Author Topic: Refi to 15 Year?  (Read 3256 times)

slowplod

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Refi to 15 Year?
« on: January 14, 2015, 06:58:02 AM »
Both wife and I currently work and we're 1 year into a 30 year fixed mortgage, at a rate of 4.25%.  We make roughly the same amount.  We are thinking about kids in the next few years, and though we both think we will work while we build our nest egg, we don't know for sure.

After maxing out both 401k's, and putting an additional amount in securities each month, we're currently paying at the 15 year pace (extra $1,200 per month).

My question is: is it worth locking in the additional fixed cost in our monthly budget for interest savings?  Bankrate advertises a 3.1% on a 15 year.  The difference in monthly payment is $1,000 a month vs. my current statement amount.

Assuming we can get that, the difference after normalizing for tax deduction is $23,000 in interest in 5 years, and 38,500 over the 15 year lifespan.  That's not huge considering the flexibility we currently have, as well as the opportunity cost of investing in the market if opportunities become attractive.

Thoughts?

boarder42

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Re: Refi to 15 Year?
« Reply #1 on: January 14, 2015, 07:23:38 AM »
how many years til you are FIRE.  I know cheddar plans to keep his mortgage in retirement.  overall a 30 year at that rate you will likely come out ahead by just investing that extra 1k vs. lowering your mortgage to a 15 year.  but if you want to be mortgage free in retirement to lower your expenses you may want to go to the 15 year.  i went to a 15 year before i found this site.  I did a no cost REFI and got it down to 15 years at 3%.   i'll have a couple years left when i get to FI but that can be paid off by not investing in retirement accounts. 

frugaliknowit

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Re: Refi to 15 Year?
« Reply #2 on: January 14, 2015, 09:03:44 AM »
It would help if we knew your mortgage amount and closing costs which help determine your break even date.

Keep in mind (just a year ago) you spend thousands on your current mortgage...refinancing is more thousands.
If you are sure (really, who is...?  Unforeseen events can and do occur... ) you are staying in your current home a long time, it could make sense.

Gone Fishing

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Re: Refi to 15 Year?
« Reply #3 on: January 14, 2015, 10:31:57 AM »
If you are going to maintain the 15 year pace it is probably worth it but it would depend on the loan amount, refi cost and time you plan on spending in the house.   

HOWEVER, for maximum returns, based on historical data (which is no indication of future returns!) you would not be doing yourself any favors by prepaying a 4.25% 30 year mortgage or changing to a 15 year mortgage if you invest the difference instead.  Don't have time to calculate the exact break even return with your numbers at the moment, but even at the higher rate, the 30 year wins over a 15 year until you get down to around a 5% return on the market or so based on a break-even I calculated a while back.  With a 30 year vs a 15 year, you are basically leveraging your house a little more to gain exposure to the market.  As far as leverage goes, there is no cheaper, fixed rate, margin call free, long term debt than a 30 year fixed mortgage.   

   

slowplod

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Re: Refi to 15 Year?
« Reply #4 on: January 15, 2015, 05:34:28 AM »
how many years til you are FIRE.

Honestly, no idea yet.  29 years old, no kids and we both work.  We live in one of the highest cost of living areas in the country, but do so because we have 2 high incomes that would be significantly lower in lower cost locations (30-40% lower).

Housing costs alone amount to about $50,000.  So any FIRE plan involves aggressively doing something about that.  Plan is to save 100k per year then re-evaluate in 3 years because I think the whole equation might change once kids are in the picture.  We might relocate at that point and/or reduce work hours for one or both of us.  Or we might just grind away for another 5 years. 

slowplod

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Re: Refi to 15 Year?
« Reply #5 on: January 15, 2015, 05:44:57 AM »
It would help if we knew your mortgage amount and closing costs which help determine your break even date.

Keep in mind (just a year ago) you spend thousands on your current mortgage...refinancing is more thousands.
If you are sure (really, who is...?  Unforeseen events can and do occur... ) you are staying in your current home a long time, it could make sense.

Current mortgage $460k.  Don't know how long we will stay there.  We bought the place because we both anticipated working for at least the next 5 years, and we need to be in this location for our current roles.  We could be here for 5 years or 15+.  We bought the house because
1) we plan to have kids in the near future
2) mortgage rates are historically low
3) we like the area and could foresee staying indefinitely, depending on how much we are enjoying working
4) we got the place for 30% less than the former owners a decade ago
5) we were renting a 1 bedroom for $2,200 a month.  The after tax & equity difference between a large house and 700 sf apartment were negligible


slowplod

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Re: Refi to 15 Year?
« Reply #6 on: January 15, 2015, 11:27:09 AM »
If you are going to maintain the 15 year pace it is probably worth it but it would depend on the loan amount, refi cost and time you plan on spending in the house.   

HOWEVER, for maximum returns, based on historical data (which is no indication of future returns!) you would not be doing yourself any favors by prepaying a 4.25% 30 year mortgage or changing to a 15 year mortgage if you invest the difference instead. 

   


Don't know if I'll keep the pace or how long we'll live here. If the market doesn't consolidate gains over this period, we will probably keep paying at the 15 year pace if we can afford to, as current P/E historically indicates lower future returns.  If the market corrects, I would put this money into additional monthly stock purchases.

RelaxedGal

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Re: Refi to 15 Year?
« Reply #7 on: January 15, 2015, 11:41:07 AM »
My question is: is it worth locking in the additional fixed cost in our monthly budget for interest savings?  Bankrate advertises a 3.1% on a 15 year.  The difference in monthly payment is $1,000 a month vs. my current statement amount.
I view the higher interest rate paid on the 30yr mortgage right now as "insuring" that lower payment.  It's a psychological thing though, you and your wife  should talk it over.

I am very conservative, and I vote  no, just in case one of you does decide to stay home with the kid(s).  If you did refi and in 5 years you are down to 1 income and want to go back to a 30 year mortgage so the payments are lower you could probably swing it, but you'd be at whatever (probably 6.5%) interest is being charged on mortgages then.

If you can already swing your current lifestyle including the extra payments on one income, and the other income is just going to taxable accounts/rental properties for FIRE goals then nevermind, but for most people that's unlikely.

For what it's worth a personal anecdote: my husband and I both stayed at work and send our daughter to daycare.  Just after her 1st birthday we refi'd at 6 years in to a 30 year to a 20 year (no points, no closing costs) for both the lower interest and shorter term with a slightly higher payment.  We had a handle on finances post-baby and our feelings on work, childcare, and stopping at one child.