Why we decided to refinance our mortgage

Happy late 4th of July! Hope everyone had a happy and safe Independence Day! We just finished refinancing our house and wanted to share a few of the details of why we did it now. Since people don’t typically refinance just for fun, and because we bought our house recently we hadn’t really considered it. We thought we already had a fairly low interest rate of 4.65%. That was until Capital One 360 (was ING) ran an offer online to take $1000 off closing costs.

The lower your closing costs, the faster you break even with the refinance, so this was enough incentive for me to look into it. Check out this helpful list of reasons to consider refinancing (personally we don’t condone the last one, but if it’s your only option…)

So I dug around and realized quite quickly there were 3 positive factors that were in our favor. First our original mortgage had PMI, you know the insurance you pay to protect the bank in case you stop paying your mortgage. Stupid, expensive, but obligatory if your loan amount is over 80% of your home’s value. You can get it removed if you pay your loan down, but it isn’t usually removed automatically. Second our interest rate was fairly low a year ago, but there were much better ones available now. The interest rates on 15 year mortgages were insanely low. And third, the combination of increased property values in our area over the last 2 years and our lower loan amount meant that a new loan would be less than 80% of our home’s value (aka no more PMI!)

After getting a few quotes to ensure Capital One 360 was the best deal, we took the plunge. Arielle had a few misgivings when I first mentioned I was considering refinancing because she had this perception that refinancing was a bad thing (thinking that most people refinanced when they couldn’t afford their monthly payments or wanted to borrow against equity/roll other debts into their mortgage). What really sealed the deal for Arielle was the fact that we were switching from a 30 year to a 15 year mortgage (cutting the life of the loan in half!), but the monthly payment would only increase by $40. Refinancing is really a numbers game. Do the math, find how long it will take to break even (after closing costs/interest savings per month) and try to determine if you will still be in the house beyond that time frame. For us the math was easy. We would break even in 6 months! Here are a few statistics about our refinance:

  • 15 years removed from the life of our mortgage
  • Closing costs: $1800 out of pocket (was higher but the promotion took $1000 off, and just last week we received a check for $1000 from escrow from the previous lender)
  • Old interest rate: 4.65%
  • New interest rate: 2.875% (-1.775% Difference)
  • Monthly payment only went up by $43.99
  • No more PMI insurance in our payments, so more of our payment is actually going toward principle
  • Break even: 6.15 months

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Our goal is to have the mortgage paid off in 6 or 7 years, but let’s assume we were only going to make minimum mortgage payments. Switching from the 30 year mortgage to the 15 year mortgage with the lower interest rate would save us over $60,000 in interest over 15 years (and we have a fairly small mortgage!) Definitely worth $800 in closing costs, don’t you think? Have you ever refinanced or considered it?

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