- My husband and I decided not to sell our home even though it’s risen in value. We refinanced instead.
- We went from a 4.25% interest rate to 2.99%, saving about $500 a month and thousands in interest.
- By putting that $500 a month towards our retirement, we’re on track to meet our $2.2 million goal.
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As in much of the nation, the housing market in our area is hot. In fact, our house has increased nearly 50% in value in the three years since we bought it. Plus, interest rates are significantly lower now than when we purchased our home in 2018. While we don’t have any plans to move, we wanted to somehow take advantage of the housing boom while we could.
That’s when my husband and I started to think about refinancing our mortgage. Originally, I shied away from the idea. Isn’t this something people do who can’t afford their monthly mortgage payments? Is this taking a step backward? Is it really worth it? But after speaking to our financial advisor and running the numbers, we decided to take the plunge.
What the numbers told us
While I wasn’t initially sold on refinancing, my perspective changed pretty dramatically once I saw the numbers. Our original interest rate was 4.25%, and our monthly mortgage payment was $2,508. After refinancing, our interest rate dipped to an impressive 2.99% and our new monthly payment is now $2,082.
This meant we would save around $500 a month just on our mortgage payments alone, not to mention the thousands in savings we’ll enjoy on interest over the term of our mortgage. We could have gotten a 15-year mortgage and paid even less in interest over time, but we opted for another 30-year one so we could allocate the extra monthly funds to our retirement savings.
Other perks? We were only three years into our previous mortgage, which meant that essentially “starting over” with a new one wasn’t that big of a hit. We also skipped a month of mortgage payments, since, after closing, your first payment isn’t due until the next month. That money was allocated to partially fund a home project that’s been on my to-do list forever. (Hello, custom built-ins in our family room!)
And we aren’t alone in our refinancing decision. Research has shown that 68% of all mortgage applications in August were refinancing applications, while mortgage lenders refinanced about $2.6 trillion in 2020 alone.
How the decision affects our retirement plans
During the refinancing process — which can be a bit lengthy, to be fair — I was shocked to see that our retirement savings plan was now 99% on track with just that extra chunk of cash each month. We went from being 75% fully funded to around 99%. Cue images of me spending late afternoons sipping wine in Napa wearing a cashmere wrap and chunky jewelry, my longstanding retirement plan.
As retirement plans go, ours is pretty standard. It allows for retirement at age 65 for both of us, with just over $2.2 million as a retirement nest egg. It’s still surprising to me how reallocating just a bit of money each month made such an impact on our bottom line.
It’s important to keep in mind that when considering refinancing,you need to make a plan for those extra dollars you’ll save on a lower mortgage payment or interest rate each month, not just use it to pad your budget, unless you need the wiggle room.
Potential drawbacks of refinancing
Refinancing isn’t without its drawbacks. For one, the bank does have to pull your credit report in order to underwrite the mortgage, so keep that in mind if your credit isn’t great or you’re working to repair it. Remember, any time there’s a hard inquiry on your credit, it will lower your score by a few points.
Second, there’s usually an application fee required for refinancing. Ours was $500 and was credited back at closing. But some refinancing options charge upwards of $5,000 in fees, which can sometimes be rolled back into your mortgage, so be sure to read the terms carefully before you sign on the dotted line.
It’s also important to note here that there are a few different options when it comes to refinancing your home: a conventional refinance, a cash-out refinance, even refinancing options for FHA or VA loans. In our case, we opted for a conventional refinance because we didn’t want to tap into our home’s equity, and we weren’t eligible for an FHA or VA loan.