May 8, 2020

Refinancing my mortgage didn’t lower my monthly payment by much, but it saves me $50,000 and gets me 2 years closer to debt freedom

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  • When the Federal Reserve dropped the federal funds rate target to zero in March 2020, the average interest rate fell to a record low.
  • As interest rates fell, I jumped at the opportunity to save on my mortgage.
  • Instead of opting for the lowest-possible payment on a 30-year loan, I took a slightly higher payment and shortened the term by two years.
  • Read more personal finance coverage.

The world changed rapidly in March. While it feels like an eternity, just eight weeks ago most of the United States was only just realizing the seriousness of COVID-19. As financial markets began to seesaw, the Federal Reserve dropped its target interest rate to zero.

While my savings account rates fell, so did mortgage rates. My loan was just three years old, but still I decided the time was right to refinance. When I did, I lowered the term of my 30-year loan by five years, which effectively cut two years off of the life of my mortgage. 

Here’s how it all happened and why I decided to go with a less-common 25-year loan term when I refinanced.

My COVID-19 mortgage refinance

My old loan was a regular old 30-year fixed-rate mortgage. I bought my home in the summer of 2017 and had to jump through a few hoops to get a mortgage as a relatively new full-time freelancer. 

With just a year of full-time income under my belt, my wife and I had to scramble to find a bigger down payment if we wanted to buy the home we had in mind. Based on one part-time year and one full-time year of self-employment, the maximum loan we qualified for left us a little short.

With a bigger down payment, our monthly payment would come into the range that the lender would approve. Thanks to quite a bit of savings and real estate success with homes we’ve owned in the past, my wife and I were able to make it all work.

We made that monthly payment as planned for nearly three years before rates dropped in March. Rates fell enough that we decided to lock in a lower rate. With four years of self-employment, getting approved for my new loan was a breeze compared to last time around.

Easy approval also gave us some options as to how we wanted our new loan to come together. We didn’t need or want a cash-out refinance. That left us with two choices for how to proceed.

Choosing between a lower payment and a shorter loan duration

With no cash-out, we had the choice between a lower payment with a new 30-year loan or a similar payment with a 25-year loan. Because we are not having any trouble with our monthly payment, we decided the best way to go was a shorter duration.

The math came out to a monthly payment of about $150 lower per month with a 30-year loan or $50 lower per month with a 25-year loan. The lower payment and lower term seemed like a win-win. We would trim two years off of our loan and cut our payment at the same time.

We decided to include the fees in the refinance and ended up getting about $700 back when our loan settled. Our loan balance did go up, but only by a small amount compared to the loan balance and lifetime interest.

The new loan has a 3.25% interest rate, which would have been the same for either loan. That’s a full 1% lower than our old 4.25% 30-year loan. Assuming we make the minimum payment every month, we will save about $50,000 over time.

I’m two years closer to debt freedom

While I could have given myself a little more financial wiggle room every month with a lower payment, it wasn’t a significant enough savings for us to give up the benefit of being closer to debt-free.

Who knows if we will still live in this house 25 years from now. But assuming we still call it home and don’t make extra payments between now and then, in 2045, we will celebrate being debt free.

By Eric Rosenberg

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