The Strickland's case meets all three of these standards. With interest rates so low, a half point -- or 0.65 points in their case -- makes up a bigger percentage of the rate than it did back in the days of double-digit interest rates. The new interest rate will make up for the closing costs and pay for itself in about four years, more than I would prefer, but still reasonable.
Because the Stricklands have 23 years left on their mortgage, I found them loans with lengths of 23 and 25 years. Many people make the mistake of refinancing into another 30-year loan when they are well into their mortgage. That reduces their monthly payment but reduces or eliminates their long-term savings because it stretches the interest payments out over several more years. Bottom line: the Stricklands will save nearly a thousand dollars a year by refinancing, and a total of $18,171 over the life of their new loan.
Refinancing Your Home Equity Line
I also suggested the Stricklands refinance their home equity line. Their case is somewhat unusual because their HELOC was not taken out in conjunction with their main mortgage. They got it later, from a different bank, to finance building a barn on their property. They live in the country and board other people's horses on their land to make some extra money and maintain their agricultural status with the county tax office, which gives them lower property taxes. (Like I said, they are financially savvy and my task was to take their savings efforts to the next level.)
The Strickland's existing HELOC was at Prime Plus two points, in other words, 5.25 percent, and it was structured as an interest-only loan, so they were not required to pay any principal, which worried me. I asked some big banks if they could do better than 5.25 percent and they said "nope," that was the going rate. But then one banker let slip that if the Stricklands belong to a credit union, they might find a good HELOC rate there. They do and they did. Their credit union offers a HELOC at just 3.99 percent. What a deal.
The new loan requires principal and interest payments, so that will keep the Stricklands honest. And let's just say they take 15 years to pay it off. They will save $6,637 in interest with the new interest rate. If you do not belong to a credit union, don't despair. It's much easier to find one that you qualify for these days. Check out the Web site www.findacreditunion.com to get started.
Prepaying Your Mortgage
The savings strategies we've discussed so far are immediate. They will save the Stricklands $16,214 this year, and every year. That's what I mean when I say "Save Big." Woo-hoo! But there's a way for the Stricklands to save even bigger. If they role some of that immediate savings into prepaying their mortgage, their savings can transform from a five-figure number to a six-figure one.