The following is a staff writer post from MikeS. He is a married father of 2. So, with the cat, he ranks number 5 in the house. He loves numbers and helping people. Please leave any questions or comments below for either Mike or Crystal.
I did it again, I refinanced my mortgage. This was the third time since my initial closing on my house that I refinanced. It has been slightly amusing as each time I think that it will be the last time, but that hasn’t happened yet.
The first couple of times I refinanced, it was more about lowering my monthly payment. That was not the case this time around, this time it was more about lowering the life and total payments.
Since I had just refinanced my mortgage back in early 2015, I had not really expected to go through the process again this year.
I had a 3.99% 30-year fixed mortgage which I was going to pay off early, in just under 24 years. However, I began to notice that the rate for 30-year mortgages began to drop again. I kept noticing headlines and such mentioning that the rates were nearing historic lows. I thought I would keep an eye on them and if they were still low towards the end of 2016 that I would look into whether it made sense to refinance. It was about this time that the Brexit vote happened and rates dropped even more. I knew I would regret not looking into what my options were when rates were this low.
I called up the mortgage broker I had used just over a year ago.
My mortgage broker said it was a good to time refinance and he ran a few options for me: another 30-year fixed, a 20-year fixed and even a 15-year fixed.
I would have loved to refinance into the 15-year, but that would have meant diverting money from other areas into the mortgage. I wasn’t willing to make that sacrifice.
It came down to the 30-year and the 20-year. Both do not have borrower-paid PMI even though I don’t have 20% equity in the house. They have lender-paid PMI, but a slightly higher interest rate. I was looking at a 30-year fixed at 3.625% or a 20-year fixed at 3.375%.
Of course I ran the numbers to see which one would be the least expensive over the life of the loan and not the one with lowest monthly payment. My current monthly payment, including my extra principal payment, was $1,725 a month. Ideally I wanted to keep the payment around that number. In the end, my payment went up by about $25 a month, between a combination of the escrow number going down and the principal and interest portion going up.
The 30-year option would have total payments of just under $441,000 with me paying extra principal every month. The 20-year option would have total payments of just under $427,000.
Both options have exactly the same principal and interest payment. Can you guess which one I liked the best?
The main non-monetary cost was reduced flexibility. By choosing the 20-year option, I was locking in the higher monthly mortgage payment.
With the 30-year option, I could always choose to go back to the original principal and interest payment and redeploy the extra principal payments to other areas. I did consider this but felt that my current financial position did not need the flexibility. I have a decent emergency fund and my wife is actually going to be bringing in some additional unexpected income in the coming months to help our position even more.
So, with these things, I felt that having that flexibility was not needed. I might not have made that decision even 5 years ago.
I bought my house back in 2011 and had a 30-year fixed mortgage. So, had I done nothing else, I would have been mortgage free in 2041. My principal and interest payment was $1,703 and I had PMI of $245. I was not making any additional payments.
Fast-forward 5 years and to a better financial picture. My new mortgage payment is $1,778 with no PMI. I have no plans right now for any additional principal payments, so I will be mortgage free in 2036.
That makes me pretty happy.