The Shocking Discovery We Uncovered While Refinancing Our Mortgage

by Kevin on April 5, 2012

My wife and I were lucky enough to close on a refinancing of our home a few weeks ago. We decided to fully commit to a 15 year mortgage in order to get the crazy low interest rate. We had been paying our 30 year mortgage like a 15 year with an added principal payment. Our new payment is the same as what we were doing previously by paying extra, so there’s been no change in cost for us from a monthly budget perspective. The only difference is we’ll shave off about $26,000 in interest payments and still pay it off earlier than expected!

But there’s one thing that really caught me off guard as we were going through the refinancing process that I thought you would find interesting.

Get Multiple Refinancing Quotes

As with any big purchasing decision I definitely did adequate shopping around. Rates had dropped so much in the 8 or so months we had owned our home that I knew, at the end of the day, we were going to save money. Just how much would come down to the details.

I called our current mortgage company first. The rate they quoted me was laughably high. Much higher than any other quote you could find online. So high that I told the loan officer up front that I didn’t think that was going to be competitive. She didn’t seem to care much.

I then got in contact with a reputable mortgage broker who gave me a very competitive quote. We hashed out details on what to expect from closing costs and I made sure there weren’t any crazy catches in the fine print.

But before I pulled the trigger on her original quote, I had her give me multiple scenarios:

  • The original quote with closing costs rolled in
  • The original quote with closing costs paid out of pocket
  • Paying points to drop the rate 1/8th of a point with closing costs paid out of pocket
  • Paying points to drop the rate 1/4th of a point with closing costs paid out of pocket
  • Paying points to drop the rate 3/8th of a point with closing costs paid out of pocket

I figured paying significant points to drop the rate as low as possible would, over the long run, pay off with significantly lower interest. If that was the case it comes down to if you think the upfront cost is worth the wait to get the lower overall interest.

But that’s where the surprise came in…

Rolling in Closing Costs in Our Refinance

…it turns out that rolling in closing costs on the original quote — the higher interest rate — was the best┬ádeal.

I was stunned.

What about paying all those points and dropping the rate to as low as it could possibly go?

It didn’t make sense to do that. There was one refinancing quote that saved us about $240 more in interest over the life of the mortgage and that was dropping the rate by 3/8th of a point. But to get to that level we would have had to pay almost $7,000 in closing costs. That just didn’t add up. You’re losing access to $7,000 to get a savings of $240 over the life of the loan. I could drop that $7,000 into an account earning 1% interest and generate $70 per year. After 4 years I would be ahead.

Lesson Learned: Run the Math Yourself

Refinancing our home has been a lesson learned for me to always run the math and to never take something at face value. I had always assumed that paying more points equated to lower interest and an overall better financial decision. In my case it did technically lead to lower interest, but it would have been a dumb financial decision.



Golfing Girl April 8, 2012 at 3:16 pm

You also have to factor in the reputation and customer service. If there are problems, it’s not worth saving a few hundred dollars.

DC Dweller April 9, 2012 at 8:15 pm

This post came at the perfect time. I’m refinancing and also looking at two scenarios – one with a lower interest rate, and another slightly higher but with closing costs paid by the bank. I was doubting my math because the higher interest rate actually turned out to be the better deal for me (it would take 7 years for the difference in payments to make up for the extra closing costs, and I’ll likely move in 3 years), so this is reassuring. Thanks!

Jamie April 23, 2012 at 4:32 pm

That was exactly the same for us. When we ran all the math, it was actually cheaper to role in the closing costs. Who knew. Just shows, like you said, always get multiple quotes and RUN THE NUMBERS.

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