This is an article that I am very excited to write. And I owe a huge thank you to Lanny for helping me make it happen. Ever since the rate cut in July, we have all been bombarded with emails asking us to refinance our mortgage. “Why you need to refinance with Quicken Loans.” “You’ve been pre-approved with Chase.” Even Ally Bank, where we have both held our investment portfolios at one time, offered us a sweet refinance deal.
With an interest rate of 3.89% on a 30-year mortgage originated two years ago, I never thought that refinancing would work for me. But as interest rates continued to slide and the refinance market exploded, rates finally reached the level where it was economically beneficial for me to make the move. Here is why I am refinancing my mortgage after two years and unlocking some serious cash along the way.
My old mortgage
I purchased my house in July 2017 and my first mortgage payment was September 1, 2017. My total mortgage was $221,000, the interest rate was 3.89%, and the monthly payments were $1,041.13. The institution also escrowed my real estate tax payments for me.
Over the years, I had committed to using side hustle income to help pay down my mortgage. On our Financial Freedom products page, we have a full arsenal of apps, websites, and hacks to earn extra dollars. Each one of those payments received went towards my mortgage. The best part is that the extra side hustle payments totaled $1,075.31. So don’t tell me that the small amounts earned by our financial freedom products don’t make a difference. Every dollar freaking counts. Don’t forget that.
At the time of my refinance, I had $211,442.90 remaining on my loan and 28 years (or 336 months) remaining. In just two years, our principal balance decreased nearly $10,000!
Why I am Refinancing and What I was looking for when refinancing my mortgage
Staring at a 3.89% interest rate, I never really thought refinancing my mortgage was an option. Especially as interest rates started to rise at the end of 2018. If anything, I was ecstatic that my rate was going to be so much lower than future, higher market rates. But things have a funny way of changing quickly. Lanny summarized the interest rate market perfectly in June (Read his article about the rate cut and the impact it could have on you), as a Fed RATE CUT was looming. For the next few months, the interest rate market was a roller coaster ride. Check out the movement in the 30-year mortgage rate yourself:
Source: St. Louis Fed
With each passing day in June and July, refinancing became a more viable option. Rates continued to plummet and I continued to monitor closely. But before refinancing, I set some major goals that I wanted to achieve with this endeavor.
- Minimal out of pocket costs
- Significant cost savings
- I did not want to “kick out” my mortgage to 30 years in order to save. I had to save while maintaining the same loan term.
There was a perfect balance of course, and based on my initial estimates, rates would need to fall below 3.5% in order for me achieve what I needed to in order to refinance.
Most of my personal finance stories start involve Lanny finding an amazing deal and telling me about it. Well, guess what, this story is not any different. One day, I received an email from him with a picture of a 30-year rates at a local credit union. The rate on the 30-year mortgage was….you guessed it… 3.375%. He immediately set me up with his contact there and I began the refinancing process. At that point, I had to refinance. You’ll see why in the next section.
My new mortgage and the savings
Finishing the application had allowed me to lock in the rate, that same day, at 3.375% (initially). Although, as the process went on, the rate would eventually increase. This was due to the fact that I was only two years into my mortgage and had a high LTV. Most banks and credit unions will increase their rates based on the LTV. My final LTV was ~75%, causing my rate to increase 2.5 basis points. My final, new mortgage rate is 3.40%. That’s right, 3.40% on a 28 year mortgage. We have a historically low rate and one that will be difficult to beat in the future (unless rates plummet of course).
Closing costs at this credit union were just over $3,000, included the CU’s cost and title costs. There was a $300 appraisal fee that was credited back to me during closing. Essentially, I received a free appraisal in the process. Further, the fees were rolled into the mortgage. The out of pocket cash for this transaction was minimal. In fact, I simply had to cut the title company a $27 check when finalizing the document.
With the fees rolled in, my new mortgage was rounded to $215,000. For a 28 year term, my new monthly payment is $992.92. See the savings below for yourself!
My mortgage payment decreased $48.21 by refinancing my mortgage, or 4.63% per month. In my mind, those are massive savings for minimal effort. The fact that I still saved that much per month with closing fees continues to blow my mind.
Mortgage Cost Per Hour
Earlier in the month, Lanny published an article explaining a metric called the “Living Cost Per Hour.” The purposes of the metric is to calculate the cost per hour your annual expenses cost in a year. Then, to turn it into a positive note, calculate the income per hour that each stock purchase or dollar saved reduces that cost per hour.
This is a perfect time to show the impact that refinancing had on my mortgage’s cost per hour. The table below breaks down this metric before and after my refinancing.
Lanny wasn’t kidding, this really is a fun way to look at things. My overall cost per hour decreased $.07 per hour with this transaction! That just means I am that much closer to financial freedom. Even if it doesn’t feel like that much, it really does make a huge difference. This will be a fun metric to start detailing out in each article, especially the ones where I am cutting down expenses. I’m getting ready to shop my cell phone plan, insurance, and internet/cable provider. There should be a lot of savings on the table.
READ: 5 EASY Ways to save $500 TODAY
Summary – Refinancing my mortgage
In my mind, this was a no brainer transaction. Unlocking an additional $48.21 per month with minimal cash out the door is amazing. But let’s look at this from one more angle, since I am a dividend investor (despite review of the mortgage cost per hour already). Assuming a 3% dividend yield, I asked myself this question: What amount would I need to invest to produce $48.21 per month in cash flow? If you guess $19,284 dollars, that is correct! So sure, I paid $3,000 in closing costs to unlock $48.21 in monthly savings. But that sure is a heck of a lot less than $19,284. That’s for darn sure!
What do you think about my transaction? Would you have refinanced if you were me? What’s your current mortgage rate? Are you planning on refinancing your mortgage anytime soon.
-Bert
Hi Bert, great stuff. Question: are you able to refinance without paying a fine to your former bank?
Thanks ADD. Correct, there was no fine. Trust me, that would have been factored into the equation for sure
Bert
Nice, that gives a lot of freedom! Here in The Netherlands when you refinance you have to pay the original lender a early redemption fine.
Interesting. How long is the period for the early redemption penalty? I can understand it if it is very short. But after a while, you assume that risk.
In most cases you are allowed to pay 10% each year without fine. For the rest you have to pay a fine, no matter how short or long your remaining fixed rate period is.
Hello Bert,
So I commented on Lanny’s post a while back – the post I believe you alluded to in your article – and I similarly feel compelled to add a few thoughts here. Overall, I want to commend you for looking into your mortgage in light of recent rates to determine whether a refinance is an attractive option. I also suspect that the refinance was indeed quite attractive relative to your prior mortgage. My two comments below are meant to help inform your audience, not necessarily detract from your decision.
That said, two points I would add for your audience that could be of value to consider:
1 – If optimizing your decision, ALL THINGS REMAINING EQUAL, a longer-term loan is better in ALL occasions. In this example, a 30-year loan is ALWAYS better than a 28-year loan if you secure the same rate, fees, etc. The reason is that a 30-year loan provides greater optionality than 28 years, and that optionality is of value to you, the borrower. You can refinance out of a bad mortgage rate, but the lender is stuck, i.e. you effectively lock in a potentially advantageous rate for longer. An easy way to consider this is that a 30-year mortgage can be paid down early over 28 years, while the 28-year mortgage cannot be extended unless you refinance. This optionality has financial value.
2 – If optimizing your decision, a lower interest rate is NOT better in ALL occasions (notice how I left out “all things equal”). You mention paying $3,000 in closing costs. Closing costs of this type are not necessarily bad, but they obscure the real value of a financial decision or otherwise reduce a borrower’s ability to access the benefit of a refinance based on an apples-to-apples comparison. For example, I would be happy to offer anyone a 2% loan, 1% loan, 0% loan etc. if they pay me enough upfront. This is important for consideration when shopping interest rates as 3.4% should NOT be compared to another individual’s situation and is somewhat meaningless without greater context. To be fair, I think you do a great job at mentioning the pertinent facts, I simply want to highlight the sneaky back-end costs that can be part of the refinance process. For example, this very page has 3 adds on mortgage rates and one (Free Rate Update.com) states 2.9%. This is 99.99% likely to be glossing over the closing cost fees, let along loan size, loan to balance, credit score, etc. that an average borrow does not necessarily consider at first blush.
ONE IMPORTANT CAVEAT: The above two comments are based on optional decisionmaking, and do not take into account behavioral finance. A 30-year loan is NOT better than 28 years if the money saved (i.e. lower monthly payment) is wasted. That said, I could say the same thing about your 28-year loan if the monthly amount of money saved compared to 20 years, 10 years, or 5 years, is similarly wasted.
A home is the largest purchase for many American families and is a purchase that deserves thoughtful consideration. Hopefully, the above notes are helpful to your audience.
Congrats again on a successful refinance.
-Friendly
Friendly,
Thank you very much for the thoughtful, detailed message. In my opinion, it is some important value added to our readers. So THANK YOU very much.
1. In most cases you are right. But as you highlight, it definitely takes some discipline. Sure it gives you the option to lower your payment and some flexibility in the event of an emergency. It can also have a negative impact though, if someone uses the savings for spending elsewhere. Thus, in essence, they just stretched their debt out two years longer. You did mention this in the caveat. Even though I am disciplined, I just didn’t want to go down the road for a few extra dollars of savings. I was quite happy with what I was able to achieve with only 28 years.
2. Understanding EVERY fee with every transaction is imperative. Especially with refinances. There were a lot of options I checked that would have resulted in much higher fees. Obviously those are a no-go, but it is always great to be reminded to double and triple check them.
Thank you again.
Bert
It’s great news, but look how much money the bank made. After 2 years of paying $1,041.13 ($25K), your principal decreased only by $10,000. After 30 years of mortgage payments, we essentially paying double the cost of the property. When I refinanced my mortgage 6 months ago, I got a lower rate, but I also cut the number of years in half to pay it off faster and save on interest. All the best!
German,
You are absolutely right. I don’t feel bad for the bank at all. They made their money off of me for two years. That is awesome right there. I love that you got the double benefit. Cutting down your payment AND the length of your mortgage. Well done, well done.
Bert
Wow your closing costs are low! What part of the country are you?
In my first house (which I now own and am renting out) we were at 3.375%, the new home (only 5% down) is at 3.85% I can’t complain but feels like there are better deals out there.
Have you ran the amortization table if you continued to pay what you were paying? So an extra $600 or so a year
Evan – I reside in the great Buckeye state, Ohio. This credit union by far had the lowest closing rates. What are yours?? There may be better deals for your current mortgage when you get a lower LTV. But with only 5% down, 3.375% is great. Part of my activity for this weekend is setting up the new amortization table and running various extra payoff scenarios. I’ll keep you update. But I’m sure that would shave many years off the back end as that is essentially an extra payment.
Bert
Ironically we closed on our refi on Monday. The fees were a little higher but the rate was 3.125% over 15 years. But we’ll save most of the cost by appealing the property tax assessment with the new appraisal (about a $35,000 variance). Check your tax assessment as well!
Charlie – That is freaking amazing. Assuming your tax rate is 2%, that is a $700 annual savings right there. That, on top of the other savings. Amazing. Heck year Charlie!
Bert
I’ve been thinking about shopping around/refinancing..but my term is almost up. I doubt i’ll be able to – but im hoping my bank (RBC) will give me a solid rate, so I can switch EVERYTHING there…then hopefully I can leverage the fact I have all my assets with them to better rates..we will see.
Congrats on the savings!
Jordan,
How much longer do you have? If it is close, you could essentially set up a plan to use the hypothetical closing costs, put that on your current mortgage as an extra payment, and finish it off. I’m not sure how close you are to being done, but I could see why you are hesitant. But if you can save, you can save!
Bert
Just catching up on some articles I’ve missed, and this was really intrigued me. I enjoy the discussion so far. Congrats on locking in the mortgage at a super low rate. I literally just bought a condo and the closing will be sometime in February. My interest rate sucks, and I’m already thinking about refinancing in 2-3 years.
Seem like you made a great decision Bert.