This post comes to you in partnership with Refily. This post is by me (Eric) and features my own opinions.
There were several significant milestones where I felt like a real grown-up, and one of them was getting my first mortgage. But I felt like a financially savvy grown-up after refinancing that mortgage, and another one more recently. Those were both big financial wins that set me up to save tens of thousands of dollars over time.
I recently teamed up with Refily, a free-to-use platform that does the hard work for you of shopping around for a lender, allowing you to compare rates to help you pick the right provider for your needs. Here’s a look at how refinancing saved me money and how Refily can put you on track to finding a lender who could help you see if you could save by refinancing.
Secret Insights Into the Mortgage and Refi Process
My first home was a condo in Denver, which I refinanced and eventually sold for a significant profit. My second home was a single-family home in Portland, Oregon, where I only had the home a little more than a year but still managed to come out way ahead when selling.
I’m writing this article in a home office in the third home I’ve owned with a mortgage. When mortgage rates dropped at the start of the COVID-19 pandemic, I jumped to refinance to a lower rate. In total, including this house, I’ve had five mortgage loans.
But before I ever had my first mortgage, I sat on the other side of the desk at the bank. My responsibilities as a bank manager included reviewing and approving mortgage and refinance loans that came into my branch. Having been on both sides of the mortgage process, I know what to look for when refinancing and how to refinance for the maximum financial benefit.
My Latest Home Refinance Saved Me Thousands
I’ve never met anyone who refinanced their mortgage for the fun of it. Refinancing takes a bit of legwork, so you’ll only want to go through the process if it will lead to major financial savings. It’s always worth running the numbers if you’re considering a refinance.
I bought my current home with a 30-year fixed mortgage originated in May 2017. The loan came with a 4.25% interest rate, which was competitive for the time, particularly for someone who was newly self-employed as I was at the time.’
I refinanced just a few years later in March 2020, which you may recognize as the start of the COVID-19 pandemic. When the Federal Reserve lowered rates in response to the pending economic challenges, I jumped and refinanced with a new 25-year fixed loan with a 3.25% rate.
The refinance lowered my payoff period by a few years and lowered my payment by about $100 per month. But most importantly, I should save about $12,000 in just the first five years, thanks to a lower interest rate. If I keep the loan through the payoff date, I’ll save more than $50,000. That’s serious money! The amount you may be able to save depends on your original loan and new finance loan terms.
When You’re Most Likely to Save Money with a Refi
Most people would jump at a chance to save tens of thousands of dollars. If you have a mortgage and any of these apply, you may be able to save by refinancing:
- Improved credit: If your credit has significantly improved since buying your home, it would be worth checking with a lender to see if you could qualify for a loan with better terms. Those with the best credit scores tend to qualify for the lowest interest rates.
- Rates have fallen: When interest rates fall, as they did at the start of COVID-19, mortgage interest rates go down for the entire market. Those lower rates spurred me to refinance. If rates are down since you took out your mortgage, you may be able to save even if your credit score hasn’t changed.
- Shorter payoff period: When you trim from a 30-year loan to a 15-year loan, your interest rate may go down, as shorter loans are considered a lower risk by the lender. Your monthly payment may go up, but your total interest cost should decrease when shortening your term with a lower rate.
It’s usually not a great long-term idea to refinance for a lower monthly payment. While it can take off financial stress in the short term, you’ll typically end up paying more interest over time. In addition to mortgage calculators, the best way to compare the cost of a mortgage is the annual percentage rate (APR), which gives an all-in, apples-to-apples cost comparison between two loans.
Situations Where You May Not Want to Refinance
Just because you can refinance doesn’t mean you should refinance. If you’re on the fence, focus on the numbers behind the loan. These situations should lead you to think twice before pulling the trigger:
- Higher interest rate: The interest rate determines the cost per dollar borrowed. You should avoid a higher interest rate for a mortgage in nearly all circumstances. The only time to consider a higher rate seriously would be if refinancing to a lower monthly payment can help you avoid foreclosure and losing your home.
- Longer mortgage term: Extending your mortgage term means more monthly payments. In most cases, that also means a higher interest rate and higher total costs.
- High cost for points: You may be able to get a lower mortgage rate by paying “points” to your lender upfront. You should definitely do the math to verify that paying for points makes sense for you. Paying too much for points cuts into your savings from a lower interest rate.
- You plan to move soon: If you’re going to stay in the home for less than five to seven years, you may not live in the home long enough to cover closing costs. Again, look at the dollars and cents behind your current and prospective loans to guide your decision.
Shopping Around For the Best Deal
When you type “best interest rates” into Google, you’ll get 1.2 billion results. Odds are you don’t have time to shop around at dozens of different banks and other lenders to find your best rate. But if you don’t shop around, you could wind up overpaying significantly.
That’s where Refily comes in. Refily is a home refinance lender comparison tool. It takes less than five minutes to enter your information (Social Security number not required), and Refily will show you a recommended lender and comparisons with other lenders.
The comparison includes interest rates, estimated monthly payments, lender fees, recommended credit scores, and other key details to help you choose the best provider for your needs and budget.
It All Comes Down to the Dollars and Cents
Mortgages and refinancing are some of the most significant financial decisions you’ll ever make. A slight difference in interest rates could help you retire early, pay for a dream vacation, or treat yourself to of benefits of having more money to spend the way you want instead of handing it over to a lender.
If you’ve done the math and the dollars and cents say it’s time to refinance, don’t hesitate to get connected with a lender now.
This post is sponsored by Refily. If you’re looking to refinance your mortgage or want to compare rates, Refily uses custom matching technology to help you compare lenders and make the right refinance decision. Refily provides transparent, tailored lender choices designed to fit each borrowers’ needs—all without giving an SSN. (NMLS# 167283)
This post was originally published on October 22, 2021, and updated on February 17, 2022.