December 2007 was the official start of the Great Recession. That happened to be the same month my wife and I decided to do a cash-out refinance on our first house and use the cash as a down payment to buy our dream home.
We bought our first house in La Mesa, Calif., in June 2000 for $200,000; we took out a 30-year fixed-rate mortgage with an interest rate of 8.375 percent. Shortly after purchasing, the housing market in Southern California skyrocketed. I decided to leverage the red hot real estate market and steadily dropping interest rates over the next few years. From 2001 to 2004 I refinanced our home five times, with the sole intent of lowering the interest rate and principal balance and forcing equity into our home. I made sure I never had to pay closing costs, so every time I refinanced I was trading a higher interest rate in lieu of paying any closing costs. I also used the falling interest rates (and the lower monthly payments associated with lower rates) to change my loan from a 30-year to a 15-year fixed-rate mortgage, which really increased the amount of principal payments being applied to my loan each month.
With two young sons, our house became too small for our family. My wife and I attempted to sell our home in the summer of 2005 in the hopes of moving to a bigger home and nicer area. We received an offer of $495,000, but we ultimately didn't sell; we thought the offer was too low.
My wife and I talked it over and decided to do a cash-out refinance and use the cash proceeds to purchase a new home while renting out our current one. By late 2007, our principal balance on our home loan was under $124,000. We decided to pull the trigger in December 2007 and refinanced our home to a 30-year fixed-rate mortgage with an interest rate of 5.625 percent. Our new loan balance became $284,000, which meant we were able to pull out $160,000 in cash. I found a renter for our La Mesa home and the rent covered all the expenses and provided $200 per month positive cash flow. This cash flow then helped -- and, to this day, continues to -- cover maintenance, repair, and vacancy expenses.
Soon after refinancing we found our dream home in Del Cerro, a suburb of San Diego. We closed on it in March 2008. We had looked at the same floorplan home in 2005; the home we looked at then had sold for over $700,000. By March 2008, the grinding real estate downturn knocked our dream home price down to $585,000. With a down payment of $168,000 (which mostly came from the cash-out refinance on our La Mesa home), we ended up with a loan balance on our new home of $417,000; right below jumbo loan status, this helped keep our interest rate on the low end at 5.5 percent for a 30-year fixed mortgage.
I have subsequently refinanced both properties to a much lower rate; they're each on a 30-year fixed-rate mortgage with an interest rate of 3.75 percent. My wife and I are very glad we decided to reach outside of our financial comfort zone by renting out our first home and purchasing our dream home. We now live next to a wonderful neighborhood park that allows my boys to ride their bikes and enjoy the playground equipment. Also, our dream home has better-performing schools than those near our original home. We have much more room in our dream home, and we now have a play room for our sons and they have their own bedrooms, which are ample sized rooms compared to our last home. I am especially glad now with the real estate market turning around as my family enjoys the benefits of having two homes appreciating in value, instead of one.
- interest rate