If you are paying above 3% and have less than 15 years left on your mortgage or you’re paying above 4% on a longer mortgage, get off your duff and go get a “no-cost” refinance. That’s where you get an above-market rate where the lender takes some of the extra money they make for giving you that higher rate and applies it to your closing costs. As long as you keep the same term you currently have (easy to do just by taking your savings and applying it to principal https://homeloansplus.org/payday-loans-la/, i.e. keeping the payment the same) you’ll pay the mortgage off faster and spend less on interest. The lender makes a few bucks, the appraiser gets a few bucks, the title insurance/closing agent earns a commission, and you save some money. It’s a win-win for everyone but your current mortgage holder, but don’t feel too badly, especially if you gave them a chance to have your refinance business.
In the past, I’ve had three different mortgages, refinanced three separate times, and had a home equity loan. I’ve made plenty of mistakes but learned something new every time. Let me share some of the lessons learned.
# 1 Shorten the Term on the Mortgage
If you have been paying on a 30-year mortgage for a couple of years, and now you refinance to a new 30-year mortgage, you’ll end up paying for your house for 32 years instead of 30, and you might just pay more in interest than you would have if you hadn’t refinanced. Your goal should not necessarily be a lower payment, but rather owning your home free and clear sooner.
Lessons Learned from Refinancing My Mortgages
Let’s use figures from the last time I refinanced to illustrate. I refinanced after 13 payments into a 15-year mortgage. My old principal and interest payment was $. The new principal and interest payment was $, or a savings of $ a month. But if I still wanted to be mortgage-free after 15 years in the house, I then needed to pay an extra $157 a month. So my real savings were only about $39 a month, or about $6,500 over the next 13 years and 11 months. (Less actually, since we paid it off completely back in 2017). Not a huge savings, but I had a pretty good mortgage rate to start with. One benefit aside from the savings on interest is that if we got into a tight spot financially, we could default back to the lower payment and increase cash flow by $196 a month.
Lenders are tricky folks, and sometimes what they do is just add the closing costs to the loan amount. You don’t have to bring cash to closing, but instead of owing $200,000, you find after the refinance that you owe $205,000. Sure, you have a lower rate, but was it worth it? Maybe, maybe not. Be very careful and understand exactly what is going on in the process. Pay close attention to the amount of principal you owe on the old mortgage and the amount of the new loan. For example, the amount of principal I owed on my old mortgage was
$368,000. The loan amount for the new loan is $368,700, which is within $50 of the payoff amount. Remember that the payoff amount is the sum of principal owed and the interest for the part of the month prior to the closing, so $700 for about half a month’s interest is about right. But if the new loan balance had been something like $371,000, that would mean I was now adding some closing costs onto my loan balance AKA a “no-cash” refinance.