Monday, July 25, 2011

Refinancing for Free

Here's my house. When we purchased our home, our interest rates were pretty high so when the economy went south a couple of years ago, we refinanced and cut our interest rates as well as our mortgage length significantly.

Would you refinance your home for a lower interest rate if there were no hidden fees or costs? I received a letter in the mail last month from our mortgage lender indicating they were doing such a thing to keep us from refinancing with another lender. They would reduce our interest rate by 1% and for no other reason other than because I was a good customer who always paid on time. I am always skeptical of getting something for nothing (unless I have a coupon for it). What does the bank get for reducing our mortgage interest rate I asked. Their answer was to keep us as a customer so although I had already refinanced a few years ago, they were convincing me to refinance again.

Does it sound too good to be true? It is and it isn't. In a way the bank still makes money. For example, if you have 10 years on your mortgage currently, after the refinance of a 15 year loan, you will have an additional 5 years of payments which is 5 years of interest the bank makes on you that it normally wouldn't. Although, your interest rate is lowered, the bank gets it for longer, and therefore, makes more money off of you UNLESS, you pay off your loan early which is exactly what I plan on doing.

Have I lost you yet? Basically, its a great deal to refinance if you pay off your mortgage in the same amount of time you would originally. It's worth it since it doesn't cost you a dime upfront. You just have to remember to make extra payments so that in the end, you do save money. With mortgage rates as low as 3.2% (well, that is what is was last week for a 15 year fixed loan), it might be worth it to call up the bank and find out if they are willing to refinance you home for free in order to keep you as a customer if you haven't already received an offer like this. We'll be saving $700 a month with this offer so it is definitely worth it.

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