Should You Refinance Your Home Loan… Again?
Posted by jefferson on Nov 20, 2012 in Saving Money | 39 comments
A few months ago, we refinanced our home to a much lower rate. We moved from a 5.25% APR down to a 3.375% APR, and switched from a 20 year loan to a 15 year loan. Our payment actually went up about $100/month, but over the course of the loan, we will save nearly $50,000. Michelle previously wrote about the refinance process here, but one of the most interesting parts of the story is that this was actually our SECOND refinance in 16 months!
There are many reasons that people choose to refinance their homes. Some folks do it to get a reduced monthly payment, while others aim to reduce the term of their loan in order to save the overall amount of interest that they will need to pay. When we first refinanced in the summer of 2011, our goal was to combine our two home loans into one. Our original home loan on this house was sitting at a not-s0-pretty 5.85%. Worse, we had a second loan that was at a variable rate and subject to the whims of the economy.
When we purchased the house originally, we only had enough of a down payment to put 5% of the purchase price down at closing. If you don’t have enough equity to cover 20% of your home’s value, you are forced to pay private mortgage insurance (PMI), which has always felt a bit like money for nothing. Instead, we opted to get a second loan to cover 15% of the home costs, while our primary loan cover the other 80%. Back in the day, banks were more than willing to offer these loans, but only at a variable rate. These floating rates can change year by year, and you never know when an increase will push your monthly mortgage payment to an uncomfortable level.
As soon as we hit the 20% equity mark, we started looking into a refinance, and ended up finishing it up last summer. One of the numbers that you look at when refinancing is to see how long it will take to pay off the closing costs that you are piling onto your principal amount due. With both of our refinances, it took about 9 months for the refinances to become profitable, with the savings kicking in after that point.
As we have chronicled in detail here at See Debt Run, 2012 has been dominated by holding our family finances up to a magnifying glass. With with all of the reading about financial topics that I was doing, I kept coming across articles talking about how interest rates for home loans were continuing to drop and new record lows were being reached week after week. I was very skeptical that chasing another refinance could be good idea for us with the paint so dry on our old (new) loan, but being a numbers guy– I decided to go ahead and run the numbers.
The amount of savings that we are getting through our second refinance is truly staggering. I can’t recommend enough for you to go ahead and check out the numbers for yourself, even if you recently refinanced your home. With decent credit, it isn’t hard to do even better than our 3.375%, which can set you up to slash your monthly interest payments, and might even make it possible for you to shorten your loan.
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Wow. $50,000 is a lot of money! Good for you guys for doing your homework in finding such huge savings!
Catherine recently posted..How To Fake A More Expensive Christmas Gift
Thanks Catherine!… I was floored when I saw how much money we could really save.
I refinanced at 2.29% over a year ago but always keep an eye out for a better deal. Even a small % is a ton of money.
Pauline recently posted..Little house in Guatemala, week 3
2.29% is absolutely insane, Pauline!.. I wouldn’t rule out refinancing again at some point next year (maybe down to a 10 year?).. but I expect interest rates to start to climb here at some point.
We haven’t refinanced yet but we definitely should get on that. The savings are just too good for us.
Michelle recently posted..My $38,000 Student Loan Payoff Plan
it is absolutely worth your while, Michelle.. Just make a phone call to your current lender and have them run the numbers for you.. You can also use sites like “Lending Tree”, but you will get phone calls for months if you do..
I have been considering refinancing but it is very expensive when my mortgage is only around $62,00. If I had a $200,000 mortgage it would be a no brainer.
Lance @ Money Life and More recently posted..2013 401(k), IRA and Retirement Plan Contribution Limits
Wow.. Your mortgage is down to 62k?.. You are making great progress and should have that paid off in no time..
80% Equity?!? I’d be happy with 30% at this point! That’s a huge accomplishment!
DC @ Young Adult Money recently posted..Why Credit Cards are Good
Big time typo on my part there, DC.. I fixed it.. It should have read 20% equity. We’ll get to 80% here in about 12 years..
I would consider refinancing if I were you guys! I just got a quote for a no-cost refinance (15 year mortgage) for 3.125%. If you paid closing costs then it would lower the rate by .25%. So, even if you didn’t want to pay anything out of pocket then you’d still save some money but doing nothing more than filling out some paperwork.
We’re refinancing on Monday but we decided to roll with a 30-year rate instead of the 15-year. It took some serious calculation but I simply wasn’t satisfied making an extra $52/month of (net worth) progress in exchange for committing an extra $250/month in payments.
Jason @ WSL recently posted..How to Get the Most Out of Your Employees
Hah.. Not quite yet.. but we may look into it again next year. You guys will save major money by shifting from a 30 year down to a 15.. Kudos to you for chasing that down.
I’m considering doing the same thing. I refinanced over a year ago to bring my rate from 6.5 down to 4.375. At the time, I didn’t think rates could get any lower, but we’re looking at high 2s to low 3s in this environment.
JW @ Allthingsfinance recently posted..Weekly Stock Pick & Favorite Reads
Do it, JW!.. It is worth your while.. I had my doubts going in, but the numbers don’t lie.
Congrats on saving so much money! Sounds like refinancing has worked out really well for you.
We bought our house about a year and a half ago at 4.8%. With rates plunging since then, a lot of people have been telling us to refinance. However, after crunching the numbers, it turned out that it makes more sense for us to just keep paying extra principal each month (at least for now). By adding $100 per month, we can reduce the loan term by about 10 years and save over $30,000 in interest… without locking into a higher monthly payment or paying a few thousand dollars in closing costs.
The biggest change you see in shifting to a smaller term and dropping a few points in interest, is the breakdown of your payment itself.. When we are at a 20 year loan at 5.25%, about 85% of our payment was going to interest.. With the new loan (15 years, 3.325%), less than 50% of the payment is going to interest. It makes a huge difference from day one!.. Maybe make sure that your numbers reflect the difference in payment breakdown.
All valid points. However, my intent was to highlight the fact that refinancing is not for everyone. Depending on whether or not you plan to stay in the same home for the life of the loan, you may or may not recoup the closing costs involved in refinancing. On the other hand, paying extra principal is a free way to increase equity and reduce your effective interest rate.
We refinanced last year into a 15 year loan with the same rate you have. I’ve actually considered whether it would be worthwhile to refinance again now that we could get about half a percent less. I’m on the fence. The current loan has already ‘paid for itself’ as the equal point was less than a year, but it would take about four years to realize the savings since the rate difference is so much smaller this time (our previous rate was 5.875%). That’s quite a long time, so I’m not yet convinced. If it got down to about 2.5%, I could see us going for it.
Money Beagle recently posted..Great Products Plus Great Customer Service Equals A Resounding Success
I think we’re in the same boat, Beagle.. At 2.5%, it would probably be worth jumping in yet again… I will keep an eye on it, for sure..
Wow that is significant savings! Not to mention you’ll be mortgage free sooner. I’m not a home owner yet, but stories like these really bring home the fact that being aware of interest rates can really make or break your financial future. Congrats on such a good refinancing deal!
Jordann @ My Alternate Life recently posted..The Life of a House Sitter
Good point, Jordann… The fact that we will be out of the mortgage sooner is certainly a big win.. We are going to pay extra principal in the spring when we get out of debt as well..
A $50K saving is INCREDIBLE!! Great move
Savvy Scot recently posted..An Exciting Passive Income
Brian and I refinanced the first condo about a year ago to drop our interest rate from 3% to 2.15%. It was definitely worth it!
My parents on the other hand, use refinancing as a way to eat up home equity and “pay” off debts. Then, it’s not so good.
CF recently posted..Why I use a car share
We refinanced twice too. First from 6.25 to 5% then from 5% to 3.25%. I wish we would have waited a little longer because now 15 year loans are at 2.675%!!! At this point it wouldn’t be worth it because of the closing costs. I am still happy with 3.25% but its insane that is has gone lower.
Great job on your savings!
Holly@ClubThrifty recently posted..What Would You Do For Money…If You Had To?
Thanks to some helpful bloggers *hint hint* we were pushed to take a second look at refinancing after being rejected twice. We just closed today and locked in 3.25%!! We’re saving $200 a month, and though PMI is still there, once it’s gone we’ll be saving $525 a month over the original loan. Pretty wicked awesome!
Jacob @ iheartbudgets recently posted..Black Friday: The Saddest Day Of The Year
That is wicked, Jacob!!!!!
Holly@ClubThrifty recently posted..This Is What I’m Thankful For…
We refinanced twice in about a two year period from 5.85% to 4.75% to 3.25%. The second one was a pain, but for that rate, I’d do it again.
Kim@Eyesonthedollar recently posted..How Do You Prepare A Budget With Irregular Income?
We are pretty close to the refinance suggested rate of saving 1% APR, but I don’t think we’ll refi again. I’m happy with where we are on the loan, and I’m not prepared to go through the hassle again. That would be the 4th time refinancing if we did, and at some point, the savings on our small loan wouldn’t be worth it.
Christa recently posted..Investing in Family: Thanksgiving Edition
I plan to refinance again once the rates drop a half of percent below my current rate. To me it has always been advantageous to refinance and have done it 3 times already since 2008.
Jason Clayton | frugal habits recently posted..Conscience Spending: How to Buy Whatever You Want Without Guilt
The main thing to remember is that closing costs can vary A LOT from state to state, as well as among different financial institutions. We refi’d a year ago into a 15-year 3.25%, but in order to make up the nearly $5K in closing costs (on a loan of about $110K), the rates would need to be A LOT lower for it to make sense…
Mrs. Pop @ Planting Our Pennies recently posted..What I’m Most Thankful For This Year
Good point! I live in New York State, and we apparently have the highest average closing costs in the country.
I think it really depends on one’s goals. If it makes sense and the numbers work in your favour I say go for it. It’s a personal choice and it sounds like your numbers were worth it to you. We’ve never done this so I can’t comment further. We are hoping to pay the mortgage in full by the New Year. Mr.CBB Great post.
Canadian Budget Binder recently posted..Killing Your Mortgage In 3 Easy Steps
I’ll be fixing in for a good 5 years when I buy again. Rates havn’t been this low for a long time (I’m talking from a UK standpoint) and I want to take advantage of that. $50,000 is massive, good job!
Money Bulldog recently posted..At What Point Will You Ask For A Pay Rise?
I’ve actually thought about doing a refinance again even though we just refinanced a year ago. With rates dropping, why not at least give it a look!
My Money Design recently posted..Affordable External Hard Drives vs Online File Backup Service – Which is Better?
That’s amazing! I always thought refinancing would lead to more financial troubles…I guess I just assumed and/or generalized.
femmefrugality recently posted..Suburbanites: Buy Your Tree in the City
That’s quite the savings amount. Good job!!
Eddie recently posted..Finance Fox Weekend Recap – $500 Blog For Financial Literacy Winner!
That’s so much money — it doesn’t sound like it would be, but holy cow! Good work. Do you think you would have done a refi without writing SDR? I’m finding more and more that I make better decisions since I have this neat community!
Kathleen @ Frugal Portland recently posted..Awesome Portland thing: Willamette Week’s Give Guide!
You completed a few fine points there. I did a search on the matter and found mainly people will agree with your blog.
Home Refinance Rates recently posted..Little Savings by Americans is Analyzed by the Law Offices of Lance Denha
Although refinancing is not so easy nowadays but the information and the ideas you have been provided regarding easy refinance has helped me dealing in this in a better way.