Started a refinance

[wakkowarner]

Original goal was to get a 15-year loan, use a biweekly payment plan to pay off house in 13.6 years.

New goal: 30-year loan, put saved money towards investments that will hopefully earn more.

Basically I am assuming 7% interest rate of return on investments (not unreasonable considering stock market history).  I figure that with my new monthly payment of $933 for P&I I will need $160,000 to generate the $933 monthly payment.  In other words, when I can save $160,000, I have effectively paid off my house for the remainder of my mortgage. 

Used this neat calculator I found online: http://www.mycalculators.com/ca/savecalcm.html

This basically shows that I would need to save an additional $600 per month to save $160,000 in 13.6 years.  Since my new 30-year loan will save me almost $400 per month, I really just have to come up with an additional $200.  My original loan I was looking to get would cost me an additional $196 per month over what I am paying now (but would pay off the mortgage in 13.6 years).

So this means that for an additional $4 per month, if my interest rate of 7% is attainable, I get the same effective payoff.  Now, I know that tax deductions on interest and taxes on income throw wrenches into these calculations, but I think it is still great that I can get basically the same benefit either way.  On top of that, if I run into any hard times I can more easily afford the lower payments without risking the loss of my house (or forcing myself to sell my house if it isn't a good time to do so).  It also gives me more money options as far as other investments might go rather than forcing investment in my primary residence.  On the downside, by the time the loan is paid off, my son will be older than I am now.  While psychologically that seems to be a downer, mathematically it is the right thing to do.

[James]

While psychologically that seems to be a downer, mathematically it is the right thing to do.

It would be fun to hear back in 30 years the end result compared to the alternative of paying off the house.  I think you are making exactly the right decision, I'm just hugely curious how it will turn out.  :)


Thanks for the breakdown, I think it is a common consideration that is seldom broken down so clearly.

[wakkowarner]

Not that it seems much sooner, but I'm hoping to have an "end result" in about 14 years (or more precisely 13.6 years).  At that time I should either have the stash, or the knowledge as to why I wasn't able to afford it (but if this is the case, at least I still have the house!).

I guess I'll know if I'm on track in just the next year or so.

[sol]

We're in a similar position, and trying to drag out our mortgages for as long as possible for tax reasons.

We made the same calculation on paying down the principal vs investing more in taxable investment accounts, and came to the same conclusion.  As an added wrinkle, we have significant assets in 401k plans that are difficult to draw from before age 59.5.  If we were to pay the mortgage off now, we would pay our (curently high) marginal tax rate on those mortgage payments.  If we can delay making those payments until we can draw on 401k funds to do it, we not only get the benefit of hopefully better market returns, as you noted, but also lower taxes on those payment amounts because we'll be in a lower tax bracket after retiring.

With mortgage interest rates at today's historic lows, I see little benefit in accelerated mortgage prepayments plans. 

[wakkowarner]

You bring up an interesting point about where and how I should invest this money.  Currently I contribute to my 401k and have not been contributing to a Roth IRA like I used to.  I am considering donating this money to a Roth account (and to a spousal Roth account, when I reach my max).  This would allow the money to grow tax free, removing that wrinkle in the calculations.  Of course this wouldn't allow us to have the money make the house payment for us, but the goal isn't really to have it make the payment for us.  The real goal is for us to beat the earnings/savings we could have had with a 15-year mortgage.  By not having to pay taxes on interest earned, that will help.  Plus if we really needed the money, the principal of a Roth is tappable if it came down to it. 

I figure I might do the Roth until at least I get my savings in order that I've got money left over after already maxing out the  401k, Roth, HSA account, and any other tax-advantaged account that I can.  Unless someone has any other suggestions.

[c]

I am looking into doing something similar right now. When I first got my mortgage I thought the best thing to do was pay it down, but now I'm thinking it makes more sense to be more liquid. I am going through the re-fi process and with the current offers, I can knock down from a 4.75% to a 3.35% on a 30-year fixed. My original plan was to pay the difference towards principal, but this thread and a few others have made me start looking into paying the minimum and then investing the rest. It's a lot to think about.

[wakkowarner]

For anyone interested in reading it, here was my frugal brother-in-law's reply when I asked him what I should do a few weeks ago (note: He's not a reader of MMM but has always been wise with money).

I hate debt.
 
But, with rates as low as they are now and a virtual guarantee of inflation, why not borrow the cheap money long term now and pay it back with inflated dollars later. The bank ends up taking the risk instead of you. Whether or not you invest a dime of the savings you have offloaded a ton of inflation risk to the bank.
 
Ideally of course you would invest the difference at a higher rate of return but at the very least you can pay extra each month on the mortgage. The thing is, you basically know your rate of return if you pay extra on the house--it will be whatever your mortgage rate is (by not paying interest you have in effect "earned" that interest).

[Mr Mark]

We're in a similar position, and trying to drag out our mortgages for as long as possible for tax reasons.

We made the same calculation on paying down the principal vs investing more in taxable investment accounts, and came to the same conclusion.  As an added wrinkle, we have significant assets in 401k plans that are difficult to draw from before age 59.5.  If we were to pay the mortgage off now, we would pay our (curently high) marginal tax rate on those mortgage payments.  If we can delay making those payments until we can draw on 401k funds to do it, we not only get the benefit of hopefully better market returns, as you noted, but also lower taxes on those payment amounts because we'll be in a lower tax bracket after retiring.

With mortgage interest rates at today's historic lows, I see little benefit in accelerated mortgage prepayments plans.

Fully agree. 30 fixed rates at less than 3.5% nominal and still tax deductible to boot? You're grandkids won't believe it.The rest of the planet can hardly believe it now!

[Another Reader]

I closed on my "last mortgage ever" in December at 3.125 percent for 30 years.  Of course, I said the same thing in 2009 when I refinanced because, well, how could rates ever go lower than 4.5 percent?  I will be content to make 30 years of payments at that rate, while the rental income and dividends keep on growing.  Unless we turn into Japan, and I can refinance in the 2's.....

[Mr Mark]

Unless we turn into Japan, and I can refinance in the 2's.....

Which is why I still hold some bonds...  ;-)

[wakkowarner]

Update
Refinance finished up about a month ago.  Ended up rolling the various closing costs back in the principal.  Due to that our "effective" interest rate is 3.375% (2% lower than the previous effective 5.375%) and our monthly payment is $939.33 (about $6 more than my original calculations that didn't have rolling so many closing costs into the loan).  The nice thing with rolling those costs in is it has given me a jump on my investments outside of my home (though I guess I could go buy something nice instead..... haha, just kidding)!

Oh, and I still haven't made my first payment yet, that doesn't come till April 1st, so even more money has been building up in the bank account!

[Mr Mark]

Well done! I do think now is a special time in the US.

To get say, money at 3.5% or so fixed for 30 years, with 20% down, on quality property is the bargain of the century. It should especially appeal to all those who are afraid of the bond market. A fixed rate nominal 30 yr mortgage is effectively a hedge against a bad bond market and/ or inflation. Taxed advantaged on top!

Note this only applies if you live modestly and invest the delta in stocks. Balanced. Index. Low fee. Tax optimised.

But the bargains in US real estate combined with these long term fixed nominal rates are phenomenal.

[randymarsh]

Well done! I do think now is a special time in the US.

To get say, money at 3.5% or so fixed for 30 years, with 20% down, on quality property is the bargain of the century.

I agree, I sometimes wish I was 5 - 10 years older so I could be in the market for a house right now. :(

I'd love to be a 21 year old homeowner. Combine today's interest rates with the low cost of housing where I live and sometimes I'd rather pay a mortgage than worrying about graduating next year!

I know I shouldn't want to waste my youth but rates have to go higher sometime right?

[wakkowarner]

Yes, rates will go up, as they have already started.  For my same loan I checked the offer and it was .175% higher than what I just got.  I've also heard radio ads talking about the interest rates going up.

Don't fret though.  Do you KNOW where you would live for the next 30 years?  I've got a wife and a son, and my son is 11.  We love the school district that he is in, and know that we plan on being here for AT LEAST 8 more years, barring other influences.  Even then, if we do move, would probably keep the house and rent it out, since we most likely won't be able to get such a good deal on low payments again.  But at that time we might just rent ourselves, or live in an RV and travel.

Don't wish your life away.  Learn from every moment of it, even the hard parts.