Shave off years in mortgage by a small change in monthly payment

We have been home owners, living the American Dream, since 2009. Our first starter home was a 1,600 sq.ft town-home with three tiny bedrooms. With our second child born in 2012, we had out grown the house by two fold. However it was not until  2014 that we finally decided to move into a 3,400 sq.ft new construction house. If it was today, we might have gone smaller, probably in 2,400 sq.ft. range but our justification at that time was the possibility of our aging parents coming to live with us. Regardless, we felt it was good time to buy a house as the housing market was beginning to recover from the Lehman crash is 2008.

After couple of months of house hunting, we finally decided on a new construction neighborhood which met most of the items in our list.

The builder was providing incentives if we were to go with their preferred lender. The lender was one of the banks that we were primarily using so it was a no-brainer for us to go with them. In hindsight however we should have put further research and thought into it at that time.

At closing, the final price with all upgrades came to $382,715. With a 4.125% interest rate and less than 20% downpayment, our monthly mortgage payment came to around $1,995. This did not include our property taxes which was estimated around $750 per month making it a grand total of $2,745.

Life was good with no surprises until close to our anniversary, living in the house,  we were informed by the mortgage company that they were off in their tax estimate by approximately $135.00 per month and now I not only had my monthly mortgage go up by $135.00 but I also had to catch up on the Escrow by almost the same amount every month for the next one year. This brought our year 2015 monthly mortgage payment to $3,015. Fortunately, It was not going to break our bank as me and my Valuist Wife were living well below our means, but it brought quite a bit of discomfort with a $270 increase in monthly payments.

Around early 2016, I was seeing a lot of ads on the HARP program. Although I quickly realized that we would not qualify for the program, it intrigued me into considering refinancing with the all time low rates. Next few days, I reached out to some lenders (including my existing lender bank) and had them send me a GFE (Good Faith Estimates) for 30, 20 and 15 year mortgages. Surprisingly, going over the quotes was the “ahaa” moment for us. The realization hit us that refinancing to a lesser term was not going to change our monthly payment significantly from what we were paying at the time.

Within the next two months we finalized the papers and refinanced our home. The refinanced amount was $360,000 for a period of 20 years at 3.625% interest rate. The monthly payment came to $2,178 which included principal,  taxes and home insurance. With a monthly property tax of $883.88, the grand total came to $3,061.

Now let’s look back

  1. 2014 – 30 year mortgage at 4.125% and monthly payment of $2,745 (with estimated property taxes)
    • If we had accounted the actual property taxes, the payment would be $2,878.33
  2. 2015 – 30 year mortgage at 4.125% and monthly payment of $3,015 (with actual property taxes and escrow catch up)
  3. 2016 -20 year mortgage at 3.625% and monthly payment of $3,061 (with actual property taxes and no catch up)

In summary, increasing our payment by approximately $45 from the 2015 payment, we cut down 8.5 years of our mortgage and over the term saved $124,000 on interest. It is pretty penny in savings!!

Some takeaways from my experience here.

  • Do your due diligence before signing up to any lender and don’t be blinded by the incentives, which may not be of much value when you look at the long term.
  • A simple but effective action was our re-evaluation of our insurance company. Just by switching, we saved about $20 in our monthly payment.
  • A 15 year mortgage payment is not twice (or close to twice) a 30 year mortgage payment. There a lot of factors that it depends on but it is probably going to be in the range of 1.25 to 1.5. If you can afford the payment go for it, as it would save you hundreds of thousands of dollars in the long run.

 

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