Mortgage or Refinance & Invest - Specific Scenario

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Topic Author
$tar-Lord
Posts: 113
Joined: Thu May 25, 2017 4:56 pm

Mortgage or Refinance & Invest - Specific Scenario

Post by $tar-Lord »

Hello Bogleheads! In the past 3 years I've been reading the site and learning. My investment savings history is decent. The first six years out of college were not as financially careful as the more recent six. However I did invest at least for the company match every year. The only hangup being I had no idea what to invest in. So I did the mildly stupid thing and put it in the safest, slowest growing option. This wasn't as painful as it could have been because this period included the 2007-08 timeframe. I've progressively incremented my 401k to the max cont. Also, began his/hers Roth IRAs. I want to invest more but I'm not sure that downgrading our life with two small kids is in the picture. Here are the specifics, thank you for your help in advance:

Married, single income - 35 & 33
$120k salary, optional $14k bonus
Two small ones
Texas

Investments: $268k sum total
His/her Roth IRA - Vanguard Target Date
$22k sum $11k per yr cont.

Fmr. Employer 401k - low fees Target Date
$20k sum

Current Employer 401k - Vanguard Target Date
$170k sum $18k per yr cont. + around $7.7k match (percentage match)

Current Employer Pension
$54k sum $6k per yr cont. (Percentage employer cont.)

Debt:
$115k mortgage 11yrs left on 15yr @3.75%
$220k house market value


My projection spreadsheet estimates us reaching $1M in investments in 10yrs (by age of 45). To accelerate this, I am contemplating refinancing to a 30yr note and investing the difference for up to 10yrs or more. In 10yrs or so, I intend to focus more resources on the mortgage to pay it off well before its maturity. The current mortgage payment is $1k per month. The hope is to reduce it by half and invest $6k per year.

Is this a good change or should I stay with the original plan?

If I change, which is better: non-deductable 401k (Vanguard Target Date) or Taxable (Vanguard Target Date ETF?)?
Last edited by $tar-Lord on Thu May 25, 2017 8:59 pm, edited 1 time in total.
mortfree
Posts: 2965
Joined: Mon Sep 12, 2016 7:06 pm

Re: Mortgage Refinance or Invest - Specific Scenario

Post by mortfree »

In 10 years will there be a chance that you'll be preparing for college payments for the little ones?

That might derail your mortgage plan.

Personally I wouldn't go from 11 years to 30 years but that's me - YMMV
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Nate79
Posts: 9354
Joined: Thu Aug 11, 2016 6:24 pm
Location: Delaware

Re: Mortgage Refinance or Invest - Specific Scenario

Post by Nate79 »

What guarantee do you have that your investments will beat your mortgage rate over the next 10 years?
JGoneRiding
Posts: 1973
Joined: Tue Jul 15, 2014 3:26 pm

Re: Mortgage Refinance or Invest - Specific Scenario

Post by JGoneRiding »

I wouldn't do it for 2 reasons. Right now you have a very good balance of income invested vs cost of living. You have no real good reason to change this balnce besides greed. Stay thr course and you should have an excellent life and retirement.

2) interest rates have gone up, you would pay more in interest to pay longer on your house and that makes zero sense

I also agree with the above poster that in 10 yrs you will want the money for something else.

Stay the course you have done amazing don't screw it up now.
Topic Author
$tar-Lord
Posts: 113
Joined: Thu May 25, 2017 4:56 pm

Re: Mortgage Refinance or Invest - Specific Scenario

Post by $tar-Lord »

Mort -
You're right, college costs are not getting cheaper. My parents are starting and funding a 529 for them now, but I would like the option to jump in and help when the time comes.

Also, I agree, going from 11yr to 30yr is a bit of a gut check.

Nate - Admittedly, the investment returns are not guaranteed. However I might consider it win-win. If the market rises I'm up. If the market drops, I just bought a discount that I plan to keep for well beyond 10 years. I haven't done any math so I'm just spit balling here.

Thanks to you both!
Topic Author
$tar-Lord
Posts: 113
Joined: Thu May 25, 2017 4:56 pm

Re: Mortgage Refinance or Invest - Specific Scenario

Post by $tar-Lord »

Gone -
Thanks for the encouragement to stay conservative, it's the direction I'm really leaning toward. Plus doing nothing is nice and lazy.

Thank you
Lafder
Posts: 4117
Joined: Sat Aug 03, 2013 7:56 pm
Location: East of the Rio Grande

Re: Mortgage or Refinance & Invest - Specific Scenario

Post by Lafder »

In eleven years when the mortgage is paid off, you can start investing the same amount as your current mortgage payment each month. I would do that rather than refi to a higher rate and longer term.

lafder
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jimb_fromATL
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Joined: Sun Nov 10, 2013 11:00 am
Location: Atlanta area & Piedmont Triad NC and Interstate 85 in between.

Re: Mortgage or Refinance & Invest - Specific Scenario

Post by jimb_fromATL »

This sounds like a really bad idea to me.

If you owe $115,000 at 3.75% with 132 months (11 years) remaining, the payment for P&I is $1064.56 per month for P&I. The total paid will be $140,522 with $25,522 interest.

If you roll in typical closing costs of about 1.5% and refinance $116,725 at the typical current rate of 4.0% for 30 years the payment will be $557.26 per month for P&I. The total paid will be (360 x 557.26) = $200,615 with $83,890 interest. That would cost about $60,093 more and 228 months longer, with 3.29 times more interest than your current mortgage.

After 132 months when the current mortgage would be paid off, you would still owe $88,896 on the new mortgage. You would already have paid $45,730 interest, which is 1.79 times more than you'll pay on the current mortgage. Then you'll still have 228 more months of the $557 payments to go, and will pay $38,160 more interest before you're out of debt.

In order to break even -- just to have enough money to pay off the extra mortgage debt after 132 months --- and assuming federal cap gains tax rate of 15% plus perhaps 6% state tax paid out of earnings on 2% dividends every year, your investment of the difference of $507.30 per month would have to be able to earn a guaranteed APY of about 6.1% with no risk to the principal.

I don't know of any funds, bonds, notes, etc that come anywhere close to that with the same guaranteed no risk.
While it's possible that you might be able to earn more than that in the stock market, there's also a possibility that there might be a big drop in the market that could set you several years behind.

So ... it makes very little sense to me to gamble with your home in the pot as collateral, when you can get the equivalent of earning more than any other guaranteed no-risk investment just by not borrowing more money in the first place.

In 11 years when your home is paid off, you can invest the freed-up payments. You'll be dollar-cost-averaging, which can reduce your chance of loss if the market takes a big down-turn. Plus you can afford to invest more aggressively with a lot more risk in the hope that you might be able to earn more than the mortgage rate then. It's a lot easier and less worrisome to ride out the market's ups and downs when you have a paid-for home and don't have to worry about being able to make the mortgage payments.

jimb
Topic Author
$tar-Lord
Posts: 113
Joined: Thu May 25, 2017 4:56 pm

Re: Mortgage or Refinance & Invest - Specific Scenario

Post by $tar-Lord »

Hello Bogleheads! I wanted to give an update and request more great advice. In the last year, I have used the previously provided advice as a guide and have found it to be very useful. I've also made a few other changes, but I was hoping for some expert opinions in any area. Here are the new specifics, thank you for your help in advance:

Married, single income - 36 & 34
$125k salary, variable $12-15k, annual bonus
Dependents: 8 & 6
Texas

Annual Savings Contributions Plan: We're on plan for 2018
His Roth IRA - $5.5k/yr
Her TIRA - $5.5k/yr
HSA - $6.85k/yr
401k - $18.5k/yr
Employer 401k & pension contributions - $15k/yr
Mortgage principal payments - $8.5k/yr
Additional Mortgage principal payments - $12k/yr
There also seems to be a small trickle of $150-300/month into our savings account
Total Contributions - $71k/yr

Investments Balance: $368k total
Investments in Target Date Funds, pension, $10k in money market
11% in Roth IRA, HSA, & money market
89% in 401k & TIRA

Debt:
$96k mortgage 9yrs left on 15yr @3.75% on required payments - 5yrs left with a continuation of the additional principal payments

Hard Assets:
$230k house market value
Two vehicles (12 & 10 yrs old) both have less than 100k miles - We drive 5-7k miles per year, hoping to get 8-10 years out of them

My wife and I are in agreement on establishing as frugal of a lifestyle as we can maintain comfortably. We do receive family help which offsets some of our costs and contributes to an improved lifestyle (e.g. occasional meals - 1-2 per week, 1 week vacation - driving to beach with paid for lodging and split meals, weekly date night babysitting, 529s for kids, no interest emergency borrowing, etc.).

Our long term goal is as early of a retirement as possible, with active travel. We are both into fitness, cycling, the outdoors, reading, hiking/walks, tinkering/creating, dumpster diving. In essence, most of what we want to do, we want to do together, it is typically inexpensive, and we don't have enough time and mental energy for all of it now with kids and a job (heavy emphasis on the job). Also, we recently discovered REI adventures and we both are excited at the prospects, but we're not planning to spend that amount of money on a vacation, today or in the near future.

My wife would live in a van or airstream trailer and travel the world, I'm a little bit of the reluctant one.

I've considered moving in with family, for up to 5 or 10 years, as an extreme measure to accelerate our progress.

I'm hoping for any suggested possibilities, extreme or not, that I can use for a mental evaluation exercise.

Investments: I'm considering moving the Roth IRAs to Vanguard Total Market (HSA is already there) and then moving 401k and TIRA from 2045 and 2050 Target Date mix to just 2045. Thoughts?
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