Author Topic: Need advice - Can I afford to refinance to a 15 year?  (Read 9740 times)

davef

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Need advice - Can I afford to refinance to a 15 year?
« on: July 15, 2014, 08:09:04 AM »
Here is my situation.
I am 32 and married (my wife is 29)
I make 86k a year at my primary job and I have consulting business on the side which has brought me 15-25k a year for the past 4 years but is unpredictable.
(note: If by some freak chance I lost my primary job I could do my secondary job full time and make good money, possibly better than I'm making now).
My wife works retail makes about 15k a year and spends the majority of that on clothes and gifts for her insanely large family. We live off of my primary income.

We have 15k in liquid funds between our bank accounts (including emergency find)
we have 23k in an investment account (stocks & bonds)
we have 42k in our 401k.

We have no debt. other than 2 mortgages.
My mother is on a fixed income and I pay her $500 per month but she says she can do without if I ever fall on hard times.

One mortgage is a rental property
It is worth about 200k we owe 68k the payment @ 4.75 is $978 a month including insurance and taxes
we charge 1850 a month inclusive of utilities which are about 250 a month.

Our primary residence is worth about 350K (we owe about 280k) it is currently a 30 year at 4.875% with a payment of $2074 (Taxes are 4700 insurance 601)

here the question...
My credit union is offering me to refinance to a 15 year fixed at 3.25 The payment becomes 2440 a month, interest monthly is reduced by $460. Total closing costs are 3076. so it pays for itself in 10 months.  Should I do it?

Over the past 20 months I have been putting about $900 per month in my investment account.   So I have no worries I can handle the extra $360 monthly with my current income.
The one thing making me hesitant is my tenant is moving out in September and I don't want to be stuck with 3320 in house payments without that income (note: i am debating selling the rental property when my tenant moves out. That neighborhood is starting to decline. 

What do you guys think?

MooseOutFront

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Re: Need advice - Can I afford to refinance to a 15 year?
« Reply #1 on: July 15, 2014, 08:30:36 AM »
I like the idea of trying to refinance a 4.875% mortgage, but I dislike the idea of decreasing your cash flow to do it.  What is the rate and breakeven on a 30yr mortgage?  At your age, I extended my 15 yr to a 30 so that I would have more to invest each month and so that I would have more margin for error in case times ever got tight.

zolotiyeruki

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Re: Need advice - Can I afford to refinance to a 15 year?
« Reply #2 on: July 15, 2014, 08:51:03 AM »
ABSOLUTELY refinance.  Sure, your overall monthly payment will go up, but a much larger portion of that payment will be on the principal, and adds to your net worth.  Status quo has you throwing away $460/month to interest.  Not only will you be converting that $460/mo from interest into net worth, your home will be paid off 15 years earlier, leaving you WAY more cash flow for the next 15 years.

I wouldn't be as concerned as MooseOutFront about your cash flow.  Why?  Because I'm not that different from you.  I'm 33, $86k salary (but no side gig, and wife is a SAHM), paying about $2500/mo in PITI on a house worth a bit over $300k, with no other debt.  Except we have 5 kids.

I think you need to treat the rental property as a business, completely separate from your other income and expenses.  If it's no longer worth your time for the profit you're making, sell it.

JCfire

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Re: Need advice - Can I afford to refinance to a 15 year?
« Reply #3 on: July 15, 2014, 08:58:38 AM »
Here is my situation.
I am 32 and married (my wife is 29)
I make 86k a year at my primary job and I have consulting business on the side which has brought me 15-25k a year for the past 4 years but is unpredictable.
(note: If by some freak chance I lost my primary job I could do my secondary job full time and make good money, possibly better than I'm making now).
My wife works retail makes about 15k a year and spends the majority of that on clothes and gifts for her insanely large family. We live off of my primary income.

We have 15k in liquid funds between our bank accounts (including emergency find)
we have 23k in an investment account (stocks & bonds)
we have 42k in our 401k.

We have no debt. other than 2 mortgages.
My mother is on a fixed income and I pay her $500 per month but she says she can do without if I ever fall on hard times.

One mortgage is a rental property
It is worth about 200k we owe 68k the payment @ 4.75 is $978 a month including insurance and taxes
we charge 1850 a month inclusive of utilities which are about 250 a month.

Our primary residence is worth about 350K (we owe about 280k) it is currently a 30 year at 4.875% with a payment of $2074 (Taxes are 4700 insurance 601)

here the question...
My credit union is offering me to refinance to a 15 year fixed at 3.25 The payment becomes 2440 a month, interest monthly is reduced by $460. Total closing costs are 3076. so it pays for itself in 10 months.  Should I do it?

Over the past 20 months I have been putting about $900 per month in my investment account.   So I have no worries I can handle the extra $360 monthly with my current income.
The one thing making me hesitant is my tenant is moving out in September and I don't want to be stuck with 3320 in house payments without that income (note: i am debating selling the rental property when my tenant moves out. That neighborhood is starting to decline. 

What do you guys think?

I would personally never recommend a 15yr mortgage when a 5/1 ARM or 7/1 ARM is available at the same interest rate.  If you can get a 5/1 for 3.25%, it may be quite interesting for you.  You can save the interest costs for the next 5 years just like the 15yr mortgage, but instead of having less cash to invest in your tax-advantaged retirement account you will likely have more.  For the next 5 years, it's a no-brainer -- saving $450 in interest AND a ~$400 better monthly cashflow than with your current mortgage, put into a 401(k) or IRA (for a ~$100 upfront tax benefit per month plus the long-term benefit of pretax growth) is worth perhaps $650/month, or $55,000 compounded at 7% over the next 5 years.   With the 15yr mortgage your tax-advantaged saving is less instead of more, so instead of that ~$200/mo gain from the tax shelter effect you would have a similar-sized loss.  That's a big impact.

The risk to you is that interest rates may be much higher in 5 years than they are now.  However, that is a much more dangerous risk for a non-mustachian.  Lets imagine that rates increase very dramatically over the next 5 years, to something scary but unrealistic like 10%.  For somebody like yourself with already high monthly savings, good current earnings from diversified sources and likely the potential to be increasing his monthly income, and on top of that a rental property that can be sold in a pinch if absolutely necessary, there's no cause for concern.  If rates are that much higher, either inflation has been high or the economy has been good (or both), and those are both scenarios where it will be easy to sell the rental property for WAY more than it's worth today.  Use those funds to pay off your mortgage, and if by some chance you still owe a bit on your primary mortgage after the rental sale (this is a worst case scenario after all), you can just direct your monthly savings towards paying it down and it will be gone very rapidly.  Certainly it would be gone rapidly enough that even really high interest rates down the road would never eat up your entire $55k interest+tax benefit from the first five years.

I am not a professional or an expert in this field, I'm not a financial advisor or tax accountant or anything like this, and nothing in this message should be construed as tax or financial advice.  Just my two cents on the general situation.

thd7t

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Re: Need advice - Can I afford to refinance to a 15 year?
« Reply #4 on: July 15, 2014, 08:59:48 AM »
Like Zolotiyeriuki, I'm in a very similar situation to you (age, income, savings and investments).  I just refinanced from a 30 year at 5% into a 15% at 3.25%.  I graphed the costs out and looked at when cashflow would be made up and how much I would save.  It was no contest after that. 

frugaliknowit

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Re: Need advice - Can I afford to refinance to a 15 year?
« Reply #5 on: July 15, 2014, 09:03:17 AM »
Does the 2440 payment include re taxes or is that just the mortgage payment?

davef

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Re: Need advice - Can I afford to refinance to a 15 year?
« Reply #6 on: July 15, 2014, 09:36:42 AM »
Thank you for the great replies.
Yes the $2440 includes taxes and insurance.
We have no kids, but 2 dogs which cost me a non-deductable 2,400 a year. (food and vet bills) not to mention in increased cleaning costs.

I have avoided Roth IRAs because I expect to be paying a higher tax percentage after I retire. My consulting business is going to be my retirement, I dont plan on truly retiring, I can work 100 days a year with my own company and make more than I make now and live wherever I want. For that reason I have invested post-tax cash.

I dont worry too much on the cash flow. Considering I could drop the payment to mum if hard times come, and I have a fallback career or 3, (I have two previous employers that would love to have me back) I think its wiser to go a bit risky on this one. 

I will look into the ARM, but I have always been philisophcally against singing a contract that isn't inked in.....


frugaliknowit

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Re: Need advice - Can I afford to refinance to a 15 year?
« Reply #7 on: July 15, 2014, 10:00:15 AM »
I would go for it, with the following adjustment:  Increase your emergency fund by about $12K.  The reason is I think you are 1)  Too light considering you have an investment property with a mortgage and 2)  Your primary residence will cost you about 29% or gross income (figuring about $100k of income) which is kind of tight, so I would reduce your monthly investing to add to cash reserves until they are increased by about 1 year of rental income.

Cheddar Stacker

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Re: Need advice - Can I afford to refinance to a 15 year?
« Reply #8 on: July 15, 2014, 10:22:14 AM »
You can afford to, but I'm not sure that it's your best option.

I'm a serial re-financer. I went from 6.375% to 5.375% to 3.875% (20 yr) to 2.875% (15 yr). My payments only went up about $100/month on the last two and the interest savings/principal paydown was crazy so it was an easy decision.

I'm also in the "keep long-term debt and invest the extra" camp, and a $400 increase in your monthly cash outflow is no small amount. I would look into the Arm as JCfire suggested, and I would look into a 20 year or 30 year refi as well. Run the numbers on all 3, put any extra cash flow into the market, and calculate which way comes out ahead in 5 years assuming a 7% return on investments.

I'm unfamiliar with Arms so I have nothing to add there. However, MooseOutFront is a banker so he may have some insights for you on that. I know I'm curious about the strategy JCfire recommended.

Exflyboy

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Re: Need advice - Can I afford to refinance to a 15 year?
« Reply #9 on: July 15, 2014, 10:25:28 AM »
Hate to be blunt or unfeeling here but.. well you DO have the $500 your giving your Mother.. And she sas she doesn't need it.

Soooo.. Why are you giving to her?

Frank

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Re: Need advice - Can I afford to refinance to a 15 year?
« Reply #10 on: July 15, 2014, 10:30:53 AM »

I have avoided Roth IRAs because I expect to be paying a higher tax percentage after I retire. My consulting business is going to be my retirement, I dont plan on truly retiring, I can work 100 days a year with my own company and make more than I make now and live wherever I want. For that reason I have invested post-tax cash.


Is that what you meant to say?  If you expect to be in a higher tax bracket after retirement wouldn't you WANT to be using a Roth now?

davef

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Re: Need advice - Can I afford to refinance to a 15 year?
« Reply #11 on: July 15, 2014, 10:33:27 AM »
The rate of a 30 year fixed is 4.25% not even worth considering. 
The market is as high as its ever been right now. Isnt a guerenteed 4% return is better than you can expect in the market at this point. My investments YTD are basicly flat.
I consider my investment account a serious emergency fund of sorts. I can cash out at any time I'm not going to leave 25k in an acocunt making .1%

My mother is on a fixed income of $1200 per month from SSI and a bit from her 401k, she works at a shelter as a volunteer and makes next to nothing. Her house is paid off, so she can live on that income but not comfortably. As long as I can afford it, I will pay it.

davef

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Re: Need advice - Can I afford to refinance to a 15 year?
« Reply #12 on: July 15, 2014, 10:36:51 AM »
If my understanding of Roth IRAs is correct then yes.

I'd rather pay the tax now while I am only paying about 18% than when I am old and will be paying 30% or more.
I was under the impression that a Roth is for people that expect to retire and reduce their income and tax liability in old age. Not the case for business owners.

boarder42

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Re: Need advice - Can I afford to refinance to a 15 year?
« Reply #13 on: July 15, 2014, 10:40:55 AM »
you have to refi that.  you are paying 400 bucks more a month and gaining 800/month more in equity.  to me this is a no brainer.  but i would look for a no cost refi.  i have refi'd 4 times and never paid a dime not even for the appraisal.  this is like a 200% return on your investment. 

Cheddar Stacker

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Re: Need advice - Can I afford to refinance to a 15 year?
« Reply #14 on: July 15, 2014, 10:47:56 AM »
The market is as high as its ever been right now. Isnt a guerenteed 4% return is better than you can expect in the market at this point. My investments YTD are basicly flat.

The market is almost always at an all time high. Poke around in the investor alley section. There's a thread about this every day. Also search around for "should I pay off debt or invest" which is a very common question around these parts. There are people in both camps. You are correct that the 4% is guaranteed, but I don't think it's better than what you can expect in the market. To each their own though, it's a personal decision.

My mother is on a fixed income of $1200 per month from SSI and a bit from her 401k, she works at a shelter as a volunteer and makes next to nothing. Her house is paid off, so she can live on that income but not comfortably. As long as I can afford it, I will pay it.

Very commendable. Good for you.

If my understanding of Roth IRAs is correct then yes.

I'd rather pay the tax now while I am only paying about 18% than when I am old and will be paying 30% or more.
I was under the impression that a Roth is for people that expect to retire and reduce their income and tax liability in old age. Not the case for business owners.

Roth's can be great, but tax deferral is very powerful. Commonly suggesting reading on this topic:

http://www.gocurrycracker.com/never-pay-taxes-again/
http://www.gocurrycracker.com/the-go-curry-cracker-2013-taxes/
http://www.madfientist.com/traditional-ira-vs-roth-ira/
http://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/
http://www.madfientist.com/roth-ira-horse-race/
http://rootofgood.com/make-six-figure-income-pay-no-tax/

Whatever you do on the refi, familiarize yourself with the above posts and ask questions if you don't fully understand everything. This is a very powerful strategy.

boarder42

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Re: Need advice - Can I afford to refinance to a 15 year?
« Reply #15 on: July 15, 2014, 10:55:12 AM »
if your investments YTD are flat you're invested improperly. you should be up around 5% give or take

Cheddar Stacker

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Re: Need advice - Can I afford to refinance to a 15 year?
« Reply #16 on: July 15, 2014, 10:57:20 AM »
if your investments YTD are flat you're invested improperly. you should be up around 5% give or take

+1. I meant to write that as well. I'm up over 5%, and I'm sure there are many others here who are up 10% or more.

davef

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Re: Need advice - Can I afford to refinance to a 15 year?
« Reply #17 on: July 15, 2014, 11:09:57 AM »
Well, My Biotech mutual fund got hit hard, that is why I am flat.... Still I think ill take the 4% guarneteed here and continue to invest future cash. I still should be able to put about $500 per month into my investment account with the higher payment.

Where did you find a no cost refi?

Cheddar Stacker

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Re: Need advice - Can I afford to refinance to a 15 year?
« Reply #18 on: July 15, 2014, 11:30:35 AM »
Well, My Biotech mutual fund got hit hard, that is why I am flat.... Still I think ill take the 4% guarneteed here and continue to invest future cash. I still should be able to put about $500 per month into my investment account with the higher payment.

Where did you find a no cost refi?

I didn't post that but I've done it before so I'll respond. Just ask the banker to see if it's an option. Many banks will do this in exchange for a slight change in the interest rate. You have to weigh which option is better based on your circumstances. If you plan to keep the same mortgage for a long-time it would likely be better to take the lowest rate possible and pay the fees. If it's short-term, take the no cost with 0.125% higher interest.

JCfire

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Re: Need advice - Can I afford to refinance to a 15 year?
« Reply #19 on: July 15, 2014, 11:53:13 AM »
I'm also in the "keep long-term debt and invest the extra" camp, and a $400 increase in your monthly cash outflow is no small amount. I would look into the Arm as JCfire suggested, and I would look into a 20 year or 30 year refi as well. Run the numbers on all 3, put any extra cash flow into the market, and calculate which way comes out ahead in 5 years assuming a 7% return on investments.

I'm unfamiliar with Arms so I have nothing to add there. However, MooseOutFront is a banker so he may have some insights for you on that. I know I'm curious about the strategy JCfire recommended.

The +$400/mo cashflow from a 5/1 ARM is actually relative to his current 30yr fixed -- basically the interest savings all go into cashflow since the term of the loan is the same.  Relative to the 15yr fixed, the cashflow difference is about double that (+$800/mo).

Just as important, in the OP's case it's not really about comparing assumed investment returns to mortgage interest rates, even though it is very nice that 7% > 3.25%.  The bigger benefit is that OP can avoid a ton of tax this way because it doesn't appear that he's currently maxing out all his tax-advantaged accounts.

boarder42

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Re: Need advice - Can I afford to refinance to a 15 year?
« Reply #20 on: July 15, 2014, 12:42:57 PM »
yeah its an 8th higher usually.  but when that cost over 15 years on my house was less than upfront buying the 8th off of him.  or anywhere else i could find.  also had i actually paid for each refi i would be way behind b/c i would have 9-12k i would have to make up rather than just being able to easily adjust down when the rates got better.

and yeah i'm up over 5% too... just was shooting low end.

davef

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Re: Need advice - Can I afford to refinance to a 15 year?
« Reply #21 on: July 15, 2014, 04:12:15 PM »
Well the rates went up across the board the past few days. But I just locked a 5/1 Arm at 3.625 with no out of pocket costs. My payment will drop to 1750

easton

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Re: Need advice - Can I afford to refinance to a 15 year?
« Reply #22 on: July 15, 2014, 11:01:54 PM »
For those of you that don't know, Pentagon Federal has probably the best adjustable rate mortgage products out there. Their 5/5 ARM is an awesome product. Currently sitting at 3.25% for first 5 yrs, and can adjust max of 2% upwards once every 5 years thereafter to a max of 5% above the initial rate (so max of 8.25% after 20 yrs). I refinanced to this a little over a year ago at 2.875% and the amount of time it would take for a 30 yr mortgage at ~4.25% to make more sense was something on the order of 13-14 yrs. The 5/5 ARM also has no closing costs other than escrow which you have to pay anyways. If you are going the adjustable route, definitely go with Pen Feds 5/5 ARM. I would totally "unlock" and ditch the 5/1 ARM at 3.625 if you read this post in time and go to the 5/5 ARM at 3.25%

https://www.penfed.org/55-Adjustable-Rate-Mortgage/?WT.ac=1021

If you want the full low down on Pen Fed, check out an in depth blog post I did last year when I refinanced. http://www.moneyandpotatoes.com/refinancing-my-mortgage-with-pentagon-federal/

« Last Edit: July 15, 2014, 11:26:46 PM by easton »

JCfire

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Re: Need advice - Can I afford to refinance to a 15 year?
« Reply #23 on: July 16, 2014, 06:22:40 AM »
Well the rates went up across the board the past few days. But I just locked a 5/1 Arm at 3.625 with no out of pocket costs. My payment will drop to 1750

Nice!  Enjoy watching that money hit your 401k/IRA/HSA/etc!

Cheddar Stacker

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Re: Need advice - Can I afford to refinance to a 15 year?
« Reply #24 on: July 16, 2014, 07:24:04 AM »
Well the rates went up across the board the past few days. But I just locked a 5/1 Arm at 3.625 with no out of pocket costs. My payment will drop to 1750

Nice!  Enjoy watching that money hit your 401k/IRA/HSA/etc!

+1.

Great job at optimising your situation davef.

Great idea JCfire.

hybrid

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Re: Need advice - Can I afford to refinance to a 15 year?
« Reply #25 on: July 16, 2014, 07:38:17 AM »
Another consideration is how long you intend to stay in this house. Oh sure, lowering your interest rate will save you money, but you have to recoup the closing costs before that happens. You are dropping a nice but not crazy amount of interest rate, so there is a time factor to consider. If you at all think you may be moving in the next three years I would say nah, be happy with that sub-5 rate you are paying (you can always prepay the principal after all) and avoid the hassle.

Having said that, I did refi from 4.375 to 3.25 a few years ago, but I used CapCenter, where there are no closing costs (you can opt to pay points to lower your rate). Those folks are great. You don't get the very best rate possible, but the no closing costs makes it a no-brainer. I know lots of folks who have benefited from their services, very highly recommended if you are in VA or NC (sorry OP).

https://www.capcenter.com//default.aspx?si=11

Regarding your Mom, fairer to say you gift her the money each month or does she provide a service (like child care) of some sort? Very nice that you can do that.

davef

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Re: Need advice - Can I afford to refinance to a 15 year?
« Reply #26 on: July 16, 2014, 05:17:16 PM »
Thank you Easton, I got a GFE quote from penfed and levereged the original lender to do the 5/1 arm at 3.125 (also a max of 2% change but annualy after 5)
I'm sure I am selling before 6 years anyhow, and I had already paid for an appraisal.

easton

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Re: Need advice - Can I afford to refinance to a 15 year?
« Reply #27 on: July 16, 2014, 05:25:44 PM »
Glad I could help davef! Yea if you are moving in 6 yrs or less it really won't matter between the two. Glad you were able to use the Pen Fed GFE to get your rate reduced, smart thinking!

Cassie

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Re: Need advice - Can I afford to refinance to a 15 year?
« Reply #28 on: July 16, 2014, 05:41:34 PM »
I think it is wonderful that you are helping your Mom!  She does not have much $ to live on.  You sound awesome!

Sand Dreamer

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Re: Need advice - Can I afford to refinance to a 15 year?
« Reply #29 on: July 16, 2014, 08:47:27 PM »
I refinanced from a 30yr to a 20yr...saved a lot of interest, but it also didn't jack my payment up too much. I don't think a lot of people ever think about the 20yr term.  At least I rarely see it mentioned.  It may be a good way for you to win on both sides of the equation.

Also, I think it is awesome what you are doing for your mom. 

Sand Dreamer

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Re: Need advice - Can I afford to refinance to a 15 year?
« Reply #30 on: July 16, 2014, 08:55:53 PM »
Something else I forgot to mention...My mortgage is with my local credit union and when I went to refi the loan officer mentioned they could restructure my loan for $500.00 dollars as opposed to the refi with all the closing cost and inspections. I have over 50% equity in the home and have no type of financial  hardship, this was something that they offered to do. Honestly I signed some papers and went from the 30yr to 20yr and lower rate basically over night. So I wouldn't hesitate to ask your bank/CU about that as a possible option.

SDREMNGR

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Re: Need advice - Can I afford to refinance to a 15 year?
« Reply #31 on: July 16, 2014, 10:26:18 PM »
I would refinance or restructure if that is an option.  The cost savings is more than sufficient to warrant the refinancing fee.  Your income is more than sufficient to handle the increased cash flow burden and your wife can learn to sacrifice a bit and stop being a negative help to your common financial picture.   She does not sound very Mustachian.

Good for you for helping to support your Mom.  That's a good thing. And if you really got into a cash crunch, you could pull back on that.

Lastly, at your income level, you really should have more savings.  Not sure who is spending the money but someone is.  Cut that out.

Good luck.

SDREMNGR

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Re: Need advice - Can I afford to refinance to a 15 year?
« Reply #32 on: July 16, 2014, 10:29:03 PM »
Also, I can't believe people are doing 5/1 arms again after what happened only 6 years ago.  Short term memories...

Stick with the 15 fixed.  No one regrets having paid it off early?

JCfire

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Re: Need advice - Can I afford to refinance to a 15 year?
« Reply #33 on: July 17, 2014, 11:41:43 AM »
Also, I can't believe people are doing 5/1 arms again after what happened only 6 years ago.  Short term memories...

Stick with the 15 fixed.  No one regrets having paid it off early?

Anybody who had a standard 5/1 ARM 6 years ago was better off because of it -- their mortgage rates reset lower, often quite significantly lower, when the crisis hit.  The problem loans you are remembering are very different from the kind of 5/1 that you, I, or the OP could apply for today.  They had "features" like teaser rates and initial negative amortization periods which led to monthly payment increases down the road.  Nobody who was making a full principal and interest payment on a standard 5/1 ARM saw their mortgage rate increase when it reset.

In addition, the OP's strong net worth and cashflow savings position means that if rates are way higher 5 years from now, he will have no trouble paying off the mortgage in a lump sum if necessary, as explained above.

Hope this helps clear up my thoughts on 5/1 ARMs, including the ones I used to finance my current and my prior home.

JCfire