Why I Am Considering Refinancing My Mortgage

by Hank Coleman

Why I Am Considering Refinancing My MortgageWhen I was in the bank the other day, the teller was telling me about the new rates on a 30 year fixed rate mortgage and how I could save by refinancing my current loan. So, it got me thinking about my mortgage.

So, I thought that I would consider refinancing my mortgage. Here are a few things to consider when looking at a refinancing and what I look for when refinancing my mortgage.

My Current Interest Rate

When my wife and I bought our home in December 2008, we received a 30 year fixed rate mortgage from our bank of 5.325%. My current mortgage rate on a $191,000 loan is $1,063 per month plus taxes, insurance, and private mortgage insurance (PMI) which are separate to these calculations.

Savings From A Lower Interest Rate

The current 30 year fixed rate mortgage is approximately 3.43%. At that rate, a $191,000 loan would be $850 per month for 30 years. Since my wife and I have paid down our mortgage balance to $173,689, the monthly payment on that loan balance if we reset it to 30 years would be $773. You can find out how much you could possibly save by using a mortgage refinance calculator.

Ultimate Checklist for Your Finances

Take back control of your finances!

Get a FREE checklist for the money moves to make in the New Year.

Also get new articles, advice, and tips delivered right in your email inbox with our newsletter!

A 26 Year vs 30 Year Fixed Rate Mortgage

One point that you may not have picked up on in the previous calculation is that the $773 monthly mortgage payment would reset the loan back to 30 years. This essentially adds four more years on the total amount that we would pay.

So, if we refinanced our mortgage for the same 26 years that we currently have left on our 30 year fixed rate mortgage at the current interest rates, we would be looking at a monthly mortgage payment of $842 plus taxes, insurance, and PMI for another year or two until we hit the magic 20% mark in home equity.

The Fees And Potentially Wrapping Them In

Like when you purchase a home with a mortgage, there are a host of fees and closing costs. The same is true when you refinance. You can expect to pay fees such as appraisal fee, origination fee, application fee, credit check fee, document processing fee and underwriting fee. You may even find that your lender may require you to pay points just like you did with your initial mortgage.

Of course, all of these fees can be expensive. Many mortgage lenders also offer the option to wrap these fees into your new loan which of course raises your monthly mortgage payment on your refinanced loan. It may pay to shop around for the best loan with the lowest interest rate and least amount of fees and points.

How Long Are You Staying In The Home?

Another big factor is how long you are going to stay in your home after you refinance. Let’s take a simple example to illustrate the point. Assume that it costs you $4,000 in closing costs and fees to refinance your home, and you wind up saving $200 per month in lower monthly mortgage payments after your refinance.

You will need to stay in your home for 20 months or almost two years in this example for the cost savings to payoff and for you to break even. This, of course, does not apply to me in my situation for the most part because the home in question is the one that my wife and I recently rented out when we became landlords earlier this year.

The Verdict On Refinancing Our Mortgage

So, what am I going to do? I might just have to call my mortgage banker later this week to see exactly what refinance mortgage rates we can get and how much we can qualify to refinance for. It would be very cool to save $200 or more every month on our home especially since I see us keeping it as a rental property for years to come. I will keep you all updated as we decide whether or not to refinance.

Why I Am Considering Refinancing My Mortgage

myFICO Score Watch Trial

About Hank Coleman

Hank Coleman is the founder of Money Q&A, an Iraq combat veteran, a Dr. Pepper addict, and a self-proclaimed investing junkie. He has written extensively for many nationally known financial websites and publications. Hank holds a Master’s Degree in Finance and a graduate certificate in personal financial planning. Email him directly at Hank[at]MoneyQandA.com.


Hank Coleman has written 578 articles on Money Q&A. Learn more about Money Q&A on Twitter @MoneyQandA and @HankColeman.


Subscribe To Money Q&A

If you want to learn more about taking back control of your money please subscribe to Money Q&A’s RSS feed or via email to receive all the latest articles! You can also subscribe to our Free Weekly Newsletter.

{ 7 comments… read them below or add one }

John S @ Frugal Rules

I can understand the dilemna. Your numbers sound very similar to ours and we refinanced about two years ago to get to a 5.25% rate. Saving an extra $200/month is a nice possibility to have if you can swing it.

Reply

Money Beagle

We refinanced about a year ago. Rates have declined a little since but I’m not sure it’s enough to go through it all over again. Might be worth a check though. Even saving another $100 a month would be good. Best of luck!

Reply

Kevin@Savvy on Credit

Will banks close on a loan for 26 years? The key to making this work for most people is having the discipline to keep the new loan term the same or shorter.

Many people focus on the lower monthly payment, and end up miring themselves in extra debt by turning a 30 year loan into a 34 year loan. Then they sell their house far sooner than planned and discover most of their payments went to interest.

There is a reason banks are so eager to get people to refinance.

Reply

Funancials

A lot of lenders are offering low cost options … Even no cost options… In order to retain you as a customer. And since they’ll sell it and make a nice little %

Reply

Jason @ WSL

I love the thought of refinancing a house! Instead of saving $200/month, what about getting on a 20-year loan and knocking an additional 6 years off while keeping your payments the same?

My wife and I will be refinancing our house to a 5/1 ARM in a month if we’re unable to sell our house by then (which is likely). The rates I looked at a few months ago were 2.75%! I hope they’re still the same here in a few weeks.

Reply

jay

Wow I haven’t seen 2.75% anywhere…. 3.25 is probably the lowest I’ve seen. Is that another 5/1 ARM?

Reply

Financial Samurai

Definitely do it Hank! I did 2.625% this Spring for a 5/1 ARM from 3.125% just last Fall!

Refinancing now is a NO BRAINER! Good luck!

Reply

Leave a Comment


Previous post:

Next post: