Our Refinancing Experience Thus Far
I have a confession to make: we have been procrastinating on refinancing our mortgage. There are good excuses; we only purchased our home two years ago and I can clearly remember the plethora of intimidating closing documents as well as all of the financial documents we had to gather in order to make everything happen. I also was not completely sold on the idea of refinancing because all of the financial gurus tell you that you should only refinance if you will be in the house long enough to recoup the closing costs as well as reap some savings. But in the end, we are still sitting on a 30-year mortgage at 5.5% during a time of historically low mortgage rates. And the thought of missing out on this opportunity makes my stomach lurch.
Fortunately, over the last few weeks I have plowed ahead with the refinance. No longer will I have to worry about how much longer these interest rates are going to be around; we now have a 3% fixed interest rate locked in for a 15-year mortgage. This will reap us interest savings of $112,000 over the next 30 years (versus if we stayed in the same mortgage loan we are in). We are not finished with the process, but far enough along that I wanted to share our experience and decision-making with you thus far.
The Decision to Refinance
I love finances and consider myself financially literate. I also hate to be in debt (something my husband and I share), and am shocked at the huge amount of interest we will be paying over the next 30 years if that is how long we take to pay off our mortgage. However, this has not been enough to motivate us to send in extra payments on the mortgage. That’s right—we have not sent in a single extra payment over the last two years. This is surprising even to me! So I know that in order for us to meet our goal of paying off the mortgage in a much shorter amount of time, we need to have the extra payments locked into place. This has made getting a 15-year mortgage a priority for us.
We were not completely sold on the refinance because of closing costs and not knowing if we will stay in this house long enough to reap the savings. It’s not the home; we found the perfect home for us that is large enough to build a family in (should we decide to do so). In fact, we’re absolutely in love with our home. The only reason we would ever move is if we decide to change locations. Currently we are in Houston, TX and loving it here. But I am originally from Pennsylvania, and we often toy with the idea of one day moving closer to the Northeast. Who really knows?
While speaking with the refinance agent, it dawned on me that if I roll the closing costs into the mortgage that we will still have paid the house off in 15 years (plus the two years we have been paying on the loan all ready) if we stay in our home. And if we do move to another state, then we only paid a portion of the closing costs anyway. This does mean that we will be paying interest on the closing costs, so you need to weigh this into your own decision-making. But for us, it seems like the way to go.
Our Refinance Process
Once we decided to move forward, we called our current mortgage company to see what offers they could give us. The offer was actually in line with others I had received in the mail, so we decided to simplify the process by going with them.
We have a VA loan, so I was pleasantly surprised to find that they do not need to conduct a credit check on us, and the overall process should take less than 60 days instead of 90 days. Once I filled out the application with an agent over the phone, we locked in our rate. This was without a commitment from us. We received all of the documents in the mail, as well as a phone call from the title company that we will be dealing with.
Our next step is to read over everything, and gather some tax documents from the last three years to prove our income.
We are not finished with this process, but are well on our way. Fortunately, our interest rate is locked in for 90 days (of course it would be unfortunate if the interest rates decrease even more in those 90 days!), and so we can afford to take some time to read over all of the documents, figure out the escrow account, and get comfortable with our mortgage refinance.
Have you gone through a mortgage refinance? What is your new and old interest rate? Any pitfalls I should watch out for?
With mortgage rates as low as they are and mortgage interest being tax deductible, one should consider locking that low rate in for as long as possible (30 yr vs 15 yr). A typical balanced portfolio will yeild 5 – 8% pre-tax, so if you can borrow for 4%, that is likely a net after tax rate of 3%, and if you can earn 5%, that is likely an after tax 3.75%, aren’t you better off making the lower mortgage payment and investing the rest in your balanced portfolio? Certainly if you currently weren’t taking full advantage of a 401K, moving that piece of monthly income there, that would be a no-brainer.
Good perspective. I am more of the camp “a loan is a loan” and would like to pay it off as quickly as I can.
There is definitely merit in your statement, and I know that this tends to be a debated topic in the personal finance realm.
Something I did not mention in my article is I live in Houston, and the real estate here is very cheap. So we have plenty of income to invest in both our retirement accounts and a side money market account.
I share Steve’s concern. Even with substantial liquidity to fund retirement accounts and money market, you’re probably still leaving money on the table using a 15 year mortgage vs. a 30 yr mortgage in spite of the interest savings because you could be using that additional capital in regular brokerage account. Right now you would need to take some risk with dividend paying blue chips, but 10-20 years down the road, you could easily be outpacing your interest savings reported here simply by investing in CD’s once inflation kicks in.
I also just finished my refinance. I wish I had a VA loan. That would have made the process much easier. Look how long my post is compared to yours!
Am in midst of refi, from 30 yr to 20 yr, 5.5 to 4.0 Save some years and payment will go down a little. It was with same bank and no closing cost. Seems like a no brainer. Only snag I ran into was having a HELOC with another bank and I had to do a subordination and pay for that out of pocket ($200)
To counter Steve and Slug’s advice, I think it’s dangerous to compare mortgage rates with potential returns from equity investments. Your fixed 15- and 10- year mortgages have characteristics more closely associated with CDs or bonds. Therefore this is not an apples to apples comparison.
From someone who paid off his mortgage a year ago, I can say with certainty that the free cash flow more than makes up for any potential “opportunity cost” that I might have missed out by not investing my extra principal payments in the markets over the past several years. From my point of view, the sooner a mortgage can be eliminated, the better off you will be, both financially and emotionally.
I think you missed the part where I was talking about CD’s. Rates are so uncharacteristically low that the statistical probability of CD rates exceeding your tax adjusted mortgage rates during a 30 year time window is quite good.