We did it! After two months of hemming and hawing, Kris and I finally closed on our mortgage refinance, dropping our rate from 6.25% to 4.96%. Bright and early yesterday morning, we made a trip to the title company, and we signed all of the documents. We were out of there in only half an hour.
How’d we do it so fast? Don’t I advocate reading all contracts before you sign them? Absolutely. So when then the title officer called on Friday, I let her know in advance that I needed to read everything first.
“Thank you for telling me,” she said. “I’ll give you your copy of the documents so that you can read them at home over the weekend.”
And that’s just what I did. It took several hours, but I leafed through all 107 pages, looking for anything alarming. I can’t claim to have understood all of the arcane legalese, but I gave it my best shot (with Google’s help), and I didn’t find anything that raised a red flag.
Because I’d read everything in advance, closing was a breeze. The title officer was amused when she noticed I was making tick marks on a piece of scratch paper. “Are you counting how many times you sign your name?” she asked. I sheepishly admitted that I was. (Over the course of 107 pages, Kris and I signed our names 29 times. We initialed 21 items.)
Now we’re done, however, and we have a new mortgage. Our payments (for principal and interest) have dropped from $1386.60 to $1137.70 — a savings of $248.90 per month. It will take about a year to repay the closing costs, but then the new loan will save us money over the next 29 years. (Well, not actually 29 years. We’ll continue to accelerate our mortgage payments.)
Remember: Saving money on the little things every day is great, but saving money on the big things can make an awesome difference to your budget. You’d have to wash a lot of baggies to save $250 a month!
You can see the first two parts of this series here: from December 19th, When does it make sense to refinance a mortgage?, and from February 3rd, Refinancing made easy: Our story.
This article is about House and Home, Real-Life
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Thank you for advocating reading all signed documents and putting your money where your mouth is and really doing it! A shining example of what everyone ought to do.
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Congrats on a successful refinance!
My only question is: Why did it take them 2 months?!?!
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Your form shows an interest rate of 5.047%, not 4.96%. Explain the difference please? (i.e., Did you roll the refi costs into the loan, or, was the difference in the rate the, ahem, commission the mortgage issuer charged on top of fees, or what?) The difference between these interest rates equals a $17,487 difference in cost on a $201,000 loan unless my math is bad.
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@Paul (#53)
This is how all mortgages work, isn’t it? I think all four mortgages we’ve ever taken out have been the same way. We might borrow at a 6% rate, but the truth in lending statement will say 6.08% (or something like that).
My understanding is that this reflects monthly compounding. That is, the interest rate on the loan may be 6%, but when compounding is considered, it’s 6.08% (or whatever) annualized.
This is the same thing as annual percentage yield at your bank. ING Direct may give you 1.65% APY on your deposits, but your actual interest rate is probably something like 1.62%. The difference is a result of compounding. Same idea here.
So, the interest rate and the APR are different. Does that make sense?
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We are supposed to close on our refi this afternoon. I hope it goes as well as yours. We are dropping our rate from 6.25% to 5% flat, with fees under $2K. It has been remarkably easy on our end. Should save us $200 a month, we will make our money back in under a year. Thanks for prompting us to refi JD. Although Amerisave was never the way to go for us, they wanted $6k in fees.
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We have saved $300/month by moving from our 1630 sq ft rental in Seattle to our 2324 sq ft rental in Portland. I have not owned a house since 2002, and I may never own one again — though I admit to fantasizing about owning this one, with its half-acre of fruit trees, blueberries, rhodondendrons, roses, vegetable garden, herb garden, and grape arbor! But then I think that’s just a left-over impulse, and really I no more want to own a house than I want to own any other kind of “stuff”.
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Congrats on your refi!
We’d been idly talking about refinancing last year (because we’d made some silly decisions and were about 18 months from our ARM shifting out of its fixed-rate stage) but with the housing market going down the drain, we were kinda terrified about even attempting it. Thanks to your post in December, I actually got the ball rolling, and closed on our new loan last week. *Such* a relief to go from an interest-only ARM (I know, I know) to a 30-year fixed rate… and the best part is that with the lower rate, our fully-amortized payments are going to be the same as our interest-only used to be!
@DanL: 2 months seems like a long time, and maybe JD’s actual processing took less time, but for comparison’s sake, it took us nearly 2.5 months to get everything taken care of. I’d asked a different bank’s mortgage department how long their processing was taking these days, so I’d know whether I had reason to be grumpy, and learned that they were often taking 60-90 days to do all the underwriting. Sounds like there’s been a tremendous amount of people looking to refi and of course, the banks are doing a *lot* more vetting of applications than they used to.
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Beware the temptation of lowered payments. Remember, refinancing to a new loan makes the total length of time you are debt LONGER and may cost more in interest. (For instance, if you are currently 5 years into a 30 year loan and refi to another 30 year loan, you make payments for 35 years.)
It is not intuitively obvious if you save money overall. An easy to use calculator that figures if it is worthwhile to refinance is here:
http://www.sample.getsyourloan.com/samplemortgagebroker/id4.html
I ran JD’s numbers, and it came out that he will actually spend $36,500 MORE in interest over the life of this loan than if he had stayed with the old loan. However, because he pays extra principal each month by making even $2000 payments, it is more complicated than that and he make actually come out ahead. JD, did you do all this math?
Most folks don’t have the discipline to keep paying the extra and of course, your mileage may vary.
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I’m surprised. For the sake of the website, I’d of thought for sure you’d refinance for 15 years. Starting your 30 years over is no way to get rich slowly.
If you were affording your previous mortgage you prob could’ve kept the payments near the same going to a 15. Not only that, but you’ve encouraged hundreds of readers to do similar, instead of saving thousands dropping to a 15 year mortgage.
Think of the articles you could’ve written on the money you saved. I think you should write one on what you would’ve saved had you done that.
And if the Blog bubble pops, you can always go back to the box factory.
Respectfully, Ian
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@Ian (#59)
Did you even read any of the supporting documentation about my decision? I provided links to past info on this topic, and even mentioned some of my reasoning in comments in this thread. This comment is particularly relevant.
I’m well aware that a 15-year mortgage offers lower costs. Kris and I don’t plan to have our mortgage that long, though. We talked about this at length, and both agreed that a 30-year loan gave us greater peace of mind. We don’t plan to hold it that long, but who knows?
But I agree: I should do a post in which I run the numbers to compare. Maybe for tomorrow afternoon?
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JD said,
“Ha! Kris calls me Overanalytical Man. It’s my super-power!
”
It’s one of mine too
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@JD #60
I did read your comments.
Honestly, I have received a lot of my good finance practices from this website and your recommendations. This one just seems contrary to that.
That being said, I have the highest respect for you and your sight. It’s been tremendously helpful for me and many others. I hope you don’t take this critique personally.
Thanks, Ian
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I was just confused, Ian. I thought I had made it clear why we chose the 30 year mortgage. There are many people who choose a 30 year when they could choose a 15 year. (Some people choose a 30 year when they could pay the loan off!) There’s no one right answer on this. In our case, the peace of mind was paramount, so that’s the direction we went.
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Well, I think there’s a psychological factor in taking more time than you need to pay something off.
Leaving aside mortgages for a moment, I just bought a used car. I could’ve financed it for any number of months at similar rates, but I chose 36 (and considered less). Sure there is a “safety cushion” of more time. But I prefer the “safety cushion” of less money spent.
I imagine nearly everyone says to themselves that they can pay it off early if they want when they are financing something. And I will bet that almost all of them don’t.
Now there are people who are highly disciplined and do just that, no question. I’m sure you are one of them.
But, all payments being equal I’d have gone with a 15-year and paid extra on that!
Unfortunately, I’ve been stuck with a 5% 30-year from the start.
Lastly, my mortgage seems the biggest obstacle to retirement than anything. Pay off that house and I can remove my nose from the grindstone.
I’m not able to do it quite yet, but it’s a financial goal to pay it off early myself.
Cheers, Ian
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@Paul (53): The Truth-in-Lending Act requires the lender to include certain closing costs when calculating the APR. The idea is that when shopping around for a mortgage, getting some quotes that have a lower interest rate but require points v. a higher rate with no points, you can use the APRs to compare apples to apples.
The costs will be included in the APR even if you do not roll them into the loan.
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JD,
We too, opted for the 30-year for the exact same reason you and Kris did–for the breathing room that we would need should we experience a gap in income. We bought a home we could afford on 1 salary and we have been paying an extra $100 toward the principal every month.
The link to Givens, Mortgage Prepayment Made Easy, was helpful and I’m wondering if we couldn’t do that instead of the flat $100.
Love the site. Have been reading for months, first time posting a comment. Thanks.
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We recently considered doing this. The penalty is about 6 months of interest. However, I worked out what we would save on the entire mortgage if we instead put that amount down as a balloon payment. After 5 years, we will have saved the amount that the refinancing would have saved and, after 15 years, we’ll have saved more than triple that amount while reducing the length of the mortgage.
I suppose breathing room might be worthwhile, though, so I haven’t walked away completely.
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I understand perfectly the psycological and financial benefits of paying of your mortgage early. I’d love to do it.
The “why not?” for me is mostly about life-phases – a topic I’d love to see discussed more here. I’ts natural to be earning more and more throghout your 20′s, 30′s and so on – until retirement, when your income decreases.
But it is also natural to have bigger needs in the 20′s and thirties. We are starting a family now, and while we would truly love to pay off our mortgage, save and invest (and we do) – we would also love to have a house that’s suitable for kids, a car, furniture and all this. We are establishing all these things these years.
And you can’t do it all – can you? So one of the main reasons people don’t pay off their mortgages (and in some cases get into debt, and don’t save for retirement in the early years and so on) is that they are in a life phase with high spending needs (compared to the rest of your life) and low income (compared to later in your working years).
We are doing a Total Money Makeover (Ramsey style) – we are. But sometimes I wonder if it’s worth it to put all this financial effort into it these years with kids coming and so on. Because now is a time when we are starting a family.
So I can understand why not.
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JD,
What information did you get from Google? Did you have general questions about the definition of some terms or words or was it more for amortization tables or something similar?
-Brandon
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Hi JD,
We did exactly the same – refi on almost an identical amount. But, we landed a 4.75% interest rate. Talk about excited. We were able to dump the two notes we had on this house. One of them would have come due in a few years with a balloon of 10% of something more hideous. We knew we’d pay that off no matter what but the refi did so much more for us.
Thankfully our rental property has just sold. We close in a week. We’ll take some of the funds and pre-pay a years’ worth of payments while making the normal monthly note. This is to protect against anything catastrophic. The bulk of the proceeds of the sale will go towards the principal of the new refi note. The goal is that we’ll have this note paid off in 10 years.
The last credit card will be paid off next month and we’ll only owe on the house. I’ve worked my whole life to get here. I’m 54 and extremely proud of where we have positioned ourselves. Such blessings we have. Truly a thank you Jesus moment for us.
We still live as if it were pay check to pay check and invest the balance.
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Why didn’t you pay 1 point to get your rate a little lower? I thought paying 1 point up front was a good way to save you money in the long run. Did you just not have the extra $ to pay the point, or is there a particular reason why you chose not to?
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