Do you get more done when you have a deadline?
The adage that “work expands to fill the time available for its completion” can be true in business, in school, and in financial goals.
So as we mentioned in our last two budget updates, we decided to limit the time we spend paying off our house! In March we re-financed our mortgage from a 30-year to a 15-year loan.
I asked my husband to write a blog post to give you all the mortgage re-fi details (actually I think he volunteered before I even asked), but he’s a busy guy so it has taken a while. I wanted to get this post up before our next budget update (which should be out on Monday), so I gave him a deadline (see what I did there!?).
So here’s Mr. SixFiguresUnder to share everything you ever wanted to know about refinancing our mortgage!
Let’s start with the numbers. Here’s the comparison:
|Original 30-yr loan||Original 30-yr loan (after 15 months of rounding up by $35 to $2,500)||15-year re-fi loan||15-year re-fi loan if we round up by $18 to $3,200|
|Loan Term (months)||360||332||180||180|
|Total Principal + Interest||$1,818||$1,818||$2,687||$2,687|
|Private Mortgage Insurance||$126||$126||$47||$47|
|Total Monthly Payment||$2,465||$2,500||$3,182||$3,200|
|Total Interest Over Loan||$285,000||$273,000||$111,000||$110,000|
Other than those numbers, everything else stayed about the same. The difference between Total Principal + Interest and Total Monthly Payment is PMI, taxes, and homeowner’s insurance, and only PMI changed with the new loan. One nice thing is that PMI is lower, and because Quicken Loans appraised our home at a higher value, we have some additional equity which means we’ll pay PMI for fewer months.
When we bought our house in January 2017, we chose a 30-year loan. We had a 15-year loan on our first home, back in the midwest, and we loved watching the principal amount go down each month. But when we decided to buy our home in California we started with a more conservative payment. We weren’t sure what our other homeowner expenses might be, and we weren’t sure how the move might affect our income potential.
After a year or so of the original loan we were ready to make a change. It wasn’t a new idea. We always intended to either re-financing to a 15-year or paying extra each month to finish the 30-year loan early.
And then, all of a sudden, we went from intending to just doing it.
I’ll answer several questions here about the what, why, and how of the refinance. Feel free to use the comments to ask other questions or for any specifics.
What’s the big deal with getting a shorter loan term?
As a general rule, paying over a shorter term means paying more each month. However halving the time does not double the monthly payment. That’s because with a shorter term, you pay off more of the principal each month, so there’s less to pay interest on.
As you can see in the table, on the original 30-year loan, paying just the required $2,465 per month, we would pay $285,000 total in interest over those thirty years. With the 15-year loan, we will be paying $111,000 in interest.
Actually, that number is a little high, because we always round up our monthly payment. On the 30-year loan, an extra $35 a month would have saved us $12,000 in interest and we would have finished 14 months early. On the 15-year loan, an extra $18 a month (rounding the payment up to a nice even $3,200) will save us just over $1000 in interest and we’ll finish one month early.
Shorter-term loans generally also have lower interest rates. Lowering our rate from 4.25% to 3.625% decreases our interest over the 15-years by $23,000.
With a shorter loan term, a lower interest rate, and our rounded-up payment schedule, we save $163,000 in interest. That’s the big deal.
That makes sense, but why refinance now?
Honestly, the trigger was a Quicken Loans ad on the radio. I guess their massive marketing budget works.
Of course, Stephanie and I had been talking about a re-finance since before we bought the house. But it was the ad in February that made me think, “Hmmmm. I should run the numbers on that when I get home.”
We’ve kept an eye on loan rates over the last few years, so we had some idea of what was good, bad and just average. Our 30-year mortgage had a 4.25% interest rate, which was a little better than average at the time. Rates have gone up a few tenths of a percent since then. It seemed likely that they would keep climbing gradually for a while, so refinancing sooner meant we could get a lower rate than waiting.
An interest rate is not the only thing that matters though. We also wanted to be confident we could meet the payment without too much strain. Since we bought the house, my take home pay had increased by several hundred dollars a month. We also got renters in the apartment above our garage, adding another $500 a month (even if for now we are still using that to pay for the initial repairs to the apartment). (More on the rental finances at the end of this post.) We also had another year of history with Stephanie’s income, which goes up each year. And we had some idea of how our future income might change.
We also had a year of expense history in the new house. That includes utilities, maintenance, and other homeowner expenses, as well as the costs of schools, sports, and some things we’ve relaxed just a little in our budget since we finished paying off our student loans.
Since we were pretty confident that we could make the payment and pretty confident that interest rates would be heading up, when the radio helpfully reminded me to look at the numbers, now seemed like at least as good or better than later.
How much more will the new mortgage cost every month?
It’s actually just over $700, but we rounded up the old mortgage payment to $2,500, and we’re rounding up the new mortgage payment to $3,200.
That $700 includes the increased principal and the transaction costs, which were rolled into the new loan. The total cost for getting the loan re-financed was $10,800. That’s why the total principal amount for the re-financed loan actually increased to more than the principal of our original loan.
Added May 7, 2018
Lucy, in the comments below, noted that $10,800 seemed quite high for transactions costs. I’m adding some details here to make it clear what those costs were.
|$4,568||1.25% of loan amount prepaid (points)|
|$1,228||Title insurance, tax cert, credit report, & other fees pursuant to loan origination|
|$1,325||12 months pre-paid homeowner’s insurance premium|
|$938||Interest due for the period between closing the loan and the first payment being due|
|$1,591||Property taxes for 6 months|
|$10,800||Total “cost” rolled into the loan balance|
Of the $10,800, $4,568 bought down our interest rate, $938 was to cover interim interest, and $2,916 initially filled our escrow account. (We received more than that back from our previous lender, who had been holding a liberal amount impounded in escrow). That leaves $1,150 as fees that actually went to Quicken Loans and $1,228 as fees that went to other entities (although I’m sure many of them are related to Quicken Loans).
Arguably, only the last two numbers are “transaction costs” as the others actually go toward the loan and escrow payees rather than to the lender, but the full amount was rolled into the loan, leaving us with a starting principal higher than the starting principal of our first loan.
Couldn’t you just pay $700 more on the old loan and finish in 15 years?
If we paid $3,200 a month on the old loan, we would have finished up in 16.5 more years.
But I’m not sure we would have done it that fast. Without the deadline it would be easy to let some other expense take priority over our extra payment, and we wanted to have some forced focus.
It also would have been been more expensive. If we paid $3,200 a month on the old loan, at 4.25% interest, we would have paid about $23,000 more in interest than we will after the re-finance. That would be $127 more a month for 15 years.
What’s the hurry?
We got used to being in a hurry when we hurried to pay down my law school loans on a completely unreasonable schedule. It was a lot of work, but it was kind of fun too. We loved being debt-free so much that we’re anxious to get there again, and not wait 30 years for it.
We actually expect to pay the new loan off sooner than 15 years, but we’re not going to force ourselves into a higher payment by re-financing to a 10-year term or anything crazy like that.
What if you lose a job or have a serious medical issue or [insert bad thing here] happens?
We hope nothing like that happens. But if it does, we’ll manage.
If one of us dies, there’s life insurance to cover the mortgage.
If one of us loses our income, we’ll have six months of emergency fund to keep us running while we get back on our feet.
If it’s so bad that we never get back on our feet, it’s quite possible that our old $2,500 payment would be just as hard to meet as our new $3,200 payment. In that case, we might need to either re-fi again, for a lower payment, or sell the house.
We hope it doesn’t come to that, but if something really terrible decreased our income so much that we had to sell, it is just a house. We’ve lived very happily other places, and we would do it again.
We’re also giving ourselves one extra month of buffer by being a month ahead on our mortgage. That’s in addition to being a month ahead of our expenses generally by living on last month’s income. So if we did have a cash flow issue, we’d have a two month buffer before we even had to dip into the emergency fund and think about figuring out how to pay the mortgage.
Ouch! You just voluntarily stepped into the Two-Income Trap.
Yes. It would be pretty difficult to make a $3,200 payment if Stephanie decided to stop blogging, or if I lost my job as an attorney. We realize that.
Thankfully I enjoy my work and Stephanie loves blogging. It is work, but it doubles as a creative outlet for her.
Actually, the warning might be late. Even our $2,500 payment would have been pretty tight on just my income. Possible, but tight. Once we start realizing profit on the rental, and some of my built-in salary increases vest, we’ll be at the point where we could make the $3,200 payment on just my work, although it would be tight again. Rather than going back to our super slim debt payoff budget, Stephanie will keep up her online income and we’ll keep cobbling together our income sources.
Is it worth it? What are you giving up to pay off the house faster?
This is a great question. Financial decisions are all about opportunity costs. A significant financial decision like this requires us to look at the many ways we could use our money and intentionally choose to forgo some of those other options.
If we pay $700 more on the house each month, we can’t put that $700 toward retirement, or landscaping, or traveling, or a newer car that needs less maintenance. So financially, we’re giving up whatever we could have bought with $700 a month, which could be quite a lot.
Happily, we’re also giving up fourteen years of paying for our house and $163,000 of interest.
For us, right now, yes, it’s worth it.
Or more clearly stated, we expect it’s more likely that at the end of the loan we’ll look back and be glad we refinanced than look back and wish we hadn’t. Only the future will tell us if it turns out like we hope. If you’re curious, follow along every month on sixfiguresunder.com and see how it’s going.
Why didn’t you support a local lender instead of going with an online mega-lender?
I like local businesses, and I looked at local lenders. It’s not a strict rule but if there’s a local option that’s not terribly more expensive or terribly more inconvenient, it’s nice to go local and build up our own business community.
That said, we’re also in our thirties and we use the Internet to make our lives easier. We buy lots of things on Amazon. We primarily do our banking at USAA, which is completely online. We have our savings at Capital One, which is completely online. We have accounts at two local banks (one for my private law firm and one for our rental income) because a local branch is helpful in those cases.
For our initial loan, including working with the buyer and seller realtors, getting homeowner insurance in place, and all those complications, we chose, and would choose again, a local mortgage bank. Our loan originator was awesome and made sure all those things worked out.
For a re-fi, there is very little complicated stuff going on. Mostly, it’s just a question of numbers for the re-fi lender, and for us, it was a question of whose numbers were better. In addition to being well-priced, the online mega-lenders can offer an online transaction. I’m busy during the day, and being able to handle the re-fi business online in the evenings was attractive.
Why did you choose Quicken Loans? How was it?
In the end, Quicken Loans was cheapest, and I was intrigued at the idea of a completely online transaction. I looked around and found Quicken had lower rates than the servicer of our original mortgage and another local lender I checked comparison. However, the transaction cost at Quicken Loans was probably going to be more than the cost of a re-fi with our current servicer. So I shelved the idea for a while.
About two weeks later I got a call from one of the mortgage bankers at Quicken Loans saying that they were running a special (pursuant to a Quicken Loans Super Bowl ad that I hadn’t seen.) The call was a classic “Even though this deal ended yesterday, because we’ve been working together, I think I can talk to my manager and get you, my most important customer in the world, in on the savings, if you act today.”
I don’t appreciate pushy salespeople, so I almost turned him down outright, but then I thought through it. With a significant discount in costs, Quicken had suddenly become comparable to the least expensive re-fi I had seen. Instead of shutting him down, I told him I’d look at the numbers and talk to my wife.
That’s a great way to get a little breathing room from pushy salesmen.
I verified the cost savings and talked to Stephanie. We had talked about it before, so explaining the adjusted costs was a short conversation. We talked about our current and prospective income, how much the re-fi would cost per month, how it compared to our current mortgage and whether we could get the same result just paying more. In the end, we both kind of shrugged and decided to do it.
From there, the actual loan experience was simple. I called Quicken twice. They called me once. Other than that, I uploaded scanned documents through the online portal. They responded through the portal and kept the status and timeline up to date there. When the loan was approved, they sent a notary public out to the house and Stephanie and I signed at our own kitchen table when it was convenient for us. All in all, it was pretty nice.
Again, I don’t necessarily recommend an online option for an original purchase money mortgage, because there’s so much to coordinate. For a re-fi, it was fast and painless. Mostly I liked that it didn’t become a big project. I’d just check online in the evening, and if I needed to do anything, I did it from my computer.
We’re interested in paying off our home sooner. Can/Should we do what you did?
I don’t know. That’s like asking if you should drive to work or take the bus. One might be better for you, but it depends on your situation and priorities. As a general rule, we like shorter loan terms. You could get there by paying extra every month or by re-financing. If it’s just question of timing, I think interest rates are likely to be crawling up for a few years, but of course, I don’t really know.
For us, we liked the forced focus of re-financing, but it took looking at our income and expenses and our goals to make that decision. While we’re happy with the decision right now, it could always turn out to have been a bad choice. You’ll have to look at your own numbers and your own priorities. It might make it a little easier to decide if you think through your opportunity costs and think about how much downside risk you’re willing to accept if something does go wrong.
Good luck! And let us know how it goes. We’ll do the same.
What do you think?
- Do you think we’re crazy? It’s okay if you do, we can still be friends. 🙂 You don’t have to make the payments.
- Would you have done what we did? Why or why not?