The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: Rekon on August 15, 2020, 12:01:24 PM
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I wanted to get some input from MMM gurus here.
Current balance: $525,484 with 348 months left on loan.
Current Term: 30-yr fixed; Rate: 3.5%; PMI: $98/mo
New Term: 15-year fixed; Rate: 2.375%; no PMI
Payment goes up about $930 which I can afford. Another option would be to just invest the $930 in index funds.
Thoughts?
FWIW: I'm 32, currently invest 15% of income, only have mortgage and car payment debt, and plan to stay in this home forever.
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By going to 15 year refi, you will save about $6000 a year in interest while reducing loan term by half. Its a Great deal. But you will lose flexibility of low monthly payments.
If you have good credit another option is to refinance mortgage to new 30 year. Since current rates are in mid 2%, you have potential to increase index fund investments by what ever you can save on the interest as well.
So its the best of both, You save on interest, you can direct $930 + $<Interest savings> into index funds and still keep flexibility of 30 year mortgage.
Key for success of this plan is to automate these savings into investments.
All good options, choose what suits you needs. All the best.
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I would take option 3 and refinance to a 30 year at 2.75%.
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If your job is really stable (even during Covid-19), then maybe you have room to do the 15 year loan. You'd increase your fixed monthly costs by $930, which I guess also means a larger emergency fund ($5,580 for 6 months of higher payments).
I actually side with the other posters in favoring a 30 year loan at a lower rate. You can pay an extra $900 or so each month, and that loan will wind up being much shorter than 30 years. But if times get tough, you can drop back to the minimum monthly payments. The flexibility won't mean much in good times, but it can help keep your house in bad times. I'd favor refinancing to another 30 year at a lower rate.
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I would take option 3 and refinance to a 30 year at 2.75%.
Would have to pay points to get to 2.75
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Do the calculations using https://www.mortgagecalculator.org/ or a similar website. Also see what rate you can get for a 30 year fixed. That can help you decide between the options. Rough calculations with your numbers is $325k in interest at 3.5%, vs. $246k at 2.75% ($79k difference).
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Where are you getting 2.375 for a 15 year mortgage?
I think you should run a couple of calculations. As a previous poster said, determine how much interest you will save over the course of the loan. Then run some numbers as to how much you would have at the end of the term if you invested that money instead, using whatever growth rate you are comfortable with. I did this with mine and decided to do the refi instead of investing, but my mortgage is much smaller, so I was only using $150 a month, not $930. I also have enough other money going into 401k, IRA, HSA and taxable accounts that I figured it was worth it to direct $150 extra to my mortgage to pay it off quicker. I wanted my mortgage payoff to coincide with my FIRE date.
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Can you split the difference? Refinance to a 20 or 25 year to take advantage of the lower interest rate, while not raising your monthly mortgage payments quite so much.