How refinancing helped one
homeowner lower his interest rate
and save $70,000
West Virginia homeowner, Kevin B., didn’t sleep well for a long time. He had a good job, good health, and good friends. But he had a bad mortgage.
It didn’t start out that way, of course. When Kevin bought his home in 2007, he got a decent rate and good terms. But because of the housing crisis and slumping economy, Kevin soon got stuck with a rate that seemed higher and higher with every year of lowering interest rates.
“It was tough watching friends get mortgages with interest rates lower than mine,” he says. Kevin was stuck because his property had lost value and he couldn’t refinance – something that happened to many people.
Then, recently, home prices rebounded enough for Kevin to qualify for a refinance. And, with rates still historically low, he didn’t hesitate.
Kevin’s Original Mortgage
Kevin’s initial mortgage was not the simplest thing in the world. He bought a $193,000 condominium in West Virginia in 2007. He took out a 30-year, interest-only mortgage for $154,400, or 80 percent of the purchase price, with an interest rate of 6.5 percent.
The interest-only part meant that Kevin would not be paying off any of the principal for many years and would need to make a balloon payment years down the line. Not exactly sleep-inducing.
Further, Kevin took out a second, variable-rate mortgage to cover the down payment so that he could avoid paying private mortgage insurance (PMI), which lenders make borrowers pay if they put less than 20 percent down on the home. The initial rate on the second loan was 9.25 percent, but he hoped to either pay it off soon or for the rate to go down.
His monthly payment on the first mortgage was $836 and $250 on the second. His total monthly payment was $1,086.
He knew he was taking a risk with his interest-only and variable-rate loans, but he had a plan. “When I purchased the condo, I did not see myself living there for more than a few years. I planned to sell it and buy another home, so I wasn’t too worried about the interest-only mortgage,” he says.
How Refinancing Helped Save Him Money and Sleep
Kevin’s plan to sell his home didn’t work out as the housing market crashed. What happened to so many between 2007 and the 2010s hit Kevin hard. His condo lost value, sticking him with his suddenly less attractive mortgage. “I wasn’t able to refinance because home prices dropped considerably, leaving me upside down on my home. In other words, I owed more than it was worth,” says Kevin.
Finally, in late 2014, Kevin felt that his condo had regained enough value to enable him to refinance. He sought the help of John Wines, sales manager of Atlantic Bay Mortgage Group, a mortgage lender. Wines says that Kevin came to him with three primary goals: Pay off his condo sooner than was now planned, save money, and pay no fees or costs to refinance.
That may sound like a tall order, but Wines says that in Kevin’s case, everything fell right into place.
First, he suggested a 15-year, fixed-rate mortgage. Typically, these mortgages have lower interest rates than 30-year, fixed-rate mortgages, but still result in higher payments because you must pay off the loan in half the time.
However, because Kevin was significantly reducing his interest rate to a low 3.5 percent, his new payment is only $990, about $150 more than his old one.
With the new terms from his refinance, Kevin will pay off his home seven years earlier than originally planned. His first mortgage was set to be paid off in 2037. His new one will finish in 2030.
Kevin still has his second loan, the one he took out to cover the down payment, but the rate on that has dropped to 4.25 percent, with a payment of only $95 a month.
That brings his total monthly payment to $1,085 a month. It’s only $1 less than his original monthly payment, but the total savings go way beyond that.
“True, I pay the same every month, but I am on track to save around $70,000 in interest,” says Kevin. Kevin calculated his savings by taking into account how much he’s already saved by paying off his principal and how much more he’ll save by paying off his mortgage seven years early.
Incredibly, Kevin could have gotten a lower rate and saved even more, but remember, he didn’t want to pay any fees or costs to refinance. “So Kevin took a slightly higher interest rate, about an eighth of a percent, in exchange for a lender credit that pays off the closing costs,” explains Wines.
“Increasing the interest rate by an eighth of a percent only raises the payment by a few dollars a month, but saves me almost $2,000 in closing costs,” says Kevin.
Kevin says his refinance, even though complicated, went really smoothly. It took about three weeks, the paperwork was minimal, and everything was clearly explained.
“The refinance itself was simple. The savings were clear. The most nerve-wracking part of the process was waiting for the appraisal to come back to ensure that the value of my home had increased enough to make it possible. Had the value not come back as much as it did, refinancing would not have been possible,” says Kevin.
The Bottom Line
Kevin’s homeownership journey may not have started out easy, but thanks to refinancing, he’s now able to sleep better at night. He now has peace of mind knowing that he’ll pay off his home 7 years early and as a result, save plenty in interest.