We originally bought our house 3 years ago when we moved here with a 30 year mortgage, similar to how most people buy homes. We had a conventional, fixed-rate mortgage and paid three years on it. Basically, we paid $30000 in interest and $0.47 on the principal. With the lower interest rates that are a result of the economic climate, we recently found a lower rate and decided to refinance our home.
We did not refinance to take out some of the equity or prolong our loan another 30 years to lower payments. I understand that things happen and it becomes necessary to do these things sometimes, but for us, our goal was to shorten the length of the loan and pay it off a bit earlier.
In a lot of cases, refinancing fees eat up a large portion of the benefit of refinancing. Closing costs and title insurance and other similar fees can total thousands of dollars and, if rolled back into the principal, can negate the refinancing benefit. We looked around some and found some interesting information. First of all, the refinancing backlog at some banks is incredible. The banking industry is apparently not suffering too bad (or else they run on a skeleton staff) as many places wouldn’t even call us back.
Anyhow, our bank, it turns out, still owns our loan and has an easy refinancing option whereby they essentially reduce our rate/term for only $415. We still have a fixed rate, prime loan at a conventional brick-and-mortar bank. We now only have to pay on it for 20 years instead of 30. I put together a little spreadsheet to analyze the loans and discovered that by cutting 7 years off of our loan (we already paid 3 of the original 30 years), we will save over $100,000 in interest. Our payment only slightly changed and it is likely that by limiting my Mt Dew intake, we won’t feel any difference in our bottom line!
You can see the spreadsheet I created to have a look at your own home loan. Basically, the yellow cells need your input. You’ll notice an area called “extra payment” that will allow you to add additional money on your principal payment to see how a little extra money translates into a lot of extra money down the road. You can also see the total cost of your loan which will likely be shocking. Anyhow, have a look and see what you think! By the way, if you don’t have excel, you can download OpenOffice which is a free replacement for Microsoft Office. I have used this since 1998 or so and have had great luck with it.