Should I Refinance my Mortgage?


Last June we refinanced our first and second mortgage (I didn’t follow my own tips for a first time home buyer) and secured a lower mortgage rate.  We signed for a 30 year mortgage in order to keep the payments low.  We wanted to know we can afford the payments so I have flexibility in my career.  You never know, I may want to be a housewife one day and I want to know I have that option!  When we refinanced our mortgage, we went with a loan that didn’t provide an escrow service for us, so we had to do that ourselves.  Not a problem; we actually enjoy saving money ourselves for homeowners insurance and property taxes.

Thankfully, the closing costs of refinancing only were $150.  The only drawback?  There is a prepayment penalty on the loan, and the only way I can avoid a prepayment penalty is if we make a large payment on the loan and then wait a day and pay the rest.  I don’t know about you, but I don’t have over $100,000 just sitting in our bank account, so we’ll eventually have to pay a prepayment penalty that will likely be over $1,000.  I was aware of this prepayment penalty when we refinanced, and we had no closing costs, so I’m not going to complain too much.  Had we gone with a conventional mortgage refinance, the costs would have been a lot greater.

Anyway, my point here in all this is that I’ve been considering refinancing again.  Mortgage rates are at a historic low, and I’d love to get a mortgage in the 3-4% range.  That would be awesome! I checked today, and we could refinance for as low as 4.32% and our payment would be about $150 less than they currently are if we went with another 30 year mortgage.  Of course, I know we’ll pay closing costs with this mortgage so I’d have to factor in about $1500(?) for closing costs, plus the prepayment penalty from our current mortgage (at least $1300).  With that alone, I’m looking at $2800 just to get a lower rate!  I’d make that up in 18 months, and we plan on staying in this house for at least that long.  However, I don’t know if it is worth it.  I’ve thought about trying to refinance into a 15 year mortgage, but I don’t know if I’d want the higher mortgage payments each month.

I think I’m just going to keep our current mortgage and maybe start paying a little extra on the principal each month as I see fit.  At least then I’d be saving myself money that wouldn’t be going towards interest.  Plus, I feel like I’m “making” 5.59% on my money then, and we know there aren’t any savings accounts or certificates of deposit that are paying that right now!

I’ll be honest: the 3-4% mortgage interest rates are really tempting, and I almost wish they weren’t that low so I wouldn’t be tempted!  It’s so hard to decide how to handle money sometimes. I think as long as we live below our means, we’ll end up fine and I shouldn’t worry about it so darn much.

Do you think I should refinance my mortgage?

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10 thoughts on “Should I Refinance my Mortgage?

  1. Kacie says:

    I say no. Why start all over with another 30-year loan? I think especially since your closing costs would be what they are, it’s not worth it.

    Keeping the flexibility of lower payments (compared to a 15-year) would probably be great in your situation.

    18 months isnt that long of a turnaround to making refinancing better. Does that include overall interest for the life of the loan?

    When it looks like you’re down to the last 2-3 years or so of your mortgage, you could start making your extra payments to yourself in the highest interest savings account you can find. You’ve already paid the bulk of the interest at that point so the extra paymetns wouldn’t reduce the amout of interest paid by that much (I think).

    That way you can have your lump last payment and hopefully not get socked with that prepayment penalty!


  2. Heather says:

    What are your goals in refinancing? If it’s just to know that you have a lower rate, then no.

    I’ve read in a few places that if you can’t reduce your rate by at least one point, don’t refinance. I don’t know what your current rate is or what rate you’d be able to get, so I can’t speak to that for you.

    Which is more important: short term (payments) or long term (total cost)?

    We just refinanced. We were able to get a rate 1.25% lower than where we were. We also went from a 30-year to a 25-year. (Since we’ve lived here for almost five years, we really took only 2-3 months off.) But our monthly payments are lower AND our long-term overall money paid is lower. We had decided that both needed to be true in order for us to do it.

    We paid a lot in closing costs, but again, it’s saving us money short-term and long-term, so it was worth it.


    Mrs Money Reply:

    Heather- I’d like to get a lower rate. We’re paying 5.59% right now and we could get as low as the high 3%-low 4% according to sites.

    I think that we probably shouldn’t do it. I think that the closing costs would make it not worth it. I probably underestimated them. I will just have to keep putting extra money towards the mortgage each month.

    Thanks so much for your insight- I appreciate it!


  3. Kacie says:

    I was thinking about this some more and it might make sense to refinance if your monthly payment will be significantly lower and if it will reduce the overall interest. Cuz 18 months isn’t a very long break-even point.

    Let us know what yuo do!


    Mrs Money Reply:

    Kacie- We’re paying 5.59% right now, and could get into the high 3%-low 4% according to sites. That’s what I was really looking at- the lower interest rate. Of course, I think I underestimated closing costs too. Plus, who knows how long we’ll really be in this house. If we knew we would be here forever it may be worth it. I think I should just start paying more each month to knock down the principal.

    I am so glad you didn’t buy a house last year 🙂


  4. Penny Frugalista says:

    We’re at 5% on our mortgage and while it’s very tempting to refinance, the closing costs in our area would probably be $5000-plus, even though I know we’d be in our home long enough to make up the difference. But I’d rather make extra principal payments instead of going through the refi process. So I think we both have the same plan — I’m comfortable with the extra payments.


    Mrs Money Reply:

    Penny Frugalista- WOW! We’re at 5.59% right now. The lure of lower rates has me curious. $5000 in closing costs is a ton of money!

    I think we’re going to stick to your plan too. 😉


    Penny Frugalista Reply:

    We were lucky that we had excellent credit when we bought our home in June 2009 — 5% was the best rate out there. Of course, being that we live in Northern NJ (I can see NYC from here, about 10 miles away), our total mortgage burden is probably double that of most people’s, except for those who live in/near major California cities.


  5. Tom MacDonald says:

    These are basically black and white decisions. It all comes down to the math. The final numbers will determine if it is even feasible. If it is, then the product features will come into play when making a decision.


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