To Refinance Our Mortgage or Not? That is the Question.
Short one today. I mainly want to start a conversation in the comments section to see what you fellow Squirrelers think about refinancing a home loan.
Here is some background.
My wife and I purchased our home for $285,000 two years ago. We put down 5% on the house so we are required to pay private mortgage insurance (PMI) each month. Currently, we have $260,000 left on our home loan.
Lately, we have been getting estimates that our home is now worth $330,000! After looking around at what else is selling near us, this estimate seems fairly reasonable.
All of this information has me asking, would it be worth it to refinance?
Costs
Refinancing is not cheap. According to Trulia, there are a lot of costs that could be hidden in the process. Those include…
- Mortgage application fee ($250-$500)
- Appraisal ($300-$600)
- Loan origination and document preparation fee (1% of the total value of your loan)
- Title search and title insurance ($200-$800)
Doing the math, it will cost us about right around $4,000. That is a lot of money!
My Thoughts
If we refinance, there is a chance we will be able to drop the PMI insurance because we will be above the 20% threshold. This will save us just over $100 a month.
Then there is a chance we can lower our interest rate. Currently, I am getting offers to get our rate lowered below four percent. If these offers hold true, we could save another $150 a month.
So after spending $4,000 for the refinance, we would save about $250 (just an estimate). It would take us 16 months to recover that $4,000.
Our home value might jump up another $20,000 in that time. Interest rates most likely will go up by then too, which would probably knock the question of refinancing out of the picture.
Conclusion
Since I am by no means an expert, I should probably set up a meeting with one. As home prices continue to climb in Denver, it might be best to wait one more year though. It is a gamble as interest rates most likely will rise before then as well.
What do you think? What would you do?
Wallet Squirrel is a personal finance blog by best friends Andrew & Adam on how money works, building side-hustles, and the benefits of cleverly investing the profits. Featured on MSN Money, AOL Finance, and more!
It’s truly ironic that you discusses this mortgage refinancing thing, because my parents just applied for a refinance home equity line of credit [HELOC]. I’m going to double back to this post momentarily to add a humble 2 cents to this discussion. Thanks again for blogging about it. 🙂
If you are going to do it – I would definitely shop around (mortgage broker). You may be able to find a lender willing to pay some or all of the 4000 penalty if you switch over to their institution.Or look into coupling your mortgage with an institution you already have some products with – you may be able to “bundle” and get a better rate…
I only ever refinanced my mortgage once, and it was when I bought my cottage. We were lucky, we bought our first house before prices were crazy, and I had enough equity in my home to purchase the cottage outright by upping the mortgage on my house. I’ve since sold the first home, but now I have a cottage with no mortgage which is nice to have – but also basically an emergency fund for me. If anything ever went crazy wrong, we could sell the cottage.
Wallet –
There are placed out there that should be able to reduce/waive most of those closing costs! Keep negotiating and working harder. Take two to three institutions and negotiate/leverage them against one another. That way, you’ll get the lowest refinance costs + best rate. Can you do it?!?! I THINK YOU CAN! Why? Because… IT’S YOUR MONEY AND YOU NEED TO FIGHT!!
-Lanny
This is a math problem, and I don’t think we have the inputs to give advice. Is this a 30 year mortgage? What’s your current interest rate?
If you can reduce the interest rate, that’s a BIG win, and, as others have said, I’d definitely include waiving fees/costs in those conversations.