Should I Refinance a Very Old Mortgage?

November 2, 1998 "I am a 62 year-old widow living on a fixed income� I have thought about refinancing my home while the rates are low� I have about 10 more years to pay on my 8.5% loan and payments are currently $300 monthly. Am I wise or foolish to try to refinance? I am hesitant but really need to lower my payments." From the numbers you gave me, you have a loan balance remaining of only about $24,000. I did a spreadsheet analysis, which indicates that from an investment point of view -- if your objective is to leave as large an estate as possible - refinancing is a loser. Refinancing costs put a heavy burden on the transaction because of the small loan balance. Furthermore, with only 10 years to go, a large part of your current monthly payment is being used to reduce the loan balance, whereas if you refinance more of it will be going to pay interest. If your objective is to have more disposable income now, however, you can indeed accomplish this by refinancing. On a new 30-year loan at 7%, the payment is only $160. Your bargaining power is not very strong, however, because of the small amount involved, and you may have to accept a high rate on the new loan to keep the costs within reason. Yet even at 8.5%, the payment is only $185. You should shop several lenders by specifying a rate to them and getting them to stipulate the total settlement costs. Then, take the best deal you find to your current lender for his best offer. Copyright Jack Guttentag 2002

Jack Guttentag is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. Visit the Mortgage Professor's web site for more answers to commonly asked questions.

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