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Are You Considering a Refinance?

Photography by: bookish in north park [1]

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 [2] 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 [3], 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 [4] that we’ve heard about a lot for the payments also included a temporary increase in the conforming limits [5] (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 [6] at Free Money Finance.

Our Considerations

We currently have a 5/1 adjustable rate mortgage at 5.625%. It’s a 40-year jumbo loan. See my rational [7] for why we have this product which is sometimes considered a risky move.

After I evaluated my decision to return to work [8] 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 [9].

Finally, the current mortgage rates [10] 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.

Our Evaluations

There’s a terrific set of mortgage and refinance calculators [11] 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 [12] 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 [13]. 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.

Action Plan

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 [14] 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 [15].