So why refinance? If your finances looks like mine, refinancing a high interest mortgage is a great way to ease the squeeze on our budgets. Refinancing not only drops our monthly payments but also saves us thousands of dollars in interest over the term of the loan.
One of the great aspects about refinancing is that if your credit is great and the home has a bit of equity as well, a refinance can be used to consolidate some of your other high interest debt as well. This was our goal recently when we decided to refinance both an $89,900 mortgage and a $11,000 equity line which we owed against one of our rental properties.
Here's how the numbers worked for us.
The rental we were interested in refinancing had been already refinanced once before, back in 2010. At that time, the best interest rate we could get was at 7.5%. The principal and interest (PI) payments were $624 a month. Taxes and insurance (TI) were an additional $300 a month for a total payment of $924.
In 2011, this particular rental sustained heavy water damage due to a leaky pipe in the shower stall. We borrowed nearly $11,000 on a personal equity line at 7% to pay for this damage. The minimum payments on the equity line was $195 a month and would take us nearly 18 years to pay off if all we ever made was the minimum payment. The total payment for both of these loans was $1135 a month.
By refinancing, we were able to consolidate both the mortgage and the personal equity line into a 4.1% mortgage. Our payments dropped to $364 a month (PI) and after factoring in the taxes and insurance, the new mortgage payment (which now includes the equity line) is $764 a month. That's a savings of $371 a month.
Along with lowering our payment, we also lowered the overall interest charges by $73,000. And with our new lower payment, we could afford to roll over that $371 a month back into the mortgage which would shorten the term from 30 years to only 14 years, saving us an additional $44,000 in interest. What a deal!
Even though new banking regulations make it tougher than ever to refinancing a rental property, the lower payments and lower interest charges makes the whole process worth it. By refinancing this property and leveraging the savings back into the mortgage, we'll have this property paid off by the time we are ready to retire.
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