3 Major Benefits You’ll Enjoy from Refinancing Your Mortgage to a 15-year loan
Refinancing your mortgage has a lot of benefits, depending on your situation.
Mortgage refinancing can seem like you’re starting all over again, like you’re taking a step back in your journey.
But, in my experience, refinancing my mortgage gave me a lot of benefits that I couldn’t get otherwise.
When we started researching if mortgage refinancing was a good option for us, we weighed out all the potential outcomes.
The good and the bad. But, we ultimately found that the benefits we would enjoy completely outweighed any potentially negative outcomes.
For a new home buyer, refinancing your mortgage 5-10 years after you’ve purchased a home can be greatly beneficial. You can save a lot of money over the long run, especially if you are not planning on keeping the property until it’s paid off.
And even if you do keep the property and pay it off (like we plan on doing), you’ll still reap awesome benefits in saving money each month and overall.
Refinancing your mortgage can also help you correct past mistakes that you may have made with your current loan. For example, refinancing can often provide a better interest rate and better loan term.
For us, refinancing our mortgage gave us a chance to get the right loan at a much lower interest rate. Because of that, we’re able to cut our mortgage repayment in half. We’re now able to afford to pay on a 15-year mortgage instead of the traditional 30-year.
Over the last 10 years, we’ve purchased two properties in California. The purchase of our first property was full of mistakes. Huge mistakes that cost us tens of thousands of dollars and added a lot of stress.
Our First Property Nightmare
When we bought our first property, we were persuaded to sign up for an ARM loan. An ARM is an Adjustable Rate Mortgage, which means the interest fluctuates every month based on the current market.
It was one of the most popular loans during the house market of the late 2000’s, until the burst of the housing bubble of 2008-09. In my personal experience, it is one of the worst types of mortgage loans out there.
We had a 5-year ARM (adjustable rate mortgage), which meant that we paid interest only for the first 5 years of our payments. So, the bank was making back their money while we made no progress toward the principal balance.
After the first 5 years, it would switch to the ARM portion of the loan, which meant that our mortgage would be unpredictable from month to month for the rest of the loan (25 years).
It was the worst loan we could have chosen, yet this is what was offered to us as first-time home buyers.
Housing Market Crash
Then, came the housing market crash of 2007. We were already in a bad financial place because of our purchase. But now, we were upside down on our loan, owing three times more than the property was now worth.
We couldn’t get the bank to approve us for the refinance that was offered for people due to the market crash, so our only option was to move out and sell it as a short sale.
About 4 months before our 5-year portion of the loan would expire, we found our dream home.
We quickly purchased it and moved out of the first property. Then, we sold the first property for less than 70% of what we owed.
At that point, we had to cut our losses and move forward. So, as hard as it was to sell so low, we knew that in order to improve, we needed to let go of the sinking ship.
Wiser Purchase Second Time Around
When we bought our second property, our current forever home, we were much wiser with our loan options. At this point, a few years had passed since the housing market crash.
So, we were able to get our 4-bedroom home for the same price as our previous 2 bedroom condo. And it was in a much better neighborhood.
We chose to go with a 30-year fixed rate mortgage that impounded our property taxes and insurance as well. This way, we could pay the same payment every month instead of paying it twice a year.
It made it so much easier, because once you get used to a certain payment coming out of your budget, it becomes an automated expense in your mind.
Why We Decided to Refinance
Fast forward 6 years later, we shopped around for lower interest rates and found that we could get a better rate.
So, three years ago, we decided to refinance our mortgage loan. To be completely honest, I was a little nervous during the process.
It was hard putting ourselves back in the financing path again when we were so comfortable with our payment and everything was going well.
But I knew refinancing our mortgage could benefit us in the long run and help us achieve financial independence much faster. So, even though I was nervous, I was also excited to get our mortgage refinanced.
It was one of the best financial decisions we’ve ever made. The benefits that we’re enjoying three years later are all because we decided to refinance our mortgage when we did.
I wanted to share some of the benefits we’ve enjoyed since refinancing our mortgage loan.
Mortgage Refinancing Benefit #1: Reducing the repayment term by 10 years
Since we decided on a 15-year mortgage loan, and we’ve already paid toward our principal balance for the last 5 years, our mortgage will be completely paid off in 20 years.
That’s 10 years earlier than we planned. 10 years earlier into financial independence.
It also means that we’re going to save 10 years worth of interest, which is whopping six-figure balance that gets to stay in our pockets. It’s pretty awesome!
Of course, refinancing to a 15-year mortgage loan means increasing your monthly payment, but it’s nothing a little frugal living can’t help us conquer.
It gives me peace of mind knowing that my house will be paid off before I start retirement. Win!
Mortgage Refinancing Benefit #2: We’ve eliminated our PMI
We bought our house with an FHA loan, which meant we only needed to put down 3.5% as the down payment. It was a great thing at the time because that’s what we could afford.
But, when you pay a down payment less than 20%, you’ll pay something called PMI (private mortgage insurance).
This little devil takes more than $300 a month and it’s built in to every single mortgage payment you make until you’ve paid off 20% of your mortgage.
Our current mortgage had a stipulation that we had to wait at least 2 years before refinancing. We actually waited a bit longer to refinance until our home equity was more than 20%.
If your property is worth more than 20% of your loan, you can refinance (without pulling any money out) to eliminate your PMI.
The process is to get a home appraisal, then calculate the total mortgage loan owed on the property.
If your home’s market value is more than your loan by at least 20%, then you can totally eliminate PMI from your payment.
It’s an awesome refinancing benefit that will save money, but also help you pay off your mortgage faster, since that amount can be applied directly to your principal balance.
Mortgage Refinancing Benefit #3: Getting a Lower interest rate
Mortgage interest is a fluctuating giant. To win in the mortgage game, you have to be on the right side of the rate.
Luckily, at the time of our refinance, the interest rates were pretty low, lower than our current rate when we were locked in our 30-year mortgage.
That meant we could save a ton of money on interest over the life of the loan. And you already know, I’m all about trying to find the best deal on everything, so for me this was a huge win.
As I’m writing this post for you guys, I can’t help but feel so thankful and blessed. Despite having a rocky beginning with mortgage loans, being able to refinance our mortgage has been a great experience.
Refinancing our mortgage benefited our lives in so many ways. It cut our costs, allowed us to propel our mortgage repayment, and saved us about 10 years of payments.
I remember when I felt that we would never get out of apartment living and be able to afford a home without having to move out of California.
And seeing our progress and our success makes me incredibly grateful.
But, I’m also secretly thankful for the pitfalls we fell into with the purchase of our first home.
We lost a lot of money with our first home. And that experience made us very careful and much more wise the second time around.
We took time to research mortgage loans and made better decisions with our refinance. We carefully monitored our home’s value along with current market interest rates.
And we chose the right time to refinance that worked for us.
We’re now in a strong financial position thanks to refinancing our mortgage. I can’t wait to see where we’ll be in 5 years.
My husband and I plan on paying off our mortgage in the next 5-7 years. We want to be completely financially independent and this is a major milestone that we want to cross.
Have you thought of refinancing your home? What stops you from taking the step?
It’s cool that you mention that you can reduce the interest rate on your home loan by refinancing your mortgage. My wife and I would like to spend less money on loan interest rates, so we’re considering having our mortgage refinanced this summer. I’m going to see if there is a good mortgage broker near us that can with refinancing our home loan.