Sorry for the dramatic title, but we slashed our mortgage interest 26% by refinancing! We bought a house early 2008 at 6.25% (30 year with intention of paying off sooner) and refinanced about a year later in June 2009. Our new rate is 4.625% (30 year with intention of paying off sooner).
We took a hit initially due to closing costs and fees, but now all of those savings are flowing to our bottom line and will continue to add to our Net Worth each month going forward. This is because we took the time to refinance. Yes, it is a major paperwork hassle and who wants to deal with mortgage closings? But for the small number of hours invested, the payback of thousands of dollars is well worth it.
You may ask why did we get 30 year mortgages? Everyone always says do not get a 30 year mortgage, it is financial suicide. Yes, I agree with that, generally speaking. For us, with the uncertainty of jobs, we wanted to minimize the required monthly payment. If something happens we can afford the monthly payment on one income plus unemployment and savings. The 15 year payment would have been riskier. The difference between 30 year and 15 year interest rates was tiny, so we chose the 30 year to remain flexible with our cash flow. We are putting some exra towards the mortgage, but with the high unemployment and companies slashing jobs, we are mainly building our emergency fund right now.
Let me make the point clear: we CAN afford the 15 year payment, but made a conscious decision to get the 30 year mortgage. We are NOT taking the extra money and buying big screen TVs or eating dinner out every nite. Right now we are primarily putting more into the emergency fund (HSBC Advance account).
The lower rate of 4.625% means we are saving 26% on the interest:
- 6.25 – 4.625 = 1.625
- 1.625 / 6.25 = .26
- .26 is 26%
Therefore if interest was $800 per month, it would be $600 per month after refinancing. A savings of $200 per month. Would you like to have $200 more each month flowing into your savings or investments?
There is a small tax impact because we are dealing with mortgage interest which is deductible, but it is not much so I am disregarding it for now. Our payback for the closing costs was 27 months so we are still in payback mode but soon the savings will be all icing on the cake!
The best place to begin researching rates is the reverse auction-style clearinghouse LendingTree. Here is a summary of their service:
- One simple form
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Click the link above to get started. One quote request will get you several refinance offers emailed directly to your inbox. All you need to do is wait and then compare the offers. No cost to you, if you do not think the offers are beneficial, you do nothing. Nothing to cancel, no trial program, nothing to lose or follow up later.