My husband and I were stuck with a mortgage with a high interest rate for several years until we finally landed a 2.75 percent interest rate. According to a recent article by The Street, homeowners often make the mistake of assuming they can refinance down the road if they want to. We couldn’t refinance when we initially wanted to because we were underwater on our mortgage, owing more than our home was worth to the tune of about $50,000. A recent survey by Fannie Mae cited by The Street reveals that about half of mortgage holders have held onto their older loans at about 6 percent even though they could refinance to about 4 percent. We took into consideration some of the downsides of refinancing before we made the move.
Lowering our payment
According to the poll by Fannie Mae, one of the reasons people don’t refinance is because they don’t think they can reduce their mortgage payments enough to make it worth their while. We went from a mortgage payment of $1,222 to about $900 a month when we refinanced. Our strategy was to pay extra on our mortgage for 2 years so we would no longer be underwater and we’d have a lower balance to refinance. Our plan worked.
Reducing the length of loan
Another argument people give for not refinancing is that they don’t want to pay longer on their new mortgage. When I was researching different mortgages, I found several mortgage companies that allowed people to take out shorter lengths. Our original mortgage was for 30 years, but our new mortgage is for just 15 years. We had already paid on our loan for 7 years. By switching to a 15-year loan, we automatically reduced the length of time from 30 to 22 years. By paying extra, we will cut off even more time.
Waiting until we had equity
We didn’t just wait until we were no longer underwater on our mortgage before we refinanced. We also waited until we had almost 20 percent equity in our home so we wouldn’t have to pay the PMI or private mortgage insurance. We actually put 20 percent down on our home, but our equity disappeared during the foreclosure crisis that hit our neighborhood. Eventually values started to go back up again. Because we didn’t quite have 20 percent equity, we had to make a large payment of about $3,000 just before we refinanced but after our appraisal.
Now that we have one of the lowest interest rates in history, it’s tempting to quit paying down our mortgage. However, I try to stay focused on the fact that I want to be mortgage free. Having a lower interest rate just means more of my money can go toward the principal. We hope to have our house paid off by age 50 so we can rent it out and buy another home with a 15-year mortgage.
More from this contributor:
I’m Not Retiring to a College Town
Owning a Home in a Super Hot Market
Waiting for the Great Senior Sell Off