Here’s the story of how one homeowner refinanced her mortgage and as a result, will save tens of thousands of dollars in interest and shave years off her mortgage.
How a homeowner saved with a refinance in 2014
Lisa Bailey always knew she wanted to refinance her home, but the timing was never right until 2014. In fact, she wasn’t a likely homeowner to begin with.
When Bailey, who is 48 and works as an accountant, bought her home in Aurora, Colorado in 2006, she says her credit score was lower than ideal.
“I had lots of student debt, a couple of credit cards, and a car loan,” she explains. “The lender managed to get me a loan, but my interest rate wasn’t great.”
How was she able to qualify for a mortgage? Bailey says despite her debt, she had a steady job for six years at the same firm as well as a history of paying bills on time.
“Plus, I had no bankruptcies or foreclosures to my name, and I wasn’t late on any of my payments,” Bailey adds. This helped reassure lenders of her good intentions to pay on time and keep up with her financial obligations.
Buying Her Home
Bailey’s house hunt began online, where she first saw her home advertised – a 1,458 square-foot townhouse with two bedrooms and three bathrooms for sale at $224,850.
“I just fell in love with it before I even saw it in person,” she says.
Her appreciation of the home grew deeper when Bailey finally took a tour of the house.
“I loved the ranch floor plan, and the house has central air conditioning, a gas fireplace, and a massive walk-in closet in the master bedroom,” she explains.
And that was a lot more than Bailey was originally hoping for. “I really just wanted a deck and a patio, both of which the house has, too, but other than that, I wasn’t really looking for any features in particular,” she explains.
After the tour, Bailey decided she wanted to put an offer on the house right away.
“I had been to a lender the month prior and was pre-approved for up to $230,000, so the house was just under my top limit,” she says.
Bailey closed the deal in July 2006, taking out a $202,000 30-year fixed-rate mortgage at 6.76 percent and putting down $23,000 – just over 10 percent down.
“I knew anything under 20 percent would mean I’d have to pay PMI, but it took me almost eight years to save that much money for a down payment, and I didn’t want to wait eight more to own a home,” Bailey explains.
Paying Off Other Debt
While she was happy about her home purchase, Bailey says her monthly mortgage payments were high.
“Including PMI, taxes, and insurance, I was paying $1,705 a month,” she explains. “Doable, but very tight for a single person.”
While the mortgage was on her mind at all times, Bailey says paying non-mortgage debt had to take priority.
“The interest rate for my credit card debt was obviously higher, so it just made sense to focus on that first,” she says.
Over the following few years, Bailey worked hard to clear her credit, paying off old debt in small amounts whenever she could.
“It might not seem like it, but $30 here and $50 there add up to a lot,” Bailey explains.
When an aunt passed away and left her $7,000, she put all of it towards her credit card debt.
“It was a huge help, and it did wonders for my credit score,” she says.
But once Bailey took care of her consumer debt, she set her sights on saving money on her mortgage.
Deciding to Refinance
By 2014, Bailey knew she needed to refinance. “I’d been following the news and knew interest rates had already hit their lowest point and were starting to go up again,” she says. “I just wanted to take advantage of it while it was still possible.”
Bailey used the same lender instead of shopping around, because she says that she simply trusted him. So with the help of her original lender, Bailey was able to refinance in February 2014 with a new 30-year fixed rate loan for $211,000 at 4.3 percent, more than two percentage points lower than the rate on her original loan.
According to Bailey, her refinance brought her monthly payments down to $1,311. However, Bailey adds that she’s already used to paying $1,700 a month, so she plans to continue to make the same payments every month.
Thanks to refinancing, that extra $400 a month means Bailey will finish paying off her mortgage in 2031, instead of 2036.
“While I can’t afford to pay any more money right now, I might consider refinancing again in the future to get rid of PMI, switch to a shorter mortgage, or get an even lower interest rate if they come around,” Bailey says.
But for now, Bailey says she’s happy with how much money the refinance is saving her every month. Plus, refinancing will save her almost $73,000 in interest over the life of the loan, she says.
“And this is despite the fact that I got another 30-year loan instead of a shorter one,” she says. “I couldn’t believe the difference when my lender told me.”
Still, Bailey says refinancing only makes sense if you really understand what you’re doing. “For example, I had to come up with an extra $2,500 for closing costs and I didn’t have it, so had to borrow from my brother,” Bailey explains.