Poll: Refinance to 15 year mortgage or keep 30 year?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills

Would you refinance to a 15 year mortgage

No, I would keep the 30 year at 3.5% (2.4% after tax)
11
44%
Yes, I would refinance to a 15 year at 2.875% (1.9% after tax) or 3% (2% after tax)
11
44%
I would refinance to a 15 year at 2.875% (1.9% after tax) but not 3% (2% after tax)
3
12%
 
Total votes : 25

Poll: Refinance to 15 year mortgage or keep 30 year?

Postby sunnyday » Tue May 21, 2013 9:42 pm

My current mortgage is: $230k, @ 3.5% (2.4% after tax) fixed with 29 years left.
If I refinance to a 15 year I could get either 3% (2% after tax) or possibly 2.875% (1.9% after tax) with no closing costs.

The appealing thing about the 15 year is the lower rate and I'd have my house paid off before my daughter starts college. However, if I keep the 30 year, I could invest the extra ~$500/mo in my taxable account. Once my taxable account reaches my mortgage balance, I'll likely pay it off in one full swoop. The break-even point will likely be in less than 10 years if I can keep contributing ~$7k a year to my taxable.

What would you do?
Last edited by sunnyday on Tue May 21, 2013 10:18 pm, edited 1 time in total.
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Re: Poll: Refinance to 15 year mortgage or keep 30 year?

Postby Bungo » Tue May 21, 2013 9:49 pm

I would keep the 30-year mortgage but pay it on a 15-year schedule. This approach gives extra flexibility in case you need to free up some cash flow, at a relatively minor cost: even the 3.5% rate on the 30-year mortgage is extremely cheap by historical standards.
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Re: Poll: Refinance to 15 year mortgage or keep 30 year?

Postby enc0re » Tue May 21, 2013 10:09 pm

If it's a no-cost refi, I'd do it. In general, I would pay half a point in this rate environment to get from a 15 to a 30 year. Since you'd save more than half a point, it is worth it to me.

If there are closing cost or you are rolling cost into the balance, no deal.
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Re: Poll: Refinance to 15 year mortgage or keep 30 year?

Postby sunnyday » Tue May 21, 2013 10:19 pm

^ I forgot to mention in my original post that the 15 year would be a no cost refinance.
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Re: Poll: Refinance to 15 year mortgage or keep 30 year?

Postby Watty » Tue May 21, 2013 10:41 pm

If you and any spouse are not maxing out all of your deductible retirement accounts then putting the $500 a month($6K a year) into a deductible retirement account would likely be a better choice then going with the 15 year mortgage. What your numbers look like for that?

If you are not maxing out your Roth and 529 accounts those would be an option too.

A fixed rate 30 year mortgage is a pretty good inflation hedge which would be expensive to otherwise duplicate. Even if you move in ten years the interest rate you have could make the house worth keeping as a rental just to keep the low interest rate mortgage.

If you have any tax advantaged saving space you are not using then I would stick with the 30 year loan.
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Re: Poll: Refinance to 15 year mortgage or keep 30 year?

Postby sunnyday » Tue May 21, 2013 10:54 pm

^ We max out all of our tax advantage retirement accounts. We have not started a 529 - I don't think we'll start one until we are debt free.
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Re: Poll: Refinance to 15 year mortgage or keep 30 year?

Postby letsgobobby » Wed May 22, 2013 12:22 am

Hello,

A variation of this question is a staple of the forum: invest or pay down a mortgage? In most scenarios the answer with the higher expected return is to invest. That also has the advantage of greater liquidity. Others will argue for the risk free approach, which may also be the feel good approach.

I am in the process of refinancing from 2.875 15 yrs with 14 years remaining to a 3.25 30 year, which very shortly may be cheaper than the US government itself pays to borrow money for the same time frame. So I guess my opinion is pretty clear.
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Re: Poll: Refinance to 15 year mortgage or keep 30 year?

Postby steve r » Wed May 22, 2013 9:04 am

letsgobobby wrote:Hello,

A variation of this question is a staple of the forum: invest or pay down a mortgage?


Close, but not exactly. In this example you free up $6,000 a year (at $500) a month but pay $1,500 (@300k loan ?) a year to get this. In the early years out, you would need one heck of a return OVER the 2-3 percent interest paid on your cash flow to get that. You pay the higher rate on the entire loan balance but can only earn interest on you cash flow savings.

Phrased differently, if you pay down the loan with say $75,000 or whatever, that entire amount is immediately investable.

IMHO if you are using leverage or home loans or whatever to invest, it matters what you invest in. Using borrowed money means you probably should probably be more conservative with your investments. If you have a moderately aggressive portfolio depending on age .... but lets say 70/30 (stocks / treasuries & cash) ...it would mean 30% of your investments are earning less than the rate on your home. You could get more aggressive with bonds ... more aggressive with stocks ... but doing so with borrowed money adds to risk ... doing so with borrowed money is where some run into trouble..

One poster on another thread was something like 90% stocks or something like that, but with no mortgage at all,the poster was, as I recall, late 40s ... to me this makes intellectual sense for aggressive investors (though not for me personally). It also makes sense to me if you have a mortgage to have more bonds.

The OP is maxed out in tax deferred, so all investments would be taxable ... dividends at a high rate ... which makes generating that extra $1,000 a year that much harder, particularly in the early years. Given this, the 15 year loan makes sense (and perhaps tweak your tax deferred to be more aggressive).

I do not think there is a choice that is knowably wrong ahead of time.
Maximize Diversification - Minimize Costs
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Re: Poll: Refinance to 15 year mortgage or keep 30 year?

Postby feh » Wed May 22, 2013 1:16 pm

I voted for 15 year mortgage. I admit, one of the reasons I did is because the thought of having a 30 year debt obligation gives me the hives.
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Re: Poll: Refinance to 15 year mortgage or keep 30 year?

Postby playtothebeat » Wed May 22, 2013 1:27 pm

Bungo wrote:I would keep the 30-year mortgage but pay it on a 15-year schedule. This approach gives extra flexibility in case you need to free up some cash flow, at a relatively minor cost: even the 3.5% rate on the 30-year mortgage is extremely cheap by historical standards.


this.

Looks like your current mortgage is about $12,800/year. Refinancing to a 15 year, 2.875% makes that payment $19,000/year.
If you keep your current rate, but make payments at the 15-year clip, you'll pay off the mortgage in 15.9 years. Basically, an extra year. However, you're buying yourself flexibility in case something unexpected comes up, you lose your job, etc. In my opinion, that's worth it. You can always increase the payment from $19k to $20k per year - that pays off your current mortgage in 15 years.

note, this doesn't take into account any tax consequences, of course.. your current mortgage will have a higher amount of interest each year, so you gotta see how that plays into your taxes.
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Re: Poll: Refinance to 15 year mortgage or keep 30 year?

Postby StillTired » Wed May 22, 2013 1:32 pm

Personally, since you've decided to do no 529 until after you are debt free (including mortgage, I assume) I would change to the 15 year mortgage with the plan on paying it off before your oldest goes to college and then using that current payment to finance college. That is what we did (actually paid it off early--- our oldest is in 9th grade) and it's definitely reassuring to know that money will be there in a few years when she needs it.
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