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?