Dec 5, 2008

We're Finally Re-Financing Our Mortgage

I've mentioned several times in the last year that I've been keeping an eye on interest rates to see if they fall low enough to make re-financing worthwhile. And they finally have.

We'll be re-financing at 5.125% or lower. Thanks to some special programs that we're eligible for, we got a low rate with a 60-day lock and two float downs, so if rates go down between now and when we close, we'll be able to get that lower rate. The loan officer said she thinks rates will go down in the next few weeks, so I took her advice and took the 60-day lock at 5.125% instead of a 30-day lock at 5% with no float down.

Calculating whether the refi would be worthwhile involved enough numbers to make my head spin, but the loan officer ran the numbers with me a second time and confirmed my conclusion. A key factor in making the refi worthwhile is our commitment to continuing to make our current monthly payment even though the minimum payment will be lower with the new loan.

Here's an example of the math (I'm using round numbers for the sake of privacy and convenience - and remember, if the balances seem high, they're normal or even on the low side for Southern California):

Current mortgage
Current balance: $230,000
Current interest rate: 5.75%
Current monthly payment: $1460
Interest paid to date: $78,300
Interest that would be paid over life of the loan: $275,215

New mortgage
Balance including closing costs: $235,000
New interest rate: 5% (I'm gambling that it will go down at least this much)
Interest paid over the life of the loan making the same monthly payment as above: $175,740
Total interest paid on this loan plus interest paid on previous loan: $254,040

Difference in interest paid between the two loans: $275,215 - $254,040 = $21,175

So that's a savings of $21,175 in this example, and the loan will be paid off in 25 years instead of 30. In our case, the numbers work out to a savings of about $30,000 over the next 22 years, and we'll still pay the mortgage off two to three years before our current mortgage (assuming no extra principal payments).

Of course, we can always increase our savings by paying more extra principal each month, and it's likely we'll do that. Still, I can't help but wish the savings were greater (and they may be if the mortgage rate goes down further before we close). But in any event, for just a few hours' investment, we'll have saved ourselves $30,000.

Maybe it's time to think about re-financing your own mortgage? . . .


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Brittany said...

We re-financed in Jan 2002. We went from a 30 yr mtg at 9.25% (we still had 22 yrs left on it) to a 15 yr mtg at 6.75%. Our monthly pmt went down $20. We have 8 yrs left! Yay!

Anonymous said...

One of the easiest ways to pay extra on the principal each month is to have your mortgage payment automatically deducted directly from your checking account, with the extra principal already built into the amount (even if it's only an extra $25 or $50). Once you're comfortable paying that amount, then up it another $25... We currently pay $225 extra each month but because it's automatically deducted, we think of it as our actual mortgage payment. If you wait around until you have extra money to apply to the principal, you'll never do it. Plus, our mortgage company gave us the option to have the payment deducted from our checking account anytime between the 1st & the 8th of the month, so it's great to have a few extra days before the payment is due.

Karen in So. MD

Anonymous said...

I have a 7.5% interest rate and never got around to refinancing. I "only" have $25,000 left on my loan. Even at my current rate I'll have my loan paid off in 5 years if I keep up my $200 extra monthly payment. Is it worth it to even think about refinancing at this point?

Chief Family Officer said...

Brittany - Great job! :)

@Anon #1 - I agree, auto deduction is awesome!

@Anon #2 - My inclination is to say it's not worth it but you'd really have to run the numbers to know for sure. You'll want to calculate the total interest you'll have paid at the end of your current loan and compare it to the total interest you'll pay if you refi. I used the mortgage calculator at