By Michael Lyons, as told to Daniel Bortz
My wife and I bought our first home in July of 1999. We were newlyweds at the time, and in lieu of taking a honeymoon we decided to purchase a house and gut it. Our date nights involved going to Home Depot, and talking to plumbers and tradesmen for advice.
During the five years we owned the house, we never refinanced because the interest rates weren't attractive enough, but it's a different story with our second home.
We purchased our second house - where we're still living - in 2004 with a 30-year fixed mortgage at a 5.5-percent interest rate. The first time we refinanced was in 2008 using a 30-year fixed note at a 4.25-percent rate. That reduced our monthly payment by about $300. We decided to pay the points upfront instead of doing a no-cost closing because it got us a much lower rate and a nice tax break.
I never thought interest rates would drop lower than 4.25 percent, but they did in 2012. Before we could decide to refinance, we had to assess our timeline. We knew we'd be in our home for at least another five years, so I ran the numbers and found it would only take two years to reach a break-even point; everything after that would be gravy in our bucket.
That's why we decided to refinance in 2012 to a 30-year fixed rate mortgage at 3.25 percent. It saved us $120 a month, and brought our mortgage down to just under $1,000 a month. Once again, we decided to pay $2,500 in points upfront because it would save us money in the long run when we factored in amortization.
Rate race
Since I'm both a real estate broker and a real estate attorney, I was in a unique position in that I didn't have to pay a closing company either time we refinanced; that saved us a significant amount of money. I also had connections in the lending field and knew how to shop around to get the best deal.
After we got pre-approved, we'd sit back and watch interest rates daily because we knew we needed to pounce on the best rate. So we'd wait until the rates dropped significantly, then jump on it.
The second time we refinanced there was a midday adjustment and the interest rate dropped a full quarter point in the same day. It was unbelievable.
Lessons learned
There's an emotional satisfaction you get from refinancing. Any time you save a significant amount of money, you feel good about what you've achieved. You've not only eased your financial burden, but also gained a sense of security.
I will say that the paperwork when you refinance is exhausting. You need tax returns, bank statements, and history of large deposits and large purchases, among other documentation. Sometimes you need to get errors fixed on your credit report. There was a questionable charge on one of our accounts, and it put a black mark on our credit. We eventually got the error removed, but it took time to dispute it.
Over time, we learned an important lesson. We used to make larger monthly payments on our mortgage than what was required because we wanted to free up some of the equity in the home. And, from a psychological standpoint, it felt good to pay down our mortgage and come closer to being free of owing money to a lender.
However, we eventually realized that by investing the money elsewhere, we could get a much higher return than using it to pay down our mortgage. So now we don't accelerate our loan payments. Instead, we invest in private mortgages, where the return can be up to nine percent.
We've also put some of the money we've saved into making home improvements. We updated a bathroom, a bedroom, and flooring.
These days I don't pay as much attention to daily fluctuations in interest rates because I don't have a desire to refinance again. I definitely talk about refinancing in conversations with my real estate clients and with my friends and family - people are always asking me about where the market is heading - but I have no personal interest in refinancing.
Granted, I still have my eyes open. If the perfect house came on the market and we wanted to buy it, we wouldn't hesitate - especially with interest rates being so low.
Advice for first-time refinancers
There are a lot of ultra-low interest rates advertised by lenders online and plastered on billboards, but rates aren't fixes. They're teaser rates, and when you read the fine print, you realize you may not meet all of the qualifications. Unfortunately, there are a lot of bait-and-switch lenders.
You should compare quotes from at least three lenders, and make sure they offer the same terms so you can get an apples-to-apples comparison. Let the lenders know you're shopping around, and pit them against each other. Nine times out of 10, there’s room to negotiate, so don't be afraid to ask for a better deal.
Related:
- Is Refinancing Right for You?
- Your Guide to the 2016 Mortgage Refi Boom
- 4 Reasons to Refinance Your Mortgage
Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.
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