How refinancing our mortgage helps us reach our retirement goal
- My husband and I have decided not to sell our house even though it has gone up in value. We refinanced instead.
- We went from an interest rate of 4.25% to 2.99%, saving about $ 500 per month and thousands of interest.
- By putting that $ 500 per month into retirement, we’re on track to meet our goal of $ 2.2 million.
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As in much of the country, the housing market in our region is hot. In fact, our home has grown almost 50% in value in the three years since we bought it. Plus, interest rates are considerably lower now than when we bought our home in 2018. While we have no plans to move, we kind of wanted to take advantage of the housing boom while we could. .
It was then that my husband and I started to think about refinancing our mortgage. Originally, I moved away from the idea. Isn’t that something people who can’t afford to pay their monthly mortgage payments are doing? Is it a step backwards? is it really worth it? But after talking to our financial advisor and analyzing the numbers, we decided to take the plunge.
What the numbers told us
Although I was not initially sold on refinancing, my outlook changed quite dramatically once I saw the numbers. Our initial interest rate was 4.25% and our monthly mortgage payment was $ 2,508. After refinancing, our interest rate dropped to an impressive 2.99% and our new monthly payment is now $ 2,082.
This meant that we would save about $ 500 per month on our mortgage payments alone, not to mention the thousands of savings we will enjoy on interest over the life of our mortgage. We could have gotten a 15-year mortgage and paid even less interest over time, but took another 30-year mortgage so we could use the extra monthly funds for our retirement savings.
Other advantages? We were only three years after the start of our previous mortgage, which meant that essentially “starting over” with a new one was not a big success. We also skipped a month of mortgage payments because after closing your first payment isn’t due until the following month. This money was allocated to partially fund a house project that has been on my to-do list forever. (Hello, custom built-ins in our family room!)
And we are not alone in our refinancing decision. Research has shown that 68% of all mortgage applications in August were refinancing applications, while mortgage lenders refinanced about $ 2.6 trillion in 2020 alone.
How the decision affects our retirement plans
During the refinancing process – which can be a bit long, to be fair – I was shocked to see that our retirement savings plan was now on track at 99% with just that extra big chunk. money every month. We’ve gone from 75% full funding to around 99%. Landmark footage of me spending late afternoons sipping wine in Napa wearing a cashmere envelope and chunky jewelry, my long-standing retirement plan.
When it comes to pension plans, ours is pretty standard. It allows both of us to retire at 65, with just over $ 2.2 million as retirement nest egg. I’m always surprised at how reallocating a little bit of money each month has had such an impact on our bottom line.
It’s important to keep in mind that when considering refinancing, you need to make a plan for those extra dollars you’ll save on a mortgage payment or lower interest rate each month, and not just to inflate your budget. , unless you need to move. room.
Potential disadvantages of refinancing
Refinancing is not without its drawbacks. For one thing, the bank has to pull your credit report in order to secure the mortgage, so keep that in mind if your credit isn’t good or you’re working to fix it. Remember that every time there is a serious investigation on your credit it will reduce your score by a few points.
Second, there is usually an application fee for refinancing. Ours was $ 500 and was credited at closing. But some refinance options charge up to $ 5,000 in fees, which can sometimes be rolled back into your mortgage, so be sure to read the terms carefully before signing on the dotted line.
It’s also important to note here that there are a few different options when it comes to refinancing your home: conventional refinancing, refinancing with withdrawal, or even refinancing options for FHA or VA loans. In our case, we opted for conventional refinancing because we didn’t want to tap into the equity in our home and we weren’t eligible for an FHA or VA loan.