This is an article that I am very excited to write. And I owe a huge thank you to Lanny for helping me make it happen. Ever since the rate cut in July, we have all been bombarded with emails asking us to refinance our mortgage. “Why you need to refinance with Quicken Loans.” “You’ve been pre-approved with Chase.” Even Ally Bank, where we have both held our investment portfolios at one time, offered us a sweet refinance deal.
With an interest rate of 3.89% on a 30-year mortgage originated two years ago, I never thought that refinancing would work for me. But as interest rates continued to slide and the refinance market exploded, rates finally reached the level where it was economically beneficial for me to make the move. Here is why I am refinancing my mortgage after two years and unlocking some serious cash along the way.
My old mortgage
I purchased my house in July 2017 and my first mortgage payment was September 1, 2017. My total mortgage was $221,000, the interest rate was 3.89%, and the monthly payments were $1,041.13. The institution also escrowed my real estate tax payments for me.
Over the years, I had committed to using side hustle income to help pay down my mortgage. On our Financial Freedom products page, we have a full arsenal of apps, websites, and hacks to earn extra dollars. Each one of those payments received went towards my mortgage. The best part is that the extra side hustle payments totaled $1,075.31. So don’t tell me that the small amounts earned by our financial freedom products don’t make a difference. Every dollar freaking counts. Don’t forget that.
At the time of my refinance, I had $211,442.90 remaining on my loan and 28 years (or 336 months) remaining. In just two years, our principal balance decreased nearly $10,000!
Why I am Refinancing and What I was looking for when refinancing my mortgage
Staring at a 3.89% interest rate, I never really thought refinancing my mortgage was an option. Especially as interest rates started to rise at the end of 2018. If anything, I was ecstatic that my rate was going to be so much lower than future, higher market rates. But things have a funny way of changing quickly. Lanny summarized the interest rate market perfectly in June (Read his article about the rate cut and the impact it could have on you), as a Fed RATE CUT was looming. For the next few months, the interest rate market was a roller coaster ride. Check out the movement in the 30-year mortgage rate yourself:
Source: St. Louis Fed
With each passing day in June and July, refinancing became a more viable option. Rates continued to plummet and I continued to monitor closely. But before refinancing, I set some major goals that I wanted to achieve with this endeavor.
- Minimal out of pocket costs
- Significant cost savings
- I did not want to “kick out” my mortgage to 30 years in order to save. I had to save while maintaining the same loan term.
There was a perfect balance of course, and based on my initial estimates, rates would need to fall below 3.5% in order for me achieve what I needed to in order to refinance.
Most of my personal finance stories start involve Lanny finding an amazing deal and telling me about it. Well, guess what, this story is not any different. One day, I received an email from him with a picture of a 30-year rates at a local credit union. The rate on the 30-year mortgage was….you guessed it… 3.375%. He immediately set me up with his contact there and I began the refinancing process. At that point, I had to refinance. You’ll see why in the next section.
My new mortgage and the savings
Finishing the application had allowed me to lock in the rate, that same day, at 3.375% (initially). Although, as the process went on, the rate would eventually increase. This was due to the fact that I was only two years into my mortgage and had a high LTV. Most banks and credit unions will increase their rates based on the LTV. My final LTV was ~75%, causing my rate to increase 2.5 basis points. My final, new mortgage rate is 3.40%. That’s right, 3.40% on a 28 year mortgage. We have a historically low rate and one that will be difficult to beat in the future (unless rates plummet of course).
Closing costs at this credit union were just over $3,000, included the CU’s cost and title costs. There was a $300 appraisal fee that was credited back to me during closing. Essentially, I received a free appraisal in the process. Further, the fees were rolled into the mortgage. The out of pocket cash for this transaction was minimal. In fact, I simply had to cut the title company a $27 check when finalizing the document.
With the fees rolled in, my new mortgage was rounded to $215,000. For a 28 year term, my new monthly payment is $992.92. See the savings below for yourself!
My mortgage payment decreased $48.21 by refinancing my mortgage, or 4.63% per month. In my mind, those are massive savings for minimal effort. The fact that I still saved that much per month with closing fees continues to blow my mind.
Mortgage Cost Per Hour
Earlier in the month, Lanny published an article explaining a metric called the “Living Cost Per Hour.” The purposes of the metric is to calculate the cost per hour your annual expenses cost in a year. Then, to turn it into a positive note, calculate the income per hour that each stock purchase or dollar saved reduces that cost per hour.
This is a perfect time to show the impact that refinancing had on my mortgage’s cost per hour. The table below breaks down this metric before and after my refinancing.
Lanny wasn’t kidding, this really is a fun way to look at things. My overall cost per hour decreased $.07 per hour with this transaction! That just means I am that much closer to financial freedom. Even if it doesn’t feel like that much, it really does make a huge difference. This will be a fun metric to start detailing out in each article, especially the ones where I am cutting down expenses. I’m getting ready to shop my cell phone plan, insurance, and internet/cable provider. There should be a lot of savings on the table.
Summary – Refinancing my mortgage
In my mind, this was a no brainer transaction. Unlocking an additional $48.21 per month with minimal cash out the door is amazing. But let’s look at this from one more angle, since I am a dividend investor (despite review of the mortgage cost per hour already). Assuming a 3% dividend yield, I asked myself this question: What amount would I need to invest to produce $48.21 per month in cash flow? If you guess $19,284 dollars, that is correct! So sure, I paid $3,000 in closing costs to unlock $48.21 in monthly savings. But that sure is a heck of a lot less than $19,284. That’s for darn sure!
What do you think about my transaction? Would you have refinanced if you were me? What’s your current mortgage rate? Are you planning on refinancing your mortgage anytime soon.