“Refinance” used to sound like one of those grown-up finance words reserved for our parents. As first-time homeowners and relative newcomers to investing—only three years into our first mortgage—we initially ignored the buzz about low rates. After talking with my dad, our loan officer, and reading helpful blogs, we decided to learn more and see if refinancing made sense for us. Who couldn’t use a lower mortgage payment these days?
At first glance, we didn’t look like ideal candidates to refinance. We’re young, which statistically increases the chance we’ll move; we’d only lived in our home three years, so our principal hadn’t dropped dramatically; and we started with a relatively low rate, a 5.75% lock back in ’06.
After digging deeper, those assumptions didn’t hold up. First, we plan to stay in the house at least five more years—maybe forever—so the risk of moving before recouping costs was low. Second, occasional extra payments over the years reduced our balance to about 73% of the original loan amount, which pleased our loan officer. Third, our strong credit and timing qualified us for a new rate of 4.35%—one of the lowest our closing attorney had seen.
All those factors combined into a near-perfect opportunity: a significantly lower rate on a substantially reduced principal. Our loan officer calculated that refinancing would cut our monthly payments by $430, allowing us to recoup closing costs within a year. That was a clear win.
One concern remained: we dislike carrying a mortgage—it’s our only debt—and refinancing would restart our 15-year loan clock. Before refinancing and with our overpayments, we were about 10.5 years away from owning the house outright, so starting over felt like a step backward.
Our solution was simple and intentional. We committed to continuing to pay the same monthly amount as before, directing the $430 savings straight to principal each billing cycle. With consistent extra payments, amortization estimates show we could reduce the new loan term to roughly nine years and save up to $32,000 in interest. Not bad for an afternoon spent signing paperwork.
We did pay nearly $4,000 in closing costs, which stung at the time, but with the long-term payoff in view we expect to net about $28,000 of benefit after fees—the $32,000 in interest saved minus the refinancing costs. If finances ever get tight, we still have the flexibility to reduce our monthly payment by stopping the extra principal contributions, since that $430 is optional.
Have you refinanced recently or are you thinking about it? Do any other homeowners prefer 15-year mortgages? We’d love to hear your experiences, tips, or questions.
Images courtesy of Wordle, featuring text from recent mortgage and refinance related news articles. Click on each image to read the full article.