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I can hardly believe that it’s been three years since we started our personal finance journey (again). In 2015, we had no idea what we were doing. No guidance. No education. No preparation of any sort.
To make matters worse, we had to hit a breaking point before we decided to do something about our debt problem. We had more credit card debt than we could afford to pay back, so we carried a revolving balance for about a year before we finally paid off the balance. Yikes!
I wish I could tell you that was the first time, but it wasn’t.
In 2013, we had a mortgage, student loans, two car loans, and we regularly carried a revolving balance on our credit cards because we used credit cards to finance remodeling projects on our home.
When we realized that our credit card debt was as bad as it was, we looked into a few options to help us eliminate more than $16,000 of credit card debt quickly. Here are some of the options we considered:
- emptying our savings (almost no money in that account);
- taking money out of our retirement accounts (costly penalties and taxes);
- cutting our spending (we did this!);
- selling our stuff (we did this!);
- and refinancing our home to lower our mortgage payment.
What we did with our mortgage was apply for a new mortgage that paid off the original mortgage. We didn’t see any cash from this transaction. Instead, we saw a lower payment for two reasons: 1) lower interest rate; and 2) we had paid down some of the principal.
Refinancing was incredibly confusing to me at the time. Get a loan to pay off a loan?!
Our original mortgage was for $189,000, so the monthly payment was based on that. On top of that, this mortgage (taken out in 2008) had an interest rate of nearly 4.5%.
Cut to 2013 and we had made some progress on the principal, so we owed less than $189,000. And the interest rate that our bank offered us on a new mortgage was lower than the 2008 rate.
Since we had decent credit, we were able to apply for a new mortgage with the intent that we’d use that new mortgage to pay off the original mortgage. Between the lower interest rate and the lower principal, refinancing our mortgage made sense. We completed the necessary paperwork and had ourselves a new loan and a smaller payment.
Refinancing our mortgage lowered our payment by about $240. With our efforts to cut our expenses and lower our mortgage payment, we applied the extra money each month to our debt and eventually paid off our credit card balance.
What we didn’t know about at the time were all the ways in which people used mortgage refinancing. Since we learned more about personal finance, we found out that lower interest rates are often just one of the benefits of refinancing a mortgage. We could have also taken some cash to pay off debt. We could have also adjusted our loan term and taken on a new 15-year mortgage instead of another 30-year mortgage.
Something else we hadn’t considered at the time was another bank. We didn’t check rates at other banks. We just kept using the same bank, so who knows how much more money we could have saved. Resources like LendingTree exist to help people like us compare interest rates, but we didn’t know about them. Who knows how much more money we could have saved!
After reflecting on our decision in 2013, I’m happy with the outcome. Lowering our payment by way of refinancing was the right move for us. We knew that we weren’t staying in that house for much longer, so it didn’t make sense to pay off the mortgage as fast as possible. At the time we had chosen to refinance our home and the way in which we did it helped us achieve our immediate goal: pay off that high-interest credit card debt we carried for WAY too long.
If you think mortgage refinancing might be an option to help you achieve your personal finance goals, consider using this free tool from LendingTree to compare home loan rates.