Author Topic: Mortgage length on refinance  (Read 3228 times)

bomburdoo

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Mortgage length on refinance
« on: December 13, 2013, 11:37:16 AM »
Hello Mustachians!

I am refinancing my home and I have hit deciding time.  By refinancing I will reduce my interest rate by about .5%, but I will also eliminate my MIP.  Hooray!  I thought this was all well and good to have a $200 reduction in my monthly mortgage payment.  More to save, right?  My ultimate goal is to live mortgage free.  But then I got to thinking, I would probably continue to pay the same amount I do now, but as extra principal on my payments.  I currently pay $200 as extra principal each month and with this reduction I could pay $400 extra principal each month.  Sounds good, right?  But then I got to thinking, if I'm going to do that maybe I could get a 15-year mortgage instead of a 30.  I had my loan officer run the numbers and it ends up like this:

1. Refinance to a 30-year for a lower monthly payment
2. Refinance to a 20-year for the same as my current monthly payment
3. Refinance to a 15-year for the same as my current monthly payment with the current extra principal I already pay

What say you, Mustachians?  Better to have the flexibility of saving with the 30-year?  Or better to commit to the 15-year and keep paying what I'm already paying?  Thanks for your input!


lm

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Re: Mortgage length on refinance
« Reply #1 on: December 13, 2013, 12:09:47 PM »
I opted for the flexibility,,,,
But then I paid the extra to make it into a 15 year,,,
So far I've been able to do it,,,,
If I can maintain everything at this level it will be ours in about 19 months.

Les

Catbert

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Re: Mortgage length on refinance
« Reply #2 on: December 13, 2013, 12:22:05 PM »
If the interest rate is the same for 30/20/15 year terms then I would go for the 30 year and keep the flexibility to cut back on extra payments.  The harder choice is when 15 year mortgage is a lower interest rate.   

bomburdoo

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Re: Mortgage length on refinance
« Reply #3 on: December 13, 2013, 12:33:08 PM »
The interest rate is less.  30-year would be 4.6%, 20-year would be 4.5% and 15-year would be 3.75%

_JT

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Re: Mortgage length on refinance
« Reply #4 on: December 13, 2013, 12:35:21 PM »
Take the best interest rate. If they're the same, take the longest term. Since you already know you plan to contribute to that level, go with the 15 year.

Cheddar Stacker

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Re: Mortgage length on refinance
« Reply #5 on: December 13, 2013, 12:44:03 PM »
I timed it almost perfectly and got a 15 yr 2.875% rate about 7-8 months ago. I went from 30, down to 20, then down to 15. Each time my payment only increased about $100-150/month because of declining interest rates.

The big difference is in the principal reduction. If you haven't already, run an amortization (excel attachment) of the payments to see the difference in principal after a few years. Even with your extra payments on the 30 year, switching to 15 will get you to $0 principal quicker due to the interest rate reduction.

I say go for 15, and the only drawback is the opportunity cost of investing that extra payment into the stock market.

bomburdoo

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Re: Mortgage length on refinance
« Reply #6 on: December 13, 2013, 12:50:54 PM »
Yes, I did run the scenarios for amortization for 3 and 6 years out.  The 15-year still has the advantage.  I am weighing the option of putting that money into the house or to start investing int he stock market.  I haven't done any investment before so my inclination is to put the money into my home and work on investment with any other savings in the future.

dadof4

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Re: Mortgage length on refinance
« Reply #7 on: December 13, 2013, 12:51:27 PM »
What I'm seeing for comparable closing costs:
30 year fixed - 4.5%
20 year fixed - 4.375%
15 year fixed - 3.5%
5/1 ARM (30 year) - 3.375%

So on a 200k mortgage, you're initially paying another $2000 a year to get that flexibility (15 vs 30 year mortgage). That's pretty steep.

It depends on your strategy.

1. If you plan to prepay that mortgage ASAP, then get the 15 year. Put $400 X 6 months = $2400 extra in your emergency fund.
2. If you plan to keep the mortgage as long as possible, while investing the difference, then go for a 30 year. If you can tolerate the risk, the numbers say you'll come out ahead this way in the long run.

3. Don't get the 20 year mortgage. It isn't worth it in any scenario.

4. If you think mortgage rates are going to stay this low for the next 5 years, and are OK with risk, get the ARM which gives you the lowest overall payment. Invest the rest.

mm1970

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Re: Mortgage length on refinance
« Reply #8 on: December 13, 2013, 09:28:52 PM »
We are refinancing and opted for the 30 year flexibility.