Oh how I love saving money. And, I especially love saving lots of money. Finding ways to save a couple hundred dollars here and there can be pretty rewarding. But what about saving $92,000!? That’s crazy talk. How can that even be possible?
Buying Our Home
A little background info. Janene and I bought our home in 2014 and paid $310,000 for it. Our loan was for $248,000 on a 30 year mortgage with a 4.25% interest rate. At the time, I thought that was a pretty stellar interest rate. Our principal and interest payment was $1,220 a month, which would stay locked for the next 30 years.
If you’re a nerd like me and want to find out what the actual cost of your house is, multiply your principal and interest monthly payment by 360 (30 years) and add that on to your down payment. In our case 360 times $1,220 plus our down payment comes out to $501,000. Over 30 years, almost $200,000 goes towards paying someone else in the form of interest. No thank you; time to reevaluate things…
Saving Money By Refinancing
Somehow, interest rates are even lower right now than they were when we bought our house. I was curious about what kind of interest rate we could get today, so I went to the Quicken Loans website, and filled out a quick 5 minute questionnaire.
The next day someone from Quicken Loans called me (Mac), and we discussed my situation. I told Mac that instead of a 30 year loan, I wanted to switch over to a 15 year loan, and I also wanted to see what my interest rate would be.
I’m not going to lie. Mortgages are confusing. There’s things like jumbo loans, a 5/1 ARM, points, and so on. I honestly don’t understand all the ins and outs of this stuff. On the phone call, Mac was going over a bunch of different options that I could go with and how that would affect my interest rate and my monthly payment. How different options would be more advantageous if I was wanting to sell before having the house fully paid off and so on. After a while I said “Mac, I just want to pay the lowest amount for my house as possible.”
What Mac got back to me was a 15 year loan with an interest rate of 2.99%. In order to get an interest rate this low, I’d have to pay for “discount points”. For this loan the discount points had a price tag of $6,056. There were some other services and fees which are all worked into the loan (no out of pockets costs), but at the end of the day our new principal and interest payment would be $1,520.
How Much Money We’ll Save
Okay, now to find out if we’ll actually be saving money with this new mortgage. I needed to whip out the old calculator and crunch some numbers.
We still have 25 years left on our current mortgage. So our $1,220 monthly payment multiplied out by 25 years is $366,000.
The new 15 year mortgage has a monthly payment of $1,520, so that multiplied out by 15 years is $273,582. If you subtract the two numbers: $366,000 – $273,582 and you have $92,418 in savings!!
Time to do a happy dance.
Other Things to Consider
Saving $92,000 is pretty amazing, but there are some things to consider if you are looking to refinance your house.
Increased Monthly Payment
Our monthly payment is going to go up $300. If you’re in a situation where you’re already struggling to make your mortgage payment, going from a 30 year loan to a 15 year loan is probably not the best choice for you. But, if you’ve had your house for a few years it may be worth it for you to look at refinancing to a 30 year loan with a lower interest rate. You could not only save hundreds of dollars per month, but you could be saving yourself tens of thousands of dollars over the next 30 years.
Rent
Something that I feel like is really important but often times gets overlooked is finding out how much you could rent your house for. A good rule of thumb is to not have a total mortgage payment (including taxes and insurance) that is more than what a similar house in your area is renting for.
You should treat your house as an investment, and a long term investment. If something happens like you lose your job and have to move, you want to have the option of being able to rent your house. If you’re able to rent your house out for the same amount as your mortgage payment or more, then you have the option of having someone else paying for your house in the form of rent! Always think of keeping your house and all your investments for the long term.
This recently happened to us. I had to relocate from Bellingham, WA to Portland, OR for a new job. Instead of selling our home in Bellingham, we decided to rent it for more than our monthly mortgage payment. After a little over a year in Portland, we decided to move back to Bellingham. While we were in Portland, we had somebody else paying off our mortgage for us. And when got back, we had a home to come back to.
Our new monthly payment will be $1,822 (including taxes and insurance). I looked up on Craigslist what homes in the area are renting for, and found a similar sized house down the street from ours renting for $2,200 per month. If a situation comes up where we have to relocate, I’ll feel pretty good about renting our house again.
Final Thoughts
If you’ve had your house for a few years and your interest rate is above 4%, I’d highly recommend looking at refinancing your home. I personally had a great experience with Quicken Loans. I filled out their questionnaire on a Thursday night, and by the end of Friday I had a new loan with no out of pocket costs. There’s really nothing to lose by just talking to someone and finding out what your options are. And if you take action, who knows, you could be saving yourself money, like $92,000 in our case.
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