If refinancing, compare 30-year, 15-year rates carefully

By Jeff Brown
Knight Ridder Newspapers

Kicking yourself for not refinancing your mortgage when rates hit bottom last spring? Well, don't miss your second chance.

Rates aren't quite as low as they were back then. But they haven't gone up as much as many experts had predicted. For that, you can thank the mixed economic news.

Wednesday, 30-year, fixed-rate mortgages averaged 6.2 percent, up from 5.6 percent in March, according to HSH Associates, the Pompton Plains, N.J., rate-tracking firm. The 15-year rate averaged 5.6 percent compared to March's 4.9 percent.

Which raises a question: How do you compare 15- and 30-year deals?

In comparing two loans of the same term -- for example, a 15-year loan you have and one you're thinking of getting -- you'd simply look at the monthly payments on each to see how much the one with the lower rate would save you.

Then you'd figure whether you'd keep the loan long enough for that saving to offset the costs of refinancing. Simple.

But it's not so simple when each loan has a different term. If the payment is larger on the 15-year loan, despite the lower rate, what would you save?

Over the life of the loan, you could save a bundle in interest by paying off the debt in 15 years instead of 30. Borrow $100,000 at 6 percent and interest will total $52,000. Borrow for 30 years at the same rate and interest will come to $116,000.

To clear things up, use a calculator from an Internet site such as HSH's: www.hsh.com.

You need to compare the interest portions of the two monthly payments, stripping out the principal portion.

Say you're borrowing $100,000. On a 15-year loan at 5.6 percent, the monthly payment would be $822. For the first month, that's $356 in principal and $466 in interest.

With a 30-year loan at 6.2 percent, you'd pay just $612 a month -- $96 in principal, $516 in interest.

By getting the 15-year loan, you'd save $50 a month in interest -- at the start.

After five years, you'd pay just $352 in monthly interest on the 15-year deal, compared to $482 on the other loan. That's because outstanding principal would be just $75,400 on the shorter-term loan, compared to $93,300 on the other.

You can use the month-by-month data in an amortization table to compare the total interest costs over the period you expect to have the loan.

Now consider another issue: If you got the 30-year loan and paid $210 less a month, what would you do with that money?

It really boils down to investment returns. The higher principal payment on the 15-year loan would, in effect, earn a return equal to the interest rate of 5.6 percent. That's because each dollar paid in principal would save you 5.6 cents a year in interest.

If you can get a higher return on another investment, it might well pay to get the 30-year loan and invest that $210 every month. Keep in mind, though, that the investment return from paying principal off faster is guaranteed, while investments with big returns, such as stocks, come with big risks.

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