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One More Refinance

We are now in our house 14 years. We are on our fourth mortgage and I just submitted an application for what should be one last refinance. We started with a 30 yr fixed rate at 7.625%. Fixed, because I remembered the inflation of the late 70’s even though I was a teenager at the time, and 30 year as we were planning a child and knew there would be some expenses early on that would later go away. Fortunately, rates were falling and within two years we dropped the rate to 6.75%, keeping the balance pretty much the same. But, as rates fell further, and the expense of the nanny went away, we paid a nice chunk to principal, refinancing to a 20 year at 5.65%. In 2004, the 15 year rate was low enough, 5.24%, that for just a slightly higher payment, we went from the remaining 18 years down to 15. Now, with 9 years left, the same bank is offering  a 4.99% 10 year loan. The bank took the application over the phone and I expect to hear back within a day or two.

Crazy, right? Each refinance was with no costs. Zero. On a $200,000 mortgage (for example) normally the closing fees would be $2500 or more, so a 1/4% savings would make little sense, breaking even in 8 years when you plan to pay it off in 7. With no fee at all, a $25/mo savings is worth it to me. $2100 over 7 years for 15 minutes of my time on the phone, and maybe a half hour to sign the paperwork at the bank. This product, and my prior refinanced were all called Home Equity Loans, fixed rates, not to be confused with Home Equity Lines of Credit (HELOC) which are variable. There’s little difference in this and a standard mortgage, except no fees, and the rate is a bit higher than what you might find if you were willing to pay points and closing costs.

It can’t hurt to see what your local lenders are offering. $25 may not seem like much to you, but I’m sure you’ll find a way to spend it. If that’s a problem, just add it to your retirement savings.

On a final note – the targeted payoff date isn’t random, I’d like to have the mortgage paid in full by the time our daughter starts college in 2017. We’ve saved specifically for this, but should we be in for post graduate college bills, it will be nice to have no mortgage and know we can do this for our daughter.

Joe

  • Evan May 18, 2010, 1:32 pm

    I can’t believe you were able to Refi without closing costs! I tried and my mortgage company basically laughed at me. Kind of Frustrating

  • JOE May 18, 2010, 2:50 pm

    I did get lucky, as this bank’s 30 year offer was high, even the 15 year rate was well above what I pay now. As with any financial situation, there are those for whom this is a good fit, with a current rate that makes paying any fee a deal breaker.

  • Mysti May 18, 2010, 5:43 pm

    I would love to do a refi…but the closing costs are the problem. We are in a 30 yr fixed at …..7.5%!! Long story…involves a shady broker…no equity in the house right now…blah blah blah…..but needless to say, it is frustrating knowing that there are much better rates and we just can’t do it.

    Good for you though!

    Yakezie…

  • JOE May 18, 2010, 7:11 pm

    I’m so sorry to hear that. Stories like yours make me think there are times that people who decide to walk are not always wrong. I suspect rates will be low for some time, I hope you are able to work your way out of this.

  • Roshawn @ Watson Inc May 18, 2010, 11:26 pm

    I would love to do a refi as well. I even got a call from our lender, boasting of very competitive rates. Unfortunately, we are likely moving pretty soon, so unless we got a no closing costs deal like yours, we wouldn’t come out ahead.

  • Money Smarts May 19, 2010, 9:51 am

    We recently refinance into another 30 year fixed rate mortgage, and dropped our rate a full point from 6.50% to 5.250%. Our payment dropped considerably, and our closing costs will be paid back in just over a year for savings of a couple hundred dollars a month. Definitely worth it if you can do it!

  • Joe Plemon May 19, 2010, 11:08 am

    Joe,
    Good for you. I too was surprised to learn that a refi with no closing cost is possible. I like how you have targeted the payoff to coincide with your daughter’s college. Good strategy. Those who are planning retirement should consider doing the same thing.

  • JOE May 19, 2010, 11:14 am

    A 1.25% savings is great, your interest line on next year’s taxes will drop nearly 20%. Huge savings, use it wisely.

  • JOE May 19, 2010, 11:29 am

    Banking is still pretty local, but from what I see, these zero closing deals are out there. Each time, I was moving to a rate that I could beat but paying fees, so it made sense to take the savings I could get at zero cost. My continuing to drop both the balance and duration certainly helped the situation.

    College – this is more of a moving target than retirement. I have no doubt she goes, but cost can be near nothing with a scholarship to $200K in today’s dollars, or more if there’s grad school.
    Good to hear from you, Joe, thanks for reading.

  • Mike May 19, 2010, 2:53 pm

    Well done I hope it works out for you. Planning for college is crazy but I’m a firm believer that one needs to have their retirement savings plan in place first. I for one do not however I’m on my way and hope to have my home paid off before my child goes to college in 18 years give or take.

  • Car Negotiation Coach May 24, 2010, 10:47 am

    Nice work, I’m looking at a refi myself. The best I’ve found so far is 5.125% w/ no points on a 30yr fixed…..if i can get it below 5 i might pull the trigger.

  • Emily May 30, 2010, 6:33 pm

    I would love to do a refi as well. I even got a call from our lender, boasting of very competitive rates. Unfortunately, we are likely moving pretty soon, so unless we got a no closing costs deal like yours, we wouldn’t come out ahead.

  • Augustine June 17, 2010, 3:56 pm

    Joe,

    A belated question on HELOC: I’ve heard that banks are hesitating to foreclose on those homes with a HELOC with a balance because it is not backed by the asset – the house – being effectively written off.

    Does it mean then that a HELOC in lieu of a mortgage is easier to walk away from?

  • JOE June 18, 2010, 9:44 am

    I’d not heard this. For us, we have a HELOC and fixed Home Equity Loan with the same bank. The way it worked out, the HELOC is the first lien, and fixed loan, second. They had no issue as our loan to value was still below 50% even assuming we tapped the HELOC 100%. I always thought the HELOC is the same (lien on property) as any other mortgage.

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