My wife and I began in 1994 with a $150,000 mortgage on a fixed-rate 30-year loan at 8.5% interest. In 2009, interest rates dropped again, so we refinanced at 4.75% on a 30-year fixed loan, rolling in the closing costs of about $3,000.
At this point, we had about $161,000 in debt, at a very reasonable rate (4.75%), but now, in 2012, the rates have dropped to historic lows of approximately 2.50% to 3.75%.
Refinancing to Achieve Our Goals
Our goal: pay off the house in 15 years or less, before retirement age. These rates finally would allow us to do just that. These rates mean REFINANCE NOW; do not wait! Rates always will go up, but there’s no guarantee they ever will be this low again.
After shopping at least 3 lenders, we settled on one with partly lender-paid funding/origination fees; about $3,600 in total settlement costs (rolled into the loan), with a 45-day locked-in rate of 2.875% on a 15-year fixed loan.
Making Sure That Refinancing Makes Sense
The general rule is that, if you can lower your interest rate by at least 1% or more, then you should consider refinancing. For us, the drop from 4.75% to 2.875% is almost 2%, which makes it worth refinancing. Use on-line mortgage calculators with amortization tables, to get an idea of the money you would save.
Closing With Zero Out-of-Pocket
Another wonderful feature involves “zero out-of-pocket money” required at closing. This means that the borrower does not need to bring any money to the closing; instead, the lender absorbs some fees and rolls other fees into the total amount borrowed. This depends on the amount of equity in your home (how much you owe versus what the home is worth) as well as other factors. In our case, our debt was $148,000, with 26.5 years remaining, and payments of $1,008 per month.
Know the Value of the Home
Originally, our home was valued at $150,000; it now appraises at almost $250,000; therefore, we have plenty of equity in the home; but we wanted to refinance and shorten the term of the loan.
Monthly payments on our new loan increased by less than $200 per month; for us, that is very manageable. We will pay off the new 15-year loan almost 12 years sooner than we would have paid off the 30-year loan. Total interest we pay on the new loan is about $36,000. Total remaining interest we would pay on the rest of the 30-year loan is about $120,000; therefore, we realize a savings of about $85,000 by refinancing and paying a few dollars more per month.
Bottom Line: Refinance Now
Even if we had refinanced a 30-year loan, we could be realizing $200-$300 less in monthly payments; so, if you simply want a lower monthly payment, refinancing also can be incredibly beneficial.
Rates may never again be in the 2.5% to 3.5% range, so take the plunge now, before rates go up again!
