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I have been reluctant to discuss refinancing our mortgage as a general topic of conversation, of late, because we know too many people for whom refinancing is no longer an option. We have friends who are upside-down on their mortgages. Friends who've had their homes foreclosed. Friends for whom times got tough and they pulled through, but with a missed mortgage payment that is now -- post mortgage-crackdown -- a much bigger blemish on their financial record than they'd planned.
Quite simply, despite mortgage rates reaching record lows, not everyone is in a position to refinance. But if you can, now is an excellent time to do so.
For us the decision was actually pretty simple; rates have dropped enough since we bought this house three-years-and-change ago that we can now convert our 30-year mortgage to a 15-year one without increasing our payment very much. Shave 15 (okay, really 13, at this point) years off the mortgage? Sounds good to us.
Here's a little crash course in mortgage refinancing, from a not-really-professional. I did actually work as a mortgage broker for about a year, but that was a long time ago (and before the regulations changed), so any advice I dispense here is mostly opinion with a sprinkling of actual knowledge. Please consult an actual professional for more information if you're thinking about refinancing, but this will get you started.
You may be a good candidate for a mortgage refinance if:
- 1) Your mortgage is less than than 80% of the total value of your home. (Most of us know the agony of dropping housing values. Even if you were at less than 80% before, you may not be, now.) and
- 2) You have excellent credit. and
- 3) You are not planning to move in the foreseeable future (some people say 5 years, but with a bit of actual math you can figure out whether that's the right number). and
- 4) You can attain at least a percent savings on the new rate and/or shorten your loan term. and quite possibly if
- 5) You have other debt at a higher interest rate you can roll into your mortgage and still stay under 80%. (That would be a home equity loan or second mortgage -- though chances are excellent that if you have either of those, it's because applying that debt to your mortgage brings you up over the 80% mark -- or a car other other largish loan.)
Let's talk for a minute about math. I don't love math, but for something like this you really need to understand and do your own math to know what makes sense. Do not allow the person who's selling you the mortgage do the math and assure you you're getting a fantastic deal, because (hello!) of course they're going to tell you it's great. You probably already know the adage about calculating out the savings per month over the old loan, subtracting out the cost of the new loan, and figuring out how long it will take you to break even before you actually start saving. It's not only important to do that, it's important to know exactly where you're being charged where. That can be confusing, particularly if you escrow taxes and/or insurance, because there's a lot of numbers and some of it is loan costs and some of it isn't. (To complicate matters, mortgages are typically paid in arrears, which means that the month you close on the new mortgage, you won't have a payment to make. That can trip up your math if you're not careful.)
I trust you can do the math. But here's a little primer on how the folks who sell mortgages make their money: When you lock an interest rate with a lender, the person handling that transaction for you (the broker or lending agent) has consulted a rate chart that allows them to calculate the bounty on your mortgage. In other words, they've looked up your 3.75% rate on a 15-year fixed mortgage and plugged in your loan amount, and it shows that they stand to profit $X on that loan. The reason that buying points gets you a better rate is because the broker can take a lower (or no) bonus from the lender if their commission is paid out of your pocket directly. A "no closing costs" loan is pretty much the same thing; the broker will lock you in at a
