Author Topic: Refi from 15 year to 30 year as a hedge?  (Read 1532 times)

Neo

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Refi from 15 year to 30 year as a hedge?
« on: April 11, 2020, 07:32:56 AM »
Current mortgage is a 15 year loan at 3.125%. 11.5 years left. \$100k balance. I'm considering doing a refi to a 30 year at 3.5% to give myself more flexibility as a hedge against uncertainty in the economy. If I lose my job I can pay the 30 year loan amount for a LONG time without working. If my job is good ill continue to pay the 15 year amount with the extra going to principal. So I'll be treating it like a 15 year loan but have the flexibility to back the payments off if I need to. Anybody see any flaws in this logic? Supposedly my closing costs will only be \$450.

NaN

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Re: Refi from 15 year to 30 year as a hedge?
« Reply #1 on: April 11, 2020, 08:34:26 AM »
Taxes, insurance, and other house stuff will be the same, so the difference is smaller proportionally than just comparing 15 to 30. But, let's look at the math.

\$100,000, 3.125%, 11.5 years: payment \$863.5/month
 Per year Total Paid Interest Paid 1 \$10,362 \$3,020 2 \$10,362 \$2,787 3 \$10,362 \$2,547 4 \$10,362 \$2,229 5 \$10,362 \$2,044 Total \$51,810 \$12,700
Ending balance: \$60,885

\$100,000, 3.5%, 30 year: payment \$863.5/month (as opposed to \$449)
 Per year Total Paid Interest Paid 1 \$10,362 \$3,389 2 \$10,362 \$3,141 3 \$10,362 \$2,885 4 \$10,362 \$2,619 5 \$10,362 \$2,344 Total \$51,810 \$14,379
Ending balance: \$62,626

\$100,000, 3.5%, 30 year: payment \$449/month
 Per year Total Paid Interest Paid 1 \$5,388 \$3,469 2 \$5,388 \$3,401 3 \$5,388 \$3,330 4 \$5,388 \$3,257 5 \$5,388 \$3,181 Total \$26,950 \$16,640
Ending balance: \$89,697

So assuming you do nothing differently on the 30 year than on the 15 year, the economy is not as bad as you think, you still owe \$1,800 more on the mortgage for spending the same amount. That is what you are doing by giving yourself the flexibility to have more money per month in case of a bad economy. Oh, also add in the \$500 for the refinance. It would be owing \$2,300 after five years to have the flexibility of reducing your payment if needed. This also doesn't account the extra interest you are banking for much longer than five years, assuming you can't pay it off entirely. I just cut it off at 5 years to make a point.

Are you saying that it is worth paying \$2.3k over 5 years just for the safety of not working for a "LONG time". Would it really be that hard to find \$413.50 per month to cover the difference between the two approaches?

Sorry, this is really flawed logic.

Neo

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Re: Refi from 15 year to 30 year as a hedge?
« Reply #2 on: April 11, 2020, 10:25:48 AM »

maizefolk

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Re: Refi from 15 year to 30 year as a hedge?
« Reply #3 on: April 11, 2020, 10:56:15 AM »
I guess I'd argue the other side of this. A small increase in total interest paid over the lifetime of the loan is probably worth it to have a mot more flexibility and resilience in the present. Keep in mind that inflation will continue to erode the real cost to you of the fixed mortgage payment on the 30 year mortgage.

I haven't run your numbers but in another very similar thread from yesterday -- using a discount rate of 3% -- the present value cost of a switch from a 15 year mortgage to a slightly higher interest 30 year mortgage was about \$1,200 total.

For that increase in total cost of the mortgage over its lifetime, that poster would be able to cut the monthly expenses they need to cover by about \$800/month (\$9,600/year).

But the one key difference is that they were planning to use the lower monthly payment (and save the difference) and you'd be planning to still pay the same amount but just be able to cut back to a lower level without missing a payment. If you are worried about your income security, I'd suggest instead paying the regular scheduled amount and saving the difference between your old payment and your new payment. This provides more security, because, if you lose your job before the mortgage is paid off, you can use those savings to keep paying the mortgage for even longer, and once you've saved off enough to cover the remaining balance on your mortgage, you can pay it off in one fell swoop.

Paying more on your mortgage than scheduled, but not paying it off entirely, doesn't provide the same benefit, since you're equally at risk of foreclosure* if you start missing payments with 75% of your mortgage paid off as you would with 25% of your mortgage paid off.

*If anything you might be slightly at higher risk of foreclosure since the more equity you've built up, the more likely the bank is to be able to recover the entire balance of what you still owe if it forecloses on you and sells your how in a short sale.

Fishindude

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Re: Refi from 15 year to 30 year as a hedge?
« Reply #4 on: April 12, 2020, 08:45:19 AM »
Why would anyone in their right mind want to lengthen their personal debt by an additional 19 years.
How old will you be then?

Neo

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Re: Refi from 15 year to 30 year as a hedge?
« Reply #5 on: April 12, 2020, 09:01:34 AM »
In 19 years I will be 55. There are many people who advocate for never paying off your mortgage if you have an aggressive rate, or at least not paying it off early. It's a valid school of thought. Here's an article. I know motley fool is kind of a joke but the content of this article is relevant.

Why You Shouldn't Pay Off Your Mortgage Early, Even If You Can
https://www.fool.com/investing/2018/12/23/why-you-shouldnt-pay-off-your-mortgage-early-even.aspx

waltworks

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Re: Refi from 15 year to 30 year as a hedge?
« Reply #6 on: April 12, 2020, 10:28:49 AM »
Why would anyone in their right mind want to lengthen their personal debt by an additional 19 years.
How old will you be then?

The kind of person who wants to end up with more money and free time, I guess?

I mean, at ~3.5% rates for 30 year mortgages, your real cost is hovering around 1% for that money, if inflation stays where it has been for the last couple decades. If there's more inflation than that, you're getting paid to have the loan.

And regardless of inflation, you'll win if you think the nominal return for equities is greater than the mortgage rate over the term.

So:
-More payment flexibility/less chance of losing house if you lose your job or SHTF somehow
-Almost certainly more lucrative/investing beats mortgage rate
-Inflation hedge

There is a great deal of emotional satisfaction in having a paid off mortgage (I've paid off two in my time) but you'd have to value that satisfaction a LOT to have it be worth more than all the advantages of not paying off quicker than required. Then again, the goal is happiness, not piling up as much money as possible. So if not having a mortgage makes you deliriously happy, it might be worth it.

-W

FatFI2025

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Re: Refi from 15 year to 30 year as a hedge?
« Reply #7 on: April 12, 2020, 11:16:35 AM »
Could you elaborate more on the scenario where a \$450/mo reduction in mortgage would make a difference?

The only one I can think of is if you're already LeanFIRE and wouldn't move after an extended layoff, then it makes sense. Maybe ratchet up your equity exposure or pick up a few low-wage gigs over the years.

But if you're still far from FI, got laid off and couldn't find work for six months, wouldn't you move to a place with jobs?

Dicey

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Re: Refi from 15 year to 30 year as a hedge?
« Reply #8 on: April 12, 2020, 02:01:08 PM »
Why would anyone in their right mind want to lengthen their personal debt by an additional 19 years.
How old will you be then?
Because the OP is smart and is trying to build in flexibility, not necessarily trying to extend their loan for 19 years.

I'm a +1 to @maizeman's way of thinking.

My vote is: Do It.

dandarc

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Re: Refi from 15 year to 30 year as a hedge?
« Reply #9 on: April 12, 2020, 02:15:46 PM »
I'd go even further and pull as much cash out as you can and still get a good rate on the 30 year.

Monerexia

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Re: Refi from 15 year to 30 year as a hedge?
« Reply #10 on: April 12, 2020, 02:25:45 PM »
You can always pay more on a 30 but try and pay less on a 15 and see how the bank responds.

Dicey

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Re: Refi from 15 year to 30 year as a hedge?
« Reply #11 on: April 12, 2020, 06:26:29 PM »
You can always pay more on a 30 but try and pay less on a 15 and see how the bank responds.
I'm not sure I understand what you're saying. Can you elaborate?

Monerexia

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Re: Refi from 15 year to 30 year as a hedge?
« Reply #12 on: April 12, 2020, 06:38:06 PM »
You can always pay more on a 30 but try and pay less on a 15 and see how the bank responds.
I'm not sure I understand what you're saying. Can you elaborate?

Yes you can always pay off a 30 in 15 but cannot pay a 15 off in 30.

Dicey

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Re: Refi from 15 year to 30 year as a hedge?
« Reply #13 on: April 12, 2020, 10:47:53 PM »
You can always pay more on a 30 but try and pay less on a 15 and see how the bank responds.
I'm not sure I understand what you're saying. Can you elaborate?

Yes you can always pay off a 30 in 15 but cannot pay a 15 off in 30.
I actually do know that, but my brain just could not interpret your words. I'm still recovering from Something. Or maybe it's because I've spent so long over at the DPOYM Clubhouse championing the Investment Order and singing the praises of the power of a long, low, fixed-rate mortgage...

Happily, it never hurts to repeat the message. It's all about having as many options as possible, especially in times of crisis.

Nice to meet another kindred spirit on the road to (and through) FIRE, Monorexia!

YttriumNitrate

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Re: Refi from 15 year to 30 year as a hedge?
« Reply #14 on: April 13, 2020, 08:54:42 AM »
I'm all for getting a really long mortgage (especially when rates are so low), but I've got to agree with NaN that refi-ing to a 30-year seems like a rather expensive way of buying a bit of flexibility if you intend on paying the mortgage off as a 15-year loan.

Neo

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Re: Refi from 15 year to 30 year as a hedge?
« Reply #15 on: April 13, 2020, 09:46:18 AM »
Totally agree on the costs. I'm being told my refi costs will be as low as \$250 so that's why I felt it made sense. We will see if that actually comes to fruition.

dandarc

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Re: Refi from 15 year to 30 year as a hedge?
« Reply #16 on: April 13, 2020, 09:53:56 AM »
Totally agree on the costs. I'm being told my refi costs will be as low as \$250 so that's why I felt it made sense. We will see if that actually comes to fruition.
In my case (Leon County, FL), the document and stamp taxes are what make a refinance expensive. We basically do everything with consumption taxes in Florida, so this is an example of that. No state or local income tax, which is great for me personally, but government does still need money to operate.

Neo

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Re: Refi from 15 year to 30 year as a hedge?
« Reply #17 on: April 13, 2020, 10:00:31 AM »
Yeah I'm really curious what the final costs will be. They advertise \$250 closing but who knows what that really means. There was no appraisal done so that will save some \$\$\$.

Dicey

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Re: Refi from 15 year to 30 year as a hedge?
« Reply #18 on: April 13, 2020, 06:23:20 PM »
Totally agree on the costs. I'm being told my refi costs will be as low as \$250 so that's why I felt it made sense. We will see if that actually comes to fruition.
In my case (Leon County, FL), the document and stamp taxes are what make a refinance expensive. We basically do everything with consumption taxes in Florida, so this is an example of that. No state or local income tax, which is great for me personally, but government does still need money to operate.
Shhhh, California doesn't do it that way; let's not give them any ideas. Seriously, I typically assume that people are going to go for the low-cost re-fi option and that their interest rate will be better. Perhaps I didn't read the OP's specific details thoroughly enough. With today's low rates, it shouldn't be too hard to scrounge up a great rate with low-to-no costs.

Heh, Dicey's know-it-all brother bought a starter house with a sweet 30. Then he got the bright idea to switch it to a 15, despite polite demurral from his big sister. Later, they decided to buy a different house and turn their first one into a rental. Fortunately, this time he listened to Dicey and converted back to a 30 before he found a new house to move into. He still owns the first house, btw, and is glad he finally listened to me, because with a 30, the rental has always been cash flow positive, but it cost him some unnecessary money and hassle to flip flop.

jinga nation

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Re: Refi from 15 year to 30 year as a hedge?
« Reply #19 on: April 14, 2020, 07:10:13 AM »
@Neo Great Q! I'm in a similar position, with similar numbers/rates.

Who's the lender pitching you this amazing low-cost offer?

For my area, the lowest I'm seeing is \$1322 in closing costs, but 3.75% rate. A 3.25%/30yr has over \$3k costs.
Maybe my LTV is too low (~30-35%).

[My monthly payment is \$835, I have 10 years left on a 3%/15y refi (original was 4.875%/30y, refinanced in Aug 2015).
Just remembered that during our last re-fi, I had to show tons of documentation on my rental properties (leases, purchase docs, titles, etc.) as a tertiary income source even though my salary would meet criteria, wife's income is secondary (we live on only 1 income and save and invest the rest).
Debating if it worth the hassle.]

Just like @dandarc I'm in FL. Local fees/taxes.

Dicey

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Re: Refi from 15 year to 30 year as a hedge?
« Reply #20 on: April 14, 2020, 07:32:42 AM »
@jinga nation, I have to admit after so many years of living in a HCOLA, to me it seems like any mortgage under \$100k is practically paid off. In your case, at that interest rate, and with your savings level, I would definitely just let it ride, especially if it's a taxable event. Sheesh, that's nuts! You Floridians have to cope with snakes, alligators and pay taxes on a re-fi? Wowza! Oh, wait...you don't pay state income tax, do you? Nevermind, CA sucks more, except for the alligators. I'm not neo, but I'd definitely keep the 3%, 15 year mortgage as long as you like. For that [comparatively] small a balance, even paying it off early isn't going to make a huge difference, especially because you're killing it with your other savings.

dandarc

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Re: Refi from 15 year to 30 year as a hedge?
« Reply #21 on: April 14, 2020, 07:39:59 AM »
Wish you had told me that back in October @Dicey. JK - \$125K loan was still a smart move, and even after this crash, I've got an extra maybe \$100K or so - can make a lot of \$600 payments with \$100K more dollars working for you. I mean, that's how it is when my head wins the argument. My gut is all like "ugggh".

I will say, when I search on bank rate, it doesn't seem to me that the government fees and taxes are included in the quote there.

jinga nation

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Re: Refi from 15 year to 30 year as a hedge?
« Reply #22 on: April 14, 2020, 07:40:53 AM »
@jinga nation, I have to admit after so many years of living in a HCOLA, to me it seems like any mortgage under \$100k is practically paid off. In your case, at that interest rate, and with your savings level, I would definitely just let it ride, especially if it's a taxable event. Sheesh, that's nuts! You Floridians have to cope with snakes, alligators and pay taxes on a re-fi? Wowza! Oh, wait...you don't pay state income tax, do you? Nevermind, CA sucks more, except for the alligators. I'm not neo, but I'd definitely keep the 3%, 15 year mortgage as long as you like. For that [comparatively] small a balance, even paying it off early isn't going to make a huge difference, especially because you're killing it with your other savings.
Enjoy the myths. We don't have to deal with gators. They are harmless and there aren't any around where I live (haven't seen any on my runs or bike rides for over 10 years). The only places I see them are on the paved trails in winter months sun basking, they're motionless rocks I can ride over on my bike (not that I do or will). Same thing with snakes, by nature they stay out of harms way and only strike when cornered.
The bigger minor nuisance is mosquitoes/mozzies/skeeters/ankle biters/no see ums.
Contemplating paying off the mortgage in one swoop or 12 easy payments versus plowing that into the market (Total Stock Market or SP500).

@maizeman thank you for providing an interesting perspective. May use it, or consider for next house purchase (if we do move to a better school district within the next 3 years).
« Last Edit: April 14, 2020, 07:50:19 AM by jinga nation »

Neo

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Re: Refi from 15 year to 30 year as a hedge?
« Reply #23 on: April 14, 2020, 07:55:56 AM »
@Neo Great Q! I'm in a similar position, with similar numbers/rates.

Who's the lender pitching you this amazing low-cost offer?

For my area, the lowest I'm seeing is \$1322 in closing costs, but 3.75% rate. A 3.25%/30yr has over \$3k costs.
Maybe my LTV is too low (~30-35%).

[My monthly payment is \$835, I have 10 years left on a 3%/15y refi (original was 4.875%/30y, refinanced in Aug 2015).
Just remembered that during our last re-fi, I had to show tons of documentation on my rental properties (leases, purchase docs, titles, etc.) as a tertiary income source even though my salary would meet criteria, wife's income is secondary (we live on only 1 income and save and invest the rest).
Debating if it worth the hassle.]

Just like @dandarc I'm in FL. Local fees/taxes.

My LTV is about 58%. Its Guardian Savings Bank in Cincinnati OH.. I'm in the same boat im terms of rental properties. It has been a bit of a process getting them all the info they need.
« Last Edit: April 14, 2020, 07:57:31 AM by Neo »

ducky19

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Re: Refi from 15 year to 30 year as a hedge?
« Reply #24 on: April 21, 2020, 09:25:55 AM »
Just made this decision ourselves. We are 5 years into a 15 year note at 3.1% with about \$145k left to pay on it. We have a decent emergency fund (18 months of expenses not counting rental income/expenses), but wanted to hedge our bets in case of a job loss. DW and I both work, but my income accounts for around 80% of our total income, so a job loss on my end is what we're trying to hedge. I wouldn't say it's highly likely, but certainly more likely since mid February.

Worked with our local bank and was able to get into a 30 year note for the same 3.1% rate, closing costs of \$1,700 broken down as follows:

\$750 Bank Fees(Closing Fee, Origination Fee, Underwriting Fee)
\$52 Credit Report Fee
\$14.00 Flood Determination Fee
\$303.00 Title Work Fee
\$70.00 Tax Service Fee
\$400 Appraisal Fee
\$57.40 Mortgage Recording Fee
\$57.40 Mortgage Release Fee

Our intent is to continue paying the same payment as before which results in the same payoff as the 15 year note (age 55), but if the shit really hits and I were to lose my job, it would cut about \$740 off of our basic expenses (nearly 20% counting rental expenses, 27% excluding rental expenses). This extends our range from 18 months to over 2 years (up to 4 years if unemployment and rental income/expenses are factored in). Overall satisfied with the trade off, 6 months of expenses for \$1,700. For anyone else who can make the math work, I'd say go for it! The time to do it is when you're gainfully employed though, not once you've lost your job.

I can't stress enough, our plan is NOT to carry mortgage debt into our 70s, but to still pay it off in 10 years. The entire purpose is to provide additional security in a worst case scenario.
« Last Edit: April 21, 2020, 09:27:36 AM by ducky19 »

Neo

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Re: Refi from 15 year to 30 year as a hedge?
« Reply #25 on: April 21, 2020, 09:19:20 PM »
I'm the OP. I pulled a switcheroo and ended up locking a 15 year refi for 2.625%. Still lowered my payment about \$250 so I got a little of the hedge I was looking for. I just couldn't pass up that rate...

jinga nation

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Re: Refi from 15 year to 30 year as a hedge?
« Reply #26 on: April 22, 2020, 10:16:31 AM »
I'm the OP. I pulled a switcheroo and ended up locking a 15 year refi for 2.625%. Still lowered my payment about \$250 so I got a little of the hedge I was looking for. I just couldn't pass up that rate...
wow. just. wow.
closing costs under \$500?
absolutely flippin fantastic.

Neo

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Re: Refi from 15 year to 30 year as a hedge?
« Reply #27 on: April 22, 2020, 10:30:38 AM »
No this is with a different bank. My closing costs will be about \$2k.

FatFI2025

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Re: Refi from 15 year to 30 year as a hedge?
« Reply #28 on: April 22, 2020, 01:48:24 PM »
I'm the OP. I pulled a switcheroo and ended up locking a 15 year refi for 2.625%. Still lowered my payment about \$250 so I got a little of the hedge I was looking for. I just couldn't pass up that rate...

Solid move -- I hope the slightly more aggressive (but very reasonable) term works out well for you!