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!