With today's low-again interest rates batting their eyes at me, it's tempting to refinance our mortgage from a 30-year fixed loan to a 15-year -- which is prancing around wearing nothing but 4.5% interest.
But refinancing needs to offer tangible savings to make up for what it costs. To get a 1.25-percentage-point reduction in our current rate of 5.75%, we'd have to pay about $2,500 in closing costs. And because of the shorter term, our monthly payment would increase by $304.
The thing is, our son just turned 3, and my husband and I had the scary realization that college is a mere 15 years away. Wouldn't it be nice to have our mortgage dead and buried by the time he starts freshman English?
Obviously, we can't put off other priorities, such as building up our emergency fund or saving for a looming home repair. Yet, now that I've done the math, it seems equally important to put more aside so we can spare ourselves nearly $100,000 in interest payments.
Of course, I have to be realistic. Money is really tight right now, and we are only halfway to our goal of saving $15,000 in our emergency fund by the end of 2009. Perhaps I need to adjust my goals to be in sync with our current finances. On the other hand, I tend to push harder -- and save more -- when I set the bar high.
We have a couple of options: Spend the money to refinance. Or simply make a bigger mortgage payment each month, a sort of do-it-yourself refi. Which is cheaper?
To run the numbers I used a refinancing calculator and a basic mortgage payment calculator that allows you to see the amortization chart (i.e., how different payments play out over a period of years). Here are the results and the case for each:
| 30-year fixed loan | 15-year fixed loan | Stepping up loan payments | |
|---|---|---|---|
Interest rate | 5.75% | 4.50% | 5.75% |
Monthly payment | $1,050 | $1,354 | $1,354 |
Year mortgage paid off | 2037 | 2024 | 2026 |
Total interest paid | $198,155 | $66,763 | $100,297 |
Refinancing:
- With a 15-year mortgage, we'd save more -- a whopping $131,392 in interest payments, about $33,000 more than what we'd save by paying extra each month under our existing loan.
- We'd be forced to stick to the plan. The disadvantage of a do-it-yourself plan is human weakness. Would we stick to such a big payment ($1,600 a month including escrow) if we had a choice?
- Mortgage freedom comes earlier. If we did a do-it-yourself refi, we'd still be making mortgage payments until our son's junior year and possibly longer (see "human weakness," above).
Stepping up payments on the current loan:
- Doing it ourselves, we'd save about $2,500 in closing costs upfront.
- We would still be spared nearly $98,000 in interest payments over the long term.
- Because it's not a new loan, we wouldn't be locked into a monthly payment increase. If we hit a rough patch, we could scale back.
- There's no additional paperwork!
Our lender made the final call. He said that in order to get the lowest rate on a 15-year loan, we'd have to pay a point -- and it would take many years to recoup all the costs. (Compare mortgage rates.) In his opinion -- as a loan officer, homeowner and father -- the do-it-yourself method would probably be the best compromise between manageable payments now and big savings down the road.
Now the test begins: Effective Nov. 1, we embark on our DIY refi. Follow my progress on the Women in Red message board.
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To save big, budget your actions
Years ago, Paul McCartney wondered whether we'd had enough of silly love songs. Lately I feel that way about budgeting Web sites: Do we really need 60,000 of them?Then again, there's always a need for a fresh take on money management. I just signed up for a new site called Thrive and think it offers an intriguing perspective for those of us who (still) struggle to keep our spending under control. (See "How much you should spend on . . .")
All money management sites are designed to show you how much you spend in certain categories: gas, eating out, etc. Thrive has expanded on this basic functionality by creating a "behavioral budget."
Here's how it works: As with other sites, you set your spending goals for the month ($200 on gas, $400 on groceries, etc.). Then, as the month unfolds, Thrive shows you not just how much money you have left but how many purchases you can make in that category, based on your spending history.
Video: Organic food for less money
For example: My goal for October was to spend $500 on groceries. Based on how often we shop and the average amount we spend per trip, Thrive informed me that we could hit Price Chopper about 10 times.
When I edited my grocery goal down to $400 instead of $500, Thrive allotted me just seven shopping trips.
That was an eye-opener. I knew that we tended toward smaller, more frequent trips. But going to the grocery store so often was probably encouraging us to spend more. How could it not? The most basic commandment of spending control is: Stay out of stores, dude.
What's smart and potentially effective about Thrive's behavioral budget is that it reminds you that a spending plan isn't solely about money but about actions. If you really want to rein in your spending, it helps to get an overview of what you're doing -- then do it differently.
If we organized ourselves to do our food shopping no more than once a week, we'd likely save not only money but a bit of gas and a chunk of time, too. Now that's a valuable gain, financially and otherwise.
Continued: What do women want?
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