Mortgage Refinance - A Look Back
In June of 2008 my husband and I decided to refinance our mortgage due to the large drop in interest rates. Now that it's June of 2009 I thought it might be nice to take a look back at how things have changed over the past year and what this change has been for our finances, specifically our equity and overall amount of debt.
Where We Were
When we originally signed up for the mortgage on our house we setup a 30yr fixed mortgage for 80% and 30yr balloon mortgage for 20%. We had a decent rate on our 30yr fixed at around 7% but our 30yr balloon was quite high at 9%. Because of this we only had about 15% of our payment going toward the principle of the loan.
To give you an idea of what this would look like, let's make a hypothetical situation. Say our payment on the larger loan was $800 and our payment on the smaller loan was $200, our total payment per month would be $1,000. Of that $1,000 only $150 would be actually going to paying down the principle each month, leaving $850 to go toward interest (in this situation I'm leaving out escrow for simplicity's sake).
Needless to say, it was pretty annoying to make that payment every month and see so little of it go toward paying down our debt. At the same time, I was trying to figure out what the heck a 30yr balloon mortgage was. What I was able to find out at the time was a bit scary. With Balloon mortgage payments, you have a certain set payment until such a time as the mortgage Balloons, or comes due. Usually you will see a 3yr or 5yr Balloon, with means that when the mortgage hits 3yrs or 5yrs old the whole thing is due at the time. I wasn't able to find out much about a "30yr" Balloon but the idea of having a Balloon anything was unsettling and gave me another reason to want to refinance.
That brings us to February of 2008 when we decided to go forward with refinancing our house. The lending market was at the point that rates were very low but it was becoming much harder to get a loan. Although my husband and I have excellent credit, we were not sure that we had built up the equity required to refinance in this tough lending market. After several months and some bad experiences with an appraiser, we finally got some good comparables in our area and were able to move forward with 15% equity in our house. Since we still didn't have the necessary 20% down payment we had to settle for paying Private Mortgage Insurance (PMI) which I am not thrilled with but it is only for a little while longer.
Where We Are Now
We ended up refinancing to a 15yr fixed mortgage at about 6.5%. We rolled both mortgage loans into this one single mortgage loan which gives us just one payment per month to have to deal with. Although we do have to pay PMI currently, we should reach our 20% equity point at the end of this year. That means I will be promptly calling our mortgage company in January to make sure we get that extra charge off our payment. Although it's not much, $15 a month, that still adds up to $180 a year and I would much rather have that money to put in savings. Thank you very much!
As you probably have noticed we not only switched to a lower percentage, we also changed the term to a 15yr fixed from the 30yr fixed/30yr Balloon. We did this because we were sick of seeing so little of our payments going to pay down the debt on our mortgage. Although our payment increased by about 20% we are both very happy that the percentage of that payment going toward our principle has increased by even more. The percentage of our payment going toward our principle is now about 40%!
To give you an idea of what this would look like, if our old payment was $1,000, it would have now increased to $1200. Of that $1,200, $480 would be actually going to paying down the principle each month, leaving $720 to go toward interest. I like this scenario much more than the one above, with only 15% going toward our principle!
The Downside
Unfortunately, there is a downside to refinancing and that is the fact that you have to pay all the closing costs. We didn't have the money saved up so we rolled these costs into the mortgage. That means that we had to add to the overall size of our loan, which washed out all payments we had made toward our principle thus far, and added a little extra on top. So, the balance on our mortgage actually went UP compared to our original mortgage on the house.
I'll admit, it was disappointing to see this and made me question whether it was truly worth all the hassle. If we had stayed with the old mortgages we would have LESS mortgage debt today, then we do now by almost exactly $1,000. It will still take us until September of this year, 2009, to reach that break even point. Add to this the fact that we've been paying a larger payment for the past year, and now we're also paying PMI and it makes me wonder. Was it worth it?
So... Was It Worth It?
I believe it was. Here are my reasons:
- I'm happy that we only have one mortgage payment and that it's for a 15yr loan instead of a 30yr. Seeing around 40% of the payment going toward principle feels MUCH better.
- The word Balloon isn't mentioned anywhere in the contract which helps me sleep a little better at night.
- PMI is deductible on newer mortgages such as ours and it will be going away January of next year.
- After September we will have reached that magical break even point and will then be kicking the pants off of what our debt repayment would have been under the old mortgages. We're talking hundreds of dollars more a month going toward the principle! That makes me smile... literally. I'm smiling just writing about it right now.
