As I’ve said in the past, Money is not Taboo has come to be because of my blundering through the learning process about financial literacy. I had very little guidance from my parents. Heck, I had very little, if any, guidance from anybody. Especially when it comes to obtaining a mortgage or refinancing a mortgage.
My wife and I pretty well learned as we went through life.
Our mortgage is just one of those blunders. We bought our current house with a zero down, 30-year mortgage, at 6.75%. We didn’t know better.
We had decided to move 300+ miles South of the city that my wife had been born, raised in, and spent most of her life. We were ready to make a break for the country and had decided to move to some family land that I had inherited.
In doing so, we had to have a house built and that meant finding a construction loan and the converting to a mortgage.
The town that we moved outside of is not very large. It has a population that’s only a bit over 6,000 folks. There were not many banking/loan options available and in 2oo6, the rates were not as low as they are now.
For 10 of the 30 years, we simply moved on through life, making the payments without giving them much thought. Then, I began to really look into financial literacy and began to learn how the length of a mortgage and the interest rate really affects how much you spend in the long run.
We had gotten caught up in “How Much Will the Payment Be?” and not, “How Much Will It Cost In the Long Run?” Yeah, better to learn later than never.
So, our efforts to refinance boil down to two reasons.
#1: Reducing the length of the mortgage
and
#2: Reducing the amount of interest paid
Now, in our case, reducing the length of the loan is not drastic. We have a little under 20 years left in a 30-year mortgage, so going refinancing with a 15-year mortgage is only going to reduce the length by about 5 years. Well, we’re in our mid-50’s, so that extra five years of not making payments will be nice.
While reducing the length of the mortgage length is not that big a deal, reducing the amount of interest we’ll pay is. We’re going to go from a 6.75% rate to 3.375%. That’s quite a reduction, huh?
I’m not going to go into the numbers in detail, but refinancing is going to save us close to $90,000.
Almost $90,000.00! That’s a chunk of change!
Not really worth mentioning, but we’ll also reduce our monthly payment by about $100.00. Of course, this is not without some upfront costs. Nope. We’re going to have to pay for an appraisal, plus there’re all those fees associated with a mortgage.
We could pull some of the equity out of the house to cover those costs, but we don’t want to raise the payment, so we’re going to pull from our investments to cover the costs.
As I mentioned above, we have two reasons that we want to refinance the house, but there’s also a third one. It’s a bit unusual, though. We could pay off the mortgage by pulling from our investments.
So, why don’t we just pay off the house?
Problem with that? Our portfolio has averaged a bit over 8% each year since we rolled our funds into Fidelity. If we pulled the mortgage balance out, at about $159,000, we’d be losing the earning potential of those funds.
With 8% good interest and 3.375% bad interest, we feel that we’re better off by not paying off the loan.
I’ve seen other reasons to refinance and one of the big ones is to cash out equity. We’re not needing to do that. We did that once on our other house and it did what we wanted it to do (Installing more efficient windows and other repairs), but in our current situation, we just want to reduce the amount of interest that we’d pay if we stayed in our current mortgage.
I’m hoping that I can work it so as to accelerate the pay off on the refi and get it done sooner. I’ll keep y’all posted on that one.
So, another episode of Shin’s financial blundering in learning. As I said earlier, better later than never.
Have you looked into refinancing? If so, what are your reasons for doing so?
