This post boils down to
Interest saving is guaranteed and tax-free gain, especially sweet when
1. it comes @ no cost/fees
2. it frees up additional cash flow
3. it allows you to build equity faster
1. it comes @ no cost/fees
2. it frees up additional cash flow
3. it allows you to build equity faster
4. The above can be accomplished with a mortgage refi done correctly
Background:
I purchased my first home a couple days before med school graduation, using doctor’s loan. The home needed some major repairs, including a brand new roof and AC. It has its original 1970’s kitchen and bathrooms. But it is still our home sweet home.
Who helped:
With the generous help of my sister and Nana, we were able to refinance our house to a lower interest rate. I paid my sister back her 2.5k with my next 2 paychecks, and Nana gifted her 4k towards my partner’s credit card debt 🙂
Short term and long term impact of my mortgage refi:
Before I signed my no-cost refinanced ARM (adjustable rate mortgage), I ran the numbers to make sure that I will not lose my savings during the fixed mortgage rate portion of the loan when the rate adjusts to a possible maximum of 8.375%. My goal was to switch from a fixed rate mortgage to a adjustable rate mortgage to save on interest that’s guaranteed during the fixed rate portion of the ARM. But I needed to make sure that when the rate does adjust and likely to a much higher rate than rate now, and possibly to the maximum rate of 8.375%, that I’m fully prepared for the higher payment and to pay off the mortgage much more aggressively to avoid the high interest down the road.
After running the numbers, I was prepared for the worst case scenario. Ie, when my rate adjust and it can adjust to as high as 8.375%, I can technically pay off the ENTIRE house in 4 months on a then projected (conservative) income.
I happily signed the mortgage refinancing documents and started enjoying paying a smaller monthly mortgage payment, AND building equity faster. The 1% less in interest reduced my mortgage payment by $160, while increasing my principle payment by $40.
This is a perfect illustration how interest is the bane of existence for debtors.
Results:
By reducing my mortgage interest by only 1%, I increased my cash flow by $160, which I can re-allocate to higher interest debt (student loan at 6.8%) and pay that off faster, leading to guaranteed tax free return in the form of interest saved. AND, I accelerate the process of becoming a real owner of the house.
Update:
I wrote this post back in January, and thanks to this financial move, I indeed paid off my student loan completely shortly there after. Now my highest interest debt is my mortgage and I have been channeling my cash flow towards maxing out 23.5k of ROTH space available to me. So far, on tract to do so for 2015.
Hindsight 20/20:
In retrospect I wish I was more educated about mortgage and started with ARM instead of a fixed mortgage from the get go when I purchase the home. It would have saved me quite a bit on interest, given mortgage payment is heavily front-loaded with interest during the initial years of the term. But I’m also grateful for quickly we were able to refinance to an ARM, and what I learned along the way.
- Did you choose ARM or fixed rate mortgage when purchasing a home?
- What are the pros and cons of your mortgage choice?
- Did you ever refinance your home? Was it a good financial move for you?
- How much closing costs did you pay the bank with your fixed rate mortgage or ARM?
Comment below!
Mortgage refinance 7 months after buying my 1st home.
