Mortgage refinance - do it or not?

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alexp
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Mortgage refinance - do it or not?

Post by alexp »

With the mortgage refinance mega thread going on and several people I know running for refinancing their mortgages, I am starting to wonder if I am missing some boat or lifetime opportunity by not refinancing. I would like to take an opinion of this group so that I don't think "Should have done it" after 5-10 years :happy . I have three mortgages:
1. Primary - $300K @3.125%, 30yr with ~22yrs left (No tax deduction for mort interest)
2. Rental - $130K @4%, 30yr with ~26yrs left (tax deduction for mort interest)
3. Rental - $108K @3.625%, 15yr with ~14yrs left (tax deduction for mort interest)

The 15-yr rates are hovering around 2.375% at aimloan and some other lenders with $3K closing cost. My monthly mortgage payment will have to increase by $400 if I opt for refinancing my primary mortgage.

Little background on my personal financial situation - early 40s, Single income household with kids. Job security average as there have been some impacts at Megacorp during Covid times. No loans other than mortgages above. I max out my 401K, Roth IRA for self/spouse and HSA annually. ~$10K per year goes to mega backdoor and ~15K per year goes to taxable. ~1.1M invested assets and ~1.5M net worth. 8 months of EF in savings.

I am little hesitant to refinance as it will decrease my cashflow towards taxable. Being single-income, having some cashflow and amount available (~$200K) in taxable gives me sense of security.

Options:
1. Refinance primary to 15-yr. Bite the bullet and have ~5K/year less going towards taxable. There are lot of chances that the 80-20 index portfolio in taxable might beat ~3%. Then does this option even make sense?
2. Cash-out refinance of $400K on primary @3.125%, 30yr. Pay off one of the rental loans with the cash + some taxable.
3. Refinance primary to 30yr mortgage. This will reduce monthly mortgage payment by $300 that can go to mega backdoor. But will this amount move a needle for me and is it worth the hassle.
4. Do nothing.


Thanks,
-Alex
mx711yam
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Re: Mortgage refinance - do it or not?

Post by mx711yam »

I've been doing cash out on my rentals and invest the money in either my taxable or other real estate. I wouldn't pay off a rental now with rates so low, i plan to keep my mortgages.
ChiKid24
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Re: Mortgage refinance - do it or not?

Post by ChiKid24 »

alexp wrote: Tue Aug 25, 2020 11:14 pm With the mortgage refinance mega thread going on and several people I know running for refinancing their mortgages, I am starting to wonder if I am missing some boat or lifetime opportunity by not refinancing. I would like to take an opinion of this group so that I don't think "Should have done it" after 5-10 years :happy . I have three mortgages:
1. Primary - $300K @3.125%, 30yr with ~22yrs left (No tax deduction for mort interest)
2. Rental - $130K @4%, 30yr with ~26yrs left (tax deduction for mort interest)
3. Rental - $108K @3.625%, 15yr with ~14yrs left (tax deduction for mort interest)

The 15-yr rates are hovering around 2.375% at aimloan and some other lenders with $3K closing cost. My monthly mortgage payment will have to increase by $400 if I opt for refinancing my primary mortgage.

Little background on my personal financial situation - early 40s, Single income household with kids. Job security average as there have been some impacts at Megacorp during Covid times. No loans other than mortgages above. I max out my 401K, Roth IRA for self/spouse and HSA annually. ~$10K per year goes to mega backdoor and ~15K per year goes to taxable. ~1.1M invested assets and ~1.5M net worth. 8 months of EF in savings.

I am little hesitant to refinance as it will decrease my cashflow towards taxable. Being single-income, having some cashflow and amount available (~$200K) in taxable gives me sense of security.

Options:
1. Refinance primary to 15-yr. Bite the bullet and have ~5K/year less going towards taxable. There are lot of chances that the 80-20 index portfolio in taxable might beat ~3%. Then does this option even make sense?
2. Cash-out refinance of $400K on primary @3.125%, 30yr. Pay off one of the rental loans with the cash + some taxable.
3. Refinance primary to 30yr mortgage. This will reduce monthly mortgage payment by $300 that can go to mega backdoor. But will this amount move a needle for me and is it worth the hassle.
4. Do nothing.


Thanks,
-Alex
I'd go with a modified option 3. Refinance the 30yr primary but keep making the same payment you make today. This will provide you a much lower effective interest and speed up your time to pay off the mortgage. Then if things go bad at megacorp, you have flexibility to pay the lower monthly payment while you look for another job.

Couple observations though.
1) You need to price shop more. Nobody on the mega thread says Aimloan has the best rates. Look at Lenderfi, Better, Watermark, Loan Cabin, Owning. With some price shopping you can likely get 2.75% or better with no out of pocket costs.
2) I'm not sure what you mean by "worth the hassle". We're at all time historic low mortgage rates. You have the chance to lock in 30 year money less than 3% with no out of pocket costs. The only thing you need to do is spend 2-5 hours in total over the next 30-45 days to price shop and submit documents online. I never had to leave my home during the process and simply downloaded statements from banks online and submitted pdf files to the lender. If that's a hassle to you then I'm not sure what to tell you.
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alexp
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Re: Mortgage refinance - do it or not?

Post by alexp »

ChiKid24 wrote: Wed Aug 26, 2020 5:46 am I'd go with a modified option 3. Refinance the 30yr primary but keep making the same payment you make today. This will provide you a much lower effective interest and speed up your time to pay off the mortgage. Then if things go bad at megacorp, you have flexibility to pay the lower monthly payment while you look for another job.
The modified option might not be that bad compared to #4. If I keep on paying same the same amount on a 2.875% interest (assuming that I can get this rate), I found that the mortgage will be paid off few months early and I will save $13,000 in interest. Thanks for this suggestion.

I was referring to investing the difference in Mega backdoor instead of paying extra to mortgage.
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gr7070
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Re: Mortgage refinance - do it or not?

Post by gr7070 »

Who has each of your rental loans? Curious.

It will likely be incredibly hard to justify a refi for either
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alexp
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Re: Mortgage refinance - do it or not?

Post by alexp »

gr7070 wrote: Wed Aug 26, 2020 11:27 am Who has each of your rental loans? Curious.

It will likely be incredibly hard to justify a refi for either
aimloan and flagstar.
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gr7070
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Re: Mortgage refinance - do it or not?

Post by gr7070 »

alexp wrote: Wed Aug 26, 2020 11:45 am
gr7070 wrote: Wed Aug 26, 2020 11:27 am Who has each of your rental loans? Curious.

It will likely be incredibly hard to justify a refi for either
aimloan and flagstar.
Gracias!
Lee_WSP
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Location: Arizona

Re: Mortgage refinance - do it or not?

Post by Lee_WSP »

It's really not going to move the needle much for you either way. I'd personally pull the trigger at 2.75%. I'm not seeing what the rate for option 3 you've been quoted is though.
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Meg77
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Re: Mortgage refinance - do it or not?

Post by Meg77 »

I'd go with option 1 for a few reasons:

1. I don't think refinancing to another 30 year loan is worth the hassle to save a fraction of a percentage point in interest. Besides, you'd be stretching the amortization back out to 30 years when you're currently already 8 years in.

2. You can easily afford the 15 year payment with your cash flow. You're already maxing out tax advantaged space AND doing a mega backdoor roth AND putting money in taxable. You can shorten the amort and still be putting money in all those places, just slightly less. That is definitely not a big deal.

3. You'll break even after just 16 months. That's not awesome, but it's not bad considering how low your rate already is. As long as you plan to keep the home/loan for 2+ years, it makes sense to refi.

4. Stock market prices are at all time highs. It is decidedly not a given that you'll earn substantially more than 3% on your brokerage account after taxes and fees (however small they may be). Sure, over the next 22 years you might (on average), but that clouds the issue of year to year volatility; the market could easily be down or flat for the next 5-10 years.

5. Your age. I think having a paid off home by age 60 is a great target. It'll set you up nicely to be able to retire then if you choose with a lot lower fixed expense each month.

All that said, #4 is a fine option too. I wouldn't move the rental mortgage to homestead given the loss of the tax advantage. Depends on your tax bracket, but being able to deduct the rental mortgage is probably worth 25% or 30% I'm guessing, likely cancelling out the interest rate savings.
"An investment in knowledge pays the best interest." - Benjamin Franklin
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alexp
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Re: Mortgage refinance - do it or not?

Post by alexp »

Huge thanks for the replies so far. Please note that I am not maximizing the Mega backdoor roth currently but plan to increase the contribution with raises.

So, we are down to these two options now based on recommendations:
1. Refinance primary to 15-yr. Bite the bullet and have ~5K/year less going towards taxable. There are lot of chances that the 80-20 index portfolio in taxable might beat ~3%. Then does this option even make sense?
OR
3. Refinance primary to 30yr mortgage. This will reduce monthly mortgage payment by $300 that can go to mega backdoor. But will this amount move a needle for me and is it worth the hassle.

I spent couple of hours today getting quotes for these options. Here is what I got:
15yr - 2.125% with $2500 closing cost.
30yr - 2.5% with $3000 closing cost.

Talked to better half who values a paid off home more than investment - tilting towards 15yr. :happy
Lee_WSP
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Re: Mortgage refinance - do it or not?

Post by Lee_WSP »

Get a twenty year then.
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alexp
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Re: Mortgage refinance - do it or not?

Post by alexp »

Lee_WSP wrote: Wed Aug 26, 2020 4:35 pm Get a twenty year then.
The rate for 20 year loan is very close to 30 year.
Lee_WSP
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Re: Mortgage refinance - do it or not?

Post by Lee_WSP »

alexp wrote: Wed Aug 26, 2020 6:49 pm
Lee_WSP wrote: Wed Aug 26, 2020 4:35 pm Get a twenty year then.
The rate for 20 year loan is very close to 30 year.
It makes the wife happy and lowers your payments. I can't see a big downside.
av111
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Re: Mortgage refinance - do it or not?

Post by av111 »

Meg77 wrote: Wed Aug 26, 2020 2:50 pm
Stock market prices are at all time highs. It is decidedly not a given that you'll earn substantially more than 3% on your brokerage account after taxes and fees (however small they may be). Sure, over the next 22 years you might (on average), but that clouds the issue of year to year volatility; the market could easily be down or flat for the next 5-10 years.
Couldn't have said it better!
AV111
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AerialWombat
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Re: Mortgage refinance - do it or not?

Post by AerialWombat »

I’m currently refinancing two of my rentals to 2.75% 30 year. Primary to 2.75% 15 year. All simultaneously with a local broker. Going very smoothly. Definitely consider it.
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alexp
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Re: Mortgage refinance - do it or not?

Post by alexp »

AerialWombat wrote: Wed Aug 26, 2020 9:55 pm I’m currently refinancing two of my rentals to 2.75% 30 year. Primary to 2.75% 15 year. All simultaneously with a local broker. Going very smoothly. Definitely consider it.
Are you getting 2.75% 30yr for rentals? - it is a tremendous deal.
I talked to the mortgage broker about rental refinance. He said that we can't get good rates for rentals right now because mortgage companies are worried about risk of rent non-payments due to Covid.

However, I locked the 2.125% 15yr for my primary. They waived appraisal, so the closing cost will be ~$2K.
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AerialWombat
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Re: Mortgage refinance - do it or not?

Post by AerialWombat »

alexp wrote: Wed Aug 26, 2020 10:20 pm
AerialWombat wrote: Wed Aug 26, 2020 9:55 pm I’m currently refinancing two of my rentals to 2.75% 30 year. Primary to 2.75% 15 year. All simultaneously with a local broker. Going very smoothly. Definitely consider it.
Are you getting 2.75% 30yr for rentals? - it is a tremendous deal.
I talked to the mortgage broker about rental refinance. He said that we can't get good rates for rentals right now because mortgage companies are worried about risk of rent non-payments due to Covid.

However, I locked the 2.125% 15yr for my primary. They waived appraisal, so the closing cost will be ~$2K.
Good on ya! That’s a great rate and fee set.

My rates were locked over a month ago, before rates went up. Also, in all fairness, these two rentals are both on VA loans, and doing a VA IRRRL (VA to VA refi) comes with inherently lower rates.
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