I recently had lunch with Winston, the Get Rich Slowly intern. We talked about our families, our finances, and our plans for this site. Winston mentioned that, at my prompting, he and his wife were refinancing their home. “The local credit union was able to give us a deal,” he said. “We got a 15-year loan at 4.625% for just 1/3 of a point.”
“I'm embarrassed to admit that I haven't done anything about my mortgage,” I said over my plate of General Tso's chicken. “I wrote that article, and meant to refinance, but then I got sidetracked. I should do this tomorrow.”
I paused for a moment and then added, “Actually, I guess I have done something. I filled out the information for Lending Tree, but I've decided not to have anything to do with them. They send me email every frickin' day. I hate that. I finally wrote them a nasty note telling them to go away.”
Winston laughed. “That's why we went with the credit union. We were going to use another guy in town who had a slightly better rate, but he was a jerk. He wouldn't leave us alone. We used the credit union instead.”
Heeding my own advice
The next morning, I called two places: my credit union, and the company that currently carries our mortgage. The credit union never got back to me, and I had to wait on hold for about half an hour with our mortgage company, but eventually I did get to speak to somebody. “I apologize for the delay,” he said. “We're swamped.”
Because we were dealing with our existing mortgage company, and because Kris and I have made huge strides in our finances during the five years since we bought this house, qualifying for a refinance was easy. “This is going to be a breeze,” the mortgage guy told me after he saw our credit scores (J.D.: 792, Kris: 809). “Other than your mortgage, you don't have any debt!”
As a reminder, our current mortgage balance is $207,000 at 6.25% with 25 years remaining on the loan. Our monthly payment (including taxes and insurance) is $1671, but we pay $2000 every month in an effort to eliminate the debt sooner.
The mortgage guy quoted me two options:
- A 30-year fixed rate at 4.96% with no points and closing costs of $2556. Our monthly payment (including taxes and insurance) would be $1409.
- A 15-year fixed rate of 4.625% with no points and closing costs of $2556. Our monthly payment (including taxes and insurance) would be $1909.
I completed the refinance application over the phone. The next morning, UPS delivered the documents for us to sign. It wasn't until last weekend that I had time to read the paperwork, though. I called back with several questions, gathered the required documentation, and yesterday I sent the forms back to Maryland.
Assuming no hitches, we should have a shiny new lower mortgage rate in about a month!
A difficult decision
To this point, refinancing has been simple. The most difficult part of the process is choosing which term we want: 15 years or 30 years. It's true that we've been paying $2000 per month toward the mortgage, so we know that we could manage the $1909 payments for the shorter term. On the other hand, dropping our required payment to $1409 gives us a great deal of flexibility should something go wrong.
Kris, the Excel-master, created a financial spreadsheet to play with various repayment plans:
You can also find a loan calculator to test out different scenarios.
Ultimately, we chose the 30-year mortgage. It's worth it to have the increased flexibility. Since we hope to continue accelerating this loan, our final payment is projected to be around 2023, only fourteen years away. We made extra sure that this new loan agreement had no penalty for early payoff.
Stephen Popick, the administrator for the GRS discussion forums, also refinanced recently. He managed to pick up a 4.375% rate for 15 years, freeing an additional $300 of cash flow each month. Stephen, an economist, writes: “Inflation right now is at an annual rate close to 4%, and the five-year average is 3.2%. So when you're refinancing at rates around 4% you're paying close to inflation, which essentially means that you're paying little to nothing in net present value with your loan.”
That's what makes an economist happy, apparently. Me? I'm just glad to trim $262 off of our required monthly payments so that even more of our extra money goes directly to paying down the principal each month!