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.