For the past couple of years we have benefited from having an adjustable rate mortgage. Originally we were paying 8.125% and it seemed ridiculous when we saw interest rates plummet but we were still making the higher interest payments. However, due to the nature of it being adjustable, our interest rate did end up going down to about 4.15%. As you can imagine, we were ecstatic! Our minimum payment was virtually cut in half. However, since we don’t like being in debt, we decided to keep paying the larger payment. In fact, we decided to figure out what it would take to pay off our mortgage in 5 years and then started making that payment. It was amazing to see how fast the principal was disappearing and that we were now making some serious headway on becoming completely debt free.
What goes down has the ability to go up
Even though we are planning to pay off our mortgage in the next 5 years, nothing is guaranteed. I am self-employed and my income fluctuates on a monthly basis. My wife is a school teacher and if anything were to happen to her job, our plan to pay our mortgage off early would get tossed out the window. That being said, since we had an adjustable rate mortgage we knew that there was a possibility for interest rates to go up. As you can see from the chart below interest rates went up to over 17% back in the 1980’s. There was no chance that we were going to take that risk.
We chose a 15 year over a 30 year mortgage
We were looking for a way to lock in our interest rate, not decrease our payment. Since that was our objective, it made it easier to choose a 15 year mortgage because the rates were lower. Not only that, but we were able to get our loan at 4% for 15 years with no closing costs (thanks to Jeramy Williams at AmeriFirst Financial). So we got a lower interest rate than our ARM and we didn’t have to pay anything out of pocket.
It wasn’t an easy decision
It was tempting to consider a 30 year fixed mortgage because the payment was naturally lower since it is a longer term loan. My mind wondered and thought of what we could do with the extra cash flow. We could save up for a down payment on a house and turn the condo into a rental. We could use that money to travel to Europe; which is something my wife and I have always wanted to do together. But then I realized, we can already do these things. A 30 year mortgage isn’t the answer to having the things that we want in life. We just need to set goals and than map out a plan to achieve them. That is how we were able to pay off our consumer debt in 18 months, that was how were able to travel to Singapore last year, and that is how we will achieve our goals in the future.
Have you refinanced a home before? How was the decision making process for you?