Refinancing? Here's The Mortgage Deal I Choose

(MoneyWatch)  Yesterday, we started shopping around to refinance our loan. Right now, we have an adjustable rate mortgage (ARM) that's gone down to 3.35 percent. We also have a home equity line of credit that's clocking in around 2 percent.

We called three lenders to compare deals. Here's what they initially offered us on a 15-year fixed-rate loan:

• Lender #1: 4.25 percent, around $1,500 in fees/costs
• Lender #2: 4.35 percent, no costs
• Lender #3: 4.50 percent, around $1,500 in fees/costs

We went back to Lender #1 to discuss more details. Turns out that the 4.25 percent deal required us to escrow our property taxes. We haven't escrowed our property taxes in years. It would be silly to do so, since our taxes are more than $20,000 per year (on a house we originally paid around $300,000 for 15 years ago - ouch!). That's a lot of cash to tie up in an account. But the lender told us we'd have to pay an extra eighth of a point in the interest rate if we declined the tax escrow.

Lenders #2 and #3 also required the tax escrow. We eliminated Lender #3, because the other deals were better and focused on whether it was better for us to pay the $1,500 and take the lower interest rate or do no fees and take a slightly higher interest rate.

For the amount of our loan, going with the lower interest rate would save us about $600 per year. So, in three years, we will have paid off the costs of the refinance compared to taking the deal with no costs. I fully expect to have this mortgage until we pay it off or sell the house, whichever comes first.So, paying the fees makes sense to me.

(I was interviewing a senior HUD official this morning and he said that refinancing is all anyone is talking about. "We won't be seeing these interest rates again anytime soon, maybe in our lifetimes.")

But we still didn't want to escrow our taxes. After talking with the lender, my husband Sam was able to negotiate the 4.25 percent interest rate with fees, but with no tax escrow. Right now, with cash earning 1 percent in the bank, it doesn't matter much. But if interest rates rise as expected over the next few years, that $20,000 could be sitting in the bank earning $800 per year. That's worth it.

So, we're going to go with Lender #1. On to the paperwork. I'll let you know how it all works out.

Please share your refinancing tale (hopefully not of woe) here, along with the interest rate and deal you've found.

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