Mortgage rates are lower than ever, and when I recently saw that 10- and 15-year mortgages have hit 3% rates, I was intrigued.
Long-term readers of the blog know that we have (and love!) our 15-year mortgage, because it’s allowed us to pay off our house faster and build up more equity than a 30-year mortgage.
I’m also completely aware that those who have a 30-year mortgage tout the benefits of those, including the ability to essentially maintain a super-low interest rate while investing their money in higher-return vehicles like the stock market.
Mr. ThreeYear (especially) and I (less so) tend to be of the more conservative variety, preferring the feeling of having no debt to the feeling of optimizing our investments. One option isn’t better or worse than the other, just different.
When I mentioned to Mr. ThreeYear that we could consider refinancing to a 10-year mortgage at a lower rate, at a monthly payment that we could afford, he was very excited.
So we began to investigate the option of refinancing to a 10-year rate.
Mr. ThreeYear did some research and found a bank with a low, 3% rate. We input our information into the form (it was on Zillow’s website) and sent it off. I did not include our phone number because I didn’t want to receive dozens of phone calls during the school day, something that’s happened before when I put my phone number into other mortgage sites, like Lending Tree.
We got an email in reply from the bank in question, BNC National Bank out of Bismarck, North Dakota. This bank is licensed to provide mortgages in all fifty states, however, and they have a substantial online presence.
The reason we decided to use them is because they offered us a low, 3% rate, gave us a 10-year fixed mortgage option, and waived the need to get an appraisal. Other banks we looked at, such as Ally Bank, offered us higher rates and didn’t have the 10-year mortgage option.
One negative about working with BNC Bank is that there was no online pre-qualification. We had to fill out a complete online application, including Social Security numbers, bank account numbers, occupations, and more, in order to lock in our rate. The online application was very involved and took about half an hour, mainly because I have all of our financial information in one place with Personal Capital. If I didn’t have all of our financials centralized, I suspect it would have taken closer to an hour to fill out the form.
Another negative about BNC is that the mortgage broker we worked with wasn’t immediately transparent about all of the closing costs involved in a refinance. At first, he told us that their origination fee, $1095, would be reduced to $350, but then when I told him that we didn’t escrow our money, he told us that the fee could not be reduced. He neglected to mention any of the other fees involved in the closing.
When I asked him to itemize these fees, I got a clearer picture:
- $1095 Origination Fee (fee the loan company charges)
- $100 Credit Report
- $16 Flood certification
- $110.80 Employment verification (2x)
- $7.50 IRS verification
- $1280.60 Title fees
- $64 recording fees
The national average for closing costs is $4876, according to Lending Tree, or roughly 3-6% of your loan. For us, the total of $2245.90 represents less than 1% of our new loan amount. We have calculated that we will break even on that cost in about 14 months (it will actually be faster than that because our mortgage time will be reduced and we’ll be paying less interest but that’s a worse-case estimate).
We will need more slightly more cash at closing because we will need to pre-pay some of the interest. That amount is $363.70, which will probably change depending on the closing day we choose. We will not set up an escrow account, however (which involves paying several months of homeowners’ and property tax up front) because we don’t escrow those costs.
One of the most annoying and frustrating moments in my life was shortly after we’d bought our house in Atlanta, and our escrow company reached out to let us know our monthly payment would be changing by several hundred dollars per month because of some error they made in the escrow account. No one cares as much about your money as you do, I thought, and we stopped escrowing shortly after. We have never once had to recalculate the amount we were saving for homeowner’s or property tax and I’ve been much happier ever since.
Higher Monthly Payments
As we have contemplated getting a 10-year mortgage, one of the questions that has run through my head has been, “But does it make more sense to refinance to a 15-year mortgage and invest the additional money we’re saving each month?” 3% is such a low interest rate that our money could probably do much better over the time period in the stock market.
Based on our particular situation, however, I think it makes more sense psychologically for us to get used to a higher monthly mortgage payment. Our monthly mortgage payment will now be $450 higher than it was before, which is not an insignificant amount of money. However, given that we tend to spend, rather than save, our extra money, we have learned over the years that forced savings plans work better for us.
By forcing ourselves to adapt to a higher monthly mortgage payment, we will also learn to live on less, and I’m guessing we’ll adjust to the higher payment in just a few years.
Plus, we have a plan to retire when the kids both graduate from school and go to college, so having our house paid off will drastically reduce our expenses on that front. And we won’t need to worry about that cost during retirement.
Currently, with our 15-year mortgage, we’re paying about $1000 per month in interest. With the new loan, that amount will drop to about $740 and drops rapidly each month. That is exciting because I hate paying that much in interest each month to the bank.
The Flip Side
If we don’t refinance into a 10-year mortgage, we could also refinance into a 15-year mortgage with a lower monthly payment than we have now. We could invest the difference, as I mentioned before, and then use that money to pay off the house when we’re ready to retire. Or, we could keep the mortgage we have now, and keep paying extra on it. Still, this refinance will save us a lot of money in interest over the life of the loan:
- Current mortgage (4%), do nothing, total interest paid: $106,060.25
- New, 15 year mortgage (3%), total interest paid: $71,698.85
- New, 10 year mortgage (3%), total interest paid: $46,825.04
While we haven’t signed the new loan documents yet, we’re well into the process, so it’s very likely we’ll go ahead and refinance.
In the Future
When we paid off our apartment in Chile, I remember being so glad that we had set up a 15-year mortgage, and how grateful I was that somehow, I had done that way back when I had no idea about money.
Will my 50-year-old self be grateful to my 40-year-old self for setting this up? Only time will tell, but I suspect when I make my last payment on the house, I’ll be glad we buckled down and went for the 10-year mortgage.
What are your thoughts? Would you do it? Do you think we’re crazy?