Our Mortgage Refinance: Taking the Plunge

Our last mortgage refinance was in 2008 or so, and we’re going to take the plunge on a mortgage refinance once again. Normally, my criteria for doing a refinance requires a “yes” answer to all of the questions below:

  • Is the interest rate at least 1% lower than our current rate?
  • Are closing costs minimal or non-existent, or is the interest rate significantly lower than our current rate?
  • Are we likely to be staying in the house longer than it would take to recoup the costs of the refinance?
  • Does the new mortgage allow for pre-payment with no penalties?
  • Can we get a shorter term than we have left now?

If all of the answers are yes, then I go ahead with the mortgage refinance. I think those are pretty typical criteria too, with the possible exception of the “shorter term” requirement.

Many people refinance in order to get a lower payment, but that’s not what’s important to me. I think there’s also the danger of paying more overall in exchange for a lower payment now — after all, you can probably get a much lower payment by doing a 40-year, interest-only mortgage, but you’ll pay a heck of a lot interest and still owe the full amount at the end.

What’s important to me is to pay off the mortgage as quickly as possible. Sadly though, we’re no longer on track to hit the goal of getting it paid off this year. I haven’t given up by any means, but there’s nothing wrong with paying as little interest as possible in the meantime. Hence the refinance.

Our current mortgage servicer (Penfed) is running a special that looks like it’s made to order for us. A no-closing costs refinance where they also pay a whole slew of fees on our behalf.

The only catch is, it’s for a 5/5 ARM at 3.25%.

I know, I know. It’s an adjustable rate mortgage! Exactly the kind of thing that can get people into trouble.

So normally I’d stay far, far away from an ARM. But in our case, we are very, VERY likely to have the mortgage paid completely off before it adjusts in 5 years. Technically we could pay it off today, with savings. (That’s not the plan, and it would suck our emergency funds dry, but we could.) Plus it can only adjust 2% at a time, up to a maximum interest rate of 8.25%.

So, I’m taking that bet. Here’s hoping it pans out.

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