Author Topic: Help thinking through aspects of mortgage refi  (Read 972 times)

engineerjourney

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Help thinking through aspects of mortgage refi
« on: July 17, 2019, 06:35:11 AM »
So we recently purchased a house and owned two houses for three weeks until the other one sold.  I don't think we got an amazing interest rate because of being highly leveraged but interest rates have also dropped a lot since we bought several months ago.  So I am looking into refinancing. 

Current loan is a 30 year at 4.5% with a monthly P&I payment of $2,280.08/month, if we pay on schedule it will cost us $370,830 in interest. 

Looking at either a 30 year with a lower rate/payment or a 20 year with a lower rate/higher payment. 
Option 1: 30 year @ 3.625%, $2043/month ($237/m savings) & $287,520 total interest ($83,310 savings)
Option 2: 20 year @ 3.5%, $2598/month ($318/m more) & $175,573 total interest ($195,257 savings)

We hope to stay in this house for at least 20 years... so the 20 year is very tempting to me for the overall interest savings even though the rate isn't that much better than the 30 year.  I looked at making equivalent extra payments to the new 30 year ($555/m) and it would pay off at 21 yrs, 3 months with $199,741.26 total interest ($171,088.74 savings) so not quite as good as the 20 year but obviously more flexible.  I just don't know if I would actually send the extra money to the mortgage and not invest it or spend it instead... and the 30 year amortization just kills me when I see how little principal you pay for the first like ten years.  Help me think through the perspectives on this, logic, math, feelings, etc and give me your opinion!  Thanks!

ETA: We already max two 401Ks, two Roth IRAs, and a family HSA so further investing would most likely only be taxable
« Last Edit: July 17, 2019, 06:52:05 AM by engineerjourney »

MilesTeg

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Re: Help thinking through aspects of mortgage refi
« Reply #1 on: July 17, 2019, 09:03:03 AM »
So we recently purchased a house and owned two houses for three weeks until the other one sold.  I don't think we got an amazing interest rate because of being highly leveraged but interest rates have also dropped a lot since we bought several months ago.  So I am looking into refinancing. 

Current loan is a 30 year at 4.5% with a monthly P&I payment of $2,280.08/month, if we pay on schedule it will cost us $370,830 in interest. 

Looking at either a 30 year with a lower rate/payment or a 20 year with a lower rate/higher payment. 
Option 1: 30 year @ 3.625%, $2043/month ($237/m savings) & $287,520 total interest ($83,310 savings)
Option 2: 20 year @ 3.5%, $2598/month ($318/m more) & $175,573 total interest ($195,257 savings)

We hope to stay in this house for at least 20 years... so the 20 year is very tempting to me for the overall interest savings even though the rate isn't that much better than the 30 year.  I looked at making equivalent extra payments to the new 30 year ($555/m) and it would pay off at 21 yrs, 3 months with $199,741.26 total interest ($171,088.74 savings) so not quite as good as the 20 year but obviously more flexible.  I just don't know if I would actually send the extra money to the mortgage and not invest it or spend it instead... and the 30 year amortization just kills me when I see how little principal you pay for the first like ten years.  Help me think through the perspectives on this, logic, math, feelings, etc and give me your opinion!  Thanks!

ETA: We already max two 401Ks, two Roth IRAs, and a family HSA so further investing would most likely only be taxable


You'll get many perspectives, many of which will pressure you into the optimum math option.

My perspective is different: When we look at these types of questions to always maximize our financial security which for us means minimizing our monthly debt load more than minimizing absolute cost.

Since the rates are not a lot different, I would definitely recommend the 30 year @ 3.625. It gives you less debt load and a lot more flexibility. That extra $555 of cash flow can easily make more than what you are paying in extra interest vs the other option, or you can pay at a 20 year rate if you prefer. But most importantly if you have a financial stress you have a lot less mortgage to come up with.

If or once you get closer to FI - i.e. the point where you have more assets than debt - you can reassess.

frugaliknowit

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Re: Help thinking through aspects of mortgage refi
« Reply #2 on: July 17, 2019, 09:30:21 AM »
"I don't think we got an amazing interest rate because of being highly leveraged"...

If that was the case, what makes you think you can get 3 5/8% now?  Has this changed?

"We hope to stay in this house for at least 20 years"...

Not likely, based on the masses.  You might want to keep this in mind and run the numbers for a 7-10 year hold...?

Based on your quotes, I would probably go with the 30 year.




engineerjourney

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Re: Help thinking through aspects of mortgage refi
« Reply #3 on: July 17, 2019, 09:56:36 AM »
Thank you both, I was really leaning toward the 20 year yesterday (feelings) but now am swinging more toward the 30 year (logic) so I am interested in seeing if there is any aspects or thought situations I haven't gone through yet. 

Fugaliknowit, I said we were highly leveraged because we were carrying two mortgages when we closed on our current house.  Now we only have one mortgage.  These numbers are quotes from multiple refinance places that I am currently investigating. 

We were in our last house for 8 years and our jobs are pretty much gonna be it (large company with plenty of opportunity).  This new house is in an amazing location and while bigger than I wanted, will be filled with lots of kids so we don't plan to move before they are out of the house.  Definitely a point to consider which would be better in a 7-10 year hold situation though.  But wouldn't that be the 20 year since we would have paid off a lot more principle in 10 years than on the 30 year? 

I believe I am also biased because we refinanced our last house after being in it for two years on a 30 year to a 12 year mortgage at an amazing 2.79% and I looooooved seeing the principle amount lowered drastically every month (more of that feeling justification for ya). 

DadJokes

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Re: Help thinking through aspects of mortgage refi
« Reply #4 on: July 17, 2019, 11:12:46 AM »
Where will the money do more to get you to financial independence?

Let's start with your option 2: $2,598 mortgage payment with the house paid off in 20 years - simple enough. Of course, until the day the house actually is paid off, you haven't bought any additional security, because additional equity in the house would not prevent foreclosure in the event of a market downturn and job loss.

Back to option 1: $2,043 mortgage payment and $555 invested in index funds through a taxable brokerage account. Assuming poor market growth of 6%, you'd still have enough in that account to pay off your mortgage in about 18 years, 8 months - over a year earlier than if you had gone with the 20 year mortgage and the lower interest rate. And that's with horribly low market growth during that time. Additionally, if you find yourselves unable to make payments due to unforeseen financial hardship, you can always withdraw from the brokerage to pay your mortgage and avoid foreclosure.

engineerjourney

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Re: Help thinking through aspects of mortgage refi
« Reply #5 on: July 17, 2019, 01:29:56 PM »
Back to option 1: $2,043 mortgage payment and $555 invested in index funds through a taxable brokerage account. Assuming poor market growth of 6%, you'd still have enough in that account to pay off your mortgage in about 18 years, 8 months - over a year earlier than if you had gone with the 20 year mortgage and the lower interest rate. And that's with horribly low market growth during that time. Additionally, if you find yourselves unable to make payments due to unforeseen financial hardship, you can always withdraw from the brokerage to pay your mortgage and avoid foreclosure.

Ahhh, I hadn't done the math that way yet. Thank you!

DadJokes

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Re: Help thinking through aspects of mortgage refi
« Reply #6 on: July 17, 2019, 01:39:45 PM »
Back to option 1: $2,043 mortgage payment and $555 invested in index funds through a taxable brokerage account. Assuming poor market growth of 6%, you'd still have enough in that account to pay off your mortgage in about 18 years, 8 months - over a year earlier than if you had gone with the 20 year mortgage and the lower interest rate. And that's with horribly low market growth during that time. Additionally, if you find yourselves unable to make payments due to unforeseen financial hardship, you can always withdraw from the brokerage to pay your mortgage and avoid foreclosure.

Ahhh, I hadn't done the math that way yet. Thank you!

You're welcome. Also, that quick calculation doesn't include capital gains tax, so that's something to add to it as well. However, it should still come out better.

engineerjourney

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Re: Help thinking through aspects of mortgage refi
« Reply #7 on: July 26, 2019, 07:40:18 AM »
Just wanted to follow up.  We are in the underwriting stage and went with the 30 year.. and were able to get a rate of 3.375%!!!!  No brainer to do.  Will be saving $300/month and with the closing costs the refinance pays for itself in 16 months! Even paid a little points because the payoff was around 5 years compared to the higher rate which offset some closing costs.  All around super happy.  Highly recommend shopping with First Internet Bank for rates.  Really helpful, not spammy, and the best rates by far at least in my shopping!