Was it Worth it to Refinance My Mortgage?

Worth it to Refinance My Mortgage?

Was it worth it to refinance my mortgage?

I think so.

Tell me if I’m wrong.

We just closed on a refinance of our home mortgage. It was a long, drawn-out process, but it is now over and we have a better rate for our 30 year mortgage (less interest owed) and lower payments (more flexibility with our budget and the property).

Here are the details (numbers rounded and approximated at times):

Previous mortgage: purchased in October 2007; 30 year, fixed mortgage rate at 6.375%; we purchased our home for approximately $207,000; we put $42,000 (20%) down; total mortgage of $165,000; our payment was $1,028; we paid $0 in closing costs after seller credits of $5,000; we paid $39,000 in interest over the last 3 years and 10 months; and we stood to pay $205,000 in interest over the life of the loan.

New mortgage: closed in July 2011; 30 year, fixed mortgage rate at 4.875%; new total mortgage of $159,000; new payment of $842; we paid closing costs of $1,000 after lender credits of $2,000; we stand to pay $144,000 in interest over the life of the loan.

Note: Current market conditions are such that we would “lose money” on the sale of our home if we tried to sell right now. Therefore, even if we leave the home in the next year, we will keep it as a rental unit.

Interest Savings and Payment Info

By refinancing, we reduced the amount of interest we will pay over the life of these loans by $22,000 ($205,000 – $144,000 – $39,000), which is nice. The way I see it, based on this savings in interest, we need 17 months to recoup the $1,000 closing costs on the re-fi. Here’s how I got that number. I spread the interest savings across all of the remain periods: $22,000 / 360 payments = $60. Then, I divide the $1,000 closing costs by $60. That gives me 17. It will take 17 periods (or months) to recoup my $1,000. If I sell the town home prior to December 2012, then this will have been a waste.

I know the typical “break even” rule of thumb on a refinance is to take the difference in payments (in this case $1028 – 842 divided into the closing costs of $1,000), but I don’t think that tells the true story. Do you think my method is right or wrong?

I’m glad we have a lower payment, for two reasons:

  1. First, we’ll probably outgrow the house soon. We bought this place with the idea that it might become an investment property in the future. With this new payment, the term “investment” can actually be used. If we rented out our place, we could get $1,500 a month at a minimum. Mortgage payment of $842, property taxes of $350, HOA dues of $175, and insurance of $20, would leave us with a rental unit that cash flows.
  2. Second, even if we don’t start renting it out, we have $186 more dollars ($1,028 – $842) in our budget each month. This will give us more flexibility as we continue to navigate self-employment.

The Self-Employment Hurdle

I’m also glad we were able to get a refinance considering my self-employment income. PT Money, LLC hasn’t exactly been reporting a monstrous income for very long. Underwriters like to see tax returns dating back two years from those of us without a W-2s. Getting approved for a mortgage using self-employment income is tough these days. My tax returns aren’t impressive (yet). But somehow, the lender (Quicken Loans) was able to get comfortable with what I reported for 2010.

There was one road block we had to cover though. We needed to pay off our car loan to clear money in our monthly expenses for my measly income to cover us for the loan. I’ll explain more about this when I do the full-on Quicken Loans review, but you get the drift, which is that I’m super stoked that we were even able to get a refinance considering our situation.

Do you think I made a smart move here? Did I get a good rate? Did I pay too much in closing costs? Did I calculate my break-even correctly?

Last Edited: July 15, 2011 @ 3:39 amThe content of ptmoney.com is for general information purposes only and does not constitute professional advice. Visitors to ptmoney.com should not act upon the content or information without first seeking appropriate professional advice. In accordance with the latest FTC guidelines, we declare that we have a financial relationship with every company mentioned on this site.
About Philip Taylor

Philip Taylor, aka "PT", is a CPA, financial writer, FinCon CEO, and husband and father of three. He created PT Money back in 2007 to share his thoughts on money and to meet others passionate about managing their finances. All the content on this blog is original, and created or edited by PT. Read more about Philip Taylor, and be sure to connect with him on Twitter, Facebook, or view the Philip Taylor+ Google profile.

Comments

  1. Yes, I think you made a smart move. You lowered your total payment as well as your total interest costs. You should now figure out how soon you could pay off the loan if you maintained the same payment. That would be an interesting number.

    I think you got a good rate and didn’t pay that much in closing. Your calculation represents the worst case scenario. I would add in the increased decline in equity to that number to come at my break even point if you didn’t want to add in the difference in payments. Either way, if you are there for a year and 5 months, you know you are good.

    • Thanks for the validation. I feel good about it for sure. Good point about maintaining the payment. We’ve tossed around the idea of doing that until we rent it out. At that point it’s an income producer, so I would want to leverage it.

  2. Hmm. Personally, I would have went with a lower term mortgage, preferably a 15 year fixed. But, obviously you have your own reasons for going with another 30. But even still, I would have pushed for a 25 year mortgage (some banks allow this) so that your previous four years of payments wouldn’t have been “lost.” Now, in total, you’ll be paying on your house for 34 years.

    In the end, it’s always better to refinance a house if it’s within your ability and it gets you a much lower rate. It’s a no brainer. Great job. But I think that you’ll soon want to refinance again, but with a lower term AND rate, so that the house would be paid off sooner.

    Case in point, PT, a 15 year mortgage rate is on average, 3.63% according to bankrate.com. Using your numbers, your payment would have only been, $1189. For only $150 more per month, you would have had your home paid off in 15 years. I’m just saying.

    But I guess with the uncertainty and fluctuation of your income, maybe the simply rate reduction was the best move. Of course, only you know your exact financial situation.

  3. I would suggest you to go for a short period of mortgage this time. Maybe for 10 years or 15 years? But since you’re the one who’s getting his property mortgaged, you should practically think about this.

  4. Good job! If it gets you paying less then it is definitely a no brainer. Hopefully, if you are intending to sell it you’ll be able to make a profit out of it in this lousy economy! Good luck!

  5. We did the same thing last year, and I had the same concerns but like you said if you stick with the house long enough to cover your closing costs then its worth it. Fortunately for me we did it before I became self employed. My friend who deals with mortgages told me they typically look for at least one filing (preferably two but one is ok) for self employment income.

  6. I am surprised, when I checked out quicken loans their fees were outrageous. How did you find a deal of $3000 worth of fees and the lender paying for $2000. You got to send me the person you worked with phone #.

    • I was surprised as well. Maybe it was a special promotion they were running, or maybe it had to do with how long it took to close. I will do a detailed post on the process and I will spell it all out. Look for an email from me with the contact info.

  7. Philip, I spent all day yesterday traveling and I’m too jet-lagged to check your numbers, but I think you were wise to refinance.

    At first I was surprised that you didn’t take out a 15 year loan, but once I saw that qualifying was an issue due to self-employment and you’d like to possibly use this home as a rental home in the future, it made sense.

    I wish my husband and I had had the sense to buy a more modest first home and use it as a rental property down the road. That is something my “millionaire next door” type in-laws have done twice.

    Good work!

    • Thanks for chiming in, Julie. Our plan all along for this home was for a max of 7 years. It’s a 3 bedroom town home. While I do think it’s big enough for our growing family, it’s become a pain to not have a yard or a dedicated home office. So we are done with this place and want to be out by the beginning of next year. Knowing that, plus the fact that we don’t want to sell the house for a loss, we will become landlords. We knew this was a possibility when buying the town home, but we didn’t want to be forced into it. Not that anyone is actually forcing us. But the point is that we are fine with becoming landlords, and the 30 year refi makes that a more reasonable investment.

  8. The market seems to be recovering but in reality the jury is still out. We can only take advantage of these low rates and closing costs now while the getting is good!

  9. Should have went with the 15 year note. I just refinanced 2 properties with interest rates in the 5-6% at 30yr to both of them at or below 4% at 15yrs. 15 year notes are the way to go, and It’s the way to make serious principle money.

  10. I think the posts recommending a shorter term mortgage are confusing their personal situation with your own.

    In your article you mention two things that lead me to believe that a 30 year mortgage was the correct choice for you. First, you mentioned that you are self-employed which can result in a less predictable income than someone receiving a salary. Second, you mentioned that you may rent this property in the future and that receiving a positive cash-flow from a rental is important to you. These point towards a need for a low required monthly payment and a 30 year mortgage.

    Sometimes flexibility trumps getting the lowest rate. There are always ways to manage your mortgage towards a shorter term in the future should your income prove stable and/or you receive excess rental cash flow.

    • My thoughts exactly, Rick. Thanks for chiming in.

      I probably should have clarified in my questioning, “did I get a good rate, given my goals of renting it out?” For sure I could have gone the 15 year route. In fact, my wife and I debated it for several weeks. But the positive cash flow aspect of this, really swayed us.

      In the mean time though, I do plan to continue making the full, old payment. My thoughts on this are that when the house is our home (an expense), we should reduce debt. But when it becomes a rental (an investment) we should focus on cash flow. This term, and only this term, will allow us to do that.