I refinanced last year and thought it would be fun to run through my thought process on here.
I originally financed 200K at 4.125% in June of 2018.
I had the loan paid down to $187,734 at the time I was considering the refi.
The best rate/closing cost combo I could find was 3% with $4,266 origination costs at a local credit union, I checked rates at about 5 places - be prepared for your credit to take a 10-15 point hit from all the hard credit checks you will get. There might be a way to avoid this if you try. I had a ~800 score. Beware of low rates with very high closing costs, keep in mind where your principal is at current loan and what they make the new loan for - sometimes they hide costs in there and are shady about it.
I was in a 20yr mortgage and wanted to refi to a 15yr mortgage.
I thought the best way to analyze this was to look at where I would be in 5 years with the refi.
I would be saving roughly 1.125% in interest cost, $2,347/year, so it seemed logical that this was a reasonable payback for the cost.
If you look at 5 years down the road - I would have a balance of 137.3K on the refi, 147.7K on the existing mortgage. In that same time period I would be paying additional money per month, and I would skip 2 payments with the refi. That would be an additional $3,550 paid towards the loan, and I would have $10,400 additional principal in the bank if I sold the house after 5 years vs not refinancing. So in 5 years, I would profit by $6,850.
The payment increased from $1,225 in the 200K, 4.125%, 20yr loan to $1,325 on the 192K, 3%, 15yr loan. So every year I would be paying an additional $1,200. The first year principal paydown would be 10,291 vs 7,669 on my existing mortgage.
I know a lot of people are against 15 year mortgages. In my first home I really wanted to pay it off so I got a 10 year loan for a few years at a deal of an interest rate (2.75% was really good back then). After staying in the home 10 years I had accumulated a lot of principal. My company decided to move me to a different city. My wife and I were able to purchase our forever home in the new city and pay cash for a newer van only because we had accumulated 140K in equity in our existing home, a good portion due to having a shorter term loan. I really think this is something most arguments would not take into account, solely focusing on what your money would be doing in market vs home equity. It really gave us the freedom to do what we wanted, not to mention how good it feels to have less debt in general in case of emergencies. I would not recommend doing this to everyone, but for the first 10 years of our marriage I think it really helped us to get our budget in line and live frugally, so later on we were in a much better position.
