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.
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.
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
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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