Am I Crazy to Consider Refinancing Again?

September 18, 2011 at 3:59 AM 9 comments

I took a gander at mortgage rates today and realized that the rate on a 10 year mortgage is only 3.25% at our local credit union. My husband and I currently hold a 15 year mortgage at 4.5% and I am unbelievably tempted to refinance our property. If I decide to move forward with this decision it will be the fourth time we’ve refinanced in ten years!

We last refinanced two years ago, so we have roughly 13 years remaining on our current mortgage. I refuse to refinance for another 15 years, because I don’t want to push our payoff date back any longer. In essence, we shrink this mortgage down to 10 years or we simply keep it just the way it is.

There are pros and cons to refinancing again. On the plus side, refinancing would save us $60,000 in interest over the next 10 years. We’d also pay off the mortgage three years faster, which means we’d be mortgage free on our primary home by the time I turn 45.

On the negative side we’d have to go through the hassle of refinancing our property yet again. The paperwork alone can make this a total nightmare. We’d also have to pay upfront closing costs, which totaled over $6,000 last time.

Lastly and most importantly our mortgage payment would increase by nearly $500 a month, which is a big chunk of change considering I’m not sure how soon I want to go back to work after the baby is born. I worry about adding an even bigger mortgage payment to our budget when I’m not sure if I’ll bring in any income.

Rather than refinancing we could include additional principal in our monthly mortgage payment. This would save us $20,000 or so over the life of the loan, rather than $60,000. However, it would provide more flexibility if I decide not to return to work for awhile. If we have money to throw at the mortgage we could do that. If time passes and we don’t have the money available we don’t have to worry about not meeting our financial obligation.

A third alternative could be to refinance the loan while simultaneously paying off a chunk of principal using a portion of my severance payment. Shrinking the total loan amount would decrease our monthly payments. The goal would be to add only $100 or $200 a month to our payments rather than a whopping $500.

Of course, the downside to this approach is that we’ll have less money in our bank account to fall back on if I decide to stay out of the workforce longer than expected. We’ll also lose out on any interest or growth this money could have earned.

At the end of the day I’m not certain how to proceed. After weighing the pros and cons it seems the safest approach is to stick with the mortgage we currently possess. On the other hand with mortgage rates this low it’s hard to pass up $60,000 in interest savings!

Entry filed under: refinance. Tags: .

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9 Comments Add your own

  • 1. NCN  |  September 18, 2011 at 4:22 AM

    We're in the same boat. We have a 15 year at 4.625, and have been paying for 1 1/2 years. I want to go w/ either a 10 or 15, b/c both have rates below 4. I can't decide if I want to go through the hassle – and pay the ridiculous fees – or just keep paying off debt asap. I'll be reading to see what you decide.
    Rock on,
    NCN

    Reply
  • 2. slugmama  |  September 18, 2011 at 4:38 AM

    Given all the things you laid out, I'd keep the current mortgage and commit to throwing more money each month at the principle.
    The outlay to get the refi kind of outweighs any gain you'd receive in lower rate.
    Keeping the current and throwing money into principle allows you to pay off the loan sooner but also gives you the flexibility of not HAVING TO pay more each month should an emergency or job layoff happen.
    Just 2ยข from someone who paid their 30 yr. mortgage off in 6.5 years. ;-)

    Reply
  • 3. Jerry  |  September 18, 2011 at 1:40 PM

    I say go for it. It's a great deal and it will lead to major savings which is always a good thing. We may do it ourselves though our mortgage, taxes and insurance payment is manageable for us and I'm not interested in paying a longer term for my mortgage, but who can resist these interest rates??

    Reply
  • 4. Another Reader  |  September 18, 2011 at 2:30 PM

    Refi in the mid 3's for 15 years. Add enough to the principal payments to pay it off in 10 if you can afford it. Otherwise, enjoy less stress because you have a lower payment at a time when you will have less income.

    Be sure to do this now, before your layoff. You will have to qualify on one income if you wait.

    Reply
  • 5. Michelle P  |  September 18, 2011 at 9:08 PM

    I've been debating about what I want to do also. We are currently at a 30 year rate and want to go to a 15.

    Reply
  • 6. Rebecca  |  September 18, 2011 at 10:54 PM

    We refinanced in December 2008 to a 15 yr at 5%. I am working right now to refinance to a 10 yr at 3.25%. I figured out we will save about 2 years and $16k. That is totally worth spending a couple hours of signing papers!

    Reply
  • 7. Kosmo@ The Soap Boxers  |  September 20, 2011 at 2:38 PM

    What was the breakdown of closing costs last time?

    It's important to note that pre-paid interest and pre-funding of escrows aren't true costs. The pre-payment of interest is interest you would have had to pay on the old mortgage, and pre-funding a mortgage is offset when you are refunded the balance of your existing mortgage.

    It's important to determine which of the costs are true costs (origination fees, points, inspections, appraisal, etc) and which costs are simply being time-shifted a bit.

    Refis here in Iowa are apparently very simple compared to other parts of the country. The actual closing takes 5-10 minutes, and pretty much everything else can over email. Not a very painful process at all.

    Reply
  • 8. Kosmo@ The Soap Boxers  |  September 20, 2011 at 4:08 PM

    "The pre-payment of interest is interest you would have had to pay on the old mortgage, "

    Let me clarify that. What I meant to say what that instead of paying interest on the old mortgage, you're pre-paying the interest on the new mortgage. These should offset.

    Sorry for the poor choice of words.

    Reply
  • 9. One Frugal Girl  |  September 21, 2011 at 2:38 AM

    @NCN – I'm close to making a decision. I hope to decide and post about it tomorrow.

    @slugmama – I'm heavily weighing the prepayment option now. Great suggestion!

    @Jerry – The interest rates are so hard to resist. I didn't think they could get lower than when we refinanced two years ago!

    @Another Reader – A 15 year refinance will buy me a lower mortgage payment, but I'm not sure I want to go through the hassle of closing and costs to save the money that way. I think a prepayment might be a better option. Though your right, if I want to do something I need to do it before my job ends!

    @Michelle P – I love the 15 year mortgage! If you can afford it go for it. We'll be all paid up by the time I'm 47!

    @Rebecca – Good for you!

    @Kosmo@ The Soap Boxers – Great point about interest payments versus closing costs! I'm going to dig up our old refinance statements and see just how much money went to fees versus interest.

    Reply

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