Friday, my wife and I signed the paperwork for our mortgage refinance. We are consolidating our mortgage (originally at 6%) and our home equity loan (at 8.375%) into one 30-year fixed 4.875% mortgage. But since this wasn’t a “streamline refinance,” I was required to start the 30-year clock over again.
At first I was disappointed that the extra gains I had made against my original “clock” were wiped out, but then I realized that it could actually be a benefit. Yes, being an estimated 30 years into debt again was frustrating, but it actually affords a little more freedom on how I pay off my debt.
The refinance took my nearly $1,183.72/month combined payment and slashed it to $943.58, for a savings of $240.14/month. But if I had kept my original clock, I would be somewhere around the 27 year mark (counting the extra payments I made) and would have $990.70/month payment – nearly $50/month extra. That $50 is very valuable to us right now.
Since the birth of our second child, we have been in need of a second “baby-safe” vehicle to replace my 15 year-old truck. When considering a new car, an extra $50/month goes a long way. The difference between a $200/month payment and a $250/month payment is an “O.K.” used car versus a good new car. Or that extra $50/month could go toward paying off our new debt from finishing our basement. Or, if I chose, I could apply that $50 could go toward the mortgage anyway – essentially making my own 27-year mortgage.
But “resetting the clock” only benefits you if you are responsible with your money. You’re not going to benefit at all if you waste those gains. I encourage you to look toward this option for extra savings, but only if you are disciplined enough to still apply the extra “savings” toward debt.
To aid our situation, we are likely to save the full $240/month until we have enough for a car down-payment and then use that savings toward paying off the new debt and the car as fast as possible. Although I am using this opportunity to add more debt to our financial house, I am comfortable that it is a good idea since it is based off of need (a baby-safe vehicle) instead of want (a projector for my new downstairs media room).
If you are able to secure a refinance (or new mortgage) with a great rate, I encourage you to take full advantage of it. Use the money you save to reduce your bad debt and to accelerate your journey to financial freedom.
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{ 9 comments… read them below or add one }
We’re looking to refinance as well. I originally got a 7 year balloon amortized over 30 years at 5 percent. Since we’re about 5 years in, I’ve thought it would be prudent to go ahead and refinance since in two years, who knows where rates will be.
Thought about a 15 year, but with another 30 year, I have some monthly flexibility that, given the surrent state of the economy, I’d like to keep.
Hmm, I just refinanced last spring but with rates at an all time low I might think about doing it again.
Can you tell me what it cost you to refinance? We went through a mortgage company last time and got a FHA loan which gave us a better interest rate, but it ended up costing around $3000 I think.
Not sure if I want to add another chunk onto what I already owe.
If you just did a refinance a year ago, I wouldn’t do another one unless you have significant savings. It could take a long time to pay yourself back the $3,000, so there’s no sense in adding more to that unless you can do a streamline refinance. Our closing costs were rolled into the mortgage, but I believe they were around the $2,500 range. I’ll be “paid back” in 10 months with that difference.
I just posted about my refinance story today – we tried refinancing our 6.5% mortgage (down to 5%), but since the home values in our area have dropped so drastically in the last 2 years it would have meant adding another $150 to the mortgage payment for Mortgage insurance. Our closing costs were around $3200 or so, which were rolled into the loan.
What would have been a $230/month savings on our mortgage turned into a $75/month savings and because of PMI and it would have taken over 3 years to pay back the closing costs. we’re not 100% sure we’ll be there that long, so we ended up not refinancing.
Now we’re just waiting for the market, and house values, to rebound a bit.
That’s a shame. Property values in my area have actually increased and finishing my basement increased my home’s value by another $11,000. My loan-to-value is now a shade below 78%.
Considering your situation, I believe waiting was your best option. A 3-year payback with PMI is just not a good deal. Hopefully things will rebound in your area sooner than later. It’s not likely that rates will go up soon – at least not much – so you should have time to wait it out.
That’s great that you were able to get a conforming loan for under 5% and consolidate your HELOC. Was your HELOC fixed at 8%, because I’ve noticed some banks advertising them at under 4%. I’m still on the fence about refinancing as we have 2 years left at 5%.
Mine wasn’t a HELOC, it was a traditional home equity loan. Its rate was 8.375%. My mortgage was at 6%. If you can get a rate that over a point less than your current rate, it may very well be worth looking into.
Great post. Even that $50 can go a long way! I know exactly what you’re talking about. By the way, I found you via Wisebread’s top 100 pf blogs.
Congrats for making the list! :)
It’s fine that the clock is “reset”. When I refinanced the HELOC with my mom the clock reset to 25 years but I have NO intention of taking that long to pay. I make the regular payments which dropped over $150 but I also make snowflake payments as well, reducing the number of years that it will take to pay. I hope to repay the full amount in half as much time. This just gives me what I call breathing room. If you can squeeze in a few extra bucks here and there it really ads up.
Good luck!