Sylvia and I just refinanced our Austin home. When we bought the home in 2010, 4.75% interest on a 30 year loan was the lowest interest rate we’d ever had on any real estate loan, ever. Yesterday we refinanced at 2.75% for 15 years. Bottom line, this will save us about $40K in interest payments and chop 13 years off the life of the loan. Let’s take a look at some numbers:
|Refinancing from 4.75% 30yr to 2.75% 15yr|
|Old Loan||New Loan||Diff|
The above numbers are taken from my October mortgage statement for the old loan, and the first December payment for the new loan, so they will actually grow more favorable over time.
OK, first let’s look at the bottom right box where you’ll see that our monthly payment increases $444 over the previous payment. I don’t care about that, and neither should you, unless you can’t afford the increase. All I care about is my Net Worth spreadsheet that I update monthly, tracking our progress toward financial freedom aka retirement. Everyone should have one of these spreadsheets and update it monthly. It helps you focus on what really matters, which is the growth of your net worth.
So how can I be adding to my net worth if I just increased my payment by $444 per month? Aren’t I “losing” $444 per month now? I assume most readers (hopefully) think that’s a stupid question after looking at the chart, and you already know the answer. But I’m surprised by the number of otherwise pretty smart people who do in fact think of a monthly payment as just one number. So, the explanation is that the interest portion of the payment decreased drastically (by $420/mo) while the equity paydown portion of the payment increased drastically (by $864).
So, almost the entire extra $444 monthly payment is actually saved with a smaller interest payment while the equity paydown is accelerated and the loan will be fully paid off in 2027 when I’m 65 years old instead of 2040 when I’m 78 years old. This is the $40K in interest savings and 13 year sooner “free and clear” date.
But I want to talk about the concept of “monthly payment” a bit more, because it bothers me that we live in such a payment driven society and that so many consumers, including real estate buyers and owners, think in terms of monthly payment instead of wealth building.
What makes Austin real estate buyers happy? The answer may surprise you. What apparently doesn’t make a buyer happy is a rock bottom price at a 4.37% interest rate. If that was the case, there’d be far less buyer angst and hand wringing than there is now in the Austin real estate market. We’d have far fewer buyers in Austin flaking out on home purchase transactions for no good reason.
No, buyers are happiest in a seller’s market, winning a multiple offer bid-up against 5 competing buyers, and paying 10% over market value at 6.25% interest, and happily covering the appraisal shortage with additional cash at closing. This is not a joke, I’m dead serious. The latter 6.25% buyer feels victorious and ebullient about the purchase. The former 4.37% buyer feels like, perhaps, a mistake was made.
Austin buyers were much happier in 2007, at the peak of the market, when they had a lot less to pick from and had to work a lot harder to find a home. Buyer remorse, buyer finickiness, buyer flakiness, and just plain old cold feet existed to a far lesser degree in the harsher buying environment of 2007 than in the buyer’s dream market of today. Don’t believe me? Go ask any production Realtor in Austin. By “production”, I mean, go talk to Realtors who are busy and closing deals every month, like me and Sylvia. Ask listing agents if it’s a lot harder to get deals across the finish line today than 3 years ago, notwithstanding loan impediments, just purely from a buyer emotion standpoint. They’ll tell you it is and they’ll have stories of buyers backing out for frivilous reasons, or, in some cases, no stated reason at all.
This doesn’t make sense, I know. So what’s going on here? Why all the buyer angst?