I read a lot of financial articles and I find it interesting there are a lot of “confessional” types of posts, like “I did this and this was the result” or “What I learned when this happened”. I’m gonna write me one of them post types now.
Usually the author wants to admit a dumb thing they did or reinforce common knowledge on a best practice. I don’t think my story really qualifies for that. Mine is more of a “don’t be afraid” story. A couple of wrong things were done, but in the end, it’s going to work out. Could it have worked out better? If the circumstances were different, sure, but that’s the point exactly, I did what I had to do to make this happen.
This story is all about my house and its financing. On one level, that’s kind of personal information, but on the other hand, being able to share some real-world numbers will add authenticity to the story and can provide a benchmark for others to compare to, for better or worse. If you’re doing better or much better than me, bravo. I’m perfectly fine where I’m at and I’m not going to let a thousand finance articles make me feel bad because I didn’t do it better.
What triggered the decision for this post is the realization that I have less than 10 payments on my 401k loan left – I’ll be done with it at the end of this year. Finance geniuses, go ahead and begin cursing me already. 401k loans are the devil and evil and should never exist and I’m a fool for even taking one out.
Why did I take out that loan? I used it to pay off my second mortgage. When I originally bought the house, we took out 80/20 loans to avoid PMI. More cursing, yeah, yeah. But, by paying off the second mortgage, I reduced the interest I was paying by over 2% and also reduced the term, and also avoided a balloon payment at the end of the term. I will take responsibility for not realizing there was a balloon payment on the second mortgage – go ahead and take your shots on that one.
Aside from the benefits of lowering the interest and term, there was another critical reason for eliminating the second mortgage, refinancing. At the time this was happening, I was divorced, but the house was in both our names. I was making all the payments, so my ex was getting free equity out of the deal. Around that time as well, the real estate market was cratered and HARP was available to refinance those who were underwater. I attempted the HARP route, but my second mortgage made me ineligible. So, there wasn’t any refinance option while that second mortgage was still in play.
After the second mortgage was paid off, my 401k loan payments were about $40 more than my old second mortgage payment. It would still be two more years before I could get an agreement from the ex on buying the house out completely. During that time, I was saving up other money for the buyout and as you would expect, keeping current on my primary mortgage.
When it was time to settle on my buyout, the refinance was greatly simplified because I didn’t have the second mortgage. Additionally, at the time, interest rates were abut as low as they would get. I was able to get a 15-year mortgage with a payment even lower than what I was paying previously. Again, it was an interest drop over 2% and lopped 5 years off my term. By simply paying the same amount I was already paying, that will also take an extra year off the term from the extra principal payments.
It’s been 2 years since I did the refinance and it’s kind of amazing to think there’s only 13 years left, 12 with the extra payments.
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