A few months ago, I undertook a financial process that I have done a few times in the past, but one that is quite an undertaking! The financial process that I did was refinancing our house, which basically means I took a new loan to pay off my old loan and this new loan either has better terms or allowed me to take money out of my house. Refinancing is always so interesting to me, as I used to think of a mortgage as just something that you held onto for 30 years, slowly paying it off each month. Turns out, you can refinance really anytime you want to and for a variety of reasons. Here’s why I refinanced our house this most recent time.

What refinancing is and why you’d do it

Firstly, let me explain what refinancing is. Although you own your house, if you have a mortgage your bank has a lien against it – meaning they have a legal right to be repaid for their balance due. Few young professionals can buy a house outright with cash and so most of us take a loan to buy it. The bank lends you the money at an interest rate (which could be fixed or could be variable meaning it could go up or down in a few years), and you make monthly payments for the next 15, 20 or 30 years (those being the most common terms for a mortgage).

From time to time, interest rates may change. With mortgages, even a drop in a few tenths of a percent (i.e. 0.1%) could make a big difference as your loan is often in the hundred(s) of thousand(s) of dollars. On a typical loan, over the next 30 years you’ll likely pay tens of thousands of dollars in interest to your bank. So, getting a lower interest rate could be advantageous, saving you money in the long run.

Another reason to refinance is that it’s essentially a new loan and you can get a loan for a higher or lower amount. Some young professionals refinance and pull cash out of their house and use it for other investments, purchases, or to pay down debt. A mortgage is often at a pretty low interest rate compared to what your car loan or credit card loan interest rate is. So it could make financial sense to borrow money at 2-4% to pay off a loan at 5-25%. Or maybe you’re looking to remodel your house or have a big purchase that you could use cash for. The nice thing about owning a house is the equity that comes from appreciation (the rise in value) of your house. If you buy a house for $250,000 and put $25,000 down, you’ll owe the bank $225,000. If the house rises in value to $300,000, you’ll still only owe the bank $225,000 but you’ll now have $75,000 worth of cash in your house. You could then refinance and pull some of that $50,000 out (of course you’d have to pay that loan back but that’s cash you can pull out and use).

One other reason to refinance is to lower your monthly payment. You’re getting a new loan on your house, and you might opt for another 30 year term, despite being years into your current 30 year loan. Even if the interest rate doesn’t change (which hopefully you are getting a lower interest rate), you’re taking your current loan and stretching it back out to another 30 year period, meaning your monthly payment will go down. It’s never a bad thing to have a little bit more space in your monthly budget!

For me, I’ve always viewed our house as both a financial asset but also as a safety net, therefore when I’ve refinanced I’ve only done so to get a lower interest rate, never to pull money out. Even though it might make financial sense to do so, there’s something about not risking your ‘castle’ and keeping it secure.

The situation

We bought our current house in April of 2020, which wow oh wow what a time to be alive, much less be buying a house. There was so much uncertainty all around! Our interest rate was 3.5%. Interest rates fell for the rest of the year and for 2021, with some rates on houses going under 2% (virtually unheard of in any other time period). There are fees associated with doing a refinance, and you’ll pay (likely out of pocket although some lenders let you roll those fees into the loan), a few thousand dollars to refi. With a previous house I had gone through a refinance 6 months into the loan, and then sold the house about 8 months after that so I was a bit cautious to go through paying fees again too quickly. I did however keep an eye on the rates, knowing I could probably do better than 3.5%.

In November of 2021, after much talking and speculation, it seemed like rates were finally going to start creeping back up. I got a little spooked and went ahead and started the refinancing process. My instinct proved accurate as later that week the Federal Reserve (the governing body here in the US that nominally controls/sets the target for rates), announced they were trimming down their bond purchases, effectively meaning rates were going up. I was able to lock my rate in at 2.6%!

Why it made sense

There are some good refinance calculators out there (a quick google will find them) that can tell you if it’s worth it or not to refinance. Typically it’s a question of how long you foresee yourself living in the house to essentially offset the fees you paid to refinance but in our situation dropping our interest rate nearly a whole percentage point was a no-brainer.

I think it’ll take 3ish years before we fully realize the benefits of refinancing (i.e. the lower interest rate offsetting the fees) but we love this house and plan to stay here. What was also nice was being able to get rid of PMI, which is private mortgage insurance, a $80-$120ish monthly fee tacked on until you hit 20% equity in your house. We only put about 10% down on our current house, but with the increase in the value of the home over the 1.5 years we’d been in it, all that became equity, which counted towards us being over 20% equity in our house.

I’ve used an online lender a few times and the entire process is super easy and quick(ish). All told it took about 3 weeks and wrapped up with the lender sending an attorney to our house and we signed all the necessary paperwork right at our kitchen table!

Summary

It’s always good to periodically re-evaluate your financial assets and debts (‘liabilities’) and 1.5 years into owning our current home, it made a lot of sense for us to refinance! I’m super happy to have locked in a super low interest rate of 2.6% for the next 30 years!