While refinancing our mortgage, procrastination actually paid off! Let me show you the process we went through and how we’re in a better position now.
I cannot think of many examples where procrastination has paid off in either my life or in someone else’s life.
But this time, procrastination has paid off for us.
What am I talking about?
We purchased our home in September of 2009 and took out a 30-year mortgage at 5.5% interest.
What a fantastic deal!
We had every intention of paying off our mortgage early. But over the first two years that we owned our home? We ended up putting no extra payments towards the mortgage (I am just as surprised as you are).
Here’s what my biggest excuse looked like:
- Complicated Ordeal to Send in Extra Payments to Mortgage Company: When I looked into putting extra payments toward the mortgage it seemed like a complicated ordeal. This created a mental obstacle.
I took a look at the numbers and realized that after 30 months of payments, we had only paid off a mere $3,000.
Given our history so far with only paying the minimum on this loan, I knew that the only way we were going to meet our goal of paying it off early is by locking in a shorter mortgage term.
That means, we needed to refinance.
What is Refinance Mortgage?
You might think that when you close on a home, and basically sign your life away in the trees’ worth of documents, that you are stuck with that home loan until you pay it off.
Well, that’s not actually the case.
To refinance your mortgage means to get a new mortgage, and new mortgage terms, that then replaces your old mortgage.
It’s sort of like a do-over, specifically because people don’t generally opt for a refinance if the terms aren’t more favorable, or if the new mortgage isn’t going to help them achieve their money goals in some way.
For example, my husband and I want to pay off our mortgage early. Way early. But like I said above, we just weren’t sending in the extra payments.
So, we decided to refinance our mortgage from a 30-year down to a 15-year, which essentially will “force” us to get it paid off early.
Our Personal Mortgage Refinance Story
Even though I knew we had only paid down our mortgage principal by $3,000 in 30 months, I still procrastinated.
Mostly because I had a clear memory of the complicated closing process we had just done – how tedious and complex it all was.
Like many of you, I watched as the interest rates on mortgages decreased even more, to the point where it is now cheaper than taking out a federal student loan. Because I remembered so clearly the closing process on our mortgage and how tedious and complex it all seemed (excuse # 2), I developed another mental obstacle against refinancing.
The longer I put it off, the guiltier I felt.
I thought I would look back six months or one year down the road and lament at the beautiful, historically low interest rates I had let slip through my fingers. And yet I still did nothing.
Fortunately for this typically ten-minute-early gal, procrastinating on a mortgage refinance was just the ticket to reducing the interest rate even further. When I had a company initially send me the paperwork (that I let get dusty on our desk), the interest rate on a 30-year fixed rate mortgage was 4%.
By the time I actually got around to refinancing our mortgage?
We locked-in a fixed interest rate of just 3% on a 15-year mortgage!
The total interest savings from the original 30-year loan will be a staggering $112,706.
Talk about plugging up a financial leak! On top of this interest savings, there is an option to make bi-monthly payments instead of monthly payments, adding an extra mortgage payment each year. That means we will pay off the loan in less than 15 years.
The estimated extra monthly expense to shave approximately 15 years off of our mortgage is $219 per month (I took this number into consideration when calculating the interest savings).
Refinance Mortgage No Closing Costs
One of the reasons you might be hesitating on a mortgage refinance – I know it was one of the reasons we procrastinated – is because you cringe at paying thousands of dollars in closing costs yet again.
Did you know that refinance mortgage no closing costs actually exist?
I don’t want to mislead you here – even if you go with a no closing cost refinance, you’re still going to be paying closing costs of some sort.
That’s because it costs money to close on a home, and/or refinance a mortgage. Closing costs include things like the appraisal fee, title search fees, title insurance premiums, etc.
But with a no-closing cost mortgage, these fees get tacked onto the loan itself instead of you ponying up a few thousand dollars at closing.
And typically, it’s by upping the interest rate, like what happened in our case.
For our own mortgage refinance, 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% (and if we went with the 3.5% interest rate, then we would not pay that $1,236 in points).
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, shave 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.
Pro Tip: 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!
Cash Out Refinancing
We did not go with a cash out refinancing, but I’d like to talk about them in case you’re considering one.
It’s best to know all your options!
First up: if your goal is to pay off your home as quickly as possible, then a cash-out refinance is counterproductive.
Also, if you don’t have any equity in your home (meaning you’ve paid down some of your current mortgage, or your home’s value is worth more than your mortgage is), then you can’t do this option.
That’s because this type of refinance gives you a loan that is greater than the value of your home, with you taking the extra off the top as cash.
People do this so that they can use the money for home renovations, debt consolidation, and any number of things.
Deciding Whether or Not a Refinance is Right for You
I’ve given you a lot of info, and shared our own experience with refinancing our mortgage.
In the end, you’ve got to make the decision for yourself.
When deciding whether or not to refinance, take these into consideration:
- Do You Want to Pay Closing Costs?: There are closing costs associated with refinancing (even if you do a no-closing cost refinance), just like there were closing costs when we purchased our home. Bankrate.com states that the average closing costs for a $200,000 home in 2008 was $3,118.
- How Long You’ll Be in the Home: One of the biggest things to consider whether to refinance or not is how long you're expecting to be in the house (hint: you want to be in the home long enough to recoup the closing costs in savings. While many people calculate the savings on a month-to-month basis, we would switch to a 15-year mortgage in order to pay it off more quickly, and so our monthly payment would actually increase. Therefore, we are interested in how much interest savings we will have by locking in a lower interest rate (to play around with your own mortgage terms and interest rate, check out the mortgage payment calculator in my right sidebar).
- Mortgage Rates are More Favorable: You only want to consider refinancing if you’re going to get a better deal than what you have currently. If you’re not, then you might just want to think about paying off your mortgage faster without having to do a refinance.
Finally, let’s look at just a few last thoughts on the truth about refinancing your mortgage.
The Truth about Refinancing Your Mortgage
Refinancing a mortgage takes time and energy.
True, you already found the home, so there’s not as much involved as when you first purchased it (whew – remember all that work?).
But you are looking at a sometimes-intense process. Here’s what it looks like:
- Shopping Around for Mortgage Rates Today: You’ll need to find the current mortgage rates, and compare them with your own terms to see if they’re favorable or not.
- Your Credit Will Likely be Pulled: Lenders will very well pull your credit reports again, and this could ding your credit score for a little bit (as much as a “hard credit pull” dings a credit report). So, if you’re thinking about refinancing a home, then you don’t want to make any other large, credit purchases (such as a new car with a new loan) right beforehand.
- You Might have to Re-Set Up Automatic Payments: If you go with a new bank, then you’ll have to set up the payment process again.
- Your Mortgage Monthly Payment Will Change: If you go for shorter loan terms – like we did – then be prepared to pay more monthly (but, that also means you’ll pay it off much faster!). You’ll have to adjust your budget accordingly. If you go for a longer loan term, or the same loan term but with a smaller interest rate, then your monthly payment will go down.