Author Topic: Refinance from 10/1 ARM to 15 year mortgage and retirement  (Read 1303 times)

couronne

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Refinance from 10/1 ARM to 15 year mortgage and retirement
« on: February 20, 2016, 09:32:20 AM »
Please be kind as I am new to the Mustachian world. I am 40 and single. I am in year two of a 10/1 arm at 3%. When the mortgage resets in 10 years it can increase 2% per year and maxes at 9%. I can currently refinance to a 15 year mortgage with the same rate. The closing costs are $5500, some of which would be rolled into the loan of 120,00.

I am a teacher and have a 403B with AXA, but am getting a dismal return on my retirement. Our current 403B company options are AXA, Metlife, and VOYA. I am trying to get Vanguard and Fidelity as additional options, so I can leave AXA completely. If I refinance, I will still contribute to retirement at the same rate as I have been, but the higher payment will mean I won't be able to increase my retirement savings as much.

Is it a silly move to refinance when I could be putting more money into retirement or is it smarter to have my mortgage paid off the year I retire? Thanks in advance.

GrOW

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Re: Refinance from 10/1 ARM to 15 year mortgage and retirement
« Reply #1 on: February 20, 2016, 09:39:39 AM »
A few questions:

1. 10/1 is over a 30 year amortization?

2. How many years are you 100% sure that you will stay in this house? 75% sure? 50% sure? If 100% sure is anything less than 10 years, do not bother to refi. You could say that anything less than 12 years, don't refi if you consider refi costs.

3. Are you currently paying any extra principle on an annual or monthly basis? If so, your risk of a higher rate is being reduced as your principle is paid down.

If you combine 2 & 3, you can begin to paint the picture that you could pay extra on your current loan to "turn it into a 15 year loan for free". For the last few years of your new "free 15 year loan", the impact of rising rates will truly be very very low given your very very low principle balance remaining.
« Last Edit: February 20, 2016, 09:43:31 AM by Redcedar »

couronne

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Re: Refinance from 10/1 ARM to 15 year mortgage and retirement
« Reply #2 on: February 20, 2016, 09:46:00 AM »
1. It is a 10/1 over 30 years.

2. I'm pretty sure I will stay here until retirement or later.

3. I am putting $140 extra monthly to pay down the principal.

GrOW

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Re: Refinance from 10/1 ARM to 15 year mortgage and retirement
« Reply #3 on: February 20, 2016, 10:01:43 AM »
Thanks for clarifying.

I am struggling to find a scenario where refinancing makes sense. First, the cost is $5,500 - more since you are financing some of the closing costs. Second, you can pay your current load like a 15 year loan for free right now and your payment risk is pretty minimal after the 10 year mark given the rapidly reducing principle.

If you are aggressive, you could keep paying your loan as is and invest all extra money. With the high fee 403b, contribute to get any match, then tIRA, then back to 403b with any remaining money.

I really don't see a third option since doing the refi pretty much precludes you from investing more, at this time.
« Last Edit: February 20, 2016, 10:07:12 AM by Redcedar »

couronne

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Re: Refinance from 10/1 ARM to 15 year mortgage and retirement
« Reply #4 on: February 20, 2016, 11:04:40 AM »
Thanks Redcedar!