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.