Should I Refinance My Mortgage?

by Krantcents · 38 comments

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When does your bank call you and offer to refinance your mortgage for a lower rate?  Until last week, I would have answered, never!  I have a fixed rate mortgage that I am paying off it off in four (4) years why should I refinance?  The bank offered to lower the interest rate and pick up all the costs.  Refinancing a mortgage at a lower interest rate isn’t always the right decision.  What should I do?

What is the Goal? 

What will the refinancing do for me?  It will lower my mortgage interest 1% and lower my monthly payment.  Under normal circumstances, that sounds very attractive!  The monthly payment is meaningless to me since I am paying a higher payment to pay it off in four (4) years.  The current loan is a fifteen (15) year mortgage and I am repaying mostly principal near the end of the term.  Yes, mortgages amortize most of the interest at the front end of the loan.

History

For three (3) years, we rented out our personal residence and rented townhouses to determine if we liked townhouse living.  We were ready to make a decision, but my home was rented for another year.  The real estate market was improving and it was time to buy and not sell. In 1997, I downsized to a 2 Bedroom townhouse.  I went with a thirty (30) year mortgage and used my line of credit for the down payment.  In case you were wondering, I repaid the 20% down payment in ten (10) months.

I refinanced in 2004 with a fifteen (15) year mortgage for $140,000.  I did something that I would recommend to all of you.  I called my lender and negotiated a better than market deal.  Since I was negotiating with my existing lender, I felt they did not have to do all the paperwork a normal refinance may require.  In other words, I negotiated all the fees.  To my surprise, they went for all of it.  My goal in the refinance was to pay it off just prior to my retirement.  I accelerated my principal payments to reach my goal of paying it off by June, 2017.

Amortization

Mortgage amortization is the gradual elimination of a liability, such as a mortgage, in regular payments over a specified period of time.  Like most loans, you pay much more interest in the beginning years and less in the last few years. For example, over 50% of my monthly payment went to interest in the first year and drops to less than 18% in the eleventh (11th) year and dropping quickly!  Why do you need to know this?  Although I am saving one (1) percent, the interest is loaded into the first years.  My goal is still to pay off the loan by June, 2017.  It is a fifteen (15) year mortgage amortized in ten (10) years.

What’s the Decision?

The mortgage is a no cost mortgage!  The bank is paying all costs, but they still expect to make a profit.  There is no penalty for paying it off early!  The mortgage is small which means there is very little margin for the bank and I cannot negotiate.  Normally, I negotiate on everything because I usually have leverage.  It helps that I have excellent credit (800+ FICO score) which means I can go anywhere and get a good deal.  I checked out other banks and the rates are lower, but there are fees that cancel any advantage.

Mortgage interest rates are increasing and I do not want to leave any money on the table!  The difference in interest is $1,200!  It is just enough money to motivate me to refinance the mortgage.  My interest costs drop from approximately $5,700 to $4,500 for the remaining four (4) years.  It is just enough money to make it worthwhile to fill out some forms and sign some documents. Should I do it?   I still need to see the documents to make sure it is what I was told, but I will probably go ahead with it

Final Thoughts

When you refinance a mortgage, there are a lot of factors you should consider.  First, what is your goal?  Is it to lower your payments, shorten the term or get a fixed interest rate?  In my case, I will pay less interest and still pay off the loan by the same date.  I also have the option to lower my payment.  It is not my objective, but it comes with the refinancing!  Second, does it make financial sense?  Did you shop around and find the best deal you qualify for?  Since I originally wrote this article, I decided to not refinance.  Although the savings were tempting, I wanted to maintain my options of paying it off earlier.  The savings diminish considerably if I pay it off in three (3) years.  Would you refinance your mortgage for $1,200 savings net?

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{ 36 comments }

Holly@ClubThrifty June 18, 2013 at 5:44 am

We refinanced for similar reasons…. First, we refinanced from 5% to 3.25%. Then we did a no-cost refi with Amerisave to get the PMI off (first mortgage company wouldn’t remove it due toa technicality). Anyways, it was a pain both times but it ultimately saved enough money to make it worthwhile.

Krantcents June 18, 2013 at 7:50 am

I may be in a odd position of a a very small balance ($50K) and only 4 years left. Very few banks want to refinance and they all want to load up on interest. The biggest stumbling block is the re-amortization of the loan. The positive side is a lower payment, but I don’t want that. The negative is the interest is loaded onto the front end.

DC @ Young Adult Money June 18, 2013 at 5:47 am

Seems like a lot of people are talking about refinancing lately. I just bought a house last Fall so I obviously haven’t even thought about it. I doubt the rates will ever drop low enough for me to justify refinancing, though I clearly haven’t looked into it as much as you have, and it sounds like you have quite a bit of knowledge about the process.

Krantcents June 18, 2013 at 7:54 am

Thanks, I think we all become quick students when faced with money decisions. At least the good ones do!

Greg@Thriftgenuity June 18, 2013 at 11:12 am

I think I probably would for $1200. The paperwork is a pain, but what else could you do to make/save $1200? I am with you on not wanting to leave any money on the table. I am looking at our finances hard to see if we could squeeze in a rental this year before rates go up.

Krantcents June 18, 2013 at 12:22 pm

I turned it down to maintain the flexibility of repaying 90% principle.

John S @ Frugal Rules June 18, 2013 at 11:19 am

That is a very interesting situation to be in. If it really is what they’re telling you it is, then I can see how you’d be tempted to do the refi. I think it comes down to if it’s worth your time to save the $1200 as it will not impact when you’ll be paying it off. If it were me, I’d likely go for it as $1200 is still $1200.

Krantcents June 18, 2013 at 12:25 pm

It is more than the money because the re-amortization changes everything. I am repaying nearly 90% principle and it gives me the flexibility of paying it off sooner.

Pauline June 18, 2013 at 12:08 pm

That is awesome. I have had the same thing happen with my bank, after a few clicks on the online banking, it was refinanced with the same bank for a cheaper rate. I still wonder why they did it but it dropped the rate 0.7%.

Krantcents June 18, 2013 at 12:26 pm

I think the banks are keeping these loans because of the spread.

Suba @ Wealth Informatics June 18, 2013 at 3:07 pm

I have a question. Why would you refuse a no-cost refinance? Whatever you goal is, isn’t it a win anyway? You will reduce the interest which means even if you are paying it in 4 yrs you will pay lesser than what you would have with the old interest rate? If there are cost involved, yes, I understand it needs further thinking through, but a no-cost refinance I will go for it. But we just bought our first house so I am not that familiar with refinance, so may be I am missing something?

Krantcents June 18, 2013 at 3:59 pm

The $1,200 was an estimate about 3 weeks ago. When you re-amortize the loan, the interest is frontend loaded. I am already repaying at a lower rate because I paying additional principal payments. In other words, the difference is less. Since I am in the last years, I am repaying 90% principal, I like the flexibility.

Mike@WeOnlyDoThisOnce June 18, 2013 at 4:13 pm

It seems that if few banks want to do it, the general rule of thumb is that there is some incentive there for you to take advantage of their interest system. Let us know how things turn out!

Krantcents June 18, 2013 at 5:05 pm

Under normal conditions, I would probably agree with you. If I had a larger balance, it would be very advantageous. My monthly payment would be roughly half of what it is now.

The First Million is the Hardest June 18, 2013 at 6:16 pm

Your situation with a low balance and so few years left make it a tricky decision. I think like you I would have opted to stick with my current mortgage and focus on paying it off sooner. If that wasn’t in the cards for you, I think refinancing and saving $1200 over the last 4 years would have been a no brainer.

Krantcents June 18, 2013 at 7:15 pm

My retirement date at worst is June, 2017 and I may want to accelerate it. That is the main reason, I want the flexibility of keeping my existing loan.

PK June 18, 2013 at 7:13 pm

“Would you refinance your mortgage for $1,200 savings net?” – Yeah, that’s worth it. I imagine since you’re going with the same lender it would be much less harsh on the due diligence, paying dividends by not wasting a ton of your time.

My vote? Go for it!

Krantcents June 18, 2013 at 7:17 pm

Thanks, but I turned it down. I decided that the flexibility of paying it off early trumps the estimated savings. I am already making additional principal payments which lowers the interest rate.

Kim@Eyesonthedollar June 18, 2013 at 7:23 pm

I have never had a bank call me to refinance, but the former owner of my commercial property did a very similar thing. It was seller financed, so he held the note. It would have been paid off at the end of this year. It was a 10 year loan, so it had a pretty hefty monthly payment. He wanted to lower my interest rate, thus lowering my payment, but add 2 years to the loan. The numbers came out to equal exactly the same amount of interest either way. I decided to go ahead with it because I was cutting back my work schedule, and it left us more room in case things didn’t go as planned. So far, the old payment would have been fine, but paying less had allowed us to save more money and pay some toward other things. All in all, I’m happy with the deal, but it was a tough decision. You certainly have to look at all the variables.

Krantcents June 19, 2013 at 8:52 am

There is always more to some thing like this then it appears. For me, I like the increased flexibility of paying it off earlier by not refinancing.

Untemplater June 19, 2013 at 1:00 am

As you said there are lots of things to consider when refinancing. And sometimes it just doesn’t make financial sense and isn’t worth it.

Krantcents June 19, 2013 at 8:53 am

The savings on the surface seemed like a no brainer until I looked at the amortization.

My Financial Independence Journey June 19, 2013 at 2:51 am

If you are saving $1,200 at no cost to you, I would jump on it. That’s like passing up a $1200 check. But I would probably see if anyone else out there could give me a better deal first.

Krantcents June 19, 2013 at 8:56 am

I did check with a number of people including a mortgage broker. My small mortgage balance is a killer. All the banks want to load it up with fees, but all the deals will re-amortize the loan. If I wanted a lower payment, it would be no brainer.

Money Beagle June 19, 2013 at 5:22 am

Looks like you already posted your decision, that you decided not to, and I think as long as you have the motivation to pay it down early, you made the right call. Either way you’re in a position to have it paid off relatively soon (comparatively speaking) so I think in either case you win.

Krantcents June 19, 2013 at 8:58 am

I started repaying additional principal about 3 years ago to pay off the loan to coincide with retirement. I like the flexibility of paying it off earlier if I change my retirement date.

Daisy @ Prairie Eco Thrifter June 19, 2013 at 6:09 am

We have a pretty good interest rate, and monthly payment lowering to me is pointless (we would just re-direct the savings back to the mortgage) but I guess if we didn’t have a good interest rate we may eventually re-mortgage. I anticipate wanting to do so at least once before they raise the rates.

Krantcents June 19, 2013 at 9:01 am

A (Financial) part of me wants to have a mortgage forever so I can have my money working for me. Another (conservative) part of me realizes, it is better to have it paid off in retirement.

Joe @ Stacking Benjamins June 19, 2013 at 10:17 am

Excellent! People might want to hurry, too. Interest rates seem to finally be on the rise….

Krantcents June 19, 2013 at 10:43 am

Thanks, I agree and have said so for roughly 6 months.

Andy Hough June 19, 2013 at 2:36 pm

If you are saving $1200 then I think it is worth it. Since it is no cost it seems like a pretty good deal.

Krantcents June 19, 2013 at 5:26 pm

My first concern was paying off my loan by 6/2017. Refinancing would change the amortization and limit my ability to pay it off earlier. The $1,200 was an estimate and I decided the pay off was more important than the savings.

Buck Inspire June 20, 2013 at 5:06 pm

I hate mortgage paperwork so my initial answer is no. However, $1200 is not chump change and especially with the stock market selling off, that savings could be helpful on a rainy day. Good reminder to do your due diligence as mortgages can be thought of as investment vehicles too.

Krantcents June 20, 2013 at 5:10 pm

There is more to refinancing than just the interest rate and savings. Refinancing may take away my flexibility in paying it off still earlier because of the re-amortization.

Melody Carrillo June 27, 2013 at 2:14 am

Called discount points by mortgage brokers and lenders, this tactic is like an upfront payment for a lower interest rate, and one point is 1% of the loan amount. So if you had a $100,000 mortgage, one point would cost $1,000 while two points would cost $2,000.

Krantcents June 27, 2013 at 7:23 am

In my case, points were not an issue, it was the re-amortization of the loan. It changed everything.

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