Mindful Money: Thinking about refinancing

By Mir
January 12, 2009

For many people, the recent situation with the economy (do you like how I call it a “situation with the economy,” all genteel-like, sort of like how during World War II there was a situation with Germany?) has had dire consequences. Unemployment is up. Housing values are down. And the reality is that many families who were doing “okay” or “fine” before this are now barely hanging on.

If you are one of those families, this post is not for you. (You’re in my prayers, but obviously a refinance is not the solution to your situation.)

This post is for those of you who are still pretty much okay; who have a sizable (but manageable) mortgage that has not outrun your current property value; and who still have stable income and a decent credit rating. You should be thinking about refinancing right now.

The media has sent us an overwhelming and sometimes conflicting stream of information of late. First they caution that credit is absolutely impossible to get right now! No one is lending! The sky is falling!! And then the next day they’re clamoring about how interest rates are at an all-time low and you should refinance if at all possible. Except maybe you didn’t hear that part, because you were curled up in the corner of your bathroom, hyperventilating.

Let’s have a nice cup of tea (how about some PG Tips? I have approximately seven thousand bags of it!) and talk about the reality.

If you need a basic primer on refinancing, Bankrate has a pretty good article about it you should probably go read.

And here are some additional things to think about, based upon my vast wisdom (stop laughing) and the fact that for one horrible, soul-sucking year of my life, I was a mortgage broker. Yes, really.

Interest rates are ridiculously low. Really low. So low, it’s hard to believe. That’s horrible news for your IRA, but fabulous news for your mortgage. Again, if you have good credit and a mortgage that is still less than 80% of your current property value, you should be looking into refinancing. “But Mir!” you say, “I have a pretty good rate on my mortgage already!” Well, that’s great. But looking into refinancing is absolutely free and many lenders are giving 30-year fixed mortgages at under 5% right now. Do your homework before deciding to pass.

Think about your lender. I normally encourage folks to shop around for everything, and mortgage rates are no exception. Except that with the collapse of several large financial institutions, getting your mortgage through Joe’s No-Name Bank starts to feel a little weird. Definitely do shop around, and remember that even when a bank fails, mortgages are insured and taken care of (albeit perhaps in ways you may not anticipate, like in that you don’t get to choose who ends up holding your mortgage), but if you’re already with a lender where you feel comfortable, definitely go to them first.

Think about your loan term. Mortgage lenders like to talk fast and convince you that they’ve got the deal of the century, right here. Make sure you understand the changes in your loan length. For example: If you’re currently on a 30-year fixed mortgage at 7%, and Smooth-Talking Bob at Big Bank is going to get you a 30-year fixed mortgage at 5%, that’s great, right? Maybe. If you’re already five years into your current loan and he’s talking about resetting the clock to 30 years without lowering your loan amount, something’s wrong. You’d be losing five years of payments, essentially. While the “standard” loan terms are 15, 20, or 30 years, some lenders will customize loan terms for you. So if you’re 2 years into your 30-year mortgage, they may be willing to create a 28-year mortgage for you, which keeps you on track with your original payment schedule.

Similarly, conventional wisdom is that a 15-year mortgage is always going to be superior to a 30-year, both because you pay it off twice as quickly and the interest rate will be much lower. Right now interest rates are so low, the difference in rates between a 15-year and a 30-year isn’t all that significant. If you’re thinking about moving to a 15-year mortgage from a 30-year, get all the numbers before you make your decision. It’s possible that staying with a 30-year (or a slightly shorter, custom term) makes more sense, and then you can always make extra payments against the principal to speed up payoff, if you wish.

Did you know that if you make just one extra principal payment on your mortgage every year, you’ll pay off a 30-year loan in 23 years? It’s true!

Know what you’re paying, and how. Lenders don’t refinance you out of the goodness of their hearts. They have to make money on it. A Truth In Lending statement (TIL) will itemize all of the expenses involved in your loan. Read it carefully. There are closing costs and fees associated with your refinance, and they can really add up. Often a lender will advertise that a loan is “no closing costs,” which is a bit of a semantics game. There are always closing costs; what they may mean is that those costs are being rolled into your loan, or that they’re not offering the best interest rate, because they’re giving themselves a large enough profit margin to pay your closing costs out of that. Just know what you stand.

Don’t be afraid to haggle. If you have a question about a fee, ask. Don’t just accept that “this is what it costs.” While the lender has the right to make a profit on this transaction, the rate you’re offered (and the associated closing cost) is not something carved in stone somewhere. You’re offered a rate that will make the lender a certain amount of profit; you are well within your rights to ask for a lower rate or a reduction in closing fees if you feel you’re not getting the best deal. The worst that can happen is that they say no. And this is where shopping around pays off—it always helps to be able to say that, “Bank Down The Street is offering me a quarter point lower than that.” This isn’t about bullying or being obnoxious, it’s just about looking out for your interests as an informed consumer.

Do the math. People often say, “But I’m not sure I know when it makes sense to refinance.” Figuring it out is a lot simpler than you may realize:

Compare your current mortgage payment and your projected new mortgage payment. Take the difference between the two—that’s how much money you’re saving each month. Now take the difference between your current mortgage balance and the projected new mortgage balance—assuming that you’re maintaining the same loan term, without adding years—that’s the cost of making the change. (Again, typically you will add some money to your loan due to closing costs.) Alternatively, look at the amount of money you’re being required to bring to closing, if you’re not increasing your loan amount.

Divide the cost number by the monthly savings number. Now you know how many months it will take before you’ve essentially “paid off” the change you’re making. If you’re reasonably confident you’re planning to stay in your current house for more months than the number you just calculated, it’s a smart financial move. (On the other hand, a good rule of thumb is that that number should come out to less than five years, even if you’re not planning to move in that time. Anything under about three years would make the most sense.)

Think about your debt. Whether you refinance or not, make sure you understand your current debt situation. Every time I post about money, someone comes along and tsk tsks me about not promoting a Dave Ramsey-esque cash-only credo. I happen to agree with the financial folks who remind us that mortgages can be “good” debt; very few of us can afford to own homes without a loan (at least initially), and the tax savings while making mortgage payments is a significant boon for most of us. Given that for most of us a mortgage is a necessity, I can only suggest that we be vigilant about getting the best deals on them—just like on everything else.

(It’s really too bad you can’t pick up a discounted mortgage at Amazon, come to think of it….)


  1. Thanks for all of these wonderful tips Mir! DH & I have been looking into a re-fi.

    The problem for us is that we had our house on the market a couple of months ago. We took it off after the stock market, um, situation when it became clear that we were better off staying put.

    NO ONE will work with us on a re-fi until we’ve been off the market for 6 months. Such a pain.

  2. We just closed on our re-fi Friday night. Dropping our rate to 4.875 30 year fixed paying .125%points. All that use to be greek to me, just a little homework and I speak mortgage. We dropped our payment by $160 a month, that’s 57k over the life of the mortgage (insert happy dance here). Start watching rates so when you are ready to refinance you know what the rates have been doing. So if they drop suddenly because of something the market does – you’ll be ready. (That’s what I did – we locked our rate the day after the last fed rate drop – the next day the rates had dropped significantly and I haven’t seen them that low again. But I’m sure they will be again.)

  3. Great post!

    We are set to close on our re-fi next week at 4.875 – a savings of about $200 a month on our loan. One of my readers said she just locked at 4.5 percent – which is AWESOME!

  4. We moved into our house about 6 months ago, and we got 5.5%, no PMI, etc…
    I guess it doesn’t make sense for us to re-fi, since our mortgage is still more than 80% of our home value.
    Thanks, Mir, for the info!

  5. Timely post, my sister was just asking me about refi. Thanks for the clear and useful info.

  6. Great info Mir! We are doing a re-fi too. Our case is slightly different in that we have a home equity loan that we are consolidating into the mortgage. Right now we are paying over 8% on the HE loan!!

    It is a great time to refinance!

  7. Great post. Timely and well-written. We looked at refinancing and decided it actually wasn’t for us. We have a pretty low rate already (just below 5%) and only 11 years left on our mortgage. So the savings really didn’t balance against the closing cost of a refinance. I agree that you need to do your homework.

  8. Received our paperwork today for our refi. We are 10 months into a 30 yr loan and were able to lock in at 4 3/4 dropping our payments be $250 a month. Our good credit reduced our closing costs significantly! My husband is a drywall contractor and it looks like I might have to go back to work if things don’t change,sigh,this refi will put that off a little longer.

    For those considering buying a new home, there are going to be many incentives available in cooperation with union contractors over the next few months. Just a heads up! Build a house so my husband can make money and I can stay home with the kids!!!!!

  9. dropping our payments BY $250, not payment will be $250!!!
    Boy, wouldn’t that be nice!!!!

  10. Most excellent post, Mir. I started calling my mortgage company on January 2 to find out what rates they were offering — it took me a full week to get someone on the phone, no lie. They are all swamped, so one must be persistent.

    We are dropping a full tenth of a percent on our refi, saving about $11k in interest over the life of the loan. Where I am sneaky is that the P&I is dropping by about $200, but I’m going to use that to prepay the principal. So, by paying the same amount monthly that I am now, I’m knocking about 4 years off the loan and saving $11k on interest to boot. Yay me! Almost makes up for the $1,000 in plumbing repairs over the last 3 weeks…

  11. We first got a loan in ’91 when the rates were sky high, then refi-ed to a 15-year mortgage at some point. A couple years into THAT, the rates had dropped low enough that we wanted to refi again, but didn’t want to go back to “15 years left”.

    No one wanted to give us a 10 or 12 year mortgage, but they WERE willing to give us a really low-rate 10-year home equity loan to pay off the prior mortgage with . . which basically worked out to the same thing (we were far enough into the loan that any tax advantage had disappeared anyway).

    So – Home Equity loan. Just another option!

  12. Great post, one of my friend was just asking about home refinance. Thanks for the useful information. I think the first thing a person should do is to understand his own financial health. I realized how bad I was in managing my finances when I took BillsIQ personal finance quiz. If we are aware of our financial status, it will be easy to select the right option.

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