Refinancing for the New Year

January 14, 2010

in cutting expenses,expenses,home,money

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Creative Commons License photo credit: bloomsberries
It’s a New Year, and at this time of year many people are thinking about ways to save more money this year. You may be tempted to slash your grocery budget by only cooking at home, or cut back on monthly expenses like car insurance. If you haven’t tackled your biggest expenses though, this effort is misguided.

When we first started on the path to fiscal fitness we started with tracking our expenses. We followed that with our first No Spend Month. Since I wasn’t spending money, I spent a lot of time making a detailed budget that included everything we had spent on in the last year. I was shocked by the money we had spent in some areas, but looking at out budget it quickly became apparent that our largest expenses were our mortgage and car payments.

Around this time rates started dropping, so we decided to take a look at mortgage rates to see if we could reduce our biggest monthly expense. Rates had dropped but to enough to justify a refinance. A few months later rates plummeted, and we were looking at refinancing at a rate as low as 5%. The issue was our mortgage lender led us to believe they could get us a lower rate, and we paid to have an appraisal, and then they turned around and said we didn’t qualify. We started exploring other options and found our credit union could offer us great rates (5%), and the customer service was fantastic.

If you haven’t refinanced yet, use this simple rule of thumb. Closing costs should not exceed 12 months of savings for your mortgage. For instance: a savings of $300/month means you shouldn’t spend more than $3,600 on closing costs.

Despite talk of rates rising, you can still find rates hovering around 5% if you have good credit, and a good amount of equity. If you are struggling though, call your lender and see what they can do. Some companies are able to work with you depending on your situation, while others won’t work with you until you miss several payments.

You can find info about your local credit union at Credit Union National Association. Our credit union, Franklin Mint Federal Credit Union is fantastic. Find out if you qualify for membership here.

Have you refinanced in the last year? Are you thinking about refinancing? Or are you a renter? Learn more about negotiating your rent from Mary Pilon.

Kelly

© 2010, Whalen Media LLC. All rights reserved. To repost or publish, please email Kelly.

About Kelly


Kelly Whalen is the founder of The Centsible Life, a blog where motherhood and money meet. Her goal is to help readers live well on less. Kelly is a mom to 4, and loves that she can stay at home with her kids, and still pursue her passions for writing, personal finance, and social media. You can often find her on twitter and Facebook talking money and motherhood.

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Tagged as: cutting costs, expenses, home, mortgages

  • Anonymous

    Some banks have different point between refinancing and purchasing in terms of rates. There is a 5.0085% point of refinance mortgage increase in the average of 30 years. Here is the explanation of the rates of each bank.mortgage

  • http://www.classymommy.com ClassyMommy

    Excellent post. Great points. We just finally refinanced right before the new year too. We'd been thinking we should do something with rates so low for the past year or so but finally acted on it. Since I know you are so into all this stuff – this is what we did to try to maximize our savings. With rates so low and our other investments never a sure thing, we opted to go to a 15 year refinancing option. (We were about 6 yrs into our 30 yr mortgage) We secured a 4.25% rate too! Obviously, by going to 15 yrs our monthly payment went up slightly, but with the lower interest and by reducing the years on the mortgage it has us saving some major money. So we are thrilled. I'm so glad we got our act together and did it.

    • http://intensedebate.com/people/CentsibleLife CentsibleLife

      That's awesome!
      Going to a 15 year mortgage is a great way to shave a ton of time and interest off your mortgage.
      I bet you can have it paid off in time for the kids to go to college. That would be great.

  • http://www.classymommy.com/ ClassyMommy

    Excellent post. Great points. We just finally refinanced right before the new year too. We'd been thinking we should do something with rates so low for the past year or so but finally acted on it. Since I know you are so into all this stuff – this is what we did to try to maximize our savings. With rates so low and our other investments never a sure thing, we opted to go to a 15 year refinancing option. (We were about 6 yrs into our 30 yr mortgage) We secured a 4.25% rate too! Obviously, by going to 15 yrs our monthly payment went up slightly, but with the lower interest and by reducing the years on the mortgage it has us saving some major money. So we are thrilled. I'm so glad we got our act together and did it.

    • http://intensedebate.com/people/CentsibleLife CentsibleLife

      That's awesome!
      Going to a 15 year mortgage is a great way to shave a ton of time and interest off your mortgage.
      I bet you can have it paid off in time for the kids to go to college. That would be great.

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  • Daria

    I am thrilled to have found your blog! It has to be fate that I got to this post, too. My husband and I have been thinking about refinancing for quite some time now and I think this will help me find that first step. It's always the first one that gets you going, right? =)

    Thanks for the post! I look forward to reading more!

    • http://intensedebate.com/people/CentsibleLife CentsibleLife

      One of the downfalls of the great rates is the amount of time it takes to refinance. It took us almost 4 months before our closing.

      Ironically, 3 months AFTER that, so a total of 7 months after I called them, our original mortgage company called to talk about refinancing. I guess they are so big they didn't know our mortgage was paid in full by the new company!

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  • http://dariasblog.com/ Daria

    I am thrilled to have found your blog! It has to be fate that I got to this post, too. My husband and I have been thinking about refinancing for quite some time now and I think this will help me find that first step. It's always the first one that gets you going, right? =)

    Thanks for the post! I look forward to reading more!

    • http://intensedebate.com/people/CentsibleLife CentsibleLife

      One of the downfalls of the great rates is the amount of time it takes to refinance. It took us almost 4 months before our closing.

      Ironically, 3 months AFTER that, so a total of 7 months after I called them, our original mortgage company called to talk about refinancing. I guess they are so big they didn't know our mortgage was paid in full by the new company!

  • http://www.observingcasually.com/ Kosmo

    It's also important to only include "true" refinance costs in your analysis. For example, pre-funding an escrow with a new lender or pre-paying interests are not true out of pocket costs. In the case of the escrow pre-funding, it is offset by an escrow refund from your previous lender and in the case of pre-paying interest, it simply means paying the interest now instead of in 30 days. Sure, there's a time value cost of the money, but it's much smaller than the gross outlay for these.

    Things that are true costs are appraisals, points (if necessary), etc.

    Also, the larger your mortgage, these less of a rate dip it takes to have a refi make sense. Are closing costs on a $1 million mortgage 10 times what they are on a $100,000 mortgage? No, of course not … but the savings on interest costs IS 10X larger.

    • http://intensedebate.com/people/CentsibleLife CentsibleLife

      Great points!

      We had some costs involved with our refinance, but as you said we then received our escrow as a "refund" from the old mortgage company which went directly to paying off debt. Even adding the total cost of our new loan the lower payment means we could "pay off" those costs in less than a year's savings.

      It can take a bit of time to run the numbers, but as you point out it is always worth it.

  • http://www.observingcasually.com/ Kosmo

    It's also important to only include "true" refinance costs in your analysis. For example, pre-funding an escrow with a new lender or pre-paying interests are not true out of pocket costs. In the case of the escrow pre-funding, it is offset by an escrow refund from your previous lender and in the case of pre-paying interest, it simply means paying the interest now instead of in 30 days. Sure, there's a time value cost of the money, but it's much smaller than the gross outlay for these.

    Things that are true costs are appraisals, points (if necessary), etc.

    Also, the larger your mortgage, these less of a rate dip it takes to have a refi make sense. Are closing costs on a $1 million mortgage 10 times what they are on a $100,000 mortgage? No, of course not … but the savings on interest costs IS 10X larger.

    • http://intensedebate.com/people/CentsibleLife CentsibleLife

      Great points!

      We had some costs involved with our refinance, but as you said we then received our escrow as a "refund" from the old mortgage company which went directly to paying off debt. Even adding the total cost of our new loan the lower payment means we could "pay off" those costs in less than a year's savings.

      It can take a bit of time to run the numbers, but as you point out it is always worth it.

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