Disclaimer: I’m not a financial professional, this is my experience looking into refinancing my home and some of the things I’ve learned from it. Please contact a mortgage professional to find out if you should refinance your home mortgage.
Something interesting happened to me in the last few weeks. A neighbor posted how he refinanced his home home mortgage and that mortgage interest rates were SUPER low (as low as 2.25% which is VERY low for home mortgage interest rates). For context, when my mom bought her first home, her interest rate was something like 8-10%. I’m paying 4.125% on my current home mortgage. The thought of cutting my mortgage interest rate in half is significant and this blog will explain why.
When I purchased my house in 2018, I knew basically nothing about mortgage rates. The mortgage broker I was working with didn’t do a great job explaining the nuances of mortgage interest rates. As a result, I accepted a pretty good deal, but didn’t know everything I could have. Things like points and terms and down payments and costs to close are still fairly unclear to me, but a recent experience made me want to learn more about this. This blog is a summary of the things I’ve learned.
How Interest Rates Affect Your Mortgage
To start off, let’s look at why I was looking at refinancing. My current mortgage payment on an originating balance of $210,000 30 year conventional loan with 4.125% interest is $1,015/month. This covers just the mortgage and interest, and does not include anything else (HOA fees, Property Taxes, Homeowners Insurance, etc). I’ve made a few extra payments and my current mortgage balance is a little under $200,000 with just under 28 years left. When I received the information from my neighbor about refinancing, they were able to offer me a new mortgage at $212,000 for 29 years at 2.576%. If I accepted this refinance, my new mortgage payment would drop to about $870, an automatic savings of $145/month or about $52,000 over the life of the loan. That’s not a small chunk of change to put back in my pocket.
This sounded amazing at first, but then I noticed that my mortgage balance would actually increase from what it currently is by about $12,000. TWELVE. THOUSAND. DOLLARS. The reason for this was to cover closing costs and points I was buying up front so I don’t have to pay for anything out of pocket.
Closing Costs / Points
Now we’re getting into the juicy part of what I learned. Financing and refinancing mortgages costs money. Between appraisal fees, attorney fees for preparing documents, fees to pull credits, fees to pay the title company, etc etc etc, the upfront costs just to write up a new mortgage can go into the thousands. When I originally purchased my house, I paid about $6,100 in fees/costs that were separate from the mortgage itself. $4,400 was to cover various legal fees, attorney services, appraisal, title insurance, etc, and the remainder was to pre-pay other fees/taxes that I would be responsible for (HOA dues, Property Taxes, Homeowners Insurance Premiums).
For refinancing, I was only looking at $2,600 in fees. HOWEVER, where the $12,000 really came from was a mix of pre-paying Property Taxes and Homeowners Insurance Premiums (totaling to $5,200) and buying points ($4,800 worth to be exact).
My basic understanding of the way points work is that you essentially pay more to the mortgage company to decrease your mortgage interest rate up to a certain amount. On my initial closing documents I paid $1,050 to decrease my interest by .5% (meaning my original interest rate would have been 4.625% but I paid a grand to decrease it to 4.125%). On the refinance documents, I’d pay $4,800 to decrease my interest rate by 2.25% to reach the 2.576%. In order to allow me to walk away without paying that at closing, they increased the mortgage balance to cover that fee.
After doing more research and introspective thinking, I ultimately decided to not refinance my house with that particular offer. I looked at a few projections, and while refinancing would have saved me $50,000, that would only happen if I owned my home for another 29 years. While I know this isn’t my forever home, and I’d like to rent it out to earn passive income in the future, I can’t guarantee that I will own the home for even another 10-15 years.
Another thing I considered was if I were to refinance, pocket the extra savings, and then sell in 10 years, would it have been worth it? The math says no. It would take me about 4 years to have the savings make up for the new closing costs I’d have to pay (specifically the fees for the mortgage and the cost of points). Plus, my mortgage balance wouldn’t be as low with the refinance (meaning I won’t get as much back when I choose to sell).
Other Things I Wish I Knew
Knowing what I know now about points, I will most likely ask to pay for points off my interest rate when I end up purchasing my forever home. There is a lot of value in being able to reduce your monthly payment in personal budgeting. This may not always be an option, but if it is, it’s a good one for some people.
Always ask for the loan disclosure (sometimes called closing disclosure) when you’re looking into refinancing. I was lucky that the company I was considering working with was willing to give me a refund on my deposit, but in the future I will 100% ask for this and review this before moving forward. Loan disclosures have so much valuable information in them (including the breakdown of closing costs) that help when making a decision like this because it explains every fee and what you can choose to pick another vendor for.
BankRate publishes mortgage rates daily and updates daily. They are a great source to give you an idea of what the average mortgage rates are in the market so you’ll have an idea of whether what you’re being offered is in line with what banks are reporting on average. You can also plug in your specific information (credit score, location, etc) to get more personalized recommendations.
I hope y’all have found this post to be helpful! Are you looking into refinancing? What other things do you wish you knew about buying a home and mortgages? Check out the 10 Things I Wish I Knew About Homeownership here, and keep an eye out for more adulting and finance related content and don’t forget to subscribe to our newsletter!