In 2005, at age 38, I moved away from home for the first time. Not literally out of my parents' home, but away from my hometown in North Texas. My husband, an airline pilot, was transferred from the Dallas-Fort Worth base to one in Atlanta.
We began our search for a three-bedroom, two-bath home in the suburbs, where we could raise our young children, ages 4 and 7. We also needed a separate area with a bedroom and bathroom, anticipating the need to care for aging parents in the future. After looking at more than 20 homes in the Chattanooga, Tenn., area (two hours north of Atlanta), we found a house that met all of our requirements. In addition to being located on 1 acre of land, the property offered a beautiful forest in the backyard, a scenic small pond next door, and views of the Great Smoky Mountains in the distance.
We purchased the home for $247,000. With the proceeds from the sale of our first home, we made a $50,000 down payment and financed $197,000 at a fixed interest rate of 5.75 percent for 30 years. This made our payment $1,150 (without an escrow account for taxes and insurance), which was manageable on our $90,000 income.
Our first refinance
Five years later, we refinanced the loan balance of $191,000 at a lower interest rate of 4.25 percent. Since we had made payments for five years and were by then in our 40s, we didn't want to start over with another 30-year loan. Instead, we refinanced for 15 years, which actually made our payment increase to $1,437, but we could now plan to have our mortgage paid off well before retirement.
Before our move, we had accrued $24,000 in debt from flight school and several thousand dollars more when my husband was furloughed for three months. After our move, the debt gradually increased with several vacations to Disney World and Milan, Italy; the purchase of a new sports car; several new items for our home, including furniture and flat-screen TV's for our living room, den, and the kids' bedrooms.
During the years that our debt continued to build, we were not concerned about it because we could make our minimum payments and on time each month. However in early 2013, after years of paying on this growing credit card debt, we started to pay closer attention and discovered that the amount we owed never changed. We had three credit cards and were paying $600 a month in minimum payments, but it all went toward interest; the principle didn't decrease. We took steps in an attempt to lower the balances, such as cutting other bills, but this didn't have much of an impact. We began to lose sleep at night, trying to find a way to pay off the debt. We could see college tuition for two children looming in the next five years and retirement soon after that. We longed for the security of someday truly owning our home and knowing we would always have a place to live. But despite our efforts, we couldn't afford to make more than the minimum payments for the credit cards and at their high interest rates (ranging from 10 to 13 percent), we believed we'd never be able to pay them off.
Our 2013 refinance
This summer, we visited our bank to open a checking account for our 16-year-old son. As we got up to leave, the manager mentioned that the bank was running a refinancing promotion and would pay closing costs. We told her that we had already refinanced three years ago. She suggested that we apply and see if the interest rate was any lower or if we could lower our payment further. We filled out an application that day and went home to gather the required paperwork, including credit card statements, mortgage statement, our most recent pay stub, and tax returns for the past two years. We then had an appraisal done on the house to help determine the amount available to refinance; the appraisal came back at $280,000. The bank offered to refinance us with a 15-year mortgage at 3.75 percent.
At this point, we started to run the numbers to see if refinancing would really be worthwhile. Since our 2010 refinance, we had paid our mortgage down to $157,000. We calculated that if we refinanced with a loan in the amount of $207,000 at 3.75 percent for 15 years, our new monthly payment would become $1,505. We did the refinance.
We could have cashed out more since the house appraised for $280,000, but our goal was to pay off our credit cards and eventually pay off our house. Now, our new payment is $68 more a month over our previous payment -- but we no longer have to shell out $600 a month to the credit card companies. So, we are actually keeping $532 of our monthly income. Our only remaining debt aside from our mortgage now is a car loan. We owe $39,700 and pay $732.67 each month. By paying an extra $532 a month toward the car loan, it will be paid off within 32 months. Once our car has been paid off, we will start making extra payments on our mortgage principal to become mortgage-free even sooner than the 15-year term of our loan.
Our savings from refinancing
Had we stuck with our original 30-year mortgage, our house would have been paid off in 2035. Thanks to our most recent refinance, our house will be paid off seven years earlier in 2028 (and maybe even sooner if we're able to pay extra toward the principal in the coming years).
Not only will our house be paid off early, but we've calculated that we'll be saving about $75,000. We would have paid almost $217,000 in interest on a 30-year loan. Instead, we will pay $142,000 in interest. We realize that if we had refinanced in 2012, we might have locked a rate around 2.75 percent, be we are absolutely content with the rate we got because it's still going to save us $75,000 over the life of the loan. That's enough to put our first-born child through college!
Our $50,000 credit card debt will be paid off when the house is paid off. While 15 years might seem like a long time to pay off credit card debt, we knew we'd never pay it off without refinancing. At least we now know our credit card debt will be completely gone in 15 years. Plus, the mortgage interest is tax-deductible while credit card interest is not. And best of all, we are now debt-free except for our house payment and one car payment. It's an incredible relief.
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- interest rate