The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: ash7962 on May 24, 2017, 02:17:23 PM
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My SO and I bought a condo last year along with a mortgage for ~365k. We got a 7 year ARM (meaning 30 year total length but rate is adjustable after 7 years) knowing we would either a. pay it off before rates change, b. refinance to a fixed rate, or c. move. We also bought the new condo before selling his old one. We weren't sure how long it would take to sell the old and my SO had not decided if he would put the money received from the sale into the mortgage or into other investments.
Fast forward to today, old condo has sold, SO decided to just pay off his half of the principal, and we (now I) have been paying additional principal every month, so we've got 165k left. I can afford the payments, and I can afford to pay the remaining off in 7 years on my own. However, I have been wondering recently if I should refinance to a 30 yr fixed rate loan for the now much lower principal. The idea being that I'd lower my monthly required payment and be able to direct more $$$ into index funds instead. Thoughts?
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Not sure, how reliable is a page like https://www.chase.com/mortgage/mortgage-rates? Let me toss some numbers in:
Current interest rate (only guaranteed til 2023): 3.25%
Current required monthly payment: 1,514.52
Current Additional principal: 530.0
Total current monthly: 2044.52
New monthly payment for 30 yr at 3.875%: 775.89
New monthly payment for 15 yr at 3.125%: 1,149.41
Lets say for ease of calculation I pay 2044.52/mo for the next 6.5 years or 78 months. If I go for the 30 yr and I'm now investing the difference (1,268.63) into index funds every month (assuming 7% return) then I in theory will have $124,852.90 at the end of 6.5 years. Over the same 6.5 years I will be paying $38,927.62 in interest where I'd pay $20,547.85 in interest by keeping my current mortgage, so I'd pay and additional 18,379.77 in interest over that same 78 month period. Also at the end of the 78 months with the 30 year I will still be $143,477.70 in debt where with the current plan I'd have pretty much paid it off.
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It would be worth doing to lower the %; but make sure that the penalty for doing it`s so large that it removes all gains you would have for the first few years.
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This might help you:
http://michaelbluejay.com/house/15vs30.html (http://michaelbluejay.com/house/15vs30.html)
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Nice, that calculator and webpage is great! I had forgotten to consider taxes on the invested funds, but I think I'm save 'cause I shouldn't be realizing taxable gains until I'm in a lower tax bracket which should drop my LT capital gains tax to 0%. Also, I am already maxing out my 401k in all scenarios so all of this is post tax investment.
I've also launched into full spreadsheet mode and done some more calcs. First of all I had thought I was paying with a plan to pay off this mortgage in a total of 7 years, but turns out I must have fat fingered my timeframe when I originally calculated how much I should pay on my loan each month. Turns out with my current monthly payment plan I'm expected to pay a total of 8 years not 7, ugh. I've currently got 91 months left till mortgage freedom.
Even so, taking the lower monthly payment and investing the difference does end in more profit long term. I calc'd new numbers for returns and expenses over 10 years which is the longest amount of time I'm likely to actually spend living in this place.
Both scenarios, we'll assume the condo neither appreciates or depreciates so is worth $435,000 total, half of which is mine giving me $217,500 house value.
30 yr mortgage plan
total interest paid (first 10 years): $-57,433.78
FV 7% 1,268.63/mo over 10 years: $219,580.58
Amount left on loan: $-129,083.90
Money from selling house: $88,416.1
Amount of money I have at the end: $307,996.68
Current Plan
total interest paid (91 months): $-20,987.49
FV 7% 2044.52/mo 29 months (120-91 months): $64,397.32
Amount left on loan: $0
Money from selling house: $217,500
Amount of money I have at the end: 281,897.32
260,910
So in theory at the 10 year mark I should be $26,099.36 wealthier by going with the 30 year mortgage. According to bankrate.com I can expect an average closing cost of $2,078 for my state. I don't think I care that I'm paying more in interest as long as I have more money at the end, right? Am I forgetting anything here? Completely wrong?
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You just need to make sure you plan to stay there long enough to recoup the cost of the refi. It's a sound plan.