When to refinance? My latest thoughts.

Posted By Paul

It wasn't that long ago that I refinanced my mortgage and I remember that as we signed the papers the agent actually said: "Let's take a moment to appreciate how good a rate this is, it will never get much better than this."

Now I see that rates have dropped to the point where I am once again considering refinancing.

There are so many sources of advice on this topic everything from: "Only refinance if you can save at least one point on your rate." to complicated spreadsheets and formulas.

Well when I found myself trying to decide if I should refinance again, I realized that what I was really doing was deciding two things:

1) What was my primary goal?
2) What was I willing to commit to?

If you can answer these two questions then I think refinancing decisions become much more clear.

Here is what it was in my case:

What was my primary goal?
There are lots of perfectly valid answers to this question when it comes to refinancing.  Some of the most common are:
"I want to pay off my mortgage as fast as possible."
A great goal.  Once your mortgage is paid off then a huge monthly expense essentially disappears from your life.

"I want to pay as little in interest as possible."
This one often goes with the "fast as possible" one since the two often relate.  It's annoying paying all of this interest month after month.

"I want my monthly payment to be as little as possible."
Another perfectly valid choice.  A smaller payment can mean peace of mind.  Less money you have to come up with every month.

What was I willing to commit to?
Here are some things that might come up when you consider this question:

"Can I commit to paying the closing costs?"
Another simple one.  If you don't want to pay the money for the closing costs, then it simplifies your hunt considerably in that its becomes a question of the best rate you can get with zero closing.

"Can I commit to a bigger payment?"
If you refinance to a shorter mortgage (go from 30 year to 15 year) then not only do you get a better rate, but it generally means paying off quicker and less interest paid.  The problem?  It often means your monthly payment gets bigger (unless your rate increase is significant enough to offset it).  Ask yourself if you are willing to commit to being obligated to make that payment every month.

"Can I commit to being in this house for a certain period of time?"
If you are CERTAIN that you are going to move in a specified time, or if you are CERTAIN that you aren't then your choices become a little more clear.  For example, probably not much point in refinancing a house if you're going to move in a year anyway.

For me I found that my primary goal was to lower my monthly payment.  Even if it means I have to pay it longer and I end up paying more interest in the long run.  I also realized that I didn't want to commit to a bigger payment, and that even though I wasn't 100% sure that I wasn't going to move anytime soon, that I was at least able to commit to the idea that a move was not in my foreseeable future.   I was also able to commit to paying the closing costs.

Once I figured that out, the refi choices became much more clear.  For me I just did a straight refi to a 30 year fixed, and took the better rate.  Of course my payment drops thanks to the lower rate and "resetting the clock" on the 30 year mortgage, but it also means that the amount going to principal per payment drops.

In this process I did discover something interesting.  When I took the amount I paid in principal before the refi, and looked up how long it would take to reach that same amount of principal AFTER the refi if I just paid the minimum each month, the answer was that it would take me about 6 years.  Wow.

I also discovered that if I did the refi and took the lower payment but kept paying the amount of my OLD payment (applying the extra to the principal) then the total principal I would pay each month is more than the total principal I pay each month right now.  My thought is that I can keep doing that, but if something catastrophic happens where money gets really tight then I can just stop paying that extra and fall back to my nice small payment.

So I decided to go for it, so I am working on the refinance right now.  I know lots of people try to approach this problem purely mathematically, but I find that difficult to do since often there are just too many unknowns for me.  By focusing on two simple questions I felt like I was able to identify the choice that got me to my goals given the best information I had right now.

Is it time to refinance?

Posted By Paul

So you've probably been hearing about the historic mortgage rates, and maybe you have been thinking about refinancing.

Well since I've been looking into it myself I thought I would share what I've learned from the process.

Before calling up a lender, there are a few items that are good to get clear in your head:

1) Your refinancing goal: Do you want to pay less interest in the long run? Do you want to pay off your house more quickly? Do you want to lower your monthly payment? It's important to be clear on these questions since various refinancing choices (or for that matter whether or not you should refinance) often come down to your refinance goal.

2) The timeline for your house: It's so hard to predict, but if you can make a guess as to how long you plan on staying in your house it helps make various decisions easier.

So if you have these items clear in your head, now what?

At that point you can call a mortgage person and have them run some numbers for you. Keep in mind that usually the way the whole thing works is that you refinance (which includes fees) and the good news is that you get a the new rate, but the bad news is that you pay the fees. You can of course roll the fees into the principal of your mortgage, that means no out of pocket costs to you (which is good) but the amount of principal you owe on your mortgage just went up (which is bad).

There are lots of mortgage calculators out there, some of which are specific to refinancing. Here is a page with a lot of them:

http://www.mortgage-calc.com/

I like the 'Simple Mortgage Refinance Calculator'. It asks you for the basic numbers of your refinance and then calculates your payment change and the number of months before the interest savings offsets the closing costs.

Where I am personally coming from in this refinance is that in these uncertain economic times, I'd like to lower my monthly payment. The refinance is a trade off for me. By refinancing I reset the clock on my mortgage (I'm now scheduled to pay off my house in 2038 if I stick to the payment schedule), and the fees (which I am rolling into the loan) makes the amount I owe go up slightly.

However my wife and I talked it over and we decided that in these uncertain times the fact that our required monthly payment goes down is worth it. We figure that we can always pay extra to the mortgage. In fact our plan is to continue to pay the "pre-refi" amount every month and just apply the extra towards the principal. The nice thing is that if things ever get dicey (like I get laid off or some other big expense comes up), we can always stop paying the extra.

We toyed with the idea of refinancing at a 15 year mortgage, but even with the better interest rate our payment would go up a good bit, and that just isn't our priority right now.

Lots of choices in refinancing, it really helps to figure out a few basic questions to guide you as you run the numbers.

The upside of paying two mortgage payments

Posted by Matt

I felt bad about posting the bad news about falling interest rates on a Friday, so let me redeem myself with a positive story about falling interest rates.

My wife and I have been making two mortgage payments each month for the last five months. No, that's NOT the good news. It's painful, no doubt, but could get worse...I spoke to a friend of mine who paid double mortgage payments for almost a year before he was able to sell his last house. He's smart with his finances and so he's always had good credit scores, but making double payments on time paid off by pushing him past the 800 mark! As a result, he is refinancing his mortgage and expects to drop his interest rate by between 1.5 and 2 percent.

I was already looking forward to selling the house and rerouting that mortgage payment into my savings account, but suddenly the light at the end of the tunnel just got a tiny bit brighter.