Author Topic: Question about 30 vs 15 mortgage with low interest rate  (Read 4788 times)

RavensBrew

  • 5 O'Clock Shadow
  • *
  • Posts: 26
Question about 30 vs 15 mortgage with low interest rate
« on: July 16, 2014, 08:01:24 PM »
I currently own a house with a 30 year mortgage (28 years left) at 3.25%. I'm wondering if would be worth it to refi (probably to around 3.25 to 3.5%) to a 15 year loan or if it would be better to take the cash of the lower payment and invest it. It would probably take me a year and half to two years to save enough cash to refi with 20% down (20%=60k, currently have 30k in cash). My payment would raise approximately 500 a month. That's 50k (60k - 10k emergency cash on hand) plus 500 a month I could be investing at a much higher rate than 3.25%. But the principal savings would be signifigant over the 15 year savings. Maybe around 150k. I guess I should run the numbers to see if my investments would earn that 150K or more in that same time frame.

Anyone have any experience with this dilemma?

Thanks you!

briandougherty

  • 5 O'Clock Shadow
  • *
  • Posts: 61
Re: Question about 30 vs 15 mortgage with low interest rate
« Reply #1 on: July 16, 2014, 08:08:08 PM »
Did you mean your 30 year is a 4.25%?   If the 15 and the 30 are both a 3.25 then don't refinance, take the lower payment as a buffer and pay the 15 year amount if you want.


Whether or not you pay extra is about personal preference.  A lot of MMM folks rightly say that you are very likely to make more than 3.25% in the market and would say to invest all you can and keep the mortgage around.  On average this is true but I fear the downside risks of what would happen in a bad economy.  I'm also not willing to take out all loans I can get at 3.25% to invest just because it's likely to make more over the long term.

horsepoor

  • Magnum Stache
  • ******
  • Posts: 3177
  • Location: At the Barn
  • Horses: for sanity & poverty!
Re: Question about 30 vs 15 mortgage with low interest rate
« Reply #2 on: July 16, 2014, 08:38:09 PM »
Unless there are prepayment penalties, why not just pay extra on your current mortgage?  Refinancing costs thousands. 

I'm also confused about the 20% down thing - are you currently underwater on your house?  You just need 20% equity, you don't need to bring 20% of the loan value in cash for a refi.  There's no way to know what the rates will be by the time you've saved the additional cash anyway.

RavensBrew

  • 5 O'Clock Shadow
  • *
  • Posts: 26
Re: Question about 30 vs 15 mortgage with low interest rate
« Reply #3 on: July 16, 2014, 08:51:47 PM »
Did you mean your 30 year is a 4.25%?   If the 15 and the 30 are both a 3.25 then don't refinance, take the lower payment as a buffer and pay the 15 year amount if you want.


Whether or not you pay extra is about personal preference.  A lot of MMM folks rightly say that you are very likely to make more than 3.25% in the market and would say to invest all you can and keep the mortgage around.  On average this is true but I fear the downside risks of what would happen in a bad economy.  I'm also not willing to take out all loans I can get at 3.25% to invest just because it's likely to make more over the long term.
Did you mean your 30 year is a 4.25%?   If the 15 and the 30 are both a 3.25 then don't refinance, take the lower payment as a buffer and pay the 15 year amount if you want.


Whether or not you pay extra is about personal preference.  A lot of MMM folks rightly say that you are very likely to make more than 3.25% in the market and would say to invest all you can and keep the mortgage around.  On average this is true but I fear the downside risks of what would happen in a bad economy.  I'm also not willing to take out all loans I can get at 3.25% to invest just because it's likely to make more over the long term.

Welp, both of you just posted things that I hadn't considered and that are extremely helpful. Thank you! I guess that's why we come here.

Yes- my current 30 year loan is only 3.25%. I hadn't considered just prepaying rather than refiing. That would save my low rate and save from the refinancing fees as well. According to Zillow (maybe not the best barometer) my house is valued at 90k (!!!) more than my mortgage. (guess I should have bought 10 or 20 houses in the neighborhood at the same time LOL). I've actually owned the house for 5 year but refied from a 5% rate to a 3.5% rate two years ago. I'm not sure I could even refi at 3.25% for a 15 year anymore so I would hate to lose that low rate. It sounds like their is no need to!

Now I need to run some numbers to see what financial benefits I could get from a certain amount of prepaying vs investing in taxable funds.

Thank you!

CaptainFrugal

  • 5 O'Clock Shadow
  • *
  • Posts: 6
Re: Question about 30 vs 15 mortgage with low interest rate
« Reply #4 on: July 16, 2014, 09:17:54 PM »
If you intend to stay in the house for a long time I would try to get rid of PMI right away.

Refinancing does not have to be expensive. We just did a refi to both lower our rate and remove PMI since our equity had risen over 20% due to increased RE prices in the area. Total costs were $400 appraisal, ~$100 in recording fees and $920 title service. We paid no points or origination fee. The PMI savings alone in about ten months will pay the entire cost of refi plus we reduced our interest rate from 4.60% to 3.00%.

If you're disciplined enough to invest the difference between a 15yr and 30yr payment then definitely go with the 30yr plus it sounds like you can dump PMI at this point. I always recommend the 15yr to non-Mustachians as few people have the discipline to actually save the difference.

I have never understood the logic behind "paying extra on the mortgage". They don't re-amortize the loan, so you're just giving the bank an interest free loan on the side. Why not save the money in an investment account and just pay off the mortgage when your investment balance is high enough?

« Last Edit: July 16, 2014, 10:05:57 PM by CaptainFrugal »

SDREMNGR

  • Bristles
  • ***
  • Posts: 324
Re: Question about 30 vs 15 mortgage with low interest rate
« Reply #5 on: July 16, 2014, 10:05:35 PM »
It makes zero sense to refinance to the same or higher rate loan with shorter term. You are paying money to the lender to force you to pay more each month.  I hope you see this.

I personally am a fan of the 15 year over the 30 year because of the lower rate. But since you already have a good loan, you can pay faster or just leave it alone and invest elsewhere. Either real estate or stocks.   But for god sakes, do not refinance.

Personally, I would max out all pretax investing vehicles like 401k, tIra or Roth Ira (read the mad fientist blog) and only if you have money left over, look to pay down additional principal on your mortgage or save money for new real estate investments.  I invest into taxable account stock etfs for down payment money for real estate purchases.

SummerLovin

  • 5 O'Clock Shadow
  • *
  • Posts: 63
Re: Question about 30 vs 15 mortgage with low interest rate
« Reply #6 on: July 16, 2014, 11:06:16 PM »
Run the numbers first.  I would not refi for the same interest rate, just make extra payments to principle.   IF you are paying PMI, I would pay to have a market assessment to remove it pronto. Based on the increase in market value, your LTV should be greater than 20%.  The assessment should be 400-800 USD depending on location.  Contact your mortgage lender to find out the next steps,  as sometimes you don't even have to pay out of pocket, they add it to your loan.
Then take the money you are saving on PMI, and put that towards the principle, and invest any extra, assuming you are already maxing out retirement contributions. 
Personally, I do a hybrid of paying down mortgage and investing.  I refinanced from 5.8%/30yr to a 3.5 %/15yr. I was already paying an extra $200 on principle, but the refi saved me the same amount, so I used the savings as the "extra payment" on the principle and am investing the $200.

hybrid

  • Handlebar Stache
  • *****
  • Posts: 1673
  • Age: 53
  • Location: Richmond, Virginia
  • A hybrid of MMM and thoughtful consumer.
Re: Question about 30 vs 15 mortgage with low interest rate
« Reply #7 on: July 17, 2014, 10:34:04 AM »

Personally, I do a hybrid of paying down mortgage and investing.

This. I am prepaying my rental mortgage, then the primary when that is done, while investing in the stock market at the same time. I'm no fan of having all your eggs in one basket, and if you are already throwing money into stocks (via 401K or some other mechanism) then you run a larger risk of getting burned in the next version of the 2008 meltdown. Yes, the market roared back, but it had to roar for over four long years just to get back to break-even.

neo von retorch

  • Magnum Stache
  • ******
  • Posts: 3371
  • Location: SE PA
    • Fi@retorch - personal finance tracking
Re: Question about 30 vs 15 mortgage with low interest rate
« Reply #8 on: July 17, 2014, 10:52:57 AM »
I have never understood the logic behind "paying extra on the mortgage". They don't re-amortize the loan, so you're just giving the bank an interest free loan on the side. Why not save the money in an investment account and just pay off the mortgage when your investment balance is high enough?

Maybe I'm misunderstanding you, but I think the answer is "it depends on the financial institution and the terms of the loan."

In other words, with my credit union and my mortgage, if I owe $100,000 as of July 1st and pay 6% interest, my interest payment will be $500 exactly. And if I made an extra $50,000 payment (which is applied 100% to principal) on June 30th... that interest payment would only be $250. They calculate interest every month based on the remaining principal. I realize not all mortgages are like that, but in my case, it is. So for me the decision is based on saving on interest vs. making money in better investments (plus warm, squishy feelings, if I'm not careful.)

TL;DR - Not all mortgages work that way, so it's not "interest-free" at all. It's "reduction of principal I pay interest on."

zolotiyeruki

  • Magnum Stache
  • ******
  • Posts: 3265
  • Location: State: Denial
Re: Question about 30 vs 15 mortgage with low interest rate
« Reply #9 on: July 17, 2014, 10:59:21 AM »
Don't refinance.  If you want to pay off the loan faster, go ahead and make extra payments.

If paying off the mortgage isn't as high of a priority, then invest the money instead.

boarder42

  • Walrus Stache
  • *******
  • Posts: 7849
Re: Question about 30 vs 15 mortgage with low interest rate
« Reply #10 on: July 17, 2014, 11:35:12 AM »
yeah this is an easy answer... you NEVER refi to a higher interest rate or equal just to lower the years on your loan if you dont have prepayment penalties.  there isnt a reason to do this just pay it off faster.  its the same concept.