Refinancing Our House

The other day Kyle wrote a post about how low mortgage rates are right now. We’ve been kicking around the idea of refinancing for a while, and at this point think we’d like to move forward. This is an opportunity to lower our rate significantly.

The big questions:

1. Is it worth it – how much of an impact will a lower rates have? For us, the attraction is paying less interest over the life of the loan. We’re going to be trying to refi into a 15-year mortgage, with rates at right about 3.875% right now, which will actually increase our monthly payment by about $300 a month, but reduce the overall interest we pay over time by $110,000. (Holy crap!) We’ll knock 10 years off our current (remaining) mortgage. The principal portion of our monthly payment will be almost 3x greater than in our current mortgage.

2. Do we have enough equity in the house? Home prices have dropped in our neighborhood since we purchased, but our down payment and upgrades should make the appraisal on our home high enough to refinance without being forced to bring extra principal to closing.

3. Does this overcome the up-front investment in closing costs? Unfortunately, refinancing a mortgage has meaningful closing costs that will not be recovered. For example, we’ll need to hire an attorney, pay for an appraisal, buy title insurance, and pay the lender, among other things. We think the answer is yes, it does make sense to invest a couple thousand in closing costs now to reap the benefits over the coming 15 years (we don’t plan on moving).

4. Will a bank lend to us? We hope so! But I guess we’ll find out soon.

One of the main reasons we’ve decided to refinance is the lack of good investment options. Money market accounts pay basically nothing. Stocks are no longer the comfortable long-term bet they were during much of last century. Bond yields are very low, so interest rates are low. This also means bond prices are very high – they’re much more likely to fall in value than rise. Where should we be investing?

Rather than choose between those unattractive options, we’re going to take this opportunity to improve our debt situation. By paying 3.875% instead of 5.375% it’s like we’re “earning” 1.5% on the entire mortgage principal balance. Our investment in closing costs should break even after about 12 months.

Since we’re in real estate, we know a lot of lenders. I’ve started this morning off by calling 3 of them. We’ll see how the process goes and keep you updated on our progress and any bumps in the road. We figure lots of folks are contemplating this right now, or going through it themselves, so we might as well share our experience so others can learn from it. Wish us luck!