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Courtesy Katie Oelker
When my husband and I bought our second home at the end of 2019, we were excited about the lower interest rate compared to our first mortgage.
Although we were postponing our debt-payoff goals and taking on a higher mortgage payment, moving to a lower interest rate was going to offset some of interest we would be paying in the long run. We were comfortable with the new payment, but the lower rate made it easier to stomach the higher monthly payment.
Once we moved and were enjoying our new home, we didn't really think twice about our interest rate; we'd gone from 4.125% to 3.875%, so we felt pretty good. It had been less than a year and a half since we bought our home, so the idea of refinancing was never on our radar.
In the spring of 2021, however, we realized we could likely get an even lower rate and decided to go through the refinance process. Rates had continued to drop, and we realized we wanted to take advantage of the low rates before they increased.
Refinancing our mortgage allowed us to go from a 3.875% to a 2.875% 30-year fixed mortgage, shaving 1% off our mortgage interest rate. This in turn lowered our payments from $2,366 to $2,141 per month. While that may not seem like a lot of money, a few hundred dollars every month can add up, especially if compound interest is involved.
The pros and cons of refinancing our mortgage
There are certainly pros and cons to refinancing, and the decision to do so was one we didn't take lightly. One of the cons is that you typically have to repay closing costs. For anyone that has closed on a home, you know that closing costs are typically thousands of dollars.
In order to justify paying closing costs again, our mortgage broker informed us that we would break even in four years. This meant that the amount we paid in closing costs wrapped into our mortgage payment would be "paid off" in four years. Because we plan on living in our home for much longer than four years, we knew that we would benefit from a lower rate and increased monthly savings over the course of the mortgage.
On the flip side, one of the pros of refinancing is being able to apply a lower interest rate to the duration of the mortgage. Since we are only 16 months into our 30-year mortgage, we will have a long time to take advantage of the lower rate. This lower rate, in turn, means a lower payment.
What we're doing with the money we save each month
While many people refinance and then spend the money they save each month elsewhere, we've decided to put the money into a separate brokerage account. This way we can use the money to pay off our mortgage in a lump sum once it reaches the balance, or we can use the investment money to fuel our early retirement goals if we decide to do so.
By refinancing, we will shave off around $20,000 in interest over the course of 30 years. If we were to put the extra $225 per month towards our mortgage, we would be able to save around $26,000 in interest and pay off our mortgage seven years early, in approximately 23 years.
While this is incredible savings, we figure if we can invest the extra money at an estimated 7% stock market return, that money should grow to approximately $145,000 in the same amount of time (23 years). While we still plan to pay off our mortgage early, investing the extra money versus applying it directly to the mortgage will help us get the most out of the money we are saving.
This article was originally published in March 2021.