First person: Small refi savings give big boost to budget
Refinancing your mortgage is all about saving money. Sometimes even a small monthly savings can mean big changes in your life – especially when you're on a tight budget.
The money that Allison and Joe saved from their small refinance made a big difference when it came to getting out of credit card debt. This is their story:
When my fiancé, Joe, and I first discussed refinancing our mortgage back in early 2011, we were living paycheck to paycheck. We had a combined $7,000 in credit card debt and were struggling to pay it off. Every month that went by meant another interest payment at 17 percent, and though we threw extra money at the debt when we could, paying just slightly more than the minimum balance was all we could afford most months.
We weren't drowning, but we were certainly treading water. We couldn't seem to get ahead, and both of us knew that any significant upset in our life together could ruin us financially. If our condo was damaged by fire -- as had happened to another young couple in our building -- the repairs and time spent in hotels would destroy us.
We decided to refinance, hoping we would end up with a little more money in our pockets right now - even if it meant taking out another 30-year fixed-rate loan.
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Our first time refinancing
The decision to refinance was one that changed our lives for the better in ways we didn't imagine at the time, despite us only saving a small amount – $90 per month - initially.
When our lender contacted us about refinancing, our original loan for $183,000 had an interest rate of 5.75 percent. We were paying $1,069 per month in mortgage payments, in addition to condo association dues and payments into a tax escrow. In total, we were shelling out $1,844 per month to live in our home.
Joe and I refinanced with our original lender in April 2011. At the time, the best interest rate we could get was 5.375 percent. We had good credit and stable income, but our high loan-to-value ratio meant we were refinancing through the Home Affordable Refinance Program (HARP). And our financial situation meant we had to roll the closing cost into the term of the loan, which meant the interest rate would be a little higher than if we'd paid out of pocket.
While we could only save a little in interest every month, we pushed forward. We had nothing to lose, and even a small savings meant we'd have a little more room in our budget each month – something we really needed.
Joe and I committed to using the savings from our refinance to change our lives for the better. It wasn't a huge amount, but that $90 per month savings allowed us to pay a fixed amount - $253 per month – toward our credit card debt. We started in June 2011, and in a little over a year we were completely free of credit card debt.
To really keep us on track, we spent any additional income that came in from bonuses and raises paying down debts, not going out for drinks.
Now we're on the road to financial well-being
Before our refinance, we were having trouble getting ahead. But since we made the move to a lower interest rate, we've been able to save and work toward paying down our mortgage. Life after our refinance means we're finally getting our finances in order. We're doing this in a few ways:
1. Overpaying our mortgage. Since getting a hold on our debt with the help of our refinance back in 2011, we now have more money to pay toward our mortgage. In addition to the $90 per month savings that we now put toward our loan, we use a portion of the money that would have been used for credit card payments to pay down our mortgage.
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2. Building up our savings. Refinancing gave us the freedom to pay off our credit card debt, and we are determined to stay debt free. Instead of blowing the money we now have in hand on fancy dinners and vacations, we're putting as much as we possibly can into savings and retirement accounts. We aren't putting away thousands of dollars each month – yet – but the few hundred bucks we can sock away adds up.
3. Getting ready to refinance again. Our interest rate is now well above today's averages, so we're doing what we can now to prepare for another refinance. Joe and I are paying off revolving debts, keeping an eye on our credit profiles and building up our savings, all in the hopes that we'll be able to successfully refinance once property values come up a little and we can get a decent appraisal.
We can't wait to refinance again, this time saving even more money by paying our closing costs and, hopefully, locking in a lower rate. While our refinance was only a piece of our financial puzzle, that seemingly small change – only $90 per month – got us on the path to financial health.
Ilyce Glink is an award-winning, nationally syndicated real estate columnist, blogger and radio talk show host, and managing editor of the Equifax Finance Blog. Follow her on Twitter @Glink.
