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Last year at this time, about two and a half years after we’d bought The Treehouse, we started talking about refinancing. Mortgage rates were dropping, and our mailbox was full of refinance offers. We had a 30 year fixed mortgage, and wondered if we could refinance at a better rate, and lower our monthly payment. We were also curious about using some of the equity of our house to get funds for home improvement projects.
But we didn’t know anything about refinancing, or what the numbers would really look like for us. These are the 10 things we learned:
1) Don’t believe the advertisements.
The crazy low rates being advertised didn’t apply to us, and probably won’t apply to most people. So mostly ignore rate advertisements, and speak to a professional you trust. If it sounds too good to be true, it probably is.
2) Go in with flexible goals.
Our original wish (a lower monthly payment) wasn’t as tempting as we thought once we saw the numbers. It was going to be a big effort to refinance, and our monthly payment wouldn’t be that much lower. We also learned that taking money out of the equity of the house for home improvements wasn’t attractive to us — if we wanted to do that, we learned a separate line of credit, that had nothing to do with the refinance, would actually be a better fit.
3) The Shorter the term, the lower the rate.
Though our original aims for refinancing weren’t panning out, in our research, we learned that if we refinanced to shorten the term of the mortgage from 30 years to 15 years, we could get an even better mortgage rate. Our focus shifted: instead of thinking about lowering our monthly payment, we took a longer view, and realized we would save substantially more by shortening the length of the loan, and taking advantage of the low rates.
But. Going from 30 years to 15 years — even at a better mortgage rate — would raise our monthly payments by 25%. Which as you know, was not at all our original goal. So this wasn’t a no brainer for us, we had to think about it.
4) Refinancing takes real hours of your time.
While we thought about refinancing to a 15-year mortgage, we also had to consider time. Refinancing takes as much time as getting the original mortgage (minus the house shopping portion of the process), because it’s effectively the same thing. The system is pretty much identical — you’ll need paperwork on taxes, proof of income, bank statements, investments, debt, savings, — usually for the past 2 to 3 years. Though I think it was less intimidating to us, because we had just done it two years before and understood the process.
Even if you’re super organized, it’s a bit of a beast to gather all this information, and communicate it to your refinance expert. It can feel like a full-time job for a week or more, and then a part-time job until the new, refinanced mortgage is signed.
What worked best for me was to make a checklist of each individual document I needed — not just a general “tax documents,” but a more specific “2015 tax return.” Our documents were entirely digital. So I created a Refinance Folder on my laptop with more folders inside for type of document I needed.
We also spent a full morning at the refinance office signing papers. So definitely consider timing — I wouldn’t recommend starting a refinance the week a baby is due, for example. : )
5) Budget for out of pocket costs.
Beyond time spent, there’s also the out of pocket costs. You’ll likely need to pay for an appraisal and possibly an inspection. And you may have closing costs that need to be paid up front, although sometimes these closing costs can be absorbed in the loan; it depends on the situation.
6) Do the math to figure out if refinancing is right for you.
So we had to think about it like an equation. We had to consider the “downsides” of refinancing — our time, our out of pocket costs, our new higher monthly payment. And consider them against the “upsides” of refinancing — cutting the length of the mortgage in half, and cutting the total amount of money paid over the life of the mortgage almost in half as well.
7) If the numbers look advantageous, move forward.
We decided to go for it. Rates were predicted to go up, and we wanted to take advantage while they were low. Yes our monthly payments are higher, but the mortgage rate is lower and the loan life is shorter by half, which means we are paying a bigger chunk of the loan principal each month.
8) Don’t forget to think about future plans.
But, if we were to sell the house this year, then refinancing was probably a bad idea. Not enough time has passed to feel or benefit from the long-term savings. So depending on your situation, refinancing at a lower rate, may or may not be a win.
9) There are other reasons to refinance too.
Another reason to refinance would be the opposite of what we did: going from 15 to 30 years, to lower your monthly payment, or to switch from an adjustable mortgage to a fixed mortgage.
10) You can sort of DIY shortening your loan.
We also received advice that we could stay at a 30-year mortgage, but make monthly payments as if it was a 15-year mortgage (meaning: pay extra on the principal each month), bypassing any paperwork. But, by doing that, the loan wouldn’t have the lower rate, and those higher payments would be based totally on discipline. We decided that wasn’t a great fit for us, but depending on current rates, it might be a great fit for you.
Now, I’d love to hear your experiences! Have you ever refinanced? Was the goal a shorter loan, lower payments, or perhaps an equity loan? And how do you feel about the paperwork involved? Does it seem like my timing estimates were an exaggeration? Are you speedy at this kind of thing? Any other advice you would add for someone thinking about refinancing?
Photos by Justin Hackworth for Design Mom.
Alexandra
February 8, 2017 at 1:24 pmGreat post! We also live in the Bay Area and refinanced last year after 2.5 years. Our monthly payments are now significantly lower. The main reason is that we had to pay mortgage insurance in the past, but since home values had increased tremendously in our area, and we paid off enough of our mortgage, we do not need that anymore. The paperwork was onerous; I agree that it helps when you are organized. I had an excel spreadsheet listing exactly what’s needed and was able to scan that all docs in and send them to the provider. It also helped that we refinanced with the same provider that we used for our initial mortgage, and their mortgage person was the same as for the initial mortgage. I am also in the legal profession, so I am used to massive amounts of paperwork …. it was worth it for us. I think if you want to refinance, you might want to start looking into it with your current mortgage provider after looking at the rates, and see what they can do for you. I had researched rates for our situation and talked to mortgage brokers and then went to our mortgage provider telling them that we would like to refinance, and what other providers offer. They were able to give us a good rate, so we went with them. It is possible to negotiate, at least in some instances. The secret is to be well-informed. Good luck!
Design Mom
February 8, 2017 at 3:48 pmI’m so glad you mentioned the ability to negotiate. I definitely need that reminder. I think when it’s a giant purchase, my instinct is to think all numbers are firm, but of course that doesn’t make sense. The big number means there’s probably some flexibility.
And I’m also glad you brought up mortgage insurance. I should look into mine and figure out when we won’t need it anymore.
Update: I’m a dunce today. We paid 20% down in order to avoid the mortgage insurance altogether.
Alexandra
February 8, 2017 at 4:07 pmI did not really expect there to be some leeway, but surprisingly there is: we have our mortgage through a credit union, and have had various mortgages over the years through them, have always paid on time, etc., so basically what I told them is: I have been a great customer for years, if you want to keep me, you need to be flexible, and they turned out to be …
Here is a good write-up about the PMI and how to get rid of it: http://www.bankrate.com/finance/mortgages/removing-private-mortgage-insurance.aspx
Especially in the Bay Area, home values have increased so much that it might be worth looking into it. Getting rid of the PMI decreased our monthly payments about $250, which I now save separately as “vacation money”.
Design Mom
February 8, 2017 at 4:18 pmI’m all in favor of diverting those funds for vacation. Well done!
Kaytee Cobb
February 8, 2017 at 1:33 pmI’ll also point out that by making bi-weekly payments (which we do because of my husband’s paychecks), you end up making an extra payment each year. Over the course of a 30 year loan, that translates to about 6 years fewer payments. For a 15 year loan it’s about 3 years fewer payments. 😊 It feels like nothing more for the year, but can make a big difference!
Design Mom
February 8, 2017 at 3:49 pmYes! You explained it so much better than I did. I think making bi-weekly payments, or paying extra with each monthly mortgage payment is almost like refinancing without the paperwork. It takes years off the loan!
Cynthia
February 8, 2017 at 2:28 pmI would advise, very simply, DO THE MATH. Rates have been low for so long now that some people think refinancing at every tick drop is wise. We refinanced once and at the same time turned our 30 year mortgage into a 15 year mortgage. Then we paid additionally on the principal to pay the note off even sooner. I can’t convey the feeling of owning a lovely million dollar home free and clear. (We bought it for one-fourth that amount.)
Design Mom
February 8, 2017 at 3:50 pmThat sounds so lovely! A whole home paid in full!
Katherine
February 8, 2017 at 3:46 pmYou mention: “Yes our monthly payments are higher, but the mortgage rate is lower and the loan life is shorter by half, which means we are paying a bigger chunk of the loan principal each month.”
Curious if you evaluated keeping your first loan, but adding a principal curtailment to your monthly payment. Depending on your rates, it seems like this could accomplish the goal of paying off the principal faster while still keeping your monthly payment lower than your new monthly payment under the refinance.
Design Mom
February 8, 2017 at 3:52 pmUm. No. I definitely didn’t look into a principal curtailment. And I say that confidently because I’ve never heard of a principal curtailment until I read about it in your comment. : )
But now I wish I had! It sounds super interesting and now I’m wondering if my mortgage broker has any thoughts on the subject.
bdaiss
February 8, 2017 at 4:13 pmPrincipal curtailment is just a fancy way of saying you pay extra each month that goes directly to principal, reducing the time you pay on your loan. You did look at it. And decided it wasn’t a good fit for you (according to your post). :)
Design Mom
February 8, 2017 at 4:18 pmOh! Thank you. I was feeling like I had somehow missed out on some important term.
bdaiss
February 8, 2017 at 4:20 pmWe also refinanced around 2 years after our original loan. In our case, we built our house and then interest rates dropped significantly. We refinanced to another 30 year as we couldn’t quite afford the 15 year but refinancing also allowed us to take our home owners insurance and taxes out of escrow. Why should the bank earn interest on our money when we can?
Interestingly, I’m of the “Pay it off fast!” mode. My husband and our financial adviser have repeatedly made the argument that, with our super low interest rate (2.5%) we are better off paying/doing other things when you look at the long game. I still can’t get my head around that one, so my husband and I agreed we’d pay about 20% extra each month (which goes directly to principal). I have our payments set up as automatic withdrawals, so the money is already “gone” in our checkbook register each month and there’s no chance to get lazy and not do it. It’s already reduced the length of our loan by years. And that is very satisfying to see.
Design Mom
February 8, 2017 at 10:07 pmSo fantastic! It sounds like you have a really good system and I’ll bet it’s fun to see that principle drop each month.
Also, I know what you mean about not being able to get your head around keeping low-interest debt, even though it might make the most sense financially. I just want that debt off my back!
Jo Maseberg Tomlinson
February 8, 2017 at 6:12 pmWe refinanced from a 30 year loan to a 15 year loan and with the lower interest rate, our payment stayed exactly the same. We did not pay a penny more, and the house will be paid off in 12 years! Such a blessing to watch what we owe drop each month!
Design Mom
February 8, 2017 at 10:09 pmHuge congrats! That’s amazing. I will try not to be jealous. : )
Annet M
February 8, 2017 at 8:26 pmI would also add that you should check if there are any penalties for getting out of your mortgage early. When we lived in Australia, the peak of interest was 8.5% (!) and we had a portion fixed and a portion on variable interest – so helped us both when interest went up to that highest point, since not all was going up, and also benefited when it dropped. However, we were locked in to the fixed part for 5 years, and when we looked at refinancing, the penalty was in the $10s of thousands. So it wouldn’t have been worth it, even with the lower amount. Thought it worth mentioning.
Also, our mortgage here in Canada offers us 3 options each year – pay a lump sum of 15% of the mortgage each year, double-up our payments each payment, or pay up to 15% extra each payment (or something like that). You can even do all 3, so plenty of ways to throw extra money at the mortgage. I too LOVE see the numbers drop!
Design Mom
February 8, 2017 at 10:10 pmSo glad you mentioned penalties for early payoff! I actually haven’t heard of that in awhile, and I don’t know why. Maybe it’s not happening as much anymore? It’s the sort of thing I would expect to be outlawed during bank reforms.
Em
February 8, 2017 at 9:34 pmWe also refinanced one year after we bought our house. We had a good interest rate but rates dropped even lower in that year. We made a lot of extra payments in that year, reducing our principal by 20k. We forwent other things like vacation and nice things to put all extra money into principal for the year. This meant that when we refinanced we were borrowing 20,000 less so our loan amount had changed and we were able to reduce our monthly payments because of the lower loan amount and interest rate.
You have to consider a few things when deciding if refinancing is right for you. Every time you refinance, it’s like starting your loan all over again. For example, at the beginning of our loan, 20% was going to principal and 80% was going to interest. If we paid $1000 toward principal curtailment, we were knocking our loan down by 4-5 months each time as it was pure principal and only $2-300 was going toward the principal itself. Since we were only 1 year in, the principal to interest ratio hadn’t changed much. However, now that we 5.5 years in, the ratio is closer to 50-50. That means if we refinanced now, even if the interest rate is better, we’d go back to a 20-80 ratio and we’d be paying a lot of interest…not to mention a few thousand in closing costs tacked on.
Moving from a 30 year loan to a 20 or 15 year loan is great. One thing to keep in mind is life. We considered it but we stuck with the 30 because we didn’t know if we’d always both have jobs. As it is, I took a year off when our son was born. We didn’t have the means to pay extra during that year. Now that I’ve been working again for a few months, we’ve added money to our savings account and his 501 college savings plan. Now we’re back to paying principal curtailment on our house which we are diligent with doing, so it works for us. We set goals and post them up in our house and check them off to help us.
It sounds like you made great choices for your family, however there are lots of things to consider based on circumstances that people should consider.
Design Mom
February 8, 2017 at 10:14 pmSuch a helpful comment! And so true. There really are several specific factors that will be different for each couple, and that will affect the decision to refinance or skip it. I love all these notes from different readers! I’m hopeful that if someone is reading, and thinking about refinancing, they’ll be able to go into discussion with a list of questions and factors to consider as they do the math. It’s all a big equation!
Paige Flamm
February 8, 2017 at 10:16 pmWe bought our home in June and are planning on refinancing around the one year mark. We did a down payment assistance program that gave us 5% for down payment, but left us with a higher than desired interest rate. We’re hoping to get that lowered to help out the monthly payment a little bit!
Paige
http://thehappyflammily.com
Design Mom
February 9, 2017 at 1:54 pmSending you good refinance vibes!
Meredith Adolf
February 9, 2017 at 10:12 amOver the years that we have owned homes, we have refinanced many times. Lots of different reasons, some worth it, some…not so much. In the process, we eventually learned how to look at all the factors to help us determine whether refinancing (again) would be good for us. You covered much of it in your article, and more great points are being made in the comments.
One factor that I haven’t seen mentioned yet is the effect of refinancing on real estate tax. In my county, taxable real estate value increases are limited to a maximum of 3% per year, unless the home is sold or refinanced.
One home we lived in for over ten years and ended up refinancing six times because the rates dropped, or the term was shortened, or…whatever…but with hindsight, I can see that we paid thousands more in real estate taxes than we would have if we had chosen to do fewer refinances. You can bet that we are more cautious about refinancing now!
Design Mom
February 9, 2017 at 1:55 pmThat is super helpful information, Meredith. I hadn’t even considered what refinancing does to my real estate taxes. One more thing to add to the equation.
C in MD
February 9, 2017 at 10:20 amI bought a house in 2007 at a pretty high interest rate, then refinanced within one year to lower my monthly payments. I had to roll about $10K in closing costs into the new loan. Then the market crashed. I moved out of the house in 2012, and now its a rental. I refinanced again in 2015, into a much lower rate, to lower payments. That time, I didn’t have ANY out of pocket costs, which was awesome. I would love to consider refinancing again into a shorter term loan, but I’m worried about closing costs and how much higher my monthly payment will be. If the rental income I receive can cover them every month, I don’t see a downside!
Design Mom
February 9, 2017 at 1:58 pmNice work on zero out of pocket costs!
Rachel
February 9, 2017 at 11:20 amThanks for posting this as it gives me some things to think about when getting my first mortgage, which we hope to be doing soon! We hope to put down 10% on a 15 year loan and put extra money into the principal until we get to that 20-22% number that allows you to ditch PMI…hopefully within the first year. Anyone have advice for how to do this? Most people seem to think about dropping PMI after the fact, but since we are planning for this, I’m wondering if there is anything I need to be be thinking/asking about that would make it easier or cheaper.
Cynthia
February 9, 2017 at 11:42 amWhy not just save another year or two so you can put down 20% and avoid PMI altogether? Do the math. You may find you’re better off saving/investing/making more money on your own vs. paying a bank to provide the required insurance in case you default.
Design Mom
February 9, 2017 at 1:57 pmThat’s a good point. We did 20% down. I totally forgot that means we got to ditch the mortgage insurance!
Rachel
February 9, 2017 at 5:28 pmAh, yes, definitely something we will consider. I should add that we will be moving from out of state and would really prefer to move once, which is part of the reason we are eager to buy right away. :) We will certainly do the math, though. The Price-to-rent ratio there makes buying extremely attractive (unlike where we live now) , so it may make more sense to shell out $ for PMI than to wait until we have the full 20% down.
Andrea
February 10, 2017 at 9:12 amA note on timing since you say not to start when a baby is due…. well we did! Our lender worked with us and sent someone to our house for the closing to sign all the papers when the baby was 4 days old! The rates were so much lower we couldn’t wait.
Faith
February 26, 2017 at 9:48 pmWe were considering refinancing our mortgage because we wanted to put a large payment down on our principal. I read an article about mortgage recasting and we did that instead. When you recast, your rate stays the same, but they recalculate your monthly payments based on your new principal so you save on interest over the life of the loan. The best part was that if I recall correctly it only cost about $300 in fees and there wasn’t a lot of paperwork. I just wanted to mention it because it doesn’t seem to be a well-known option.
Amy White
June 18, 2017 at 3:22 amDuring the summer of 2016 (the one-year mark of purchasing our home), we started receiving lots of offers of no-cost refinances. I researched the companies thoroughly, and confirmed with multiple sources regarding the “too good to be true” feeling. Everything checked out, thank goodness! Our home value had increased 18% since the time of purchase, and the loan-to-value was now just under 20% so that we could get rid of PMI. And we were able to lock in a slightly lower interest rate. Yay! We decided not to move from a 30-year to a 15-year due to possible life changes.
I’m glad that we refinanced (no PMI, lower interest rate), but it caught me off-guard to start over at such a large ratio of interest-principle, even though we’d only had the mortgage for 16 months. Our interest rate is good enough now that I think we’d only refinance to move to a 15-year (or 10-year). Instead, we’ll just put more towards the principle when we can. I love the idea of recasting– thanks for mentioning that, Faith!