What Would You Do?: Should I Refinance My Mortgage?

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should i refinance my mortgage?Welcome to the seventh edition of “What Would You Do?”! If you have a question and would like to know what others would do please contact me and I’ll keep it in mind for future editions of “What Would You Do?”. Recently I’ve asked Should I Buy a SmartphoneShould I Buy the NeatDesk or NeatReceipts ScannerWhat Would You Do With $1,000,000Should I Pay Off My Car Loan, Should I Pay Off Higher Interest Rate or Variable Rate Student Loans First and Should I Donate To Co-workers’ Kid’ Fundraisers? Now on to today’s What Would You Do…

Should I Refinance My Mortgage?

Recently Sam from Financial Samurai wrote about the best time to refinance a mortgage and it made me wonder if I should refinance my mortgage. I reached out to a mortgage banker I have dealt with in the past and asked for a quote. Below are the details of my mortgage situation along with the quotes I received. Do you think I should refinance my mortgage based on these circumstances?

The Necessary Background

The first thing anyone needs to know whenever they’re considering refinancing their mortgage is their future plans. Do you plan on staying in the house or do you plan on moving soon? If you move, will you sell or rent out your current house?

I bought my townhouse on a whim (kind of) a little over a year ago and we plan on living in it for at least the next 5 years and possibly as long as ten or more years. It is only a two bedroom so when we have a kid or two it might get a bit tight. Eventually we may buy a bigger house but we currently plan on keeping the townhouse. We’d like to rent it out which should be pretty easy in the area.

I personally believe current interest rates make mortgages a great deal. If inflation averages 3% over the next 30 years you’re essentially getting a very low real interest rate loan. On top of that, the dollars you pay your mortgage back with in 20+ years will be inflated dollars, not current year dollars.

My current loan payment is right around $325 a month (just for the mortgage part, this doesn’t include taxes/insurance) for a 30 year term mortgage with a fixed 4.625% interest rate. I have about 29 years left on the loan.

Option 1 – Refinance to a New 30 Year Mortgage

This option would allow me to refinance to a 30 year mortgage at 3.375%. These calculations assume I pay off my old mortgage in full and roll the closing costs into the new loan.

I’d have to pay a .125% origination fee ($81.50), other lender fees (underwriting, courier, etc) of $450, a credit report fee of $32, an appraisal fee of $400, a tax service fee of $61, a flood certification fee of $6.50, closing agent fees (including lender’s title insurance) of $500, state tax stamps of $227.50, city/county intangible tax of $130, and recording fees of $190 which brings my total closing costs of $2,078.25! Phew… that was a lot of fees!

My new mortgage payment would be $283 which is $42 less than my current mortgage payment. It would take 49.5 months, or a little over 4 years, to recoup my closing costs by using the difference in the new lower mortgage payment.

Option 2 – Refinance to a 15 Year Mortgage

This option would allow me to refinance to a 15 year mortgage at 2.75%. The calculations include the same fees as above. This would raise my mortgage part of my payment to $435 but my loan would be paid off 14 years sooner than my current 30 year mortgage. This would mean an increase in my mortgage payment of $110 a month.

Option 3 – Don’t Refinance at All

This is the easiest option to explain. I’ll continue paying $325 for the next 29ish years until my mortgage is paid off. No closing costs here, just the status quo.

What Would You Do?

Leave a comment below and let me know what you’d do in my situation!

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About Lance Cothern

Lance Cothern, a Certified Public Accountant (CPA) licensed in the Commonwealth of Virginia, is the founder of Money Manifesto. You can read more about him here or connect with him on Facebook, Twitter, Google+ or Pinterest.

Comments

  1. If you want, we have a spreadsheet that can compare your scenarios and tell you how much you’ll be saving in interest over the life of the loan. Drop me a line, and I’d be happy to send it to you.

    We refi’d a year ago into a 15-year loan, and even after the fees, we’re paying the same amount per year that we were before, but will save almost $45K in interest over the life of the loan since we never plan on selling our place.

  2. This is something that we’re debating on right now! We don’t see ourselves living here for too much longer (yes, yes, I know, lifestyle inflation has got us) but we might rent it out after.

  3. If you got your house refinanced recently I doubt you’d have to pay a new appraisal fee. Anyhow, I think both options are great. Obviously you’d get your money back on the 30-yr refi in a little over 4 years (which is a little too long for me personally…I’d prefer 3) and the 15-year refi would save you a substantial amount of interest.

    If it were me I’d get on the 15 and save that extra .6%/year in interest.

  4. Jason Clayton | frugal habits says:

    I would certainly go with the 15year loan, pay it off 15 years earlier – especially at only $100 a month extra. If you are considering living in the home 10 more years – why not consider a 10 year loan. Then rent it right when it’s paid off and move into your new house?

  5. Both #1 & 2 look good, but at only $100 extra a month I’d have to go with #2. That would save you a bunch of money on the interest and you get it done so much quicker.

    • I agree Jason, if you have that extra $100 and it won’t tighten your belt very much, I would go with that as well, after a while you won’t even notice that extra $100 as you get used to it and you’ll be done sooner

  6. I would take the 15 years one, the payment being quite low for the benefit of being mortgage free years sooner. Or do nothing and invest the $100 in stocks. Not the first one, who knows where you will be in 4 years.

  7. Can you pay the fees upfront or will you have to roll those into the loan? I’d go 15 and pay it off in 10 years or less.

  8. If you are absoluteely sure you will only live there 5 years, you should consider a 5 yr ARM. It has a lower interest rate. You may want to keep the townhouse and rent it out, which means the 15 or 30 year is a better choice. I think your decision is more personal or should fit your situation versus advice.

  9. The overall savings you’ll get by doing the 15-year is huge. That’s such a small amount in terms of ‘real’ dollars that I would think you could hopefully scratch up the extra $90 or so difference to increase the payment. If you do a side by side comparison on how long it takes to build up equity, you’ll see the 15 year will get your equity built so much faster. 15 year mortgages and low rates that go along with them are huge recommendations in my book, namely because they allow you to build equity at such a rapid rate, it would reduce the chances of a housing crash ever happening again.

  10. I think I’d go for the 30-year because I would invest the difference in monthly payment. What would you do with the payment difference?

  11. This is also something we are dealing with right now. We would like to lock in while the interest rates are still really low. Plus we are considering doing an addition. They are so many options. Thanks for the tips.

  12. Wow, what an awesomely low mortgage amount you have!

    I’d go the 15 year route and lock 2.75% for sure. I’m assuming you make more than $2,000 a month, therefore that payment should be no problem!

    Sam

  13. Do what I did! Go with a no-cost refinance. At today’s rates, you can get both a lower rate and a lower term for nothing out of pocket (and yes, if you do it right, no principal tacked on to your loan). Gotta stay away from a “no-fee” which is different.

  14. jay @ effumoney says:

    There are more then one metric that can be used to determine if it makes sense to do a refi. You can compare the sum of all payments over the course of the loan, the total interest charged, the payment difference as an impact on cash flow, and the total duration of the loan. I recently posted all of the calculations needed to determine all of you break evens, I also posted s Spreadsheet which compares various scenerarios side by side so you can see for yourself if it makes sense to refi.

  15. I would go with the 15 year refi, if you are not struggling with cash flow right now and if you have the cash to pay for the fees up front.

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