Just one year (plus a week) after we bought our house last year, we’re closing on our refinance.
Last year, interest rates were low and we obtained a 4.5% 30-year fixed loan. I didn’t think rates would drop much, but I was wrong.
In March, I said we probably wouldn’t refinance unless rates were in the 2% range, and at the time I mistakenly thought that if we refinanced, we’d lose our Mortgage Credit Certificate.
I now know that’s not true. We just need to reapply and pay a $325 fee. We shopped around and are going with a different lender this time (lower interest rate AND cheaper closing costs).
Old loan: $668.82/month. 4.5% for 30 years. $132,000 starting balance. We made a total of $260.10 extra in principal payments. We’ve already paid $5,401 in interest, and only have reduced the principal by about $2,000.
With no extra payments beyond what we’ve already done, we’d pay $108,056 in interest.
New loan: $890.30/month. 2.875% fixed for 15 years. Starting loan balance: $130,050. Total interest with no extra payments: $30,204.
We’re saving $77,852 in interest. And, we’re eliminating 15 years of $668/month payments (the second half of that 30-year loan).
That’s $120,240 in cash flow freed up, for a total improvement of $198,092. And that’s not even calculating the growth that the freed-up cash can do when invested.
I could argue that refinancing could improve our net worth by more than a quarter million dollars when it’s all said and done.
We’re building equity much faster than we would have without refinancing.
This means that when we go to sell, simply by having a lower interest rate and a faster amortization period, we’ll have that much more cash in our pocket from the sale.
Twelve months from our refinance, we’ll owe $123,013 on our house. With no refinance, that same month we’d owe $127,336.
Twenty-four months from the refinance, we’ll owe $115,771. Without the refinance, we’d owe $125,023. Almost $10k more in equity by refinancing, after only 2 years!
That’s the point I want to drive home to those of you who are considering a move in the next few years.
It’s worth crunching numbers to find out if it would make a difference for you in terms of payment and equity. If you’re already several years into your loan and are planning on moving soon, it may not be worth refinancing. But it could still have a big impact.
Our closing costs were $250. In addition, we have to pay $10.38/day in interest charges from the date we closed until the first of next month, so $218.
Our first new payment of $890.30 isn’t due until November 1, so that delay is nice for cash flow and recovering those closing costs, in a way. Instead of October’s mortgage payment, I used that cash for closing costs.
It certainly is true that small amounts go a long way when paying off your mortgage. Even so, we are not going to worry about paying it off faster right now.
We want to load up our retirement and college savings first. I am fairly confident that we’ll be able to earn more than 2.875% on those other accounts. Also, with our Roth IRAs, we are limited to how much we can contribute each year.
I want to make sure we’re contributing as much as we can to those before worrying about our low-interest mortgage.
I suppose I could round up the payment and call it $900 instead of $890. That indeed would have a modest impact — it would cut 2 months off our loan and save $442 in interest.
We may want to accelerate our mortgage payoff at some point, or even save up and pay it off in one big payment ahead of that 15-year mark. I’m not going to worry about that right now.
I’m going to maximize this cheap loan and improve our net worth in other areas.
For more, check out this post I wrote in 2009 (waaay before buying a house) about not paying extra on the mortgage.
How about you? Shopping around a refinance?