Quick Housekeeping Note
If you’ve enjoyed reading Lazy Man and Money this year, or any of the previous 14 years, please nominate me for a Plutus Award. I’ve never won, but I was nominated for a Lifetime Achievement Award several years ago.
I’m not sure what category is the best fit, because I certainly do family, financial literacy for children, real estate, investing, underserved communities (mostly through my MLM content), side hustle, and traditional retirement. I just don’t specialize on any one particular area.
If you want some kind of reason why you should nominate me here’s a brief 14 year history of this blog. I may have been one of the first FIRE blogs… and probably the longest-running one. What’s missing from that article is all the years that I fought the MLM/pyramid scheme industry. I like to think that my 12 million page views have maybe impacted a billion dollars in people’s financial lives. (I don’t know if it’s true, but it sounds like it could be, right?)
I’ve kind of wondered what it would be like to walk across the stage to receive a Plutus Award. I kind of feel like this could be my year… simply because there will be no stage to walk across.
Now let’s get back to the original question
Should I Refinance?
There are a lot of questions that people have asked during COVID-19. One of the ones that may have been overlooked, for obvious reasons, is that there are historically low-interest rates for mortgages. That leads to the question, “Should we (or you) refinance?”
Before I get into our situation, mortgage rates are around 2.74% for a 15-year fixed (our preferred option) or 3.17% for a 30-year fixed according to Bankrate. I’d like to think that most people would be better off refinancing, but a variety of circumstances may make it not work for you. For example:
- You might not have the best credit to get these best rates.
- From what I’ve read, banks aren’t very eager to refinance during these uncertain times
- You might already have a great rate. After all, mortgage rates have been low for a while.
If you have a rate that’s .50% or .75% above those rates that I mentioned above, it might be smart to do an internet search for a mortgage calculator. That will give you an idea if it’s even worth moving forward. If so, it may be time to call some banks. I prefer local banks for mortgages because they know they stand a good chance of getting your other business.
Side note: I completely understand if you are busy managing work and kids during this time. If someone had even suggested that I do anything more a couple of months ago, I would have bit off their head. Things have settleed down with school being out. Hopefully, like me, you have a little more time to move forward with projects and financial things like these.
Our Refinance Situation
We refinanced our home in 2012. It was a particularly great time to refinance. We hit the interest low getting a 2.75% rate on a 15-year mortgage.
You might be thinking… “Umm… that’s today’s rate.”
Yep. On the surface, it wouldn’t make a lot of sense to refinance to the same rate. However, we’ve been living close to paycheck-to-paycheck for a while with 3 investment properties (that don’t make money until their mortgages are paid off), kids’ private school, saving for retirement, and our general costs of living.
This creates a lot of stress. It’s not end-of-the-world stress, but I feel like I worry about money more than I should.
Refinancing would allow us to lengthen the payments over a longer term. On one hand, we’re more than halfway through our 15-year mortgage and only have 7 more years left. On the other hand, refinancing it over another 15-years would lower our payments of $1,061 according to one mortgage interest calculator.
While it’s tempting to have an extra thousand dollars a month, it would mean that we wouldn’t be mortgage-free until 2035. By that time, we’ll all be vacationing on the moon, right? (I’m joking.)
The calculator also said that we’d pay $13,161 more in interest. Yikes, that’s an expensive decision.
In this case, it’s just what the guidelines say… it doesn’t make sense for us to refinance. I was fairly sure that was going to be the case, but it can’t hurt to kick the tires every now and again when the opportunity arises. This is certainly one of those opportunities for many people with mortgages.
Refinancing is a tough call. We refinanced twice(I think) on our current house we bought in 2002, each time going back to 30 years. We had kids in private school, had decided to have my wife stay home(she’s a medical professional), and needed the cash flow relief. Now I find myself at 57 with officially 19 years left on the term. We have started paying extra, currently at double the payment, which would pay off in around 6 years. I’ve run all kinds of calculations to try to get it down to 3 years but it would be tough.
Our rate is 4.375 and we’ve considered refinancing, but if we stay on plan the it’s pretty much a wash due to the cost of the refinance.
And then, along came Covid. There was a layoff last week and 10% of my group was cut. So should I drop back to regular payment and start really hoarding cash? If so, then if I refinanced to a 15 year 2.75-ish rate, it would probably be good even though the cost of the refi is still an issue.
Lazy Man says
I see what you mean with paying the extra and it being a wash. That’s a good situation to be able to pay off double. Over loans of shorter term like that, I can see how it wouldn’t make much of a difference.
The “problem” we’re running into is that we have our principal paid down quite a bit. The remaining balance isn’t enough to qualify for the best rates, so it doesn’t make sense.
On the plus side, we probably have 60%+ equity.
Lazy Man says
I hadn’t thought of that. That’s a “good” problem to have with the principal being paid down.
We did a refinance in March on the upward slope of the pandemic. We dropped our mortgage rate about .75% but continue to pay it as if we hadn’t refinanced, saving us $22k of interest over the life of the loan and ultimately paying it off sooner. But we also have the flexibility to back off to a lower monthly payment if we need to, for whatever reason.
We closed at home at the end of March. We had to attest that no one in the family had a cough, fever, or any signs of sickness within a certain period of time before the closing agent would come. Wild ride!
Here’s some of the analysis I ran before pulling the trigger: https://www.ochosincoche.com/2020/04/17/is-a-refinance-worth-it/
So the amount is too low for a lower rate? I’ve never heard of that issue before.
David, thanks for posting that. I was talking to Bofa about refinancing our mortgage once and basically asked him the same question, couldn’t I just pay extra, save money, and not pay you? Crickets.
you can always ‘pay extra’ when i purchased my first home back in 12/1984, that was a normal strategy. you designate the payment as ‘principal’ and it can shorten the mortgage by years, without refinancing [which often starts the clock over again].
yes, you need to be refinancing enough of an amount to make it worth the bank’s while too. i’ve been told that if it is less than 100K, it is not happening [by a mortgage broker, the amount may or may not be accurate. ]
Lazy Man says
I’ve thought about paying extra, but I have always thought that I simply wouldn’t do it unless we were forced to. A lower mortgage rate is also a plus. If we could have gotten a still lower rate and gone 10 years instead of 15, we probably wouldn’t have considered that.
We refinanced last year. Took the money out of one house and paid off a condo. Financially, it helped a bit. Not a big difference, but I like it because now we only have one mortgage. Once we sell the condo, I’ll get a nice chunk of cash… :)
Could be worth it but not always. It’s important to check the costs of refinancing against how long you’ll be in the house/what you’ll save in lower interest.