When it comes to buying a home, there is often much excitement. A new place to call home and make new memories can be source of much joy. Of course, there can also be some nerves in the whole process as well. Most of us aren’t fortunate enough to buy with all cash, and thus end up taking out a mortgage of some kind.
I remember buying my first condo, at about the time when many others I knew were buying their first homes – either condo or single family home. Now, some of us are more interested in personal finance techniques and applications than others are. For those of us that have an interest in this area, we pay closer attention to what a mortgage means, how they work, etc. There are many others who simply buy what they’re told they can afford, stretch themselves with the biggest loan possible, and just sign on the dotted line hoping for the best. Clearly, there’s a range of experience out there!
Soon after my first condo was purchased, I recall having dinner conversation with a local couple with whom we had become friends. They had purchased their first home about a year before mine was purchased, and were carrying a 30-year mortgage. My home also had a 30-year mortgage. Sounds the same, right? Well, not really. Aside from their property being a bit more expensive to begin with, they had bought at a time of higher interest rates. Between the two time periods of their purchase and mind, rates had dropped almost a point. Or, more accurately, they paid an extra percentage point of interest. It might have been slightly more or slightly over, but it was around a point. I’m guessing they didn’t spend too much time looking for a good rate, not being too financially oriented.
Anyway, the guy in the couple directly asked me the rate I got, and when I told him he seemed a bit surprised. I mentioned the topic of refinancing, as if I had been in his place, I’d be looking to refinance my home.
Now, of course it might be uncomfortable for some of us to talk about financial issues with friends in such a comparative manner. I rarely feel good about letting anybody know that I got a better deal than they did, even if I was directly asked. There are some cases, however, where I might say something for the sole reason that I’d like to help out in some way. In this case, I tried to make the case that they could save thousands of dollars by refinancing, particularly since they were planning to stay there for a while.
Here’s what I’m talking about:
Let’s say someone has a $250,000 loan, and is paying 5% interest on it over 30 years. The monthly payment on that mortgage will be about $1,342. If you simply lower the rate by 1%, down to a 4% interest rate, the payment will be about $1,194.
That’s a $148 difference per month! Multiply that by a larger number of months, and it adds up. Of course, there are costs to refinancing. However, if one is going to be in the home for the long haul – like the couple I mentioned – it would be worth it. When interest rates drop by a significant enough margin, refinancing becomes a real option for some people – depending again on how long they are planning to stay in the same place.
Admittedly, and for full disclosure, I didn’t refinance my own home at the time. I had a good reason though: I didn’t anticipate being in my place for too long. So, I can’t speak to this with direct experience of my own. Additionally, while I knew that their home was more expensive, I didn’t know their exact loan amount. However, the ballpark math clearly points toward refinancing as a good option for that couple.
I wonder why they were so leery about refinancing? Maybe it was inertia, fear of the unknown, or competitiveness? The guy seemed to get a bit worked up (while his wife’s eyes clearly mocked him), and I could see a silly competitive side come out. I suppose sometime people are just like that by nature. Whatever. I do know that there could have been some savings for them, and I tried to help by suggesting refinancing:)
My Questions for You:
Have you ever refinanced? Or, in retrospect, wished you had?
How much do you monitor rates before you try to do so?
I haven’t purchased my first home yet but I would definitely keep an eye on rates before I make the leap. Lenders are a bit unwilling to lend right now because there is high risk that rates will rise (as in 100% chance lol).
FSYA – rates sure do seem incredibly low, compared to historical figures. The rates I got some years ago would be astronomical today (and I’m not talking that many years ago).
I’m looking to refinance right now. I’m going to go from a 30 to a 15 year mortgage. I’ll be dropping my rate by around 2 points probably. I’ll be able to cut 7 years off my mortgage and keep my payment basically the same. LOVE!
Ashley – that’s fantastic! 7 years of working for a mortgage wiped away, you just have to like that!
Molly – that’s good that the bank president took care of you. Otherwise, that sounds like was set up to be a typical bank cluster. Good story, though I realize it was a hassle for you guys.
We are just starting to make initial contacts for refinancing looking to take advantage of the historically low rates. Will have to see how it all goes.
cashflowmantra – Rates are so low as they are now. Of course, people also thought that when they were at 6%:)
I refinanced about 8 years ago. I went from a 30 year to a 15 year mortgage. I will have it paid off in less than 6 years to coincide with retirement.
krantcents – seems like that’s a common refinance, from 30 years to 15 years. Good to have it paid before retirement!
A timely post for me since I just had a conversation about refinancing with my friend the mortgage broker this afternoon. It looks like I’ll finally be able to refinance. Rates are awesomely low but with all the craziness in the mortgage market it has been difficult for many to refinance. Whether it’s tightened lending restrictions or that their property has lost value many people just don’t qualify and can’t take advantage of the low rates.
Re comparing rates with your friends – not so long ago rates were changing quite a bit day by day. I was at a closing (I’m a real estate agent) and for two hours the wife complained about their rate since all her friends had locked in at lower rates. Her husband had gotten too greedy – he played the game of waiting for rates to go lower (they were insanely low at the time) and they went up instead before he locked.
I’ve refinanced many times over the years. With rates this low, you’re crazy not to. Just make sure you aren’t getting gouged on points or fees.
Refinancing shouldn’t be a second thought if it’s possible. Too bad many people have a set it and forget it view towards money, when we should be constantly shopping for the deal possible.
I am not a homeowner, but it seems like now would be a great time to refinance for a lower rate and a shorter mortgage term.
I have refinanced and I am contemplating doing it again. I want away from Bank of America, and what better way than to refinance to a lower rate with someone else? I am trying to find the lowest cost option I can though because I only have 7 years left on the mortgage, and really want it paid off in 5.
Wells Fargo has no-cost refinances for people who already hold their mortgage with them. It’s super easy– they send you a packet, you sign stuff, get it notarized, and done. At most you pay for the notary (and you don’t have to if your bank does notarization for free). Absolutely no strings attached (except the rate is a little higher than the rate would be if you paid to refinance). We’ve done it twice. I saw the daycare director’s mortgage envelope and mentioned it to her– all she would have to do would be call up to ask to see if she qualified. She never did.