another mortgage decision - switch to 30yr or finish out 10yr

[Surf]

I'm 6 yrs in to a 10yr mortgage on my home.  It's a HCOL area and my pre-mustache-enlightenment financial plan was to crush the mortgage ASAP to minimize interest paid and (somewhat) mitigate the effects of HCOL area.  After reading some mortgage threads I'm now considering streamlining to a 30yr fixed.

Terms:
~300k financed (~100k down payment)
3.25% interest
10yr
~120k outstanding, 4 yrs left
$2940 P+I per mo, a bit over $300 is interest.

Streamline to 30yr fixed at current rates:
120k financed
4.75% interest
30yr
$625 P+I per mo, over $400 interest per mo initially.  This part is viscerally unpleasant regardless of the investment math on investing the difference.

I'm 35, married w kids, wife is exceptional at saving and my biggest asset!  We are both savers, though before MMM we didn't really know how.  I maxed a traditional IRA and she maxed 403b at work(3% cap, matched), but the rest of our saving was post-tax and either went towards paying down mortgage or sitting in savings account in cash for emergency fund.

We have two small kids and wife stepped away from work last year to be with kids, which has been fantastic.  She likely won't return for another year or two other than per diem work.  I'm loving the extra time together and would like to fast-track FIRE life, if I can do it right she hopefully won't have to go back.

a couple wrinkles:

Natural disaster hit the home a few years ago.  We put 70k into repairs - insurance payout shortfall.  Our house had ongoing issues from the disaster and our property value had cratered, so we put 80k more into construction/disaster mitigation which added >150k to the sale value of the home, were we to move.  We're likely not moving.

This leaves us now owning a house that cost us >$150k more than what we would have elected to purchase otherwise, with a large monthly financial burden for the next few years.

We're having a blast raising our kids - I work from home.  If I knew in my 20s what I know now about tax-advantaged savings and mustachianism we'd be FIRE by now.  It's not that I wasted money on frivolous things, just that I let all my savings sit in <1% interest accounts since 2006 and paid an unthinkable amount in tax by not maxing a 401k when I had nearly no writeoffs. *shudder*

I'm self employed, and income fluctuates year to year, likely looking at 50-80k per year next few years, was higher when we got the loan.  Wife per diem work perhaps 10k/yr.
Expenses(including large part of that 80k to house) are going to exceed income this year and eat into our emergency fund, which is disproportionately large due to my volatile income.

Logic for 30yr:
-kids are only little once. the small payment virtually guarantees wife won't have to go back to work before she wants to and preserves our current way of life(getting to be together) in the event that my income drops over the next few years
-interest rates forecast to rise so this is cheapest it's going to get for us in the near term
-we're not likely to be in the house for 30 years, or even 15 years.  If we are, we will have nearly certainly paid off mortgage quickly when wife goes back to work, or if my income rises
-free up >$2000/mo to invest so long as my income stays around current level
-surprisingly difficult to access equity in our home vs equity in investments
-immediate lowering of stress level for being able to "make ends meet" to get to enjoy time w family as monthly nut will plummet

logic for 10yr:
-paying nearly all principal each month is forced savings at very efficient rate
-as long as nothing drastic changes with income should be able to finish off the mortgage without negative impact on family lifestyle
-with large emergency fund actually more like 1.5-2yrs away from paying off mortgage and having no monthly payment.  Once we get close enough I can wipe it out and won't need the large emergency fund as expenses will be drastically lower
-avoid paying closing costs again, surprisingly expensive even on a streamline
-save large chunk of time not having to go through whole loan process again
-better interest rate
-deal with higher stress for next ~2yrs to be free of the large monthly housing payments forever after.

Whew that was long.  Any input is appreciated!  Thanks everyone :)

[boarder42]

look at this from the math side not the whats it do for me side if your goal as you stated is to fast track FIRE.

to do this you take 2940-625 = 2315 and invest that for 30 years at 7% = 2.8MM

then you take 2940 and invest it over 26 years at 7% - 2.6MM

here a good calculator to use http://www.moneychimp.com/calculator/compound_interest_calculator.htm

so at the end of 30 years you will likely come out ahead by 200k.  So with the numbers you provided you should do it.  i should also note what i didnt include here is inflation if you add inflation to this it makes it even better on the side of 30 years b/c that 625 will slowly decrease over time with regards to inflation.  So your emotional side of wanting the 30 year lines up with the math.  Take it to full term and turn the new page in your life. 

congrats on being a saver and welcome - if you have questions about how to invest this is a good place to start. http://jlcollinsnh.com/stock-series/

find low exp ratios in your company run accounts and use vanguard VTSAX for everything else or whatever AA you choose but thats a good start.

also i see you call it forced savings - when you do the REFI just pump 2315 each month into vanguard set it up as auto withdraw its the exact same forced savings.

i'd personally recommend pulling some cash out and dumping it into the market but you can make that choice you dont have a high income and its variable so that could be tough on your cash flow.

[Surf]

that is excellent info, thank you.

Another piece to factor is the 30yr mortgage will cost about 105k in interest over the full term, plus closing costs.  The 10yr i have now is $7-9k interest left depending on whether I knock it out in 2 yrs or let it go to 4.  So in the 30yr numbers you provided the new mortgage nets 2.7MM v 2.6MM, close enough that the "what does it do for me" aspects may become important enough to swing it when the math is this close.

Changing the timeline makes it closer.

2315 monthly for 15 yrs is 747k - 77k interest/closing costs = 670k

2940 monthly for 11 yrs is 596k.
for 13 yrs(if I pay off mortgage early) it's 760k

So on a shorter timeframe it could go either way.  I'd be pretty astonished if I still had this house in 30 yrs.  15 yrs is possible but I would be unsurprised to move sooner than that.

And the highest return plan appears to be keep the current 10yr, and when there are 2yrs left on mortgage start moving monthly chunks of emergency fund into investments, letting the mortgage go full term but begin investing early rather than paying it off.

I'd love to start firing extra money into investments now, but the natural disaster experience taught me that a large emergency fund is a must with my unpredictable income.  we lived off our savings for nearly a year after it and would have gone broke otherwise.

Thanks again for the info that link was really helpful.

[Bird In Hand]

Using FIRECalc instead of a fixed 7% ROR may give you a better sense of the likely tradeoff over various time periods.  I ran the same scenario as boarder and saw a $124k difference in average ending balances after 30 years.

With 30 yr mortgage

With payoff

Interestingly, even in the runaway success periods for each scenario, the difference was relatively small and quite close to the difference in the average value ($134k more in the 30 year mortgage scenario).

Make of these data what you will.  With a difference of ~5% after 30 years -- an amount that could easily be gained or lost in a 6-month period -- I don't think there's a compelling case to be made one way or the other.  IMO, do what makes you feel happiest and don't worry about it.

[economist]

You say with your large emergency fund you're only 1.5-2 years away from having the house completely paid off. I'd just do that. The biggest factors to me would be:

1. The rate of interest on the 30 year is a full 1.5% higher than on the 10 year you have now. And you are immediately paying that on the entire $120k balance. You might (might!) get a higher return on the difference between the payments, but you're certain to pay that extra ~ $1,800 in interest the first year. Since you won't be in the home 30 years maximizing total return over the next 5-10 years is more important. And, while I'm strongly opposed to market timing and am fully invested in equities myself, the current price level of the market doesn't exactly scream "Now is the time to lever up to maximize investments!"


2. The closing costs. You haven't mentioned how much these are but if it's something like $1k-$3k I'd think that alone makes it a bad deal. It seems like it's not worth it to pay to re-finance a small-ish mortgage like that.

I think the math over the next 10-years will favor the 10 year mortgage. The math over the next 30 years might favor the 30-year, but at that point you're basically guessing and presenting a somewhat idealized version of life where you put the difference in investments 100% of the time.

I myself just bought a house with a 15-year fixed 3.25% mortgage a year ago, so I could be biased. But I love having a ridiculously low interest rate and wouldn't give that up.