My husband and I purchased our home in Hudson, Wis., in 2011 with a 30-year mortgage. In the months following our move in, we found ourselves questioning that 30-year term. Currently in our 30s, it dawned on us that we would most likely have grandchildren before our mortgage was paid off. Sure, we could pay it off sooner by making extra payments each month, but we knew it would be difficult for us to follow through unless that payment was a requirement, not a mere option. We decided to reevaluate our finances and look into shortening the term of our home loan.
So in August 2012 -- just a year after buying our house -- we refinanced. We went from a 30-year 4.25 percent mortgage to a 15-year loan at 3.375 percent. Our monthly payment increased by over $350, from a principal and interest payment of $875 a month to $1,229.
This increase was not insignificant in our budget. We had to make changes in our lifestyle, including restraint when it came to purchasing things that we didn't necessarily need.
Now in Summer 2013, a year after our refinance, there are several reasons why we are pleased with our decision.
1. Savings. Our initial 30-year loan was for approximately $177,000 at 4.25 percent, which meant we would have been charged more than $136,000 in interest. Our refinanced 15-year loan is for about $173,000 at an interest rate of 3.375 percent, which reduces our finance charges to around $48,000. So, while an interest rate differential of .875 percent may not seem like much at first glance, our interest savings as a result of refinancing amounts to over $88,000.
2. Money for college. In 14 years, our two older children will be in college and our youngest will be a sophomore in high school. We save as much as we can every month but realize that it may not be enough to cover the costs associated with putting these three through college. By eliminating our mortgage early, we will have extra money to count on when the bills for higher education start rolling in.
3. Potential to save more for retirement. Saving for retirement is just as important as padding a college fund, but it's difficult to prepare for both when there are so many bills to pay now -- our mortgage being the largest by far. While we contribute what we can to retirement accounts, in addition to making mortgage payments and monthly deposits into our children's college fund, we are fully aware that it may not be enough. The sooner we eliminate our mortgage, the sooner we can start investing more for our retirement.
4. Conscious effort to live more frugally. We started altering our spending habits when we first became a one-income household in September 2011. We eliminated ordering take-out or going out to eat (except for on special occasions); we started buying in bulk; and I began clipping coupons and shopping around for the best deals on items that frequently appear on our weekly shopping list. When we refinanced and our monthly mortgage payment went up by $354 per month, we became even more conscientious about saving small amounts of money here and there. Some of the changes we made include: taking quick showers instead of baths; getting movies from the Redbox instead of going to the theater; shopping at thrift stores; keeping our thermostat between 68 F and 70 F during cooler months and between 75 F and 80 F when the weather is warmer; using only cold water to wash clothes and hanging quicker-drying items up instead of using the dryer. We also started purchasing many of our perishable grocery items at a discount supermarket chain, which offers the most competitive prices compared to other grocery stores in our area. Not only have these minor changes helped us to save money each month, but they also set a good example for our children when it comes to pinching pennies.
5. Personal sense of satisfaction. A few months after resigning from my job, I started working from home as a freelance writer because I missed contributing to our household income. Then, when we made the decision to refinance, the freelance work that I was doing whenever my kids were napping or down for the night went from being optional to necessary. I now have a monthly quota that I have to meet in order to ensure that we have enough money to make our mortgage payments, pay all of our other bills each month, and put away for college tuition and retirement. It was difficult at first to create a routine that would allow me to devote enough time to my primary job as a stay-at-home mom and still make enough money to help pay the bills, but where there's a will there's a way. Now, I am able to surpass my income quota each month, which more than satisfies my need to contribute financially and reduces a lot of the financial burden on my husband's shoulders.When my husband brought up the idea to refinance our mortgage, he posed this question: What do most rich people have in common? His answer: They don't have mortgages. In my opinion, his answer is debatable, because the odds of us ever being "rich" -- at least when it comes to having an overabundant supply of money -- are slim to none; however, we will be mortgage-free within the next 14 years.