Are You Considering a Refinance?
Photography by: bookish in north park
We’re considering refinancing our house. It’s been two years since we refinanced our construction loan into our existing mortgage and rates are lower now than the interest rate we got two years ago. If you are considering refinancing, here are some situations where it might make sense to refinance.
Lower interest rates. Determine how long it will take you to recoup the closing costs with the savings from a lower interest rate. If you will hit your break even point before you plan to move, it might be time to refinance.
Refinance an adjustable rate to a fixed rate. If your mortgage is nearing the point where it will start adjusting and the variability makes you uncomfortable, it might be a great time to consider moving to a fixed rate mortgage.
Refinance to a shorter mortgage. If your goal is to pay down your mortgage faster, you might be able to refinance to a shorter term. Five Cent Nickel recently refinanced to a 15 year mortgage, shaving years off their mortgage.
Refinance a jumbo loan to a conforming loan. The current limit for conforming loans is $417,000. Anything over that is considered a jumbo loan, which typically results in a higher interest rate. The Economic Stimulus Bill that we’ve heard about a lot for the payments also included a temporary increase in the conforming limits (to the lesser of $729,750 or 125% of the average home value for the largest metropolitan areas).
For more ideas see when you should refinance your mortgage at Free Money Finance.
We currently have a 5/1 adjustable rate mortgage at 5.625%. It’s a 40-year jumbo loan. See my rational for why we have this product which is sometimes considered a risky move.
After I evaluated my decision to return to work I’m considering not only ARM products, but fixed products in case I decide to ever leave the workforce in the future.
In addition, we’re staying longer than anticipated in our house. Ask our family and friends and they will tell you that by now, they would have thought that we would be considering a move. We aren’t! I think it helps that we had this house custom built, so we have a lot of what we need, and even some things that we don’t.
Finally, the current mortgage rates at Pentagon Federal Credit Union, where we have our current mortgage, have been lower than our current mortgage recently (and they offer no closing costs).
Even though we have a jumbo loan, we are not in one of the affected metropolitan areas to raise the conforming limits. Luckily, Pentagon Federal doesn’t usually charge a premium for the jumbo rates.
There’s a terrific set of mortgage and refinance calculators at Dinkytown. Unfortunately, I couldn’t find the one titled, “Optimal refinance, credit card arbitration, and shopping for a new car.”
I’ve been working on a home-grown spreadsheet to try to pinpoint our “break even” point. The difficult part of a refinance for us is that I have to scale back on our credit card arbitrage to refinance. Any interest lost is calculated into the equation and offsets the savings from a refinance.
It’s going to take a lot more number crunching, because I’m also in the market for a new car. We also have access to two home equity lines at very appealing rates. If we refinance, we may also need to refinance these.
Yes, this is one of the situations where my complicated financial world puts me at a disadvantage. It becomes a very involved process to evaluate and execute a large change.
I’ll continue to work on computing how much we’ll save under various scenarios, but I don’t think it’s going to be at the top of my priority list. Maybe I’ll work on it some more after we get our taxes done (oh yeah, mortgage interest is another input to the equation!)…
Have you refinanced lately? Or are you considering a refinance?
This article is featured in: Carnival of Personal Finance #146.
What kind of costs are involved in a refi? ie how much $$ per $100k of mortgage?
I’m at 5% for 3 more years, THEN I’ll be looking around! The way I figure it, I should be completely debt free (excluding the mortgage) and I should be able to get some primo rates….I hope. 😀
@ Four Pillars: Our costs would probably be between $500 and $1,000 for closing costs. It isn’t really based on the size of the mortgage where I live, but rather fixed costs for an appraisal, credit report, title insurance, etc.
I’m in a similar situation, with my 5-year interest-only mortgage at @6.625%. I recently paid the mortgage down by around $30k, in preparation for the refinance. This way I would have plenty of equity, considering the problems with the Florida real estate market. I was fortunate that I left South Florida when I did to make the move to Jacksonville, because things are even worse down there than they are here.
I know a lot of folks say you are better off investing extra money rather than putting it in your house, but I had little confidence in my ability to earn over 6.625% anywhere (in the relatively short term) and was feeling bearish as well. In retrospect, with the way the markets have been acting, I think it was a relatively good move. I think there’s still a good chance we’ll dip into a recession, and the markets aren’t going to like it. This year will definitely be a good year to refinance into a fixed rate.
you can pay off any loan earlier or make more the required monthly payments. no need to refinance just to do that!
@ Investing & Passive Income: Yes, I should have clarified that refinancing to a shorter mortgage often results in a lower interest rate. Without that benefit, you could as you pointed out, just make additional payments.
I’m looking to refinance but certain things about our apartment building have triggered us to be a non-conforming loan even if we’re way below the $417k. Otherwise, I would have refinanced our 10 year ARM of 6.375% to a 5.625% 30 year fixed.