Progress to Date

  • Original Loan Amount: $204,000.00
  • Balance at Beginning of 5-year Goal (1/1/08): $188,983.82 @ 6.00%
  • Balance at Refinance in February 2009: $148,000.00 @ 4.625%
  • Outstanding Balance: $0.00 (PAID IN FULL!!!)
  • Latest Payment Date: April 2011
  • Latest Additional Principal Amount: $17,623.22
  • Amount Ahead of Schedule (since refinance): $121,462
  • Time Ahead of Schedule (since refinance): 7 years 10 months
  • Interest Saved Last Month: $23,972.48
  • Total Interest Saved: $28,435.55 ($1,037.74 on original mortgage; $27,397.81 on current mortgage)
  • Months Remaining in 5-year Goal: 20
  • Average Monthly Principal Needed to Meet Goal: N/A (Goal achieved)
  • Progress List Explained

Monday, February 23, 2009

Refinancing

One of the most frustrating parts of having a fixed-rate mortgage (aside from the debt itself) is the arbitrary nature of the interest rate. While it's possible to find slight variations in rates between lenders when shopping for a loan, the most important factor in determining the rate (the collective credit markets) is beyond the borrower's control. After we locked in our 6.00% rate back in 2006, I had watched the average non-variable mortgage rate slowly trend downward. For a while I was tempted to refinanance, but every time I ran the numbers, I found that the difference in savings wasn't meaningful when offset by the closing costs required to draw up a new loan. This was magnified because we weren't planning to spread those savings out over a longer term (assuming we could keep pace with our goal of paying off the debt within five years or less). So after a while, I stopped paying attention to the rates. I convinced myself that it was unlikely we'd ever see a rate low enough to make refinancing pay off.

Then, about two months ago, my dad mentioned that he had refinanced his own mortgage (an adjustable-rate loan which was about to reset) at a rate much lower than we were paying on ours. I told him about my doubts, but he referred me to a lender who had reasonable costs and suggested that I explore it further. After I ran some numbers with the going rate, I realized that refinancing would actually benefit us even if we maintained our progress toward the five-year goal.

To make a long story short, we now have a new 10-year mortgage with a fixed rate of 4.625%.

There are three advantages to this new loan. First, and most obviously, the interest rate is lower. This means we will fork over less money to the lender each month, leaving extra cash which we can use to pay down the outstanding balance. Second, we reduced our term. Instead of having 10+ years left on a 15-year mortgage (which was our status as of the most recent payment on the old note), we now have a 10-year loan. This is a psychological advantage. And third, our monthly payments are lower. The lower payment (along with the shorter term) will benefit us greatly if we run into misfortune and have to suspend (or abandon) our goal. As it stands now, as long as we can make the (new lower) minimum payment, we will be mortgage-free in no less than 10 years.

I'm going to pause a moment and savor the rewards of our hard work to date. Had we not paid down the mortgage so aggressively in 2008, I doubt we would have been able to reduce our interest rate, term, and monthly payment in a single transaction. Ahhh...

There are some drawbacks, of course, primarily the closing costs associated with the refinancing transaction. We also had the hassle of providing a lot of paperwork to the new lender, and taking time out of our schedules to attend the closing. It may take us a while to get used to dealing with the new lender when making the first few payments. And, to top it all off, I have to figure out a way to account for the transaction in this blog when charting our overall goal progress. :)

Of course, the only significant drawback of those I just mentioned is the cost of the transaction itself. This amounted to about $1700, covering various fees, reports, certifications, and taxes. I ran several hypothetical scenarios through my spreadsheet model (using both the old mortgage and the new debt for comparison) and found that the cumulative monthly interest savings should allow us to break even somewhere in the next 9-11 months, depending on how successful we are at making extra principal payments. Since we are nowhere close to paying off our mortgage in a year or less, this transaction should benefit us in the long run.

One peculiarity of the whole process is that while we did make an interest payment during the month of February (partially to the old lender and partially to the new lender), we don't have to make our first principal payment until the end of March. So we'll save the payment we would have made this month (less the closing costs) and apply that amount toward our first payment on the new loan.

Now, wish me luck in figuring out how to make sense of all of this in our Progress numbers...

5 comments:

Louise said...

thats really good that you could get such a good rate and lower the term. I have no doubt you are going to reach the five year goal!

Middle Way said...

Congratulations on getting the lower rate! I believe it is worth the trouble and cost because of how mortgage interest is compounded.

Laura @ move to portugal said...

Contrats on getting a lower rate from me too.
I know what you mean about working it all out, it's mind blowing sometimes :)

Anonymous said...

If you put that $1700 on the prince...you'd been better off!! your time fuel and sleepless nights also add into the confusion! They Gotcha!! Nite Nite..

The Executioner said...

Care to back that statement up with an explanation, or some calculations? I ran through several variations of two scenarios: one with the refinancing (including expenses), and one without (the status quo). In all cases the refinancing scenario comes out ahead in under a year.