Should I refinance for a 30 year or 15 year mortgage?

[frozen]

What are pros and cons on this refi for the 15 yr vs the 30 yr? Which would you choose?

I have an opportunity to refinance at the following rates:

15 year fixed:  2.25%   Principal and Interest $1175
 
30 year fixed :2.625%  Principal and Interest $721

No points, Closing costs are $2200-$2800

I am at 3.75% right now and have about $174K left on my loan. I am thinking of going with the 30, but still paying it off early, within ~10 years, which is what I have been planning anyway.

[Telecaster]

I'm a big fan of the 30-year fixed, especially at those rates. 

[YttriumNitrate]

I'd go 30-year. When adjusted for inflation, there a decent chance that 30-year loan will effectively be interest free.

However, I'm not planning on paying off my loan early. If you are supremely confident you'll be paying off the loan in 10 years, then getting the 15-loan makes sense.

[frozen]

Thanks for the feedback! I only have a medium level of confidence that I could pay off my mortgage in 10 years. I am leaning towards the 30, and then will likely do some combination of investing extra money and making extra payments to pay it off sooner.

I just feel safer with the lower monthly payment in case something happens to my job.

[Telecaster]

One thing some people recommend is recasting your loan rather than paying extra each month.  Basically, you save up for some period of time and then make a big lump sum payment.  The advantage is that the term and rate stays the same, but your payment goes down.

Another advantage of this method is that if you were to say lose your job before the loan is paid off you would still have access to the cash.  If you are paying down early then the money is tied up in the house where it is hard to get to. 

[frozen]

Thank you. I am familiar with recast and have been making extra payments for several years. I’m more interested in taking advantage of lower rates at this time.

One thing some people recommend is recasting your loan rather than paying extra each month.  Basically, you save up for some period of time and then make a big lump sum payment.  The advantage is that the term and rate stays the same, but your payment goes down.

Another advantage of this method is that if you were to say lose your job before the loan is paid off you would still have access to the cash.  If you are paying down early then the money is tied up in the house where it is hard to get to.

[RWD]

If you're making extra payments anyway then the cash flow advantage of the 30-year goes away and you should opt for the lower interest rate of the 15-year.

The better strategy is to invest more instead of paying extra on the mortgage, especially at those rates.

[Telecaster]

Thank you. I am familiar with recast and have been making extra payments for several years. I’m more interested in taking advantage of lower rates at this time.

One thing some people recommend is recasting your loan rather than paying extra each month.  Basically, you save up for some period of time and then make a big lump sum payment.  The advantage is that the term and rate stays the same, but your payment goes down.

Another advantage of this method is that if you were to say lose your job before the loan is paid off you would still have access to the cash.  If you are paying down early then the money is tied up in the house where it is hard to get to.

Understood.  I'm saying go ahead and take advantage of the lower rates, but instead of making extra payments, consider the recast option instead.   

[Mako52]

Regarding recasting......most people don't know (or understand) that if you're a few years into your mortgage, and have made extra principal payments, it will take you back out to a 30 year amortization, going back to the principal/interest split of payment #1 at the same interest rate.  It does lower your payment, but you are putting a smaller percentage of the total monthly payment towards principal, and the monthly payment is smaller.  So the net monthly amount going towards principal is greatly reduced.   For this reason we did not do it, and opted to put a chunk towards principal. 

Let's say you are 5 years into in a 4%/30 year mortgage.  Your current payment is 63% interest / 37% principal.  When that mortgage started, it was 70% interest / 30% principal.  Do you really want to go back to the days when your payment was 70% interest?

I would only recast if I was a year or two into the mortgage, had a chunk of cash, and needed to lower my monthly payment.  It's not a good way to build long-term home equity IMHO.  I would try to refinance and put a chunk towards principal to make my monthly payment (and interest) as low as possible.