tax deferred accounts maxed (401k, 403b, IRAs), 529 matching tax deferral maxed ($10,000 in NYS), emergency fund funded. From there, your only realistic options are a taxable account, mortgage principal payments, or refi.

When you look at interest-to-total payment ratio charts of a 30 year fixed loan, it's pretty mindblowing. The opportunity is just tremendous when you compare it to a 10 or 15 year fixed chart. Although you get the tax benefit for that interest you're paying with the 30 year, you're still paying at least 60% of that interest every month. And at the worst possible part of that curve. The NPV of a principal-only payment is horrible for a 30 year mortgage because the future value of money in 30 years is nothin'.

Moving to a shorter duration just demolishes that curve from a fairly exponential curve with an extremely high initial interest to a much more gradual curve with a reasonable starting point.

I only have 7 years left. Best decision I ever made. Let that emergency fund do what it's supposed to do: provide you support in times of EMERGENCIES. Don't double insure with both an emergency fund and a long duration mortgage. If you're worried, that means you need to eat out less and sink more into that emergency fund :wink:

As a result, I've saved even more since I'm used to minimal discretionary income. It's also a good behavioral tool for the wife's spending habits 8). As a result, I even have a taxable account to boot now in order to avoid Home Equity Line of Credit pulls for home projects.

I like to think of it this way: I take the risk of getting thrown out of my house. If I ever defaulted, the bankers can simply put it back up on the market and sell quickly because the house is very liquid and reasonably priced. WHERE ARE ALL THE HOMEOWNERS' YACHTS?

Cheers,
Eric
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Postby LH » Fri Jan 18, 2008 2:10 am

tfb wrote:Do a no-point-no-fee refi. The rate is slightly higher than a normal refi with closing cost but as long as the rate is still lower than your 30-year, you have nothing to lose. Then if the rate drops again, you repeat. I call this "stepping down the ladder." I've done this in .25% increments like four times in the last five years. I'm contacting my broker to see if I can do it again now.


Thats a neat trick.
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Postby Rodc » Fri Jan 18, 2008 7:36 am

LH wrote:
tfb wrote:Do a no-point-no-fee refi. The rate is slightly higher than a normal refi with closing cost but as long as the rate is still lower than your 30-year, you have nothing to lose. Then if the rate drops again, you repeat. I call this "stepping down the ladder." I've done this in .25% increments like four times in the last five years. I'm contacting my broker to see if I can do it again now.


Thats a neat trick.


It is a neat trick provided you don't keep refi to 30 years (or keep refi to 15 years, etc).

This is only a good idea if, for example if after two years you refi a 30 year to a 28 year, and then if you refi two years later to a 26 year, etc.

Better yet, if you refi to years into a 30 year down to 25 years, etc.

Even though you may have trouble doing this directly, (does anybody offer a 28 year mortgage?) you can do this by taking money out on the refi and immediately using it to pay down principle - now you have the payments for a loan of X, but you only owe X-Y.
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Postby tfb » Fri Jan 18, 2008 11:38 am

Rodc wrote:It is a neat trick provided you don't keep refi to 30 years (or keep refi to 15 years, etc).

This is only a good idea if, for example if after two years you refi a 30 year to a 28 year, and then if you refi two years later to a 26 year, etc.


If you have 13 years left on your 15-year mortgage and your refi extends it to 15 years, you can still pay the same monthly payment you made before the refi. The extra will go to principal and you will pay if off faster than 13 years because the interest rate is lower now.
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Postby Rodc » Fri Jan 18, 2008 11:50 am

tfb wrote:
Rodc wrote:It is a neat trick provided you don't keep refi to 30 years (or keep refi to 15 years, etc).

This is only a good idea if, for example if after two years you refi a 30 year to a 28 year, and then if you refi two years later to a 26 year, etc.


If you have 13 years left on your 15-year mortgage and your refi extends it to 15 years, you can still pay the same monthly payment you made before the refi. The extra will go to principal and you will pay if off faster than 13 years because the interest rate is lower now.


Yes, that is another perfectly good way to do it - the key however one achieves it is to not let the end date drift off ever farther into the future.
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Postby risharinga » Sat Jan 19, 2008 4:19 am

johnoutk thanks for starting the thread. This one got some nice informative replies.

I too have been contemplating a refinance and am looking to go from a 30 yrs to a 15 yrs loan. Have recently made a move to increase my emergency funds and as soon as that is done I was hoping to refinance.
I do not intend to stay in the current house for more than 4 years. But I was thinking that a no-fee refinance would still be worth it. Would others agree?

www.penfed.org and www.virtualbank.com are the two sites that I have found with the good rates. For people that are eligible, www.usaa.com seems to have the best rates.
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Postby johnoutk » Sun Jan 20, 2008 8:51 pm

What is a reasonable amount to pay in closing costs on a loan such as this?
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Postby Boris » Mon Jan 21, 2008 3:10 pm

Been calling banks all morning long to find out what they offer for no-point-no-fee refi and it's not looking good from the major/"blue chip" players, however I called one place (Alpine Mortgage Company), which I found on BankRate.com and they're offering me a 5.625% no-fee-no-points 30-year. Sounds too good to be true, but I guess time will tell. Anyone else have any insight? I'd love to lower my rate for free!

I'm just curious, if I'm on an accelerated repayment plan, is there a calculator that could tell me at what point it maybe actually worth paying for a refi?

Thanks,

Boris
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No-fee/No-cost Mortgages?

Postby Taylor Larimore » Mon Jan 21, 2008 3:38 pm

Hi Bogleheads:

Before seeking a no-cost mortgage (obviously a misnomer), it may be helpful to read this article by The Mortgage Professor:

http://www.mtgprofessor.com/A%20-%20Options/no-cost_mortgages.htm

Best wishes.
Taylor
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Postby RTR2006 » Mon Jan 21, 2008 4:10 pm

Keep it simple. My suggestion is to keep your mortgage as is and pay it off as aggressively as you can. You could refinance to what I'd call a "forced 15" but if you lose your job in 6 months or 3 years you are forced to make that larger payment when you may not want to or be able to. Keeping it at 30 means you can bump up the payment when you want to, not because you have to.

In your lifetime it won't matter if your loan was at 6.25 or 5.875% after your house is paid off and yours free and clear. Trust me, I know...

:D

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I refi'ed to a 15

Postby rpike » Mon Jan 21, 2008 7:59 pm

but I was already down to 20 years of the original 30 year mortgage and the rate was significantly lower than my original mortgage so that re-amortizing the remaining balance from 20 years down to 15 left me with approximately the same payment but 5 fewer years to pay.

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Re: I refi'ed to a 15

Postby Ted Valentine » Tue Jan 22, 2008 1:23 pm

rpike wrote:but I was already down to 20 years of the original 30 year mortgage and the rate was significantly lower than my original mortgage so that re-amortizing the remaining balance from 20 years down to 15 left me with approximately the same payment but 5 fewer years to pay.

Another Rick


The OP already has a very good rate already. I'm skeptical the new rate will be good enough to warrant the refinancing costs. He'll probably pay it off himself or get very close by the time he makes up the difference in the refinancing cost. with the lower rate.

I don't have all the facts, but its close. On a 5 year horizon, he's going to need a maximum rate of 5 1/8 and closing costs rolled in not to exceed $4,000 to come out ahead.
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Postby johnoutk » Tue Jan 22, 2008 1:31 pm

I've been trying to figure out what the breakpoint would be for this. I think we're targeting a 5 year plan to pay it off. My local bank quoted me 5% for a 15 year loan, with closing costs of $1,300 - 1,400. I don't know how to figure it out - if we'd save $1,400 by refinancing into the new loan. I'm sure there's a way to do it, but there are a lot of variables involved.
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Postby Valuethinker » Tue Jan 22, 2008 1:35 pm

johnoutk wrote:I've been trying to figure out what the breakpoint would be for this. I think we're targeting a 5 year plan to pay it off. My local bank quoted me 5% for a 15 year loan, with closing costs of $1,300 - 1,400. I don't know how to figure it out - if we'd save $1,400 by refinancing into the new loan. I'm sure there's a way to do it, but there are a lot of variables involved.


I'd run with the existing loan-- it doesn't sound like the cost/ benefit will be huge of shifting, and you have greater flexibility this way (suppose one of you is injured or cannot work, you are in a better position than if you were on a 15 year loan).
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Postby Boris » Tue Jan 22, 2008 1:36 pm

johnoutk wrote:I've been trying to figure out what the breakpoint would be for this. I think we're targeting a 5 year plan to pay it off. My local bank quoted me 5% for a 15 year loan, with closing costs of $1,300 - 1,400. I don't know how to figure it out - if we'd save $1,400 by refinancing into the new loan. I'm sure there's a way to do it, but there are a lot of variables involved.


Wait a little... with today's cut your local bank may offer you a better rate tomorrow :). Who's your local bank, by the way? I'm thinking of going with a refi also, but need to figure out at what point it's worth it based on a prepayment schedule.

Anyone know how to figure it out? Can provide all the details if someone can help. Don't want to hijack John's thread, so willing to go to PM.

Thanks,

Boris
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Postby johnoutk » Tue Jan 22, 2008 10:41 pm

Was finally able to do the calculations after stumbling upon a more complete mortgage calculator on countrywide.com where we currently have our loan.

Ran it to payoff loan in 5 years time. In our current loan we would have to pay off an additional $2,669.95 per month over five years, (total paid per month minus property tax would be $4,239). The total amount paid by us, excluding property tax, over 5 years would be $254,435 (current principal is 221,339).

If we refinanced at 5% for 15 years and targeted the same 5 year payoff, our total payment per month, excluding property tax, would be $4,125 a month. The total paid by us over 5 years would be $251,039.

So if we paid our house off in 5 years, refinancing would save us $3,396. The local bank I spoke with said closing costs would run $1,400. So refinancing would save us roughly $1,996 over that time period. I'm giving it some more consideration as the paperwork is such a pain, and I'd like to see the rates slip a little more.

Boris, the local bank I spoke with is Lincoln Federal Savings, but their Omaha branch.
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Postby Jadzia » Sat Feb 02, 2008 8:15 pm

I am bumping this thread because I am in a similar situation and I need some advice on what to do.

We have no debt except for the house and I was thinking it might be a good idea to get aggressive about paying it off early. We now have 27 years left of a 30 year mortgage, with a balance of about $150K at 6%.

I have the opportunity to refinance to a 15 year at 5.25%. The amount of interest we would save would be enormous. Even if we paid the same extra amount as the new payment towards our 30 year mortage, it would still save us around $20,000 over the life of the loan. We would also be finished with our mortage the same year as our son turns 18 which would be great.

The mortgage broker is covering all their costs, and I would only need to pay for the titlework, etc. so closing costs would be very minimal. (~$1000).

My only consideration is the "locking in" of the higher payment. (I would like to eventually be a SAHM or make a career change). However, we do have adequate emergency savings and I am fortunate to have family that could help in the case of a dire emergency. In a way, I think having the forced higher payment would force us to cut back in other ways and save money where we might not unless we had to. The new payment would only be about $300 more, which I am sure we could cover by tightening the food budget. Plus, our 3yo son attends Montessori pre-school, and once he starts public school kindergarten in 2 years we will start saving quite a bit there.

Do you think I should refinance?
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Good Evening

Postby haban01 » Sat Feb 02, 2008 8:41 pm

I would do the re-finance for the 15 year loan. I know of many people who have done this. Yes, it cost $300 per month extra now but in three years it will seem routine and you will have forgotten what your old payment was. Bankrate.com has excellent mortgage amatorization charts that show your monthly payment breakdown (principal vs. interest), so you can see how much less in monthly interest you are picking up with a 0.75% interest rate. I've found that the break-even point was around 1.5 years and everything after that was gravy.

I wish you the best of luck in your choice! You will be much happier when it is done!!


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Postby uspeed » Sat Feb 02, 2008 9:24 pm

Refinancing the loan will start your amortization right from the begining. In the begining years, they have more money goes towards Interest. So better find a way to pay more toward captial every month, so that you paid off in 15 years.

e.g if you have 5 year arm and refinance at end of 5 year, and continue to do every time i.e 6 timers., then you can never able to pay of the loan in 30 year.
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Postby Otto » Sat Feb 02, 2008 10:24 pm

uspeed wrote:Refinancing the loan will start your amortization right from the begining. In the begining years, they have more money goes towards Interest. So better find a way to pay more toward captial every month, so that you paid off in 15 years.

e.g if you have 5 year arm and refinance at end of 5 year, and continue to do every time i.e 6 timers., then you can never able to pay of the loan in 30 year.

That is just a function of the length of the loan and the interest rate. It's not something "they" restart.

In the above situation, about $200 p/ month would currently be going to principal at this point in the loan and increasing with each payment. If the person increased the total loan payment by $300 p/ month, $500 would be going to principal and the loan would end in approximately 15 years instead of 30.

If he/she refinances at .75% lower and for 15 years, more than $500 p/ month is going to principal and the overall interest paid is lower by about $20,000.00. Given the low cost of refinancing, I say it makes sense if they don't mind getting locked-in for the extra amount.
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Postby baw703916 » Sat Feb 02, 2008 11:04 pm

I refinanced a few years ago (the last time mortgage rates got really low) to a 15 year loan at 4.75%. Almost immediately, I was paying more principal than interest. It looks like from the numbers given, that the monthly payment from refinancing to a 15 year loan @ 5% would be virtually identical to what it currently is, just that an extra $300 would go to principal rather than interest.

So, the argument about going back to a lower payment doesn't really seem relevant--the payment would be pretty much the same as it is now. And, you can still go on paying extra as you are now. It's just that, if you were to get into a bind for some reason and had to scale back on the extra payments, it won't cost you as much, because the interest rate would be lower.

I can't really think of a downside to refinancing, other than the hassle. Of course, you may want to look around a little and see if you can beat the rate. I just happened to look at what my credit union's loan rates were (just for curiosity, not planning to refinance). They were 4.75% for a 15 year with an 0.5% origination fee.

Best wishes,
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a couple of things...

Postby mchampse » Sun Feb 03, 2008 4:01 am

1)AFAIK, if you re-fi into another 30 year loan, you can ask for a lower amortization period..i.e. if you are 3 years into your current loan, you can ask for a 27 year amortization so that the loan will still get paid off at the same time.

2)If you are truly confident that you can pay off the loan within 5 years, consider a 5 year ARM which might get you a better rate. I would only consider this if you are in a stable job situation, have an adequate emergency fund, etc.
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Postby jeffyscott » Sun Feb 03, 2008 2:17 pm

If you are confident that you will be able to pay off over 5 years, another option to look at would be a home equity loan. When were aggressively paying off a 15 year mortgage and had about 3 years to go, somewhat lower rates were available, but did not make sense to pay even the minimal $500 or so fee that our credit union would have charged to refinance. We, instead, "refinanced" by taking a fixed rate 3 year home equity loan with no fees at all.
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HELOC to pay off loan

Postby zzcooper123 » Sun Feb 03, 2008 4:09 pm

When rates get ultra low , like 2004, I use my HELOC to pay off my loan balance. Refinanced when rates went back up. Lowest rate was 3.75%. Your rate changes monthly, so there is some risk.
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