Note from Crystal: This guest post was originally published in 2011. I wanted to re-post it as part of this series since it’s something I think everyone who has a mortgage should consider. This idea might not actually save you $100 this year — as your mortgage rates could actually end up increasing a little bit if you refinance — but over the course of the life of your loan, it could end up saving you thousands of dollars!
Guest post by Megan
“Will I ever pay off my mortgage?”
This question has taunted every mortgage holder in America at one point in time or another. My husband and I have been blessed to have a decent amount of equity in our home, and yet the thought of shelling out hundreds of dollars a month for another 28 years has still sent quivers through me a time or two — at least until recently.
I had purchased a house in 2007 before my husband and I were married. I grew up flipping houses (buying, fixing and then reselling) with my family. This instilled in me a desire to try my hand at one myself. I thought it would be an excellent way to get ahead and that I may as well start knocking out mortgage payments sooner rather than later. So with a 30-year, $80,000.00 mortgage at a 7% interest rate, I started doing just that.
Thanks to the help of friends and family, I completed the necessary renovations on the home I purchased and then proceeded to rent out my house while I continued living at home. Even after getting married a year later, my husband and I decided that, for the time, we would continue to rent the house I owned out. For us, it made more sense to let someone else pay our mortgage while we lived in an inexpensive apartment.
The arrangement was working nicely, but it still seemed as though we could be doing more to manage the finances that were tied up in our rental investment. We started looking into refinancing options and were very surprised by the numbers we discovered.
What does it mean to refinance?
Simply put, refinancing is paying off your current loan with a new one to reduce the term of the loan. This in turn saves you a good deal in mortgage interest. We were so excited to find this silver lining in our current economic cloud!
How Much We Saved By Refinancing:
Before Refinancing: After Refinancing:
$80,000.00 loan $80,000.00 loan
30-Year Note 15-Year Note
7% Interest ($112,168.12 ) 4.25% Interest ($28,330.41 )
$811.00 Monthly Payment $846.00 Monthly Payment
Note: In the process of refinancing, my husband and I recently decided to move from our apartment into our rental, as residential loans offer lower rates than investment loans.
As you can see, our return on two months’ worth of paperwork has been $83,837.71 in interest savings and 15 years off the life of our loan!
I was, and am still floored at the savings in interest alone. You may have noticed our monthly payment increased by $35. For us, this is an overage my husband and I are willing to make up in other areas of our budget. We believe it will be worth every penny in the long run!
If you are interested in pursuing the option of refinancing your home, here are a few tips to get you started:
1) Calculate Your Current Mortgage Information
Before you start shopping for a better interest rate, you’ll want to know what percentage you’re trying to beat. Pull out your latest mortgage statement and input the information into Dave Ramsey’s Mortgage Calculator. This is my favorite tool for tracking our mortgage, as it is very simple to use.
With it, you can see how a lower interest rate can affect your loan, or you can calculate how much you would save by simply paying a little extra on your monthly payment. This tool can even help you calculate how much you could save by simply cutting a few restaurant visits and coffee stops each month!
2) Start Shopping For Rates
It is a good idea to start with the company who currently holds your loan. Although this was not the case in our situation, often your mortgage holder will offer you a better rate so they may keep your loan, thus keeping your business from moving to their competitors.
Once you have their rate quote, ask for rate and payment quotes from one or two additional banks before making a decision. Don’t be afraid to let each company know what the others are offering you as they will want to know what would be necessary to acquire your business.
3) Recalculate Your Proposed Refinance Information
Now calculate your proposed rate, payment and loan term information in the Mortgage Calculator to see if refinancing will incur a savings for you and your family. If it does…
4) Act Fast!
Quickly contact the company that gave you the best rate quote. Although interest rates may be low now, there is no guarantee they will stay that way in our ever-fluctuating economy. In fact, we took our time during a certain portion of our refinance, during which the rates jumped on us by 0.75%. Believe it or not, this “little” jump cost us a savings of nearly $5,000.
It is likely that few of you will have the exact scenario we had, but if this information helps you save even a few thousand dollars and a couple years from the life of your loan, I wish you Godspeed!
Megan is a wife and mom who desires to be a good steward of the earthly possessions God has blessed her family with.