When to Refinance Your Mortgage

Mortgage rates dropped to record lows this week.  It’s a story that has been pretty common over the past few years as the Federal Reserve keeps its own interest rate near zero.  So when all the newspapers in the country are publishing stories like these, is it the right time to refinance?  That’s a sticky question because so many variables go into the refinance process.

 

We refinanced our mortgage last fall, after having been in our home for about 2.5 years.  Published rates on 30-year mortgages were falling below 4%, so I decided to start thinking about what refinancing might look like for us.

 

A few general items on mortgages and refinancing, first.

  1. The published rates are the best available.  But they can be pretty hard to get.  You need good credit scores, proof of income, longevity of income, etc.
  2. Loan approvers don’t like to see a whole lot of change on your application.  They like it when you’ve been at the same job, with the same credit cards and checking accounts for a few years.
  3. You’ve got to have equity in your house to do a traditional refinance, preferably the refinanced mortgage cannot be more than 80% of the current market value of the house or you’re not going to get the best rates.  (This is because of limits on selling the loan off to Fannie or Freddie Mac after the fact.)
So what did I look at when evaluating if we were going to refinance?
  1. Credit Scores – We knew that ours were pretty good based on the HELOC application that we had completed a few months before.
  2. Longevity – I had been at my job for 3 years, and Mr. PoP had recently changed jobs to a much more secure position.  We also had longer credit histories than our original mortgage application showed 2.5 years before.
  3. No Plans to Sell House – Note I didn’t say no plans to move.  We feel pretty confident that our house is a great long-term hold for us.  Even if we need to move from the area, the going rental rates for a 3/2 with a pool in our neighborhood would cover the mortgage, taxes, and insurance.  So no plans to sell anytime soon.
  4. Income – We were booking good incomes, and with both halves of the duplex currently rented out, we were showing a great diversified income stream.
  5. Low Rates – The current 30-year rates were a little under 4%, with 15 year loans as low as 3.2%, and I thought between the credit scores, longevity, and income, we had a pretty good chance of getting near the best rates.
  6. Equity in the House – Recent sales in our neighborhood have started to rise again, and a house the same size as ours, but with no pool, sold a few months before for $160K.  We owed under $110K, so we had about 31% equity in it, definitely enough for a standard 80/20 refinance.  (The 80/20 is the cheapest because mortgages that start off with less equity in them require you to buy mortgage insurance, which is an additional cost that gets rolled into your monthly payments.)
  7. Timing – We knew we wanted to buy another property, and would have to extend the HELOC to do so, limiting our liquidity.  If we were going to refinance, it was best to do so before we found another property and showed way less immediately available cash and credit.
  8. Refinance Savings Spreadsheet – If you’ve poked around the blog much, you may have deduced that I’m the numbers junkie out of the two of us.  So I built a spreadsheet to figure out (1) how much interest we were going to pay over the remaining 27.5 years of our current mortgage, (2) how much interest we would pay depending on what rate and term (# of years) we thought we could reasonably get, (3) how much more (or less) the loan was going to cost us on a monthly basis (if we shortened the term to 15 years it would likely increase the monthly cost).

The results of the spreadsheet were pretty clear.  If we refinanced into a 30-year loan at around 4%, we would save around $10K over the next 25-30 years.  It would also save us about $75/month.  Good, but not great.  Especially considering that we had plenty of room in the budget to increase what we were putting toward the mortgage payment each month.  However, if we refinanced into a 15-year loan at 3.5%, we could save over $40K, while only increasing our monthly payment by less than $200/month.

Since we were looking for long term savings, the 15-year option was pretty enticing to us.  So I made the call to our current mortgage servicer, Wells Fargo, who we had been pretty happy with.

After some quick questions about income, debts, assets, and checking our credit scores over the phone, the banker said “I can give you a rate lock subject to verification – 3.25% on a 15-year loan.”  Seriously, I was glad that we were on the phone so the banker couldn’t see my jaw drop.  This was lower than the rates we had estimated, so I knew we were going to go for it.  I got the rate lock and we dove headfirst into the refinance process.

If you’d like to see the spreadsheet that we used to compare refinance rates, shoot us an email at plantingourpennies@gmail.com, and we’ll happy send you the file.  For Free!  Whatta deal…

 

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