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 Smartphone, Should I Buy the NeatDesk or NeatReceipts Scanner, What Would You Do With $1,000,000, Should 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!