Author Topic: Worth refinancing?  (Read 3409 times)

FerrumB5

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Worth refinancing?
« on: February 23, 2016, 10:35:37 AM »
Hi Folks,

I have a chance to refi my current (still very fresh) mortgage from 3.625% 20yr to 3.125% 15yr fixed. It will cost me $120 - 150 more each month w.r.t. what I pay now

Pros: savings of roughly 30k in 15 years compared to my current plan + 1/12 prepay

Cons:
1) possibly less 401k contribution (currently 9k per year + 10% of bonus if any)
2) tighter budget
3) somewhat unclear situation with DW tuition - trying to get concrete numbers from the University to plan accordingly
4) somewhat unclear situation with EF since payments will increase

P.S. 30k savings does not include any tax calculations (itemize vs SD) - it's pure interest savings
« Last Edit: February 23, 2016, 10:41:02 AM by FerrumB5 »

NoStacheOhio

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Re: Worth refinancing?
« Reply #1 on: February 23, 2016, 10:54:36 AM »
Are you comfortable in your current spending/mortgage situation? How much of a 401k reduction are we talking? It could easily end up having a higher opportunity cost (lost gains on money never invested) than the 30k interest you're saving. Why do you really want to make this change? If you feel really strongly about paying off your house, then it may be worth the (possible) lost 401k gains (or losses).

FerrumB5

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Re: Worth refinancing?
« Reply #2 on: February 23, 2016, 11:06:50 AM »
Are you comfortable in your current spending/mortgage situation? How much of a 401k reduction are we talking? It could easily end up having a higher opportunity cost (lost gains on money never invested) than the 30k interest you're saving. Why do you really want to make this change? If you feel really strongly about paying off your house, then it may be worth the (possible) lost 401k gains (or losses).

Why thinking about this change? Well, 30k is 30k.
At most $120 less 401k per month. Giving me 17k potential growth at 7% for 15 years + ~1400 less AGI each year (15% bracket)

NoStacheOhio

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Re: Worth refinancing?
« Reply #3 on: February 23, 2016, 11:21:30 AM »
Are you comfortable in your current spending/mortgage situation? How much of a 401k reduction are we talking? It could easily end up having a higher opportunity cost (lost gains on money never invested) than the 30k interest you're saving. Why do you really want to make this change? If you feel really strongly about paying off your house, then it may be worth the (possible) lost 401k gains (or losses).

Why thinking about this change? Well, 30k is 30k.
At most $120 less 401k per month. Giving me 17k potential growth at 7% for 15 years + ~1400 less AGI each year (15% bracket)

What are closing costs on the refi?

FerrumB5

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Re: Worth refinancing?
« Reply #4 on: February 23, 2016, 11:23:42 AM »
Zero closing on refi

NoStacheOhio

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Re: Worth refinancing?
« Reply #5 on: February 23, 2016, 11:25:32 AM »
Zero closing on refi

To me, it's a toss up, and neither one is a bad choice. I think it really comes down to your individual priorities.

trashmanz

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Re: Worth refinancing?
« Reply #6 on: February 23, 2016, 11:33:23 AM »
Losing any tax savings too?  Is that in the calculation. 

FerrumB5

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Re: Worth refinancing?
« Reply #7 on: February 23, 2016, 11:41:55 AM »
Losing any tax savings too?  Is that in the calculation.

No, not in calculation just yet. Need to figure out how to do it or estimate at least

FerrumB5

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Re: Worth refinancing?
« Reply #8 on: February 23, 2016, 11:52:45 AM »
With current mortgage, my mortgage interest + property tax are above standard deduction for 8-10 years, depending on SD increase over years. With new plan I estimate this period to be 5-6 years.
I might find a way not to touch 401k contributions

arebelspy

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Re: Worth refinancing?
« Reply #9 on: February 23, 2016, 09:13:52 PM »
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

dess1313

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Re: Worth refinancing?
« Reply #10 on: February 23, 2016, 09:33:53 PM »
are you able to make prepayments on your mortgage?  you could add payments that way without the hassle. ends up being very similar

also then if things get tight for reason you would not be locked in to a higher payment.  this was a big thing for me.  being single income that was always a concern.  if numbers are still vague, that's a concern for locking in higher payments

is that the best you can do shopping around?  i get why you'd want to end it early and be rid of all that debt.  a lot love to invest.  i paid off my mortgage ahead of time before i found MMM. 

FerrumB5

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Re: Worth refinancing?
« Reply #11 on: February 23, 2016, 09:52:37 PM »
Here's what I have just calculated given 4 different scenarios.
1. Original. Loan 225k, 3.625%, 20 yr. Total interest 91.7k
2. Current. Original + 120/mo prepay: total interest 80.1k. Savings of 11.6k. However, if I assume 7% market growth, in 18 years this 120 prepay gives to 26.5k of interest. In current market I'm better off right now
3. New Offer #1: 3.5% for 20 yr. Not worth a candle.
4. New Offer #2: 3.125% for 15 yr. That's where stuff gets interesting. Total interest on NEW loan = 56.2, add 4k of interest I already paid = 60.2k interest. Extra pay compared to (1) is 220, to (2) is 100.
     - If I take this 220 extra pay compared to very original scenario and assume 7% investment, in 15 years I will have 31.4k interest, but in 20 yr (original loan), it it 63k
    - If I take this 100 extra pay w.r.t. (2), I get 14.3k in 15 years interest. However, I still get 5 more years of itemized taxes (see above why).

All in all, current loan + 1/12 pre pay works better for me, and more importantly - flexible. I can immediately take out $120 prepay when market stops going 1.5% up and down on any day and put it into market. Plus tax breaks a little better with current plan.
Math rules. Emotions don't. It does look very cool in words - wow, you save 30k on interest if accept 3.125%, but in long run market wins. Also, extra money from bonus (discretional, hence not in budget really) can go towards either 401k or taxable Vanguard [there are very solid reasons why not maxing 401k just yet]

Comments? ideas? Did I miscalculate stuff?

CanuckExpat

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Re: Worth refinancing?
« Reply #12 on: February 24, 2016, 10:36:13 PM »
I think you should reconsider your plan.
You are already not maxing out all your 401k space and you want to consider taking on a mortgage that will leave you with less cash-flow.

Hard to guesstimate numbers without knowing your income / tax brackets, but I don't think this will work out for the best.
Once you give up your tax advantaged space, you can never get it back.

What are your future plans? Do you have reason to believe you will be in the same place for five, ten, fifteen, or thirty years?
If you really wanted a lower interest rate, you can also consider a five, seven, or ten year ARM depending on your plans for the future. Each of those will give you lowish interest rates, and improve your cash-flow situation.

FerrumB5

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Re: Worth refinancing?
« Reply #13 on: February 24, 2016, 10:40:14 PM »
Future plan is to pay for DW tuition with CC - no goddamn loan, hence not maxing 401k yet.
Yes, we plan to stay here for 10+ years.

I think I know what to do - stay with current loan and try to put as much as possible into investments given tuition expenses