Michael & Liz are Bloggable

I don't think I blogged about this back in the Spring of 2010 but I probably should have. I'm a math nerd and when it comes to money and math, I can get pretty geeky. There is very little I enjoy more than a conversation about personal finance, which is why I enjoy listening to Dave Ramsey so much.

Last Spring we took advantage of the low mortgage rates and refinanced from a 30 year fixed to a 15 year fixed. Hindsight is 20/20 I guess because the rates continued to go down even more after we had done it. Nothing I can do about it now, so no biggie.

But today we just got in the mail our tax statements for both mortgages. The 30 year was only 2 months worth of payments and the 15 year was 10 months of payments. I can't help but be amazed at how good of a decision it was to refinance. But I thought I'd let the math do the talking.

30 year fixed for 2 months:
Interest paid: $1400
Principal paid: $350.

Now assuming those numbers for the full year, the next 10 months would have looked like this(I'm probably off by a few dollars, but I'm also rounding so as to make it simple):
Interest paid: $7000
Principal paid: $1750

Now for the fun part, here's the 15 year info for the 10 months:
Interest paid: $5700
Principal paid: $7500

What makes the 30 year mortgage look even worse was that it took us 3 years to pay $6000 toward the principal when in only 10 months we have already paid $7500 toward the principal with the 15 year.

So by doing the 15 year we basically sent $1300 fewer dollars to interest payments and put $5750 extra toward the mortgage. Assuming we sold the house and could get that $5750 back, I'd say that's a savings of $7050 right? (I couldn't decide on this... maybe the $1300 should just be counted as money put towards the $5750 principal... can't decide on that savings. I guess I'll stick with the $7050 number)

Alright for all the math geeks, I'll keep on going.

So we sent $1300 fewer dollars to the bank so we don't get to take that out of taxes. I'm going to assume the absolute worst tax bracket at 35% here (I promise, we are not in that), then we would be losing $455 in our tax refund. So our savings for 10 months is down to $6595.

We are also sending $200 more per month for our payments, so for the 10 months let's take off another $2000 because that's not really saving either, down to $4595.

Now the only thing left to deduct from our savings of  $4595 is how much it cost to refinance, and while I feel like I've revealed enough about our lives here, it didn't even come close to half that amount.

What is nice is that because the principal balance is so much less than it was last year, the savings will just continue to snowball. We'll be paying more to principal and less to interest every year than the year before. When I first started looking at refinancing last January/February, I calculated that by refinancing we'd save just over 30K if we lived here 5 years. That takes into account all the information I logged above too. Although that might seem far-fetched, I also calculated that outside of the price it costs to refinance, we'd save $5200 in 12 months. It looks like my math is going to be pretty accurate!!

The only reason I post this is because I think it's a common myth that having a mortgage loan and sending interest payments to the bank is a good thing for the tax savings. In reality there is very little saving going on in that scenario at all. This may be naive, but I don't look at a mortgage as an asset or an equity builder, but as a bank account. The more I put into it, the more I'll get back later.

I realize there are probably stocks or mutual funds that would get a better return on my money than the amount I'm saving in interest by paying off the mortgage, but there's just something about getting rid the debt and owning more and more of my own home that appeals to me. If I'm going to be sending payments, I want to be doing it as intelligently as possible. I'm forced to do it anyway, so I might as well do my best to control the outcome.