I’m busy. Really busy. Two kids, full-time job busy. So the last thing I wanted to do was deal with a refinance (the paperwork! the annoying emails from the bank!). Until I did the math. Even though my original mortgage rate was reasonable (3.6%), shortening my loan term and lowering the rate to 2.62%—some 15-year refi rates are near 2% and some 30-year rates are below 3%—was going to yield me about $60,000 in savings over the life of the loan. Was it a lot of paperwork to refi? Yep. But that $60,000 is going to help pay for college for my kids. Here’s what I learned from the process, and what others who did the same shared with me too.
It can be worth it to refi, even if you have a pretty low rate already.
Our rate was already below 4%, but it still was worth it to refinance. We shortened our loan term to 15 years, and we dropped our rate by nearly a point. Holden Lewis of Nerdwallet, told MarketWatch Picks recently that the general rule of thumb is that refinancing is worth if you can shorten your loan term and/or can reduce your interest rate by three-quarters of a percentage point, and you plan to stay in the home for at least a few years to recoup all of the costs associated with a refi.
Shorten your loan term, if you can.
This was a huge savings for us, we had about 25 years left on our existing mortgage, and shortened the term to 15 years. This raised our monthly payments a bit, but not more than we could manage, and the savings are going to be significant over the life of the loan.
Don’t neglect buying points, if it makes sense.
It’s easy to forget about discount points—which are basically a form of prepaid interest—when you refinance, but they can pay off. One discount point costs roughly 1% of your loan total, so one point on a $300,000 loan costs $3,000; you’ll get about a 0.25% reduction in your interest rate per point that you buy. For us, buying points made sense because we had the cash saved up to pay them upfront, and we knew we’d be in our house for a long time. Here’s a guide to who should, and should not, buy discount points.
Yes, there is a lot of paperwork ...
I knew there would be and yet it still surprised me. W2s, bank statements, mortgage statements, tax returns—we supplied it all. My husband runs his own business so that came with a whole other set of requests for his P&L statements and business tax returns. It took some time but we just broke it up, gathering all the items up into manageable chunks of time over a couple weeks and got it done.
... But the feeling of not handing over money to the bank unnecessarily is pretty awesome.
I dreaded the process of a refi, and yeah, at times it was annoying (the bank asking us for items we’d already submitted; the first appraiser saying he couldn’t come for 45 days). But the savings feel damn good. That’s $60,000 I’m paying myself, and not the bank, and I sure do like the sound of that.
— With additional reporting by Brienne Walsh
For more smart financial news and advice, head over to MarketWatch.