How I refinanced and saved $200,000

My husband and I weren’t planning to refinance our mortgage.

We already had a great rate at 4.5% and could comfortably afford our mortgage payments.

Plus, we’d just refinanced in 2010, and it was a huge hassle.

After my editor assigned me a story on whether now is the right time to refinance, I did the math to see how much interest I could save by refinancing my 30-year mortgage to a 15-year loan and cutting my interest rate by another 1%.

The answer stunned me: $200,000.

If we could also eliminate the FHA mortgage insurance we were scheduled to pay for the next seven years, we'd save another $12,000.

But could we swing the higher payment in good times and bad?

When you refinance from a 30-year into a 15-year term, your interest rate typically goes down by about 1%, but your monthly payment increases by about 40% because you’re paying down the principal 15 years faster.

And yet you'll save tens of thousands of dollars (or more) in interest by eliminating those years of payments.

Calculate your refinance savings
Suppose you have a 30-year, fixed-rate mortgage of $200,000 at 6% that you took out Jan. 1, 2009. Plug that data into our mortgage calculator, then click the amortization table tab.

By the end of 2013, you had paid $57,122.90 in interest. You'll pay another $174,553.48 in interest over the next 25 years if you keep this loan.

Now, let's do a new calculation where you refinance the remaining principal balance — $186,375.94 — into a 15-year mortgage at 3.5%. On this new loan, you'll pay $53,342.67 in interest over the 15-year term.

Subtract $53,342.67 from $174,553.48 and you'll see that refinancing will save you a whopping $121,210.81. Your new monthly payment will be $1,329.68 instead of the $1,199.10 you're currently paying.

Sometimes refinancing is a no-brainer.

I decided we could swing the higher payment because the increase would be about the same as my "fun money" budget. I would stop buying clothes, restaurant meals and the like if things got tight in order to save a ton in the long run.

And our new monthly payment would be similar to our payment before our first refi. We made those payments on a lower income.

On Jan. 20, I talked to a lender affiliated with Churchill Mortgage, the only lender financial guru Dave Ramsey recommends.

Its rates weren’t low enough. Going from 4.5% to 3.875% wasn’t going to cut it.

Plus, if our home didn’t appraise high enough, we would still have to pay $110 a month in private mortgage insurance.

The lender assured me that if our home’s value increased after our loan closed, we could try to get PMI removed before paying our principal balance down to 80%.

We didn’t want to mess with that.

Next, I used Interest.com’s current mortgage rates search tool to see which lenders had the lowest rates in my area. The first one I talked to offered me 3.375%. If we needed PMI, it would be $80 a month, not $110.

It sounded too good to be true.

I checked out the loan officer and her company by looking up her real estate license and NMLS number. There were no disciplinary actions, and both were authorized to conduct business in my state. I checked out the mortgage company’s reviews on Yelp (mostly very positive) and its BBB rating (A).

The good-faith estimate I received looked good. The lender proposed:

We'd spend a reasonable $1,450 to refinance.

The next step was the appraisal.

People told me only comparable sales, structural integrity and square footage mattered, but I disagreed.

First impressions count, and a tidy home looks better maintained. We wanted our home to appraise as high as possible to avoid PMI.

My husband and his mom went to work sprucing up the outside of our house; I went crazy cleaning the inside.

Fontinelle bath remodel

When the appraiser came Feb. 14, our home looked fantastic. He spent 30 minutes taking measurements and making notes. He asked us what improvements we’d made. We told him what we'd spent on the hardwood floors and the guest bathroom remodel.

Our home appraised for $20,000 above its Zillow estimate. We could avoid PMI if we brought a few thousand dollars to the table.

I emptied the savings account I created specifically for house-related expenses, and we did a cash-in refinance.

Loans got slightly cheaper between the day we applied and the day we locked our rate, so we closed with a lender credit of about $1,240. It only cost us about $1,050 to refinance.

And our monthly payment increased by less than we initially decided we could afford because we did a cash-in refi and closed at 3.375%, not 3.5%.

Here are my tips for successfully refinancing into a shorter-term mortgage: