Ever zigged when you should have zagged?

The Brady-Boucher Refinancing Numbers

September 10, 2010 at 8:08 AM | Posted in Bill is my husband., I am good with money., I am resourceful., What's up? | 1 Comment
Tags: Dave Ramsey, early payoff, mortgage refinancing

Bill’s sister purchased his previous home from him at the end of 2009 , I was out of the prepayment penalty window on my mortgage for this house as of June 2009, and we wanted to have a new loan in both of our names (like a true partnership), so we decided to refinance the mortgage together at the beginning of this year. We had been paying extra toward the principal on the current mortgage and thought refinancing wouldn’t make much of a difference budget-wise…that is, until I checked out Dave Ramsey’s mortgage calculator. Holy crap.

The original mortgage was for $146,000 @ 6% APR for 30 years. I had been paying $100-200 extra each month toward principal, plus putting annual bonus money toward the loan, and had managed to get it down to a balance of under $120,000 in five years. Not bad for a single gal, right?

Monthly Payment: $874.41
Total Interest Paid Over Life of Loan: $169,130.33 (in 30 years)
Extra Toward Principal: $100-200/month
Total Interest Paid with Extra Payment Toward Principal: $98,902.50 (in 19 years)

Now, these numbers aren’t watertight. I didn’t pay the same amount extra for the life of the loan, which is what the calculation takes into account. But you get the idea. Paying extra toward the principal knocked a significant amount of interest and time off the mortgage overall — something like $70 grand + 11 years off the loan. Not bad.

The refinanced mortgage is for $114,400 @ 4.375% APR for 15 years. We did have to put several thousand dollars down to get the principal amount that low because the house appraised much lower than expected* and I didn’t want the loan-to-value ratio over 80%. I despise PMI and would rather put the money down up front than give it to the bank for no good reason — it’s a matter of principle (no pun intended).

Monthly Payment: $867.86
Total Interest Paid Over Life of Loan: $41,818.29 (in 15 years)
Extra Toward Principal: $250-260/month
Total Interest Paid with Extra Payment Toward Principal: $28,699.53 (in 10 years, 7 months)

Are you paying attention here? The monthly payment is lower than it was before and the term of the loan is half as long. That’s 15 years of interest KNOCKED OFF, right off the bat. Just the thought of it makes me giddy. Our monthly payment (mortgage, interest, escrow) stays the same but we only have to make the payments for another 15 years instead of 25 more. We are able to put more toward the extra payment each month because (1) property taxes went down a little, freeing up some funds to put toward the mortgage, and (2) we have two incomes paying the bills; this means even more interest + time saved.

Let’s do some math, folks. This is the part that drives it all home. The original loan + interest total, assuming extra payments made toward principal on a monthly basis as described above, would’ve been ~$245,000 over the course of 19 years. (Without extra payments, the loan + interest total would’ve been ~$315,000 over 30 years. Just the sight of that number makes me slightly queasy.) The new loan + interest total, assuming extra payments made toward principal on a monthly basis as described above, is ~$143,000 over the course of less than 11 years. (Without extra payments, the loan + interest total would be ~$156,000 over 15 years.) We should also include the downpayment and closing costs in the refinancing total to be fair, so let’s add another $8400. And let’s not forget that I already paid about $70,000** over 5 1/2 years on the original mortgage already. That means that, if all goes as planned re: extra payments and whatnot, we stand to save over twenty grand:

$146,000 + $98,902.50 = $244,902.50
$114,400 + $28,699.53 + $8424.45 + $70,000 = $221,523.98
Amount Saved = $23,378.52

In addition, we will be mortgage-free much sooner. The original loan may have been paid off in another 14 years. Now we have the potential to pay off our home in a little over 10 years. While I was drooling over the amount of money saved and the concept off eliminating 15 years of interest, Bill was marveling at the idea of owning a home in such a short period of time. “It took me five years to own the car,” he said. “We could own this home in 10 years! That’s amazing.”

With a little research + aggressive negotiation, I secured us a pretty sweet refinancing deal.*** In sum, our monthly payments stay the same, we pay off the mortgage in about a decade, and we save over twenty thousand dollars. And that’s having started with a responsible, money-saving approach to the original loan. If we had gone from a loan with a ridiculous rate, or a let’s-pay-the-minimum philosophy, then our savings would have been greater in the end…but I wouldn’t be as impressed because it’s not so hard to improve on something foolish. We were behaving so responsibly already that we didn’t think there was much room for improvement, but the data proved us wrong. So wrong. So wonderfully wrong. Thanks, data.

SPACE

*The house appraised at $143,000. When I had it appraised in 2005 to get a home equity loan, it was valued at $165,000. My ex-husband and I bought it in 2003 for $145,500.  I’m happy my livelihood doesn’t depend on the roller-coaster real estate market because this kind of thing makes me ill.

**Totally ball-parking this number. May be more, may be less. This is an educated guess based on the mortgage calculator.

***I had several mortgage brokers actively vying for our business and trying to underbid one another, mostly because I studied the rules ahead of time and knew what I was talking about. Being an educated consumer has its perks. Mortgage rates dropped even lower over the course of 2010 but the rate we got at the time was very competitive, especially in a market where banks were hesitant to hand out loans to just anybody.