My wife and I recently made the decision to refinance the mortgage of the home that we've lived in since 2002.
We're both 46, so what we're doing is admitting that we're not going to be living in the house for the length of the 30-year mortgage. But we decided to refinance in order to make our financial lives much easier for the next decade.
We bought the house for $280,000, putting down $65,000, which came from the house that we sold. But in the past nine years, the value of the home has appreciated, unlike real estate values in many markets. That makes us somewhat lucky. On Monday, we received the appraisal, which valued the home at $368,000. For tax purposes, the home is valued at $386,000.
Currently, we owe approximately $188,000 on our mortgage, and we have $22,000 that we owe on a home equity line of credit.
Our plan is to refinance the mortgage for $245,000, which means we'll be taking about $57,000 in equity out of the home. Some of that money will go to pay for the expenses of refinancing, such as the appraisal, the attorney's fees, the title check and the application fee. But there are plenty of advantages to doing this.
Here's our rationale:
1. Because interest rates are near their lowest in years, we've been able to lock in a 5.25 percent interest rate, down from the 5.87 percent we're currently paying. So while we're starting all over on the 30-year fixed rate mortgage, our monthly payment is actually going to go down slightly.
2. We're going to take the money that we're taking out of the home and pay off some debt, notably the home equity line of credit and some credit card debt. The credit card debt has high interest charges, and we're eliminating about $600 in monthly payments for both of these, freeing up some cash flow for regular expenses.
3. We're going to take the rest of the money and use it help pay for college for our oldest son, who will be a sophomore at his university next year. If you remember an earlier post, we used federal loans to pay for his freshman year. This way he'll have less debt than when he graduates.
We've got another son that's 14. So I'm estimating that we're going to live in this house for another 10 years. By that time, both kids should be out of college and on their own, right? Then we can take the equity that we've rebuilt in the house — and hopefully some more appreciation in value — and use that money to purchase a townhome or smaller home that will fit our changing lifestyle.
Yes, we're lucky. We bought a house nine years ago in a market that has seen a continued demand for homes, and we bought a house that has appreciated almost $90,000 since it was purchased. If we were living in Florida, Arizona, California or another market hurt by the real estate market, we'd be lucky to be in a home that has maintained its value.
Refinancing now is a way to get us through the next 12 months to 24 months without taking on any more outside debt. We're also hoping the economy rebounds in the next few years. I'm in a job where I've not seen a raise in more than three years. My wife has had her salary cut, but still has her job.
But if the economy comes back, we'll both likely see raises, and that will mean that we'll have the money to pay for the next kid to go to college without refinancing yet again.
And it also means that we can delay cleaning out the attic for a few more years.