KJ: One of the benefits of lower interest rates these days is the very low cost of credit: be it mortgage loans, home equity lines of credit, car loans, student loans (er, generally…), etc. and ultimately saving money on large purchases. Well, for some reason, credit card interest rates don’t EVER seem to decline, so that’s really the exception to the rule and why you should avoid carrying any balance from month-to-month anyways. But, just because interest rates are lower, doesn’t mean you should go out and take on NEW debt just because! With rates as low as they are today, we chose to refinance our 30 year despite our historically-low 3.75% mortgage rate. I would have never thought I would utter those words, but crazy as it is, we did, and here’s our story why (thankfully we weren’t around to purchase a home when interest rates for mortgages were in the TEENS in the late 70’s/early 80’s!) and how we saved money on our interest rate.
When we moved into our current home, rates were about as low as they had been in all of the recorded history for mortgage rates. Unbeknownst to most, interest rates and mortgage rates declined throughout 2014 and into the first part of 2015. So, what were we to do? How could we benefit from the decline? While interest rates themselves actually aren’t all that different from when we bought, fast forward a year of continued savings, changed goals and circumstances, and the timing was right again. So, after a lot of number crunching and analyzing, and rates dipping to a point that we were comfortable, we decided to go ahead and take the plunge on refinancing. Of course there are costs associated with refinancing (loan costs, appraisals (if needed), surveys, and title policy to name a few), but here is the breakdown of why we still chose to refinance and how it will lead to us saving money over the long-term:
We switched to a 15 year mortgage
What!? Yes, I know. I generally am quite averse to getting a 15 year mortgage, but it was right for us for a number of reasons. One of which was that it allowed us to drop our interest rate even lower than it was by more than 0.5%. We locked in 3.125% for fifteen years. But, the fortunate thing about home “amortization schedules” (i.e. those sheets of paper at closing that show how much EACH payment EACH year for what seems like an eternity counts toward your loan principal versus what goes toward interest) is that a 15 year mortgage is NOT double the payment of a 30 year mortgage. In fact, ours only changed by a few hundred dollars more. Plus, each payment will now have roughly DOUBLE the amount applied to principal than it had last month. And, if something were to happen to either of our incomes over the next 5-10 years, we have continued to build up our emergency fund to be able to weather the storm.
Housing prices in our area have increased
With housing prices increasing in our area over the last couple of years, we were able to eliminate some costs by having an even lower loan-to-value of our mortgage simply due to housing prices having increased. Not something everyone could expect to do, for sure, but something that just happened to work in our favor this time. We don’t have any intentions of selling in the next 5-10 years, but hopefully those values can maintain themselves! Fortunately, this equated to instant money savings!
We were able to go with a better loan servicer
Not much that you really can do about this, but it was nice to move to someone who has a little better loan servicing department, better website, etc. Not that we’ve ever run into any servicing issues, but just nice to have a little more technology and website behind the company. As with most loans though, they end up getting sold off, so that may change in the future anyways, and it wasn’t that strong of a reason for us to make a change, but one for the refinance column nonetheless.
You skip a payment
While not in and of itself a reason to refinance since the costs far outweigh the benefits of refinancing regularly, it does help. In fact, with the refinance we did recently, by still making our regular payment in the month that didn’t require one, we were able to actually get ahead and have a lower principal balance than had we not refinanced in the first place. Break-even rate already hit!
We are debt averse
We just flat out don’t like debt. Even the “good” kind that mortgages and the like are often referred to as. Sure, it’s good for your credit score to have diversity in credit types (home, auto, credit card, credit lines, etc.), but there’s just something about a regular fixed payment we don’t like (I guess better than an irregular, variable payment though!?). So, long story short, with our refinance, we’ll get to this goal much quicker than we had planned before.
Uncertainty versus certainty
While with interest rates as low as they are today, the math would otherwise suggest that you mortgage your house to the hilts and you take on leverage to be able to earn more with productive assets, we chose a slightly different route. It’s a little “a bird in the hand is worth two in the bush” if you know what I mean. It’s about balancing the certainty of what you KNOW the interest rate is on your loan now, versus what the next DECADES worth of investments, expenses, life, returns – you name it – may be. As well, you don’t know that like clock work over the next 20 years that you would even follow the exact schedule of what you can to make the analysis work like it needs to.
- Have you considered refinancing?
Have you refinanced in the past?
What’s stopping you from saving money?
Tell us about your experiences in why you did or did not go through with it!
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