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Refinancing Our Mortgage

Written by Nickel - 21 Comments

After nearly pulling the trigger and refinancing our home last spring, we finally decided to go ahead and pull the trigger on a refi yesterday. We’re currently about 1.5 years into a 30 year fixed mortgage at 6.375% (yes, rates bumped up right around the time we moved in 2006). Besides getting a lower rate, we’ve been thinking about moving to a shorter term (15 years instead of 30 years).

The search

After poking around at Bankrate.com and checking the rates at PenFed, I discovered that going rate for 30 year fixed rate mortgages (without paying any points) was around 5.875%, whereas the going rate for 15 year fixed rate mortgages was around 5.125%. On top of this, PenFed doesn’t charge any lender fees, and covers many third-party fees, as well.

Yesterday, I checked with PenFed again and was pleased to see that rates had dropped by 0.125%. Thus, I shot an e-mail to our mortgage broker to see what he could do. He responded with 15 years fixed @ 5.00% — same as PenFed. When I replied that we could get the same rate from PenFed, and that they’d cover many of the fees, he responded with an offer of 4.875% and the same fee structure. After getting a Good Faith Estimate, we decided to go ahead and lock in at that rate.

The resulting deal

So in the end, we’re getting a 4.875% fixed rate, 15 year mortgage. We’re on the hook for title and recording fees as well as the settlement attorney, whereas the broker is covering all other fees. Yes, we’ll have to bring extra money to the table for the items that we escrow (taxes and insurance), but we’ll be getting a refund of our escrow account from our old mortgage lender.

We’re only refinancing the actual balance due, so the principal on the loan is somewhat lower than our previous mortgage (though not dramatically – remember, it’s only been a year and a half). When combined with the lower rate, our overall payment is only increasing by about $225/month, yet the term of our mortgage is getting cut in half.

The actual savings are a bit hard to pin down because we’ve been overpaying our mortgage and the math is a bit convoluted. Moreover, we don’t have a crystal ball, and thus can’t necessarily project our overpayments going forward. Just comparing the raw numbers (ignoring overpayments), however, refinancing to the 15 year option could save us upward of $150k. Of course, this difference is narrowed by overpayment as well as by the fact that we’re effectively throwing away the 18 months of interest payments that we’ve already made.

A question of timing

Given yesterday’s interest rate cut, a logical question would be whether or not now is the right time to be refinancing. That’s a great question, and I don’t know the answer for certain. But given that longer term, fixed rate mortgages are relatively insensitive to short term rate fluctuations, at least in the near term, I’m comfortable with our decision. We’re reducing our rate by 1.5%, and saving thousands (and thousands) of dollars. Could we do slightly better by waiting? Maybe. But maybe not. And in the mean time, we’d be paying down a much more costly mortgage.

Update: Rates slipped further today, with PenFed offering a 15 year fixed rate for 4.625%. Oh well, 4.875% is still really low.

Published on January 23rd, 2008
Modified on December 20th, 2008 - 21 Comments
Filed under: Mortgages, Real Estate

About the author: is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

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21 Responses to “Refinancing Our Mortgage”

  1. 1
    Lily Says:

    I don’t know much about mortgages, but thank you, thank you for recognizing that the Fed rate cuts are short-term and don’t directly impact long-term rates, like those that mortgage rates are pegged to. I felt nauseous when I read an MSNBC article that implied that the rate cut meant mortgage rates would fall (like, tomorrow). Anyway, good jorb! :)

  2. 2
    Frugal Dad Says:

    I think your timing is perfect, because as you mention the latest round of cuts really doesn’t impact mortgage rates (in the near to medium term). As for a long-term view, I can’t imagine rates getting much cheaper from here with rates at such historic lows (still). The only way to go from here is up, and by locking in that great rate you are safe for the next 15 years.

  3. 3
    DD Says:

    What company was your mortgage broker with?

  4. 4
    Clever Dude Says:

    Although we spoke last night and you mentioned PenFed, I didn’t check who they were until this morning (from the link in this article). I said “Oh, Pentagon, I don’t work there). But lo and behold, my company is in the list of authorized employers! Woohoo! I’ll be opening up an account tonight and checking into rates as soon as I can.

    I just worry whether we still have enough equity in our home to finance both mortgages into one.

  5. 5
    greg Says:

    So weird, I just emailed my lender after just getting my mortgage 2 and a half months ago, and I got my lock for .75% less, with them picking up all closing costs.

  6. 6
    My Dollar Plan Says:

    It’s always nice to get a lower rate and it’s a gamble exactly when to lock. How does the service at the broker stack up with PenFed? That’s one reason I love Penfed is because they are so easy to deal with… but a cheaper loan might be worth jumping ship.

  7. 7
    Llama Money Says:

    Good call on pulling the trigger. It’s like playing the stock market – you can’t ever time it, so there’s no sense in trying. The rate is fantastic now, and the fees are minimal ( or none at all – it was hard to follow ). Go for it, and enjoy the savings.

  8. 8
    nickel Says:

    Llama: The only things we have to pay for are title-related (recording, title insurance, etc.) and the closing attorney. Everything else is waived/covered by the broker.

  9. 9
    pfodyssey Says:

    Congratulations to everyone who is taking advantage of the lower interest rates. I also traded in my 30 for a 15 year mortgage some years ago and have not regretted it one bit. However, I do think there is a strong case to be made for sticking with a 30 year so you give yourself the flexibility of a lower payment (cash flow) while having the option to make additional payments (as you had been doing)when you can do so. It just really depends on your finances and how “tight” you can / want to be with them.

  10. 10
    Llama Money Says:

    If that’s all you’re paying nickel, then it seems like an absolute no-brainer. How’s it feel to save a hundred and fifty thousand dollars? ;)

  11. 11
    livingalmostlarge Says:

    The rate cuts will take awhile to affect the long term mortgage rates. So did you consider not locking but floating until later?

  12. 12
    nickel Says:

    No, we didn’t seriously consider waiting until later. There’s no guarantee that longer term rates will go much further, and in the mean time we’re paying 6.375%. I’m content to shave 1.5% off our rate even though we could conceivable squeeze out a bit more (but might also lose ground).

  13. 13
    SingleGuyMoney Says:

    I too am thinking about refinancing but I think I will wait a little longer. I want my credit score to be as high as possible and I want to see if the rates decrease a little more.

  14. 14
    Patrick Says:

    Hmmm save $150,000, cut your obligation by 15 years, and only spend $225 more a month to do it? Amazing! :)

  15. 15
    Doug Says:

    Nickel –

    The rates at PenFed seem excellent. Can you tell us a bit more about PenFed? I had never heard of it until your post.

  16. 16
    Sam Says:

    We also have been thinking about a refi (4 years into a 30 year morg. at 6.125%). We have been looking at trading to a 20 year mortgage but have not taken any steps to refi. Instead we are paying an extra $250 a month on the prinicpal (which basically accomplishes what the refi would dod of us) and continuing to watch rates.

    If rates keep dropping we will probably move to refi.

  17. 17
    KC Says:

    I’m one of those “subprime loan” folks (we had no money when we bought this house) and I have a balloon set to burst this coming Decemeber. However – my home has appreciated about 40% (even in a bad market) and my income has gone up considerably so that only about 15% of it goes to the roof over our head (banks recommend less than 30%). So I’m very thankful for the rate cuts. I’ll refi into a 15 yr fixed at an incredible rate. Too bad our home is small and we’re fairly certain we’ll move within the next 3-5 years. But still – that’s a good rate – and I’ll get savings anyway I can.

    I’m waiting til next week though – most experts expect the Fed to cut rates again on Tuesday – but we’ll see. They certainly won’t raise them yet.

  18. 18
    MITBeta Says:

    I wish I could take advantage of this, but my home has lost value since I bought it, so I can’t refinance because I currently owe >90% of the value of the house. I have an 80/10 mortgage now. The only way I could swing it is if I came up with more cash to put down on a refinance so that I was back down under the 90% Loan to Value mark…

  19. 19
    Siena Says:

    I’m interested in this too. I have an adjustable that’s currently 4.75%–for just under 2 more years (5 year rate). I know I can’t refinance to that low a rate, but I think now I should go with a fixed rate–that being said, should I wait until my low rate ends? Or is it better to strike because fixed rates are low now?

  20. 20
    Lynda Says:

    PenFed sounds great so I checked their site. The sad thing is they only deal with military or gov’t past and current employees.

    Am I correct on this?

  21. 21
    Nickel Says:

    Lynda: Not entirely. You can join PenFed if you are a member of the National Military Families Association. The good news is that anyone can join NMFA for a $20 fee. You don’t have to maintain your membership, so it’s really just a one-time fee. Details should be on the PenFed site (and I think you can join NMFA during the PenFed signup process).

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