Fixed vs Variable Mortgage

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dcr1984
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Fixed vs Variable Mortgage

Post by dcr1984 » Mon Aug 05, 2019 8:05 am

We're trying to decide whether to refinance our mortgage.

Currently we have a 30 year fixed mortgage at 4.5%. At the rate we are paying with extra payments we should be able to pay off the mortgage in ~18 years.

Our bank offered us a 15/1 ARM at 3.625%. (or a 15-year fixed at 3.5% but I'm hesitant to lock in the higher monthly payment every month).

It's a large mortgage so the interest savings from 0.875% a year for the first 15 years would be significant. We'd plan to make the same monthly payments we are now and get it paid off in 17 years or so, so ideally the principal would be pretty low by the time the rate becomes adjustable.

The biggest risk I can see is if something else changes with our finances and we can't make as many extra payments as we expect, that the loan balance could be higher than expected when the rate becomes variable.

Anyone have advice for this situation? If you're planning to payoff a 30 year mortgage in 17-18 years, is this a good option?

Thanks!

Admiral
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Re: Fixed vs Variable Mortgage

Post by Admiral » Mon Aug 05, 2019 8:14 am

dcr1984 wrote:
Mon Aug 05, 2019 8:05 am
We're trying to decide whether to refinance our mortgage.

Currently we have a 30 year fixed mortgage at 4.5%. At the rate we are paying with extra payments we should be able to pay off the mortgage in ~18 years.

Our bank offered us a 15/1 ARM at 3.625%. (or a 15-year fixed at 3.5% but I'm hesitant to lock in the higher monthly payment every month).

It's a large mortgage so the interest savings from 0.875% a year for the first 15 years would be significant. We'd plan to make the same monthly payments we are now and get it paid off in 17 years or so, so ideally the principal would be pretty low by the time the rate becomes adjustable.

The biggest risk I can see is if something else changes with our finances and we can't make as many extra payments as we expect, that the loan balance could be higher than expected when the rate becomes variable.

Anyone have advice for this situation? If you're planning to payoff a 30 year mortgage in 17-18 years, is this a good option?

Thanks!
#1) Are all your retirement accounts funded to the IRS max? If no, then you should not be pre-paying.
#2) If you can afford to pre-pay, then you can afford a higher payment. You would do better to get a shorter loan with lower interest.
#3) Rates are extremely low right now, nearing the historical lows they were a few years ago. I have an aversion to adjustable mortgages. I would lock in the lowest 15 year rate you can find, enjoy the inflation hedge, and not worry about a higher rate in the future. This is especially true if you plan to stay in the house long term. I would not pre-pay any mortgage that is below 4%, ever.
#4) Please post actual #s

4th and Inches
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Re: Fixed vs Variable Mortgage

Post by 4th and Inches » Mon Aug 05, 2019 8:49 am

Is the 3.5% 15-year mortgage a ZERO cost refinance? If not it isn't a competitive rate. Shop around.

dcw213
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Re: Fixed vs Variable Mortgage

Post by dcw213 » Mon Aug 05, 2019 9:03 am

Those rates are not competitive. Right now you can get 3.5% on a 30 fixed easily.

Topic Author
dcr1984
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Re: Fixed vs Variable Mortgage

Post by dcr1984 » Mon Aug 05, 2019 9:31 am

Thanks for the responses. Suppose I should clarify a few things:

-We're on a physician's loan and only have about 10% equity in the house, hence the higher rates. I believe we need to get to at least 20% equity or more before we can refinance at better rates, though perhaps I'm wrong on that point?

-We've paid off our student loans and are currently maximizing our 403b's and backdoor Roths.

-We're in an expensive housing market and have about 650K left on the mortgage, so the 0.875-1.0% interest savings aren't trivial (though at least partially offset by the deductability of the interest)

-The 15 year fixed would be about what we're paying now monthly on the 30 year fixed + current extra payment. I'm interested in the interest savings but hesitant to lock in that higher payment every month for 15 years, which is why the 15/1 ARM seemed a potentially attractive happy medium, provided we can pay off enough to offset the interest risk in years 16+.

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willthrill81
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Re: Fixed vs Variable Mortgage

Post by willthrill81 » Mon Aug 05, 2019 9:49 am

dcr1984 wrote:
Mon Aug 05, 2019 9:31 am
-The 15 year fixed would be about what we're paying now monthly on the 30 year fixed + current extra payment. I'm interested in the interest savings but hesitant to lock in that higher payment every month for 15 years, which is why the 15/1 ARM seemed a potentially attractive happy medium, provided we can pay off enough to offset the interest risk in years 16+.
Why are you hesitant to "lock in that higher payment every month" if doing so results in significant long-term savings? If it would be a financial stretch for you, that suggests that you may be 'house poor'.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Admiral
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Re: Fixed vs Variable Mortgage

Post by Admiral » Mon Aug 05, 2019 9:55 am

willthrill81 wrote:
Mon Aug 05, 2019 9:49 am
dcr1984 wrote:
Mon Aug 05, 2019 9:31 am
-The 15 year fixed would be about what we're paying now monthly on the 30 year fixed + current extra payment. I'm interested in the interest savings but hesitant to lock in that higher payment every month for 15 years, which is why the 15/1 ARM seemed a potentially attractive happy medium, provided we can pay off enough to offset the interest risk in years 16+.
Why are you hesitant to "lock in that higher payment every month" if doing so results in significant long-term savings? If it would be a financial stretch for you, that suggests that you may be 'house poor'.
And, presumably, as a physician your income is likely to rise, not fall.

If for some reason you get strapped and CAN'T make the payment, you could always refi to a 30 year later. The rate is likely to be higher (though really, who knows?) but the payment will be lower.

Make sure you have an adequate emergency fund and you'll likely be fine.

Dottie57
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Re: Fixed vs Variable Mortgage

Post by Dottie57 » Mon Aug 05, 2019 9:59 am

Op

Find a lower 30 yr rate. Then. Continue with same amount you are paying today ( including the extra you are doing now). You will finish in about 15-18yrs. If job is lost you still can pull back and pay lower amount.

This is what I did 25 yrs ago..

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willthrill81
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Re: Fixed vs Variable Mortgage

Post by willthrill81 » Mon Aug 05, 2019 10:04 am

Admiral wrote:
Mon Aug 05, 2019 9:55 am
willthrill81 wrote:
Mon Aug 05, 2019 9:49 am
dcr1984 wrote:
Mon Aug 05, 2019 9:31 am
-The 15 year fixed would be about what we're paying now monthly on the 30 year fixed + current extra payment. I'm interested in the interest savings but hesitant to lock in that higher payment every month for 15 years, which is why the 15/1 ARM seemed a potentially attractive happy medium, provided we can pay off enough to offset the interest risk in years 16+.
Why are you hesitant to "lock in that higher payment every month" if doing so results in significant long-term savings? If it would be a financial stretch for you, that suggests that you may be 'house poor'.
And, presumably, as a physician your income is likely to rise, not fall.

If for some reason you get strapped and CAN'T make the payment, you could always refi to a 30 year later. The rate is likely to be higher (though really, who knows?) but the payment will be lower.

Make sure you have an adequate emergency fund and you'll likely be fine.
Exactly. If you compare the savings on a 15 year mortgage to a 30 year mortgage and view that as your 'return' for a correspondingly larger emergency fund, the additional amount in your emergency fund can be providing you with a pretty high marginal return.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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willthrill81
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Re: Fixed vs Variable Mortgage

Post by willthrill81 » Mon Aug 05, 2019 10:07 am

Dottie57 wrote:
Mon Aug 05, 2019 9:59 am
Op

Find a lower 30 yr rate. Then. Continue with same amount you are paying today ( including the extra you are doing now). You will finish in about 15-18yrs. If job is lost you still can pull back and pay lower amount.

This is what I did 25 yrs ago..
That's possible, but it's expensive due to the spread between 30 year and 15 year rates, which is .68% right now according to BankRate.com.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Dottie57
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Re: Fixed vs Variable Mortgage

Post by Dottie57 » Mon Aug 05, 2019 11:57 am

willthrill81 wrote:
Mon Aug 05, 2019 10:07 am
Dottie57 wrote:
Mon Aug 05, 2019 9:59 am
Op

Find a lower 30 yr rate. Then. Continue with same amount you are paying today ( including the extra you are doing now). You will finish in about 15-18yrs. If job is lost you still can pull back and pay lower amount.

This is what I did 25 yrs ago..
That's possible, but it's expensive due to the spread between 30 year and 15 year rates, which is .68% right now according to BankRate.com.
It all depends on what you consider expensive and if you value peace of mind. Peace of mind was my priority. I refinanced once but paid what I had been paying before refinance. Paid off the new 30 yr in 12 years. ( rate reduction was 2%).

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willthrill81
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Re: Fixed vs Variable Mortgage

Post by willthrill81 » Mon Aug 05, 2019 12:13 pm

Dottie57 wrote:
Mon Aug 05, 2019 11:57 am
willthrill81 wrote:
Mon Aug 05, 2019 10:07 am
Dottie57 wrote:
Mon Aug 05, 2019 9:59 am
Op

Find a lower 30 yr rate. Then. Continue with same amount you are paying today ( including the extra you are doing now). You will finish in about 15-18yrs. If job is lost you still can pull back and pay lower amount.

This is what I did 25 yrs ago..
That's possible, but it's expensive due to the spread between 30 year and 15 year rates, which is .68% right now according to BankRate.com.
It all depends on what you consider expensive and if you value peace of mind. Peace of mind was my priority. I refinanced once but paid what I had been paying before refinance. Paid off the new 30 yr in 12 years. ( rate reduction was 2%).
In the thread I referenced above, one poster calculated that for a $100k mortgage, the higher 30 year rate would result in an additional $48 of monthly mortgage payment for the option of 'reducing' your payment (to the 30 year level) by $205 or so. That seems like a very expensive option to me, but that's why it's called personal finance. I would strongly favor a larger emergency fund.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Bacchus01
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Re: Fixed vs Variable Mortgage

Post by Bacchus01 » Mon Aug 05, 2019 12:17 pm

Get better rates.

Definitely refinance.

Right now, I'm not seeing any ARMs that are attractive enough to move to them from a 15/20/30 fixed rate. There just isn't enough of a gap. In fact, I'm seeing many 5/1 ARMs at HIGHER rates than 15/30 fixed.

petiejoe
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Re: Fixed vs Variable Mortgage

Post by petiejoe » Mon Aug 05, 2019 12:27 pm

I can't speak to whether the rates you're quoting are competitive (since I'm not currently in the market), but if you think you can afford the 15-year and are just nervous about locking into the higher payment, the 15/1 ARM might be a good compromise. You would have incentive to pay on the 15 year pace without the commitment to do so.

You'll read a lot of literature that warns against ARMs, and they're right. You should only go that path if you know yourself and you are confident in your ability to pay the mortgage down before the rate reset OR pay the increased cost when it does reset. Pay very close attention to the limits on the adjustment.

Topic Author
dcr1984
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Re: Fixed vs Variable Mortgage

Post by dcr1984 » Tue Aug 06, 2019 9:37 pm

Thanks for all the responses.

re: Concern about higher payments: We can afford the higher 15-year fixed payments now, I just find it hard to try to project a budget 5-15 years down the road. Our kids are 5 and 2 now, will they be a lot more expensive at 15 and 12? I don't think so, but it still seems like an unknown variable that makes me hesitant to commit to the higher payments. I suppose the interest savings even in the short term would justify the move now, even if I for osme reason had to refinance back to something with a lower payment later on.

One other option would be to wait until we have 20+% equity and can get better rate offers than we have now, but would probably save some money even in the short term by refinancing now and then potentially again down the line once we have enough equity to qualify for the better rates.

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willthrill81
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Re: Fixed vs Variable Mortgage

Post by willthrill81 » Tue Aug 06, 2019 10:06 pm

dcr1984 wrote:
Tue Aug 06, 2019 9:37 pm
Thanks for all the responses.

re: Concern about higher payments: We can afford the higher 15-year fixed payments now, I just find it hard to try to project a budget 5-15 years down the road. Our kids are 5 and 2 now, will they be a lot more expensive at 15 and 12? I don't think so, but it still seems like an unknown variable that makes me hesitant to commit to the higher payments. I suppose the interest savings even in the short term would justify the move now, even if I for osme reason had to refinance back to something with a lower payment later on.

One other option would be to wait until we have 20+% equity and can get better rate offers than we have now, but would probably save some money even in the short term by refinancing now and then potentially again down the line once we have enough equity to qualify for the better rates.
It's important to keep in mind that if/when inflation causes your nominal income to increase, the dollar value of your mortgage, at least the principal and interest portion of it, will not change. Over time, this effect can help to reduce the size of the mortgage in relation to your income. If your need was lasting and significant, you could refinance the mortgage or possibly just have it recast to add years to the term and lower your payment. There are options.

But again, if there is serious concern about your ability to buy a house with a 15 year mortgage, you may be buying too much house. It's possible to do so at virtually any income level.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Goal33
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Re: Fixed vs Variable Mortgage

Post by Goal33 » Tue Aug 06, 2019 11:52 pm

I think it’s a great idea to do the 15/1 arm. Try to pay off in 15, but 17-18 is fine too.

1/8 higher rate more for flexibility is worth it.

OP - people are missing that you only have 10% equity. This is a great rate. Do it.
A man with one watch always knows what time it is; a man with two watches is never sure.

DVMResident
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Re: Fixed vs Variable Mortgage

Post by DVMResident » Wed Aug 07, 2019 6:44 am

I may even go shorter duration on the ARM such as 7/1 or 10/1 for a lower interest. You are already paying extra on the fixed so it’s built into your budget. If you keep the payment the same, you will accumulate rapidly. Also, when ARM adjust they in effect ‘recast’ and will have a lower monthly minimum payment due the extra principal. ARMs (when there is a discount va fixed) are advantageous for people who make extra principal payments in the early years.

LongRoad
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Re: Fixed vs Variable Mortgage

Post by LongRoad » Wed Aug 07, 2019 6:55 am

If these are your options, the 15/1 ARM at 3.625% looks like an easy win.

If you continue making your current payments, increasing your monthly payment by just 1-2% a year with your rising income, you'll be nearly paid off in 15 years.

Is the adjustment/refinance low/no cost?

coupleofcents
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Re: Fixed vs Variable Mortgage

Post by coupleofcents » Wed Aug 07, 2019 7:06 am

There's also a high chance you move at some point in the future. Average home owner is in a house for 7 years. Given that you're starting out in a career, with 2 young children, I suspect you will move at some point before the 17-18 year point you mentioned. So I would probably just refinance now to take any savings you can get.

Admiral
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Re: Fixed vs Variable Mortgage

Post by Admiral » Wed Aug 07, 2019 7:10 am

dcr1984 wrote:
Tue Aug 06, 2019 9:37 pm
Thanks for all the responses.

re: Concern about higher payments: We can afford the higher 15-year fixed payments now, I just find it hard to try to project a budget 5-15 years down the road. Our kids are 5 and 2 now, will they be a lot more expensive at 15 and 12? I don't think so, but it still seems like an unknown variable that makes me hesitant to commit to the higher payments. I suppose the interest savings even in the short term would justify the move now, even if I for osme reason had to refinance back to something with a lower payment later on.

One other option would be to wait until we have 20+% equity and can get better rate offers than we have now, but would probably save some money even in the short term by refinancing now and then potentially again down the line once we have enough equity to qualify for the better rates.
What is the relative percentage of your housing costs to your full household income (take home, not gross, so after taxes and all retirement contribs)?

Topic Author
dcr1984
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Re: Fixed vs Variable Mortgage

Post by dcr1984 » Fri Aug 09, 2019 12:32 pm

Goal33 wrote:
Tue Aug 06, 2019 11:52 pm
I think it’s a great idea to do the 15/1 arm. Try to pay off in 15, but 17-18 is fine too.

1/8 higher rate more for flexibility is worth it.

OP - people are missing that you only have 10% equity. This is a great rate. Do it.
Thanks for the response. Rates have actually come down after the fed rate cut to 3.25% for 15 year fixed and 3.5% for the 15/1 ARM. It's now a 0.25% difference but still thinking I like the flexibility of the 15/1 ARM option with the plan to pay it off in 15-18 years.

Topic Author
dcr1984
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Re: Fixed vs Variable Mortgage

Post by dcr1984 » Fri Aug 09, 2019 12:33 pm

LongRoad wrote:
Wed Aug 07, 2019 6:55 am
If these are your options, the 15/1 ARM at 3.625% looks like an easy win.

If you continue making your current payments, increasing your monthly payment by just 1-2% a year with your rising income, you'll be nearly paid off in 15 years.

Is the adjustment/refinance low/no cost?
It's not low cost ~ $3500. Though we'd more than makeup the difference in interest saved in <1 year

Topic Author
dcr1984
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Re: Fixed vs Variable Mortgage

Post by dcr1984 » Fri Aug 09, 2019 12:39 pm

Admiral wrote:
Wed Aug 07, 2019 7:10 am
dcr1984 wrote:
Tue Aug 06, 2019 9:37 pm
Thanks for all the responses.

re: Concern about higher payments: We can afford the higher 15-year fixed payments now, I just find it hard to try to project a budget 5-15 years down the road. Our kids are 5 and 2 now, will they be a lot more expensive at 15 and 12? I don't think so, but it still seems like an unknown variable that makes me hesitant to commit to the higher payments. I suppose the interest savings even in the short term would justify the move now, even if I for osme reason had to refinance back to something with a lower payment later on.

One other option would be to wait until we have 20+% equity and can get better rate offers than we have now, but would probably save some money even in the short term by refinancing now and then potentially again down the line once we have enough equity to qualify for the better rates.
What is the relative percentage of your housing costs to your full household income (take home, not gross, so after taxes and all retirement contribs)?
What we are currently paying (mortgage + escrow + extra monthly payment) is roughly equal to what we'd need to pay monthly under the refinance to have the house paid off in 15 years, and is equal to approximately 29-30% of our net income after all of our retirements accounts and other pretax deductions (mostly health insurance) are accounted for.

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