Should I Refinance My Mortgage?

I’ve owned real estate for more than ten years. Over that period I’ve refinanced my rental property twice and our primary residence once so far. I’ve been thinking, should I refinance my mortgage again?

Refinancing is a minor hassle. But it has saved me tens of thousands of dollars over the years. That’s why I deem it one of the 6 powerful (and low-risk) financial maneuvers that put extreme frugality to shame.

The amount of time and hassle it takes to refinance is absolutely worth it when the numbers add up.

If your rate is above 4% and you plan to stay in your home, there’s a good chance refinancing can save you considerable money. Compare refinance rates at a specialized website comparison site such as Credible*.

Below, you can also find a free mortgage calculator download. 

Refinancing the Condo (aka The Banana Stand)

I used to own a condo rental that I lived in for five years and rented for eight. We gladly sold it in 2019. 

The original condo mortgage rate was 6.375% back in 2006. I had a $40,000+ second mortgage too. That rate was 8.50%. Yikes! That was hard to face looking back at my old spreadsheets. But it was “normal” back then to get a second mortgage with a high rate like that.

I hated that second mortgage and paid it off in 23 months. For that two-year period, most of my cash flow went to aggressive extra mortgage payments instead of investing.

After another two years, I refinanced down to a 5% mortgage and the payment dropped significantly. Then Mrs. RBD moved in and started and paying rent (yes, I charged her rent when she was my fiance).

Over the following two years, we paid for a wedding and put 20% down on a house thanks to savings from the lower payment and the financial benefit of cohabitation (another powerful financial maneuver).

Then a few years later when it was a rental, I refinanced to a low rate of 3.75%. To this day 3.75% is an excellent rate on an investment property.

Over the course of six years, my all-in monthly condo payment went from almost $3,000 to $1,500 (while taxes and HOA fees went up most years). That’s about $18,000 in annual savings!

How? By refinancing and aggressively paying down principal.

The rental was cash flow positive excellent tenants for years. I even raised the rent.

So why on earth did I get a condo with a $3,000 payment? In hindsight, it was a horrible decision. I was living in a great house with friends and paying $750 per month.

My savings was growing and I received a big raise. Then, the real estate bubble burst. So I was timing the purchase perfectly! This was September 2006. The bubble had popped in my area, but the air leak was slow. Then came the financial crisis.

The only reason the condo cash flows today is because I spent six years fixing a mistake – I spent too much on a property when I wasn’t ready to buy.

For a while, the home value sagged. But I didn’t do a short sale or give up. I fought through it. And even though it’s cash flowing today, by every financial measure it was a powerfully horribly maneuver.

But there’s a silver lining. Had I lived elsewhere, I never would have met my wife. You can read the story of my condo mistake here. 

The First Refinance on our House

We bought our house in 2011. The real estate and financial crises had settled.

We chose a house that could be paid for on one salary. Our family was about to grow and Mrs. RBD was slated to be a stay at home Mom.

Our original mortgage was 4.875%. After one year, we refinanced down to 3.875%. With the lower rate and some principal pay down, our monthly payment decreased by about $375 per month. That’s $4,500 in annual savings. So the payback period for the closing costs was well under a year. It was a no-brainer.

We’ve now made 51 payments after the refinance. So far we’ve saved $19,125 thanks to the refinance.

Historical Low Rates Continue

All three of my refinances were possible because of the low and falling rates we’ve seen over the past decade. Each time I considered refinancing, I simply ran the numbers and saw an opportunity to save a chunk of cash.

Here’s a chart of 30-year fixed mortgage rates for the past 40+ years:

Rates are crazy low historically. People with top credit scores can usually beat the average Freddie Mac rate. In fact, every time I refinanced, I managed to find a rate below the Freddie Mac survey numbers.

If you plan to stay in your house, refinancing your mortgage should always be on your radar. The savings is too powerful to ignore. Freddie Mac is a good place to watch rates.

If you decide to refinance your mortgage, there’s plenty of places to shop for a lower rate. Credible* is one I’ve used to obtain quotes this latest time. 

But how do you know if you should refinance?

How to Determine if You Should Refinance

If you’re not a spreadsheet wizard, you can utilize a simple calculator below.

Or create a simple spreadsheet to figure out your new total monthly costs if you refinance. To get the payment, you’ll need the PMT function in Excel.

=PMT(rate, nper, pv, {fv}, {type})

rate = annual interest rate/12
nper = number of periods (360 for 30-year, 180 for 15-year)
pv = present value; the amount of your new loan
fv = leave blank (default is zero)
type = also leave blank

Download my mortgage calculator spreadsheet for free. 

Once you have your new payment amount, add in HOA fees, taxes and insurance (your escrow). Then compare the new payment to your current total payment.

If the rate is significantly lower and/or the principal balances has decreased a lot, you’ll be amazed at your potential long-term savings.

For example, if you can refinance your mortgage and save $300 on your monthly payment, you’ll save $3600 per year.

However, there’s a price associated with refinancing in the form of closing costs. In this case, if closing costs set you back $3,000, you’d recoup the cost to refinance in 10 months.

So in 12 months, the return on your “investment” in the refinance is $600. On $3,000, that’s a 20% return on the first twelve months. But in the second year after the refinance, your total savings is $3,600, or an additional 120% return! Each year going forward, your annual return is 120% on the closing costs you paid to refinance.

That’s a crazy good return on your money.

That’s the power of the refinance.

The new interest rate, new loan amount, and term are the big variables. Then it’s a matter of figuring out the new payment (easy) and the closing costs (more on that below). You’ll also encounter what they call prepaids (typically prepaid interest and escrow). They don’t count toward your net actual closing costs because you’d pay these anyways. They’re just necessary to reset the mortgage.

So, Should I Refinance My Mortgage Again?

Haven’t I done this enough times already?

Last month, not long after the UK vote to exit the EU, I casually looked at rates. I found we could get a rate that was 0.50% below our current interest rate. We’ve had our mortgage for four years, so the balance has come down a decent chunk too.

When I ran the numbers again, I realized it made sense to refinance again and pulled the trigger. We’re going through a refinance now.

The numbers are pretty good this time around. Our monthly payment will decrease by about $290 by combining the better interest rate, 30-year mortgage reset, and some escrow payment recalculations. It’s going to cost us, though. Closing costs will be around $3,400 making our payback period last approximately one year.

Since we’ve had our current mortgage for four years, we have less than 26 years left on the mortgage we’re paying off. Some anti-mortgage people may point out that we’re resetting our mortgage back to 30 years and that’s a bad thing.

I’m not concerned for a few reasons:

• We don’t plan to live in our house for 26 more years
• We can always pay extra against the mortgage to pay it off faster
• In fact, if we take the savings on interest and pay it as extra principal every month, the mortgage would be paid off in less than 24 years
• Or we can take the monthly savings and invest it
• We’d rather have higher cash flow today than a shorter mortgage term
• The rate is a very low 3.375%, no points

What About the Hassle Factor?

Part of me didn’t want to refinance for the sake of time and hassle. A huge downside to refinancing a mortgage is all the paperwork. Many mortgage companies have gone completely digital. Mine has, so that saves time. But man, I’ve had to download and upload a shit ton of financial statements. “Last two copies of XYZ bank statements, all pages including blank ones”. “Current lease on the rental property.” etc. The list was 15 items deep.

I have quite a few investment and bank accounts. I can quickly provide the balances of everything by logging into Empower. But that’s not good enough for the underwriters. They want visual proof. Thankfully I can print to PDF.

We’re nearing the closing date. A babysitter is booked (for the older kids) and I’ll step away from work one day next week to sign about 50 pages of paperwork with Mrs. RBD and our one-year-old. Total hassle. But to perpetually save $290 a month, it’s still worth it.

I put in less than 10 hours of work to complete the paperwork, email the processors, and sign a bunch of documents. Since we’ll save about $3,400 per year, it’s an excellent return on my time.

Because of the cost and hassle, you should set a limit where the refinance is worth your while. I’ve always aimed to save at least $300 per month. I’m a little below that this time, but it’s a good rule of thumb to follow so I’m not repeatedly refinancing to save $150 or less. The longer-term numbers would still work in my favor, but you have to draw the line somewhere.

What About Those Attorneys?

Even though I know the refinance will save me a boatload of cash, it still infuriates me to pay for more title insurance, another title exam, an origination fee, local taxes and the various processing fees to get this done. The mortgage closing industry is a racket in my opinion. If someone in the industry is reading this, that may be offensive. But three title exams in five years is not necessary. If the title was clean the first time, it’s still clean.

But that’s the way it works and why I consider the closing costs an investment. Closing costs are part of the process. You gotta suck it up and pay them. Don’t be afraid to ask for discounts or shop around for places to save.

Our original closing costs quote included another appraisal. This was unnecessary since our loan to value (LTV) is well below 80% and we had two other appraisals within five years. That saved us $450. Felt like a victory, even though they probably stuck it to us somewhere else.

Conclusion

Running the numbers doesn’t take much effort. The monthly savings may surprise you. And if the monthly savings is good, the long-term savings is awesome.

The hassle and closing costs of refinancing is a deterrent. But if you think of both your time and the cost to close as an investment with a return, you’ll get over them quickly.

Have you refinanced recently? How much did you save? Do you agree, should I refinance my mortgage again?

* Advertising Disclosure: RBD partners with several companies that offer products and services that may be beneficial to readers. Credible offers rate comparisons on many loan products, including mortgage refinances and student loans. RBD only recommends reputable companies that have been tried and or vetted by the author. This content is not provided by Credible or any of the Providers on the Credible website. Any opinions, analyses, reviews or recommendations expressed here are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by Credible. RBD is compensated for customer leads at no additional cost to readers. 

Featured Photo via Pixabay  CC0 Public Domain