Freed by 50

As a homeowner, 2020 provided some interesting opportunities. Home prices in the suburbs surrounding major metro areas have gone up considerably, while interest rates have plummeted. This has fueled a wave of refinancing (both for good and bad reasons).

At the end of 2019, before anyone even knew what COVID-19 was, I refinanced my mortgage, reducing the period from 24 to 20 years, lowering my interest from 4.375% to 3.125%, and barely changing my monthly mortgage payment. This was a huge win for me. I celebrated in August of 2020 by sending a large lump sum payment to the mortgage and accelerating my pay off date by a little over two years.

By all accounts, I’m in a great place. I have almost 50% equity in my home at its current value, I have about 17 years left on my loan, my interest rate is just above inflation, and my loan will be paid off just in time for my last kid to graduate high school. But interest rates keep falling.

I had three options before me:

• Option 1 – Do nothing and be happy. I’m pretty happy with my situation. My mortgage will be paid off in 16.75 years. I’ll have paid a total of $92,731 in interest over 20 years, and that part makes me not so happy, but I’m still saving significantly over my old 30 year loan and saved almost even money in interest with my lump sum payment last year.
• Option 2 – Continue to make large lump sum payments when I have the money. I started doing the math on this and immediately stopped after calculating the first year. If I make a one time $30k payment in 2021 I’ll save 24 months on my loan and $18k in interest. While this is a great savings, the return on investment compared to a refi is poor. I would have to send nearly $60k to my mortgage to save $34k in interest. This would remove a little over 4 years from my loan, but I’m not in a race to pay the loan off at this time.
• Option 3 – Refinance to a 15 year loan at 2.25%. This will save me $34k in interest over 15 years, plus knock 21 months off my loan when compared to option one. The upfront cost is $5500 in closing costs and a fair amount of frustration with my bank, which moves at a glacial pace. My mortgage will go up about $53/month, which is well within the acceptable range. Compared to option two, this saves slightly less time (3 months less) but almost double the interest. It also costs $24,500 less to get those savings.
• Option 4 – Just for the sake of argument I’m including the “just pay your 20 year mortgage as if it’s a 15 year” strategy. I have spent a great many hours using Dave Ramsey’s excellent Mortgage Calculator to weigh the pros and cons of making lump sum payments, monthly payments, and any other kind of mortgage payment scenario I can think of, and this option just doesn’t work for me. Similar to option two, the return on investment pales in comparison to the return from a $5500 upfront cost. This is a great strategy to use if you simply want to shorten the length of your mortgage, but I’m at a point where I just want to set it and forget it at the lowest rate possible.

This will be a lengthy process. My bank is a small credit union that moves slowly even when they’re not getting hit with an overwhelming volume of requests. What’s more, even though they already hold my existing mortgage, they keep sending me paperwork asking for information they already have as my lender. The current closing documentation has me sending them a check for half a year of property taxes to hold in escrow, even though they already hold that amount in escrow for my existing loan, and then they’ll send me a check from the existing escrow account after the closing. See how this can get frustrating?

Hopefully this process gets less painful as it goes on, and I can close by mid-March. I honestly can’t see myself refinancing again unless rates drop near 0%.