The Story of a Mortgage
We bought our current house in late March 2005. The price was $242k and the interest rate was 6% (which was considered a good interest rate at the time). We had not quite $7k down and our original mortgage was for $235,250. It was cheaper for us to have the single mortgage and pay PMI than it was to have an 80/20, which is what we had on our first house. At the time, cheaper mattered, as buying this house was a bit of a stretch for us, but the move would improve our quality of life dramatically. PMI was $188/month and we knew we could get rid of it in 2 years.
The mortgage payment was $500/month higher than on our previous house, but I was making more money, and we were switching out a 100 mile/day commute for a 6 mile/day (done on the bus) and a 30 mile/day commute. And while the move took us away from a kitchen that we loved and to a kitchen that we did not like (and now actively hate), it meant that we cooked at home a lot more often. No more deciding that traffic was too bad and stopping to get dinner to let it thin out, or just deciding that we were too tired to cook.
We got rid of the PMI in July 2007 just based on appreciation. At that time, our house appraised at over $300k.We dropped our mortgage payment from $1900/month to $1750, in order to pay some extra on the principal. Throughout the next 5.5 years, based on changes in taxes and escrow, we paid between $1700 and $1800/month in mortgage.
Given the continued drop in mortgage interest rates, we decided to refinance our house at the start of this year. We knew that the value had dropped considerably, but our neighborhood has been on a rebound, with short sales going for $250k. RealEstate.com estimated that our house was worth $245k (while that would have been nice, we knew it was unrealistically high, but we thought by $20-25k). However, the appraiser for the refinance came back with our home being worth $200k even.
After our February 2013 payment, we still owed just under $203k on the house. While we had paid down the mortgage by over $32k, we were underwater by $3k and needed to come up with another $10k plus closing costs in order to buy ourselves up to 5% equity and refinance the house, this time with lender paid PMI (which results in a slightly higher interest rate, but no monthly sum). It was still a good deal though, as our interest rate would be dropping from 6% to 4%.
We raided every savings account we had and came up with the $17k we needed. As of today, our new loan has been funded. Our first mortgage payment won’t be due until April 1 and will be $1200. This is a savings of $600/month ($400 in straight interest savings), which puts us at our lowest house payment since we stopped renting (and splitting rent 5 ways).
On some level, this feels odd, almost counter-intuitive. Before refinancing the house, we were in the best financial position we had ever been in. And while we did have to deplete savings, we’ll be able to build it back up rather quickly. So now, we’re in the best financial position we have ever been in, with our lowest housing payment in 10 years.
And you want to know what our plans for the extra money are? Saving up to replace all the windows in the house this summer and then paying off my student loan and the HELOC on the condo we inherited from C’s mother early. Financial responsibility has turned us boring, at least for another two years. But I am okay with that.
I wish I could refinance but I'm not willing to increase the mortgage which is what the VA streamline would do AND I don't have the cash upfront to pay the fees. Right now we are at a 4.25% so I think I must be happy with that.
Good luck, I'm sure you'll build your savings up quickly!!
You never said what the term of your new loan was, but based on the fact that your payment is dropping, I'm guessing that you re-financed with another 30 year loan. That's the only part I would ding you for if I were keeping score, because one of my key tenents of personal finance is that your re-finance should not extend past the term of your original loan. Meaning, if your original loan was slated to be paid off in 2035, your re-fi should have been a 20 or 15 year re-fi so that you wouldn't go past that date. Now (assuming your re-fi was a 30 year), you'd potentially be paying until 2043. You could offset that by using a loan amortization calculator to calculate the extra payment required each month to get you back to a payoff date of 2035, and begin applying that extra payment.
It is another 30 year term. We considered a 15 or 20 year term, but the rates weren't actually any better. We've already done the math to know that if we pay an extra $200/month on the new mortgage (still giving us a savings of $400/month) we will pay the loan off in the same 22 years we still owed on the first mortgage. Once we get our savings back up comfortable levels, we'll be doing that.
However, the main reason for sticking with another 30 years was DTI ratio. We would like to be able to keep this house as a rental when we decide to move, or possibly pick up a rental property while home prices in our neighborhood are still so low. That means that we need to keep our committed monthly expenses as low as possible in order to get approved for a mortgage on a second house.
Boring is awesome! We're boring and living a good life because of it. 🙂 Boring is great! And yay for refinancing! We're going to try to refinance our new home's mortgage in about a year because I think we could do better than 4% with 2 years self-employment history and a great credit score. We'll see…
I have to agree with crystal boring can be a good thing. Life can get too exciting trust me I'd much rather be boring than having my life go to heck because of all the excitement.