Author Topic: (Moving to) Higher interest rate- mortgage refinancing.  (Read 580 times)

myemail1045

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(Moving to) Higher interest rate- mortgage refinancing.
« on: April 10, 2020, 01:35:46 PM »
From the subject it may seem like no brainier. But my goal is to reduce the monthly amount due. With the refinancing I can lower my monthly due by $800. There could be some uncertainty with our income in upcoming months. In that case this move gives us extra cushion (we already have 1 year worth expense in cash with current mortgage). Best case scenario our income continue as is and we end up investing the extra money in total stock market. It seems like a win-win situation to me. Can you give your prospective on this?

Current mortgage:
Monthly Due: $1341 (Principle: $1072, Interest: $269)
15- years
APR- 2.625%
Balance Due: $122,000 (9 years left)

New Refinance option:

Monthly Due: $541 (Principle: $208, Interest: $333)
30- years
APR- 3.36%
Loan Amount: $122,000
« Last Edit: April 10, 2020, 01:42:04 PM by myemail1045 »

Malum Prohibitum

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Re: (Moving to) Higher interest rate- mortgage refinancing.
« Reply #1 on: April 11, 2020, 08:37:16 AM »
Is the uncertainty a generalized fear or something specific and likely, because it would take a LOT to convince me to ditch that great mortgage rate you have right now that should be gone in 9 years (less if you pay extra). 

The best case scenario you laid out does not account for closing costs (averaging $5000 in the US today) and the likelihood that you stretch out paying off your mortgage for 30 years (instead of 9). 

I would not do it, especially not to raise my interest rate from 2.625% (difficult to find even today!) up to 3.36%

BUT - you know your future financial situation better than I do and the likelihood of something bad happening better than I do.  With ONE YEAR of expenses saved in your emergency account, however, that will cover even an entire year of no income from employment.  What is the likelihood of your future income being $0 for more than a year?  With the generous unemployment being offered right now and all of the companies desperately seeking workers to fulfill "essential" needs, I would predict the chances of that are about 0%.


tawyer

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Re: (Moving to) Higher interest rate- mortgage refinancing.
« Reply #2 on: April 11, 2020, 08:53:16 AM »
Where does the difference end up in 30 years with the payment difference invested @6.5% minus closing costs?

maizefolk

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Re: (Moving to) Higher interest rate- mortgage refinancing.
« Reply #3 on: April 11, 2020, 09:02:13 AM »
You're currently scheduled to pay $137,00 over the remaining lifetime of your loan. After the refinance you will pay significantly more over the lifetime of the loan (~$193,800), but you're shifting a lot of that further into the future where, at even 2-3% inflation, the same number of dollars will be worth less.

Assuming a discount rate of 3%* monthly payments of $541 for 30 years is equivalent to a cost of ~$128,000 today. Monthly payments of $1,341 for nine years is equivalent to a cost of ~$126,800 today.

A net cost of only $1,200 total to cut your spending by $800/month -- $9,600/year -- seems like a really good trade off. Provides more flexibility with more cash on hand and less risk of losing your home (and less risk of being stressed about losing your home).

In your shoes I'd go for the refinance so long as you think you can commit to saving and/or investing the extra $800/month. Okay to tap into those savings to support current spending if you do indeed hit that income uncertainty you are worried about, but if the $800/month goes towards increasing your regular monthly spending you would be giving the the benefits of flexibility and security that justify the refinance.

*Some people would use interest rates, some inflation, some the long term CGAR of the stock market for this discount rate. This is towards the middle of those.

achvfi

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Re: (Moving to) Higher interest rate- mortgage refinancing.
« Reply #4 on: April 11, 2020, 09:37:18 AM »
Go for it.

This is exactly what I am doing. I am refinancing my 15 year fixed mortgage to 30 year fixed, reducing monthly payment by about 40% while lowering interest rate a little. Directing increased cashflow to taxable investments and incase of income loss it will greatly improve our flexibility.

I would recommend automating the increased cashflow to investments so you dont get tempted to spend it.

You will find following thread interesting. It is focussed on similar strategy.
https://forum.mrmoneymustache.com/throw-down-the-gauntlet/dont-payoff-your-mortgage-club/


myemail1045

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Re: (Moving to) Higher interest rate- mortgage refinancing.
« Reply #5 on: April 11, 2020, 01:07:15 PM »
Where does the difference end up in 30 years with the payment difference invested @6.5% minus closing costs?

Option-1: If I continue as is, that means I won't have any additional cash for next 9 years to invest. After 9 years mortgage free, invest ($1,341*12= $16,092) at 6.5% rate for 21 years.

Option-2: If I take refinance option and invest extra cash ($800*12= $9,600) at 6.5% rate for next 30 years.


Option-1 outcome: $681,497 ($16,092 compounding at 6.5% interest rate over 21 years)
Option-2 outcome: $829,199 ($9,600 compounding at 6.5% interest rate over 30 years)
                            If deduct $5,000 of closing cost $829,199-$5,000= $824,199.
                            Closing cost will be added to mortgage amount hence deducting $5,000 at the end.

I used attached simple calculator.
« Last Edit: April 11, 2020, 02:05:16 PM by myemail1045 »

myemail1045

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Re: (Moving to) Higher interest rate- mortgage refinancing.
« Reply #6 on: April 11, 2020, 01:30:44 PM »
Is the uncertainty a generalized fear or something specific and likely, because it would take a LOT to convince me to ditch that great mortgage rate you have right now that should be gone in 9 years (less if you pay extra). 

The best case scenario you laid out does not account for closing costs (averaging $5000 in the US today) and the likelihood that you stretch out paying off your mortgage for 30 years (instead of 9). 

I would not do it, especially not to raise my interest rate from 2.625% (difficult to find even today!) up to 3.36%

BUT - you know your future financial situation better than I do and the likelihood of something bad happening better than I do.  With ONE YEAR of expenses saved in your emergency account, however, that will cover even an entire year of no income from employment.  What is the likelihood of your future income being $0 for more than a year?  With the generous unemployment being offered right now and all of the companies desperately seeking workers to fulfill "essential" needs, I would predict the chances of that are about 0%.

At work, our project budget was cut significantly last year (may be 1/5 of staff layoffs), and there is lot of speculations that next year's budget that is due in 2 months may have some more cuts. so income might get affected. I'm not sure how's the job market outside. I should start testing the market. I'm not necessarily worried about loosing the house since If we sell all our stock investment we can pay off the mortgage tomorrow.

I used to have mindset of living debt free but what I leaned here at MMM is that having mortgage is not a bad thing. see my calculation in above post. Looks like we would make money in a long run with refinancing. And I don't see any benefit to payoff the house.
« Last Edit: April 11, 2020, 02:07:07 PM by myemail1045 »

myemail1045

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Re: (Moving to) Higher interest rate- mortgage refinancing.
« Reply #7 on: April 11, 2020, 02:01:38 PM »
You're currently scheduled to pay $137,00 over the remaining lifetime of your loan. After the refinance you will pay significantly more over the lifetime of the loan (~$193,800), but you're shifting a lot of that further into the future where, at even 2-3% inflation, the same number of dollars will be worth less.

Assuming a discount rate of 3%* monthly payments of $541 for 30 years is equivalent to a cost of ~$128,000 today. Monthly payments of $1,341 for nine years is equivalent to a cost of ~$126,800 today.

A net cost of only $1,200 total to cut your spending by $800/month -- $9,600/year -- seems like a really good trade off. Provides more flexibility with more cash on hand and less risk of losing your home (and less risk of being stressed about losing your home).

In your shoes I'd go for the refinance so long as you think you can commit to saving and/or investing the extra $800/month. Okay to tap into those savings to support current spending if you do indeed hit that income uncertainty you are worried about, but if the $800/month goes towards increasing your regular monthly spending you would be giving the the benefits of flexibility and security that justify the refinance.

*Some people would use interest rates, some inflation, some the long term CGAR of the stock market for this discount rate. This is towards the middle of those.

Thank you @maizeman. really appreciate your input. I needed that reassurance.

myemail1045

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Re: (Moving to) Higher interest rate- mortgage refinancing.
« Reply #8 on: April 11, 2020, 02:15:23 PM »
Go for it.

This is exactly what I am doing. I am refinancing my 15 year fixed mortgage to 30 year fixed, reducing monthly payment by about 40% while lowering interest rate a little. Directing increased cashflow to taxable investments and incase of income loss it will greatly improve our flexibility.

I would recommend automating the increased cashflow to investments so you dont get tempted to spend it.

You will find following thread interesting. It is focussed on similar strategy.
https://forum.mrmoneymustache.com/throw-down-the-gauntlet/dont-payoff-your-mortgage-club/
Thank you