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).
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.