We later took out a home equity loan at 5

The little errors we’ve made from time to time pale in comparison to the most common one, and that is to not refinance at all. Some people go for years paying rates that are 2, 3, even 4% higher than the market rate. Our first mortgage in 1999 was 8%. We refinanced it to 7.75%, then to 7.25%. The mortgage on our next house was 6.25%. 3% and paid off that mortgage with it. My mortgage on this house was 3.625%, then 3.375%, and finally 2.75%. The difference between 3.375% and 8% on a $500,000 mortgage is $19,712 A YEAR. That’s more than enough to max out a 401(k).

But there are millions of people in this country still paying 6-8% on the mortgages they got just a few years ago. Some may be trapped in their mortgage by being underwater, but that’s rare these days. Many are simply too ignorant or too lazy to get a no-cost refinance. Don’t be “that guy.”

What do you think? When was the last time you refinanced? What mistakes have you made in the process? Comment below!

115 comments

When you cut through the fog and come to the bottom line, it’s actually very simple: the rate and the lender credit net of all closing cost. It doesn’t matter whether you apply the lender credit to escrow, interest, principal, or just pocket it. Money is fungible.

The talk about funding your escrow, with or without getting the balance in your old escrow, or funding your first partial-month interest, is just trying to make you feel better. All that comes out from your lender credit, and it’s a fixed number (a percentage of your loan principal). The lender budgeted for the worst case scenario already. If you happen to close toward the end of the month, they just pocket the difference. Your job is to get that fixed number for the lender credit and compare it across different lenders.

In your options A, B, and C, A is a negative-cost loan. They pay you $1,900 after all costs for taking the 3.5% rate. B is a no-cost loan at 3.375%. C is a full-cost loan at 3.25% with $1,900 closing cost. Escrow and prepaid interest are not closing costs.

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I’d be interested payday loans KS to hear your opinion on why you chose a 15 year mortgage. I definitely see the logic in getting your mortgage paid off more quickly. It’s easier to plan for retirement without a mortgage, and paying off any loan more quickly is essentially a risk free investment with a return equal to the interest rate you are paying. It’s also psychologically nice to be “debt free”. But there are a couple of arguments for going with a 30 year. First, if you can borrow at under 4% and invest the money instead you would likely come out ahead. Even if you went with a good quality, tax free municipal bond with a 10 year maturity you could likely get over 4% return. Second, mortgage interest is one of the few tax deductions that is not subject to the AMT. Particularly in your likely higher tax bracket you will be missing out on substantial tax deductions.

This. Exactly correct. And in the unlikely event you can’t find an investment that beats your 4% (which is really like 2-4% based on your tax bracket), you can always double up on payments to emulate a 15-yr, albeit at a slightly higher rate.

The deduction is only of value that in essence your rate is now slightly less. It thus helps you get closer to a point where you might be able to invest and get a better return. This would need to also consider taxes on that investment since maxing out you 401k etc should be done regardless and thus this would be with non qualified money.