The Refinancing is Finished–Should You Look Into It, Too?

It took about two months–and a whole lot more stress than I hoped it would–but the refinance finally closed yesterday. Surprising how just casually browsing the web one day can lead to so much activity over two months of your life, but I suppose a lot of even bigger life-changing things start with such small things.

We’ve almost lived in our house for 5 years now. We’ve now refinanced twice. The initial rate we had was something like 6.625%, as I recall. Three years ago, I refinanced because rates seemed so rock bottom: I got 5.25%, and I was very happy. My payments dropped 11%. Then rates kept falling. And falling. And I was leery of refinancing again, because house prices had fallen, as well, and I didn’t want to have to get Private Mortgage Insurance.

But they fell some more. And house prices had come up some, so I went for it.

We closed for 3.875%. Our payments are dropping 17%. Compared to our original payments, we’ve come down 24%. That ain’t bad, being able to save that much money each month. The bad news? Our house’s appraisal is now down 13% from what it appraised for when we bought it. That meant that we had to chip in some of our savings to cover closing costs and avoid PMI. (Not a good time for us to be trying to sell our house, either. Good thing we’re not planning on doing that.)

The good news? We had enough savings to cover that, leave our emergency savings alone, and still have enough left over. It helps to have so many different income streams coming in (my day job, writing, Denisa’s online job, her bread baking, both of us teaching–some of those streams are a lot smaller than others, but they all contribute). But it’s definitely true that it takes money to make money sometimes–if we hadn’t had that money from our savings, we wouldn’t have been able to save as much money as we will now in the future. And if we’d had debts from earlier (student loans, credit card debt), we would have been hosed, as well. (Really, a large part of the credit for us having enough savings goes to Mint, which I still use every day to keep track of finances. It’s such an awesome budgeting tool. If you’re having trouble staying on top of your finances and you’re not using this . . . you really need to start. It’s free. And the longer you use it, the more helpful it becomes.)

Anyway. If we don’t refinance again, we’ll still have paid the house off before we retire, which is my main goal. So hooray for that.

Would I recommend people refinance right now? Yes. With a few stipulations:

• Know how much you have left on your mortgage. It’s not easy to refinance unless you are doing it for 80% or less of the value of your home. (Over that, and the banks get skittish. They start wanting PMI–which is pricey and you do NOT want–or they try and con you into getting a home equity line of credit (something our bank “helpfully” tried to do when our appraisal came in too low. I said no thank you (the line of credit was going to cost a ridiculous amount of money in monthly payments–it would have meant our monthly payments would have gone down by only 3% instead of 17%. I was no math major, but I can see a bad deal like that from a mile away. Yikes!)
• Be fairly confident of how much your house will appraise for. This is the one thing that was really tricky for me to anticipate. And I turned out to be wrong. The problem is that the appraisal cost $450 or so, and I was going to have to pay that one way or another–even if I decided not to refinance. I didn’t want to pay $450 just to find out I couldn’t do it.
• If your loan interest rate is currently within 1 percentage point of the advertised mortgage rates, then it’s probably not worth it. (Them closing costs are expensive, folks). Rates today are around 4%. That means if your rate is between 4% and 5%, then I’d probably not do it. If it’s over 5%, I’d definitely look into it. Especially if
• You’re planning on staying in your house more than 3 years. If refinancing costs $2000, and it will save you $200 a month on payments), then it will take 10 months before you’ve earned that money back. If it costs more and saves less, obviously that time gets longer. No need to refinance if you’re just going to move next year or the year after.