For long-time readers, my home buying journey is a well-tread territory on Financial Best Life. The long and short of it is this: I bought my first home at age 26, I used a 203k loan to renovate a MAJOR fixer-upper, Then five years later I sold for a large profit.
And then I went radio-silent on the moves I was making in real estate; mostly because it wasn’t just my story to tell anymore. My husband is a private person and he gets veto power over what I write and share about our own personal money story for this website. But NOW I have permission to share about some big money moves we make, like refinancing our home. (initially, I found it annoying, he's obsessed with getting the lowest rate possible.)
Flash forward to now, and I'm a fan; refinancing your mortgage might be the secret financial super power everyone is missing out on.
My husband loves it so much we refinanced again in February 2020. Yes, you read that right.
We’ve refinanced our mortgage twice in the short 18-month time span that we’ve owned the home. Here's why.
Why We Decided to Refi
Since I bought my first home in 2013 when rates were still super low because of the first recession, I never really explored how to refinance a home. (I do have a post on the how, when, and why to refinance which you can read here. It’s a great primer for those who aren’t totally sure about what I’m talking about right now. NO SHAME. Just go read it and come back here when you’re done.)
We bought our current home in October 2018. And it was a lot of work to secure and buy the home (or maybe it just felt that way because we bought it around seven weeks out from our wedding. I don’t recommend smashing your wedding and home buying purchases all together like, but we’re here and we survived so moving on….)
Then, my husband comes to me in June 2019 and says he wants to refinance the mortgage…on the home we just bought seven months earlier.
Admittedly, I wasn’t into it. Digging around for all the paperwork, coordinating the appraisal and inspection (which you have to do even on a refi), and attending a closing. Not to mention loan costs. Yuck.
And while the paperwork aspect of the application is annoying, we’re better for it. And our financial picture is better for it too.
The second time we refinanced was much smoother than the first, barely even a headache. We were used to the process, yes, and we used Ally Bank and were very pleased by their online platform where you just upload the documents needed for the application and all the communication exists in the portal too. No juggling emails or nagging phone calls. (Not an ad by the way, but I did enjoy the UX so much I wanted to mention it.)
Now, depending on the interest rate you received when you first took out your mortgage and the total amount of your loan, refinancing may not make sense when you factor in the loan costs. Yes, refinancing loans cost the same as if you were closing on the loan buying a new home. The bank has to get paid.
But, if the interest difference is substantial enough, it could make sense to refinance your home. Especially since interest rates right now (as of July 2020) are some of the lowest that have been since the 1970s. Yowza.
To calculate what you might be able to save, I like this refinance calculator. It’s my favorite because it also tells you how long it will take you to recoup the loan costs in months.
And also keep in mind that by refinancing (whether you do a cash-out refi or a traditional) you're starting over on a new loan. So, if you refinance another 30-year mortgage, your payoff date is 30 years from the day you sign your new loan.
Refinancing Your Home: The Numbers
Here are our numbers and why we were HOT to refinance.
- From our first refi we shaved off $214.14 per month and dropped our interest rate from 4.625% to 4.125%
- After our second refi we shaved off another $200 from the monthly payment and lowered our interest rate from 4.125% to 3.625%
- Our mortgage payment interest rate is down one whole percent since we started and we’re projected to save over $52,000 over the 30-year loan.
But in the short term the total we’ve saved since June 2019 is $3700.00
The TL: DR
I think the “unsexy” parts of personal finance turn people off.
There’s a pandemic on.
We don’t want to have to think about refinancing or worry about tracking down paperwork for what feels like a slight decrease in our monthly payment.
But when it comes to refinancing your mortgage the first step is to do the homework and see if it’s right for you.
And finally, look at what you’ll save over the long term, not just the decrease in the monthly payment. If you save $100 per month, but $36,000 over 30 years… that’s a car. Or a retirement nest egg. Or your kid’s college education.
Looking at it this way means for a small amount of time and hassle, you’ll yield a big return.