Should I Refinance My Mortgage?
Wondering if you should refinance your mortgage right now? Well, turns out if you’re in a solid financial position and you plan to live in your house for awhile: the answer might be a resounding yes. A combination of low interest rates, low interest rates, and really really low interest rates (ok, so it’s really just that one factor) is at the root of this explanation.
Let me explain.
We bought our house back in 2015 with an interest rate of 4.25% on a 30-year mortgage (and you can think of the interest rate as kind of like the “fee” for borrowing money from the bank). We thought that was a pretty slick deal, and my parents thought it was a GREAT deal.
See, when my parents (Boomers, or #OKBoomers. Nah, they’re cool) bought their first house back in the ‘80s, their interest rate was in the teens. Yes, we’re talking an interest rate of 15% —a rate just as angsty as a real-life teenager when the wifi goes down.
That means on a $250,000 loan, you’re actually paying $1.1 million over 30 years with that fat 15% interest rate. With our 4.25% interest rate, that $250,000 loan would “only” cost $354,197 over 30 years. Put another way: a monthly payment of $3,100 vs. $1,200—all because of that difference in the interest rate.
So, our GREAT interest rate of 2015 was actually pretty good...until 2020 rolled around.
Interest Rates Have Plummeted to Their Lowest Levels on Record
When COVID hit and interest rates took a swan dive, we were thankful and fortunate enough to continue to be still employed with steady incomes. As we eyed this swan dive in progress, we wondered: should we refinance our house? Refinancing meant we would trade in our current mortgage for a new mortgage—and one with a lower interest rate.
I had always felt a little guilty for taking out a 30-year mortgage—I was raised on the Shave Shamsey mantra that a 15-year mortgage is the only mortgage (and my parents actually took out a 15-year mortgage rate back then as well and paid it off in half the time...because of those interest rates). So, maybe it was time to switch to a 15-year mortgage after all!
If you’re considering refinancing, here are the questions we asked ourselves (and you should too) before you jump in.
5 Questions to Ask Yourself Before You Refinance
1. Is the New Interest Rate 1-2% Lower Than Your Current Rate?
The general rule of thumb is that it’s worth it to refinance if your new interest rate will be at least 2% lower than your current rate, but many argue even a 1% drop (or less!) is worth it if you’re going to stick around.
So for us, the old interest rate was 4.25%. The new interest rate was 2.75%. Difference: 1.5%
So far so good.
2. Will You Be In Your House Long Enough to Make Up for the Refinance Fees?
It’s not free to refinance: you have to pay for someone to write you a new mortgage, and the average cost is around $5,000, depending on where you live. So while lowering your interest rate saves you money in the long run, you have to find your breakeven point: where the money you save in interest is greater than the initial upfront refinancing costs—and then do some crystal ball staring to figure out the likelihood of you still living in your house at that point.
I used this calculator from Nerdwallet to find we would break even after just one year. Since our crystal ball staring still had us in our house (I’m planting SHRUBS y’all), this was a green light to refinance.
3. Is Your Work Situation Steady?
It’s a fool’s game to predict what’s going to happen tomorrow (at least we’ve learned that much from 2020), but even if you don’t know the specifics, you probably have a general tone of security or shakiness with your current employment situation.
Since refinancing can eat up a big chunk of your cash or lock you into higher monthly payments if you reduce your mortgage term, you should feel quite steady and confident in your future inflows.
Even more pertinent: lenders are getting far stricter in their requirements for who to lend money to right now, and if you’ve had a recent drop in income, that reduces your likelihood of getting approved. While we were refinancing, I think I had to submit three different paystubs to prove I was employed throughout the process.
4. Can You Stomach the Paperwork?
Refinancing is far from a customer-centric, smooth-UI type of process. Picture: closer to getting your license renewed at the DMV than Amazon one-click ordering.
You must summon your forgotten paycheck software passwords, perhaps reset it once or twice, submit paystub after paystub after paystub, track down addresses, phone numbers, and employment dates. You must pull copies of bank statements, unfreeze your credit (at all three credit bureaus), and pull the last three Christmas cards you received from Aunt Marg to compare glitter usage. Kidding about that last one, but not kidding about the iron persistence for the real paperwork that will need to be summoned should you decide to refinance.
When it comes time to actually sign the paperwork, picture a ream of paper the size of a Harry Potter book (we’re talking almost Order-of-the-Phoenix sized) whose pages will need to be flipped through one by one with sporadic autographs required (will your hand cramp? Quite possibly).
5. Do You Have the Patience?
Picture olden times, when people would camp out by a new Chik-Fil-A store to get free chicken sandwiches for a year. To get the deals, they had to wake early and sit in the dark and cold. It’s like that, but you get to sit in your house. And instead of free chicken sandwiches for a year, you get a lower interest rate.
And what does that get me? By year five, I’ll have saved enough money to buy me 5,000 chicken sandwiches. Maybe even a few milkshakes too.
Because interest rates are so favorable, lots of people are refinancing, and the whole process takes a looong time.
I talked to Daren Pentz—my refi guy over at Chase—to ask him what he’s been seeing.
“The normal timeline for a refinance has a lot of determining factors, but on average, it lasts 30-60 days,” Daren explained. “The new average timeline right now is 90+ days.”
Sure enough. We started to refinance on May 10. We closed September 10. Our refinance process took us 123 days, or 4 months—start to finish.
If you can answer “yes” to all five of those questions, it makes a lot of sense for you to refinance. It’s mostly math, and a little bit of “how much annoying paperwork are you willing to put up with?" If you’ve reached your resounding “yes,” you still might have a few questions!
Should I Go With a 15-Year or 30-Year Mortgage?
When we were well under way in our refinance (remember: it stretched between three whole seasons of weather), Jesse busted out this brilliant post about whether you should choose one over the other. While his former guidance from 2005 leaned toward the 15-year, with current interest rates in 2020 he actually recommends going with the 30-year and paying it off like a 15-year—because it gives you more flexibility with your cash should your life change.
Well, I went with the 15 year, since the ball was already rolling and it did give us a slightly lower interest rate. Our payment is $200 a month higher, but we had already been practicing budgeting the higher amount each month (see this sneaky powerful way to determine how much you can afford) and it felt comfortable.
Should I Shop Around?
Everyone says you should shop around for interest rates, because even a tenth of a percent makes a big difference. But I’m going to be honest: we didn’t really. We were kind of lazy (or you could spin it and say we opted for simplicity). We already had an account with Chase, they did everything online (a perk in the times of ‘Rona) and the rates seemed fair in comparison to other lenders. I’m quite happy with the route we took. Part of my brain prefers the simplicity of one less password to remember even if we could’ve gotten a tenth of an interest point lower elsewhere (and I mean, I feel like I already got my adulting badge for refinancing in the first place, so I'm cool with it).
There’s an argument for savings and an argument for simplicity: ask yourself where your balance is between the two.
Is It Too Late?
Nope! Interest rates are still low, low, low. The benefits of doing a refi doesn’t seem to be going away—and Daren said the demand for a refi has stayed steady with no notable drop in applications since the pandemic started.
What Should I Know Before I Refinance?
Keep in mind those expectations we set above: refinancing your mortgage will take time and it will take patience.
“I think some people are not aware of the timeline and the amount of documentation they need to provide. Some customers will say the last loan they closed took half as long and required half the upfront loan documentation and they are right,” Daren said.
But if you can stomach it—steel your will, friends. Bask in the glow of all those chicken sandwiches you could buy with the money you save.
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