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Noodling Over a Mortgage Refinance
With all the news about "historically low interest rates," I lately find myself giving a lot of thought to refinancing our mortgage. I am sure that a number of you have been considering and investigating it as well. After looking into it, however, I’m not convinced that refinancing is the best course of action for me at this point in time.
Rules of thumb for a refinance
I’ve heard various criteria for deciding when it is a good idea to refinance (like if you can save 2% off your rate, for instance, or figuring out if it is better or not based on how much longer you’ll live in your house). The problem with that, of course, is that a simple formula can not possibly apply accurately to the unique circumstances of each individual. I think a better course of action is to look at the details of the refinance tailored to your specific situation. (BTW, do people actually know how long they will live in their house? I’m sure there are a few stable people out there, but it just seems crazy to me to know that you’ll be living in this house for 10 or 20 years or whatever! – I guess because we’ve lived in 6 different places in the 12 years we’ve been married).
Considerations for refinancing a mortgage
There are a number of reasons why you might want to refinance your mortgage. In the olden days (they weren’t really that long ago, but they sure seem like it), your home would make a great ATM for whatever you wanted and couldn’t afford. I didn’t recommend this in years past so I am certainly not going to recommend it now as house values plummet (Seriously, this is a really bad idea right now).
Some better reasons to refinance
A much better motive for refinancing in the current environment would be to secure a "historically" low rate. Especially if you have an adjustable rate mortgage, this feels like a good time to lock it in (to be honest, we currently have an ARM though there are 5.5 more years before the rate adjusts for the first time).
Another great reason would be to lower your monthly payment. If you can get a significantly lower interest rate, then your monthly payment might decrease quite a bit (and that extra cash flow would surely help out these days). If you are doing this, however, keep in mind how long you’ll be making these payments. It might sound like a good idea to save a few hundred bucks each month, but if you are trading in a mortgage that you’ve had for a number of years and starting over with another 30 year term, you might end up paying a ton more money over the length of the mortgage).
Some (potentially) bad side effects of refinancing
If you, like me, do not have very much equity in your house, then refinancing might drop you into the realm of the dreaded private mortgage insurance (PMI). Unfortunately, after the events of the past year or so, I would guess that a lot of us find ourselves with less than 20% equity which is the typical cut-off for PMI. I currently do not pay PMI but if I were to refinance, I would be required to start paying it. Depending on the type and amount of your loan, the PMI could run as high as hundreds of dollars a month. Just to review: PMI is bad. It’s extra money (on top of the principal and interest) that you have to pay each month that doesn’t reduce the principal…it just disappears into the ether (from your perspective, that is…it certainly ends up someone’s pockets).
Of course, do not forget that refinancing a mortgage is an expensive proposition. You will need to pay closing costs and lender fees and all that junk to get the refinance done. In fact, if you end up paying points on the mortgage, the refinance itself could run up near or over $10,000. I do know of some companies, like CapCenter Mortgage , that advertise no closing costs – so that could potentially save you a lot of money. Most of the mortgage companies out there, however, will take their share.
To refinance or not to refinance?
In my specific situation, I really don’t know if it makes sense to refinance at the current time. I do have an ARM that resets in 5.5 years so it would certainly be advantageous to lock in a low rate. I would also love to refinance into a shorter term loan that could save me more north of $100,000 compared to continuing on my current 30 year path.
On the other hand, I do not currently pay PMI and do not like the idea of starting to pay it. In my specific situation, I could refinance into a 20 year mortgage and end up paying about the same monthly payment but for 7.5 fewer years…plus a PMI of almost $300 per month! And don’t forget the cost of the refinance itself – the estimates I’ve gotten from one company range from $5000 to over $9000!
So the question becomes,would I be better off using that cash to pay down my current mortgage a bit and then applying the extra I’d be paying for PMI to accelerate my monthly mortgage payments? I don’t know…I think I’ll create a spreadsheet and run some numbers for a future post (woohoo – a spreadsheet!) (BTW, Dave Ramsey has a pretty useful mortgage calculator for playing around with these numbers)
What are you thoughts on this? Have you recently refinanced? Have you been considering it? Have I missed anything else that I should be considering?
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How much mortgage will you have remaining after the 5.5 years and are you going to aggressively try and get totally debt free?
Also what is the current ARM rate?
The Happy Rock´s latest blog post…Screw Saving Money…I Want a Snowblower!
Have you heard of the Money Merge Account (MMA)? It is a great way to pay down your mortgage (without refinancing) in record time. It also shows you how to best pay off all of your additional debts, making it an amazing financial planning tool. The cost to enroll is far less than the cost of a refinance (especially at the numbers you’ve quoted). Best of all the system works with any future home you may purchase as well.
When you are ready to refinance your mortgage you are ready to start the research on securing the best refinance mortgage available in the market. Research is the key to securing the lowest refinance mortgage rates.
@THR – I would love to get totally debt free but I just don’t see that happening anytime soon. I’m not sure on exactly how much principal will be left after the 5.5 years – that’s the topic for a spreadsheet and my next blog posts. My current rate looks pretty high now – 6.625%
@Anthony – The basics of the Money Merge Account involve getting a home equity line of credit and periodically shifting some of the mortage over to the HELOC according to what the software tells you, right? Alas, I do not think that I even have enough equity to get a HELOC at this point in time.
@Kenneth – Good point…I’ve only dabbled in looking at refinance rates to date…my lack of equity is seriously limiting my options.
My husband and I refinanced our mortgage about 5 years ago after being in our home for only 18 mos. Here were the motivating factors: 1. The interest rate was the lowest had ever seen (4.35% w/no points) 2. The payments were a few hundred dollars higher but ultimately that is applied to principal, which is to our advantage. 3. We had to pay closing cost but I figured that we saved enough in interest to recover that cost w/in 24 mos. 4. It is amazing how quickly you pay down your mortgage and decrease the amount of interest you pay each year. Have you considered using enough personal savings to cover the 20% and avoid PMI? I recommend locking in a low rate for 15 years (you know Dave Ramsey would tell you to do the same.) If your goal is to increase net worth – aggressively increasing your equity and decreasing interest payments will have a huge impact.
@Veronica – I would LOVE to get into a 15 year mortgage and yes the overall goal is to increase net worth. My problem currently is that, though house prices have not fallen nearly as much in our area as in some other areas, they have gone down recently and I am nowhere near 20% equity (I’m probably not even near 0% right now!). So, it would go beyond our cash savings to get to 20% and with our mutual funds and all down, too, I’m not want to cash those out now either.
It is awesome that you guys were able to lock in a super low rate and shorter mortgage term. That should really pay off handsomely down the road.
Hi,
Nice article….Mortgage refinancing is a difficult process for anybody. Luckily, it doesn’t have to be. The first thing you should know about refinancing a home mortgage is that mortgage lenders are greedy. After all, the more they make off with you the more they get to bring home. The best thing you can do is arm yourself with as much information as possible prior to the mortgage refinance.
home loan rate/s
Mortgage refinancing is the best option if you have mortgage loan that you can’t afford to pay because of high interest. Refinancing can lower the rates of your loans.
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Great site here. Very informative. Generally even a 1 pt or lower is a good time to refinance, however each persons plan of action and situation is different. It all depends what stage of the game your at. As far approaching retirement, money still owed etc.
Bad Credit Mortgage Refinance´s last blog ..Getting help with Obama’s Loan Modification & Mortgage Refinance …