Recently Sam and I decided to consider refinancing. We had an interest rate of 5.5%. This interest rate is high with the current market but when we were purchasing interest rates were around 4.5%-5%.
When we started looking to buy our house, we were preapproved by WHEDA with an interest rate of 5%. They were supposed to cover our down payment for free, we did not need this but figured it was a nice benefit, which is why we didn’t look at other places. Then the week of closing, WHEDA increased our interest rate to 5.5% and the day of closing they told us we had to pay back our down payment and it would be a second mortgage. We knew to get multiple quotes for our mortgage but it seemed like a lot of work to send info to multiple mortgage lenders. Looking back now, we will definitely get multiple quotes from lenders even if it means a little extra work. So, Sam and I ended up with a 5.5% interest rate, which we feel is high for a home mortgage (at this time).
Sam and I wanted to find out if refinancing was a viable option for us. We have been paying double to quadruple our mortgage every month to try and pay it down since we have been getting hit with so much interest. Sam made an algorithm in excel, so we could see how much interest we would pay over the term of our loan, dependent on how much we were paying in mortgage. This led us to test out a few different interest rates to see how much we would pay in interest over the term of the loan.
When shopping for newer interest rates, we wanted to know if we paid $1500 or $3000 a month on our mortgage, how much we would save on interest in a 5 year time period if we got a lower rate. Our first company we contacted quoted us a 2.25% interest rate. We based our projection over a 5 year period to get a sense of what we would pay in interest with 2.25%, our current rate of 5.5%, and a current average rate of 3%. This is what we came up with.
|Interst Rate||$1,500 a month||$3,000 a month|
When thinking about refinancing, we had to factor in, if the fee for a refinance would be less than our potential savings of interest. The average fees we were finding for our refinance were between $2,300 and $4,800 depending on interest rate and company. As you can see in the table above, even if we had $4,800 in fees, we would have more in interest payments in 5 years than the fee amount. We decided it was a good option to refinance.
We encourage you to look at your local mortgage lenders and Credit Unions. We got quoted our lowest rates and lowest fees, 2.25% – 2.75% for under $2,500 in fees with those lenders. However, when we applied for the bigger companies online, such as Quicken loans, Amerisave Mortgage, and Loan Depot they all wanted to charge us over $4,700 to refinance for interest rates of 2.75%. I told them our rate and fees with the local lenders and they said that was impossible, they stated they give the lowest rates and fees around. (Turns out it is not impossible..) Do your due diligence when shopping around and get at least three quotes from local areas to make sure you are getting a good deal.
If you are interested in refinancing your house and want to know if it is worth it. Make an algorithm or find a financial calculator online to help you calculate if it is worth it or not. If you will pay less in interest than the refinance will cost, you probably should not do it. If you are similar to our case, a refinance would be a very good idea. If you are unable to find an algorithm to use or you would like an easy option. On our budgeting tool, we have the algorithm and a tutorial on how to use it.
We will update as we go through the process of refinancing.
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