I'm taking advantage of low interest rates and refinancing my mortgage, even though it means paying about $100 more per month

older couple doing paperwork at home

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The author is not pictured.

 
  • My husband and I applied to refinance our mortgage after the Fed cut interest rates earlier this month.
  • We're currently in a 30-year fixed-rate mortgage at 3.875%, and we expect to get our rate down to 3% or lower and switch to a 15-year loan.
  • Although we'll pay more each month, we'll save about $28,000 on interest over the life of the loan and our mortgage will be paid off a lot sooner.
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When I signed the mortgage papers for my first house in 1989, the interest my first husband and I signed on to was over 10%. The house we bought (all we could afford) was $39,000. I can't remember how much of a down payment we had, but I remember we were paying over $400 per month just for the mortgage. 

The value of homes has increased dramatically over the years, but the interest rates are far lower than they were back then. In fact, earlier this month, the interest rates were cut by the Federal Reserve in response to coronavirus-related market volatility, which means it is cheaper for banks to borrow money from the government, and it is also less expensive for Americans to borrow money from banks.  Advertisement

Because interest rates are so low, now is an excellent time for many Americans who own their homes and carry a mortgage to look into refinancing. There are many free mortgage calculators online, and many banks will give a free quote for what your payments would work out to be. 

One thing to remember, though, is that by refinancing, there is usually a fee. Generally, the bank will add the charge or cost to your loan (making what you owe a little higher), or if you have the cash, you can pay it upfront. 

My husband and I are refinancing

My husband and I are in the process of refinancing right now. We currently have a 30-year fixed-rate loan with an interest rate of 3.875%, and we have approximately $165,000 left of principal required to pay off our mortgage. 
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We are 11 years into our loan, and our principal payments are finally starting to make a difference in the balance. Our monthly payment is currently about $535 in interest and about $485 in principal for a total mortgage payment of approximately $1,020. 

As you can see, even after a decade of paying down our current mortgage, we are paying more in interest than in principal. Although we are starting to see our monthly payments beginning to add up and chip away at the total we owe, seeing a real drop in principal has taken many years because so much of what we pay goes to interest. We are not looking to refinance with another 30-year loan because we are less than 10 years from retirement. Ideally, we would retire without a mortgage, but that is unlikely to happen at least for the first five to six years of our post-work-life. Advertisement

We're willing to pay a little more each month to get out of debt faster

Because we are so close to retirement, we are looking at refinancing with a fixed-rate 15-year loan. Before this last rate cut, the numbers looked like this: We could lock in at 3% interest, making our monthly payment $1,139 per month. Our first payment would be approximately $725 toward the principal and about $412 toward interest. 

With a new loan, almost $240 more a month would be going to pay down our principal, though our monthly payment does go up by slightly over $100. 

With a 15-year fixed loan, we would pay close to $40,000 in interest over the life of the loan. Although $40,000 sounds like a considerable amount, we would be paying less interest than if we stayed with our current 30-year fixed loan - $28,000 less - and we would be taking four years of mortgage payments off of our existing mortgage. Meaning, we could free up a considerable part of our monthly bills to use in retirement that much quicker. Advertisement

When we get back to our mortgage loan officer to finalize our deal, our numbers will be slightly better because of the rate cut I mentioned that went into effect on March 16. I don't expect the numbers to change drastically, but even $50 would help pay another bill and leave more in our pockets - and more in our pockets is a winning scenario every single time.

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