To Refi or Not? Invest or pay down principal?

[tomatoqeen]

I am a new Mustachian who has always been interested in money.  I have recently paid off a $10,000 credit card bill incurred when I was laid off due to a company acquisition.  I am working part time now and my SO works full time.  We are forty-somethings that have zero credit card debt, no car loans (we do need a new-to-us car!!), and $50,000 left on our mortagage with a 4.75% interest rate.  At our current payment schedule, the house will be paid off August 2018.  We did not refi recently as most of the interest is paid at the beginning of a loan and because we have a short time left on our current loan.  Did we make the right choice in not refinancing or should we still be considering that option?  Our credit is excellent so getting a loan is not a problem.  Combined salary is around $70000 with emergency savings around $10,000.  I do not have a 401k at my current job, but about $155,000 in my previous employer's 401k plan.  SO has a retirement account with about $5,000 and is contributing about $70/mo.  SO has a county pension in addition to the retirement account.  Should I start paying down the mortgage principal or should I open an IRA or investment account?  Currently, saving for a new-to-us car.  WOW!!  Talk about letting everything hang out!!  Thanks for any and all comments!!

[vytas315]

With this country's subsidy of home mortgages, I think it's almost always a good idea to refinance regularly.  The only reason you pay more interest early in the repayment schedule is because the principle is also greater.  In your case, you could pull the equity out of the house and pay a low interest rate while investing it elsewhere where you can earn an even higher return (I like index ETFs).  The additional interest is surpassed by your investment gains.  Therefore, refinancing regularly is as much about extracting equity as it is about locking in low rates.

I especially like this strategy on mortgages because you can get a long time horizon on your investments.  It's a little different with 5yr car loans.

Other considerations are the cost of refinancing.  If you refi too often, these costs will take a real bite out of your returns.  You should also make sure that you don't run into a cash flow problem.  I wouldn't go and buy a bunch of illiquid assets which you might have to sell at a loss if for some reason you can no longer make your mortgage payment.

But this is just the way I've always thought about this puzzle.  What are others doing?

[Another Reader]

You could improve the rate if you refinanced to 10 or 15 years, but with a short time span and the recent increases in rates, it may not gain you much.  In addition, most lenders don't like to do loans for small amounts and the fees can be higher. 

In your shoes, I would be much more concerned about the retirement accounts as a 40-something.  I would open and fully fund both IRA's.  With a relatively low combined income right now, the Roth might be more advantageous.   Unless you are retiring in 2018, I would also consider diverting some extra money from mortgage repayment to car savings.

If you and SO are not married, then you need to be careful about handling joint assets.  If you are not married, you may want to each contribute to your own IRA's.

[ZMonet]

If you can get a loan from Pentagon Federal Credit Union (check and you will find that you can join by joining one of a number of organizations for around $50), you might refinance into a 5/5 ARM at 2.875%.  They pay your closing costs with that loan product.  If you made your current payment, you would pay it off well before the loan percentage readjustment in 5 years.  https://www.penfed.org/55-Adjustable-Rate-Mortgage/

[Hotstreak]

If you can get a loan from Pentagon Federal Credit Union (check and you will find that you can join by joining one of a number of organizations for around $50), you might refinance into a 5/5 ARM at 2.875%.  They pay your closing costs with that loan product.  If you made your current payment, you would pay it off well before the loan percentage readjustment in 5 years.  https://www.penfed.org/55-Adjustable-Rate-Mortgage/

Another one here.  5 year fixed rate at 3.25%, no closing costs, no appraisal fee.. no nothing.  You have to be in their footprint, so no go for anybody on the east coast.
https://www.usbank.com/home-equity/smart-refinance.html

Somebody upthread mentioned banks don't like refinancing small loans.  Lets be clear, if you request to apply for a loan they are required to take your application, it's the law.  That being said they can re-price at any dollar amount they want, and you might end up paying a higher rate for a tiny loan.  Ask your local salesperson.

[oldtoyota]

I am a new Mustachian who has always been interested in money.  I have recently paid off a $10,000 credit card bill incurred when I was laid off due to a company acquisition.  I am working part time now and my SO works full time.  We are forty-somethings that have zero credit card debt, no car loans (we do need a new-to-us car!!), and $50,000 left on our mortagage with a 4.75% interest rate.  At our current payment schedule, the house will be paid off August 2018.  We did not refi recently as most of the interest is paid at the beginning of a loan and because we have a short time left on our current loan.  Did we make the right choice in not refinancing or should we still be considering that option?  Our credit is excellent so getting a loan is not a problem.  Combined salary is around $70000 with emergency savings around $10,000.  I do not have a 401k at my current job, but about $155,000 in my previous employer's 401k plan.  SO has a retirement account with about $5,000 and is contributing about $70/mo.  SO has a county pension in addition to the retirement account.  Should I start paying down the mortgage principal or should I open an IRA or investment account?  Currently, saving for a new-to-us car.  WOW!!  Talk about letting everything hang out!!  Thanks for any and all comments!!

Welcome!

In short, I personally would invest the money. I asked this very question, I think, a few months back when I was trying to figure out the answer. At the time, I was paying $200 more per month in order to pay off the house earlier.

After I did the math and viewed the whole picture, I determined that my decision to pay $200 more per month was not rational. Then, I kept doing it despite it not being rational. Then, I decided to stop pre-paying and to invest the money in the stock market.

Why? Because I can make more $$ in the stock market than I will get back from pre-paying my mortgage.

For me, the answer was in the math.

I suggest using the refinance and mortgage pre-payment calcs on this website to calculate how much savings you would gain from paying off the mortgage early.

http://www.mtgprofessor.com/CalculatorArticles/Refinance%20Calculators.html

Keep in mind that future savings is in future dollars and not today's dollars. Those future dollars will be worth less due to inflation.

Is your PT work for yourself in your business or for someone else? If it's for you, look into a SEP IRA and see if that is something you can do. If you are working PT for someone else's company, then definitely put the max into your IRA since you can't take advantage of using pre-tax dollars in a 401K.

Gosh, it drives me nuts that people who work at companies without 401ks can't save pre-tax dollars. Urgh!

What are your expenses? How expensive is your geo area?

I ask because I'm wondering if your SO could be putting away more than $70/month. Saving that little is a bit worrisome.

[tomatoqeen]

Thanks for all your great advice!!  My SO (hubby) wants to contribute more to his retirement, but it's difficult right now.  We just paid off a $10,000 credit card bill (incurred during unemployment).  We live in CA where the COL is high and property values are just starting to rebound.  I work PT for a company so I definitely need to go the IRA route.  I will definitely look into the 5/5 ARM.  Although my 401k is in high risk funds, I don't like the idea of mortgaging my home to invest...too risky!!  I think I might like to pay off my current house, buy a new primary residence, and rent out the paid off house.  That way most of the monthly rental income can go to the new residence.  Thoughts???  Oh, my hubby in particular is not interested in giving up our luxuries--$120/month cell phones, $155/month cable.  I am trying to reduce spending via couponing (don't laugh, this can save me $300 per month, and I love getting stuff for free)!!  I am also working the cash back deals on my credit cards!!  So far so good!!  Thanks for all your help!!