Hi there, Mrs. 1500 here.
A few months ago, I read this article in the finance section of Yahoo.com. (It is from their First Person series, which gives real life accounts of how people have improved their financial state.) To sum up the article, Allison and Joe were living paycheck to paycheck with $7,000 in credit card debt. They could afford little more than the minimum payment. They had the opportunity to refinance their mortgage, and did so even though they would only reduce their payment by $90 a month. They took this $90 and put it all toward their credit card debt and were able to pay it off in just over a year.
Even just a little bit extra toward a debt can have a large impact. This article illustrates the authors’ positive change in their attitude toward money. They go on to tell how every extra dollar goes toward savings or paying down their mortgage, rather than celebrating a bonus by going out to dinner or drinks.
I really liked this article for two reasons:
1. They took the initiative to refinance their mortgage to get a smaller payment. I think most people would look at the $90 gain and think, I can’t get ahead with only $90, so nevermind.
2. It highlights their determination to pay down their debt. Most people, upon receiving a bonus or unexpected money, take it and spend it on a treat for themselves. (Mr. 1500 works with people who, upon receiving a raise or bonus, promptly spend it on things they do not need and will not enhance their life. These same people also plan on either winning the lottery for retirement, or dying early so they don’t have to worry about it.) In this article, they specifically state that they take any and all extra cash and plow it into their mortgage or savings, rather than going out to eat to celebrate their windfall. What a great choice! While I don’t see anything wrong with going out to an inexpensive dinner to celebrate a raise (a permanent source of additional cash rather than a one-time bonus) I applaud them for taking the extra and putting it in a useful place. If you can live comfortably on $25,000 a year, then when you get a raise to $26,000, take that extra $1000 and put it into paying off debt first, then into savings (until you have a 6-month cushion) and then into paying off your mortgage or investing, depending on your interest rate.
I do have some issues with the article, though.
1. They state they refinanced with their original lender. They don’t go into detail about a search for the best rate. It has been my experience that your original lender does not have the best price, nor anything even close to the best price, but since they didn’t go into detail, I can only hope they did their research and did indeed find the best price.
Mr. 1500 really likes to save a buck. (Shocker!) Why pay more if you can pay less? His search for the best mortgage rate directed us towards Lending Tree (slogan: When banks compete, you win) about 7 years ago. You put your basic information into their site, and banks contact you with their best rates. Todd Bukaty* from National Bank of Kansas City contacted us with the best rate AND the lowest closing costs. We have either refinanced or purchased every year since then, and every single time he has the lowest overall costs.
2. Their rate is in the 5% bracket. Our current rate is in the very low 3% range. (NOTE – This post was written last month, when rates really were in the low 3% range. They are now in the 4% range, but that is still better than 5%. Every little bit helps.) Perhaps they do not qualify for this super low rate, but they do mention that they are going to refinance again soon to take advantage of these low rates. I hope they shop around. You do NOT need to stay with the current mortgage holder. Banks sell mortgages all the time, so you can feel free to shop around and not feel disloyal.
Overall, I feel this article has a positive message: even a small savings makes refinancing your mortgage worth it, and small extra payments can pay down your debt quickly.
*Not only have we used Todd numerous times, we have recommended him to several friends who have also used him. We just purchased home, having finally sold our house in Douglas County. Of course, I called Todd for a quote. My realtor also suggested someone, so I called them, too. The other mortgage guy actually had a 1/4 point lower rate, but his closing costs were $1,600 MORE than Todd’s. At the amount of our mortgage, this makes our payment $10 more a month. It will take us 160 months to make up the difference, and our mortgage is only 180 months long. We will end up paying $200 more over the life of the loan, but we have $1600 extra right now for investing or whatever. (Renovations, because this house is NOT awesome.) But one or two extra payments early in the mortgage will cancel that out.
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My husband used to work in high finance, and neither of us were prepared for bonus season. As you move up the ranks in banking, your bonus becomes a larger and larger percentage of total compensation, and people build their lifestyles around an anticipated bonus. On the years when bonuses don’t meet expectations, it’s a disaster, and people start freaking out about having to take their kids out of private schools and cancelling vacations. I can’t imagine depending on a bonus to fund basic expenses.
My husband’s bonus was 13% of his base, which was standard for his position at the time. I think we used it to finish funding his IRA and put the rest toward paying off my student loan.
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If you quality for Penfed (Pentagon federal credit union) you should check them out as well. We refinanced with them into a 5/5 ARM with very low rates (it runs 3% right now with a max of 2% adjustment every 5 years), with $0 closing costs. This worked great for us because we were planning on paying of our loan in 5 years anyway (which we just did).
At least something to consider.
I am wondering if the couple had too much condo for their income? I am proud of them for paying off their debt…but, wonder what city they are living in? I did enjoy the article though.
Just actually received a small raise. It only amounts to an extra 100 bucks a month, but I am super excited to have that extra to put towards my student loans. It might not seem like a lot but it shaves 4 months off my payment date.
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Hi Mrs. 1500,
It seems the couple has the motivation to change, but might not have the experience or knowledge to make the change optimal. I figure that’s the better pairing, if you’ve got to pick. Better to have the drive and try to pick up the knowledge on the way, than the other way around.
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Sometimes refinancing with your current lender makes a lot of sense even if they don’t offer the very best rate in town. When we decided to refinance, other banks offered a lower rate, but our current lender let us refinance at zero cost to us. Given that we were paying down our mortgage rapidly and that there is always the possibility that we might want to sell or refinance again in the next few years, the no fee refinance was quite attractive.
I haven’t read the article, but if this couple was in a situation like ours or if they simply didn’t have much cash on hand then going with their original lender might have been a good decision. Of course, they should shop around and crunch numbers to verify that before signing any paperwork.