A Refinance Game-Changer for Us

I could not be happier than a person whose mortgage company decides to lower their rate at no cost to them…which is exactly what is happening for us! Santa Claus, did you decide to give us our Christmas present early this year?

Two weeks ago we had our offer of 3.0% for a 15-year loan in hand, ready to be signed and sent off to the bank. However, after writing the article about our refinance process thus far, I read through all of the documents and something did not sit well with me: we were going to have to pay $1236 for points. That means that we were paying the bank to get the 3.0% interest rate. Since we were going to roll the closing costs into the mortgage, this means it was an extra $1236 accruing in interest over the next 15 years of the loan. I listened to my gut, and decided to make a few phone calls.

I had heard of people getting free refinances, but assumed that this meant the closing costs had to be rolled into the mortgage somehow. Boy was I wrong! After speaking with our mortgage refinance counselor, it turns out that our estimated costs at closing would be a little less than $3,000 and that this would be paid for by a lender’s credit if we bumped our interest rate to 3.5%.

This is how our choice broke down:

  • Refinance at 3.0%, 15-year loan for an extra $219 per month; pay approximately $3,000 in closing costs plus an additional $1236 for points
  • Refinance at 3.5%, 15-year loan for an extra $230 per month; pay no closing costs, pay no points

The more I thought about it, the more I thought that this was actually a beautiful answer. We could essentially refinance for free, shaving 15 years off of the loan term, 2 percentage points, and $103,000 in interest. If we decide to move within the next few years for work or any other reason, then we have not taken on additional closing costs that we may never recoup.

The downside to this, of course, is the added 0.5% interest we will have on this loan over the next 15 years. As Crystal from Budgeting in the Fun Stuff pointed out to me, we can always pay the loan off earlier than even the 15 years if we are concerned with this extra percentage on the loan. And aside from this, we are still getting a 2 percent reduction on our mortgage for free. I’m in!

11 comments… add one

  • Emily Woodhouse

    Hei Amanda refinance at 2.5% what will be the prospect? Any particular suggestion? Waiting for your reply. Informative post thanks
    Emily Woodhouse recently posted..Bad Credit Money Loan

  • Still, 3.5% is a great rate. You can always pay extra to decrease the ultimate costs assuming that you aren’t able to do anything better with those funds.
    cashflowmantra recently posted..Financial Lessons Learned From Video Games

    • FruGal

      I checked, and there is no prepayment penalty. So that is good.

  • kim

    We just refinanced last year and it was a nightmare. We had purchased many houses in the past, but the questions they asked this time were ridiculous. We finally settled on 3.36 for 10 years, but good grief.

  • That’s excellent! Yeah, I’d just figure an extra dollar amount to throw at it each month to offset the additional .5%. You are well on your way to total debt freedom.
    John @ Married (with Debt) recently posted..Early Retirement Extreme

  • Wow that is freaking awesome. I might approach our bank to see if we can explore refinancing. The apr now is 5.25, not bad but not as good as it could be! That has got to make you feel great!!!
    Christopher @ This That and The MBA recently posted..Gas prices got you down?

    • FruGal

      Feeling wonderful:). Good luck with your search! Email me if you’d like more information.

  • Congrats! Really thinking it through can save you both money and frustration.

    We just got approved for a rate through our bank…3.89%! There is a prepayment penalty of $450 for the first three years to cover the cost of the “free” appraisal, but I think that’s fair. I’m really excited and can’t wait for this to be complete.
    Andi @ MealPlanRescue.com recently posted..Quick Potsticker Sauce

  • That’s awesome – and it shows you can save money sometimes by simply asking about it! I think you made the right decision. I wish I could refinance (I’m at 4.6% with a 30 year loan) but I called recently and checked and apparently, I’m not eligible for any right now. At least my rate is not that bad.
    Young Professional Finances recently posted..What’s In A Name?

  • I figure that you are ahead of the game because you even thought to “run your numbers” – too many people this side of the pond are still grovellingly grateful to be offered a mortgage at all they would take any deal.

    But good on you for asking the question – and being ready for the answer
    Elaine Colliar recently posted..Don’t do as I do ……

    • FruGal

      How is the housing market in the UK? Sounds like it took a dive like here in the US? Houston, where we live, did pretty well. But Houston also did not experience a big bubble in the housing market.

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