Ask the Readers: When Does It Make Sense to Refinance a Mortgage?

So much for vacation. I just can’t keep myself away from you guys!

While surfing around this evening, I found a story at USA Today about how mortgages are at a 37-year low. A 30-year fixed-rate mortgage averages about 5.28% right now.

I don’t usually pay much attention to these stories. We refinanced our first house (from a 9% 30-year loan to a 5.75% 15-year loan), but our current mortgage is in a kind of phantom zone: We have a $207,000 balance at 6.25%, with about 25 years remaining. We think our home is worth about $350,000 ($333,500 according to Zillow), even after the wild swings in housing prices over the past few years.

The USA Today article piqued my curiosity, so I jumped over to Bankrate to see what sorts of loans were available. The site gave me three options:

The best option would give us a 5.00% rate and a monthly payment of $1111. (Our current monthly payment — principal and interest only — is $1386.60.) We could conceivably save $275 per month by re-financing.

But then I noticed an ad for a company called AmeriSave. It touted rates as low as 4.25%. A 4.25% 30-year mortgage? My jaw dropped. Literally. Could this be real? I clicked over, filled out the initial form, and took a gander at the rates they offered:

A payment of $1018 per month? That’s $378 less than we’re paying now! Yes, I do see the $6634 in fees and points. Yes, I understand that it will take us 18 months to recover these costs. That’s fine. We still plan to live in this house forever (or until we can afford to relocate to Wells, England).

As a reminder, Kris and I have a mortgage prepayment plan in place. For the past year, we’ve paid $2000 every month, knocking off a a few hundred dollars in principal each time. We would continue to pay $2000 every month even with a new loan, so we’re looking for a low interest rate and low fees.

So, my book proposal is on hold for a day. I’m spending my Friday digging into mortgages. I have several tasks on my agenda:

• I’m going to call AmeriSave to find out more about their rates.
• I’m going to call my current mortgage company to see what sort of rate they can offer.
• I’ll go through the process at Lending Tree.
• I’ve e-mailed my mortgage broker to see what he can do for me. (And he replied almost immediately — at 10pm on a Thursday!)

It seems strange to be devoting a day to this when it hadn’t even been on my radar until an hour ago. But it’s moves like this that can save big bucks in the long run. In All Your Worth, Elizabeth Warren encourages readers to “count the dollars, not the pennies”. When you make smart choices on the big expenses, you have more freedom to spend what you want on the small expenses. By refinancing, I’m trying to count the dollars. (When we refinanced our first house, we were able to keep the same payment, but cut the term from 26 years to 15 years.)

Meanwhile, Jason B. wrote in yesterday with a story about his efforts to refinance in this crazy market:

I’m refinancing my mortgage from 6.375% to something lower. I originally locked in my rate at 5.25% just in case it went higher. But the rate dropped to 5.0%.

I realized my $300 application fee was less than what I’d save in just 9 months of interest at the lower rate, so I called up and they agreed to keep my application open, charge an extra application fee (instead of starting over with all the paperwork) and lower my rate. But now the rate has dropped to 4.875% and could go even lower! I guess I’ll just keep paying the $300 until the rate still drops. But it feels wasteful.

Have you refinanced your home in the past few years? What advice can you offer us? It’s been a decade since Kris and I did this. Have you used Lending Tree? AmeriSave? What can we do to make the smartest decision? And do you have any advice for Jason? What should he do about rates that keep falling?

For research, I dug up an old post where Nickel shares his thoughts about how to decide when to refinance your mortgage.