Refinancing to a shorter-term loan is a smart way to help reduce interest costs and own your home sooner. But, the higher payments that come with a shorter-term loan can discourage some homeowners from making the commitment.
That wasn't the case for homeowners Danny and Tracy Kofke, who refinanced twice to lower their mortgage terms - and they did it with modest salaries behind them.
Here's their refinancing success story...
The Kofke's Background
Danny Kofke is a 38-year-old special education teacher and author of two personal finance books, including, "How To Survive (and perhaps thrive) On A Teacher's Salary." He currently teaches what is known in Georgia as a severe/profound intellectual disabilities class.
"This is my 14th year teaching and I have also taught kindergarten, first grade, and second grade," Kofke says.
Kofke's wife, Tracy, 41, is currently a second grade teacher.
"Tracy taught first grade for nine years before becoming a stay-at-home mom to our daughters, Ava and Ella," Kofke explains. Although Tracy just returned to the classroom in fall 2013, Kofke says they lived off his teacher's salary of around $41,000 a year during the nine years she stayed home to raise their daughters.
Purchasing Their Home
The Kofkes moved from Florida to Georgia, where they bought their home, in May 2006. The house they purchased is located in Hoschton (about one hour outside of Atlanta).
The home is roughly 1,500 square feet, has three bedrooms and two bathrooms, and is located on almost one acre of land.
"We have a great backyard in which the kids love playing in - that was a big selling point for us," Kofke explains. "Hoschton is a rural location but we are close to both Atlanta and a large mall, which is only 20 minutes up the road."
The couple purchased the home for $145,000, with a $65,000 down payment that they saved up for over several years. As a result, they took out a 30-year fixed-rate loan for just $80,000. Their interest rate on the loan was 6 percent.
Their large down payment on the property benefited them in a few ways. It allowed them to start with a relatively small mortgage, and they didn't need to add the extra expense of mortgage insurance, which is required of homeowners who put less than 20 percent down.
Plus, their mortgage payments turned out to be very affordable.
"Our monthly payment was around $700, including escrow," Kofke says. This means their monthly payments included homeowners insurance and property taxes, which they set aside in escrow.
Refinancing to a 15-Year Loan
Just three years later, in April 2009, the couple decided to refinance to a 15-year loan for $79,000 with a 4.5 percent interest rate.
While they were able to drop their interest rate by 1.5 percent, their monthly payment increased to $825 (with escrow) since they cut their mortgage term in half.
And though they could have simply added extra payments to their principal to pay off their original 30-year loan faster, Kofke says it wasn't that easy. Something would come up every month - Christmas in December, Valentine's Day in February, summer vacation in June, etc., and so they were less motivated to pay extra toward the mortgage each month.
"So we decided refinancing [to a 15-year loan] and being forced to pay more would guarantee that we paid off this loan sooner," he explains.
Refinancing again to a 10-Year Loan
In May 2013, the Kofkes decided to refinance their remaining mortgage again, but this time to a 10-year loan with a 3 percent interest rate. Their new loan amount was $70,000, and their new monthly payment was $910 a month, Kofke says.
When they refinanced to the 10-year loan in May 2013, Kofke says the main goal was to be completely debt-free as soon as possible.
"The only debt we have is our house and once we pay that off, we will own all of our possessions," he explains.
By switching to a 10-year loan, not only will they be debt-free in less than a decade, but they will also save a lot of money over the course of their loan.
"With our original 30-year loan, we would have paid a total of $252,000 when all was said and done," says Kofke. With the 15-year loan, the amount would have been reduced to a total of $148,500.
"With our current 10-year loan, we will pay a total of just $109,200," Kofke adds. This is a savings of more than 50 percent over the cost of their original 30-year mortgage.
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