Refinance 15/20/30 year?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
illnevertell
Posts: 9
Joined: Wed Aug 12, 2020 9:28 pm

Refinance 15/20/30 year?

Post by illnevertell »

Hello,

With rates so low I'm wanting to refinance. Given my financial status would it make sense to refinance to a 30 year? My current mortgage payment including taxes/insurance is roughly 33% of my monthly income.

I have been given these quotes and would like to move forward and lock with one of them:

15 Year @ 2.25%
20 Year @ 2.65% (Will lower my payment by $50)
30 Year @ 2.75% (Will lower my payment 19% of my monthly income).

Background Info: 31 Years Old, Single, No Kids, Sacramento, California.
Current Mortgage: Purchased 2013, 65% LTV, $170,000 @ 4.25%
Current Financial Status: $90k Income, 24% Tax Bracket, 90k Brokerage, 35k 401k, $5k roth, $10k cash, 0 debit.

I'm leaning towards a 30 year as it will allow more monthly cash flow for investments/flexibility. I don't foresee any huge pay increase without relocating. Plan to keep the house long term.

All feedback is appreciated, thanks!
User avatar
Watty
Posts: 20909
Joined: Wed Oct 10, 2007 3:55 pm

Re: Refinance 15/20/30 year?

Post by Watty »

The 20 year mortgage rate is barely lower than the 30 year rate so I would not consider that option.

Will you be able to max out all your retirement accounts(401k, IRA, Roth, etc) and have plenty of spare cash flow with the 15 year mortgage?

If not then I would go with the 30 year mortgage and contribute as much as possible to your tax advantaged accounts. You can crunch the numbers but the tax advantages should be worth a lot more to you than the lower interest rate would be.
Topic Author
illnevertell
Posts: 9
Joined: Wed Aug 12, 2020 9:28 pm

Re: Refinance 15/20/30 year?

Post by illnevertell »

With a 30 - Yes, 15 - no.
mw1739
Posts: 736
Joined: Mon Mar 21, 2011 5:44 pm

Re: Refinance 15/20/30 year?

Post by mw1739 »

Take the 30 but continue to pay it over the 23 years remaining on your current mortgage. Assuming you owe $170,000, at 2.75% that results in a monthly payment of $832. Otherwise a lot of your savings are coming from resetting the 30 year clock on your mortgage.
HomeStretch
Posts: 5155
Joined: Thu Dec 27, 2018 3:06 pm

Re: Refinance 15/20/30 year?

Post by HomeStretch »

+1

You will be age 54 at payoff in 23 years. Having a paid off mortgage by retirement or when kids (if you have them) start college is advantageous as it reduces retirement expenses or frees up cash flow to help with college costs.
MikeG62
Posts: 3252
Joined: Tue Nov 15, 2016 3:20 pm
Location: New Jersey

Re: Refinance 15/20/30 year?

Post by MikeG62 »

illnevertell wrote: Sun Oct 11, 2020 7:57 pm Hello,

With rates so low I'm wanting to refinance. Given my financial status would it make sense to refinance to a 30 year? My current mortgage payment including taxes/insurance is roughly 33% of my monthly income.

I have been given these quotes and would like to move forward and lock with one of them:

15 Year @ 2.25%
20 Year @ 2.65% (Will lower my payment by $50)
30 Year @ 2.75% (Will lower my payment 19% of my monthly income).

Background Info: 31 Years Old, Single, No Kids, Sacramento, California.
Current Mortgage: Purchased 2013, 65% LTV, $170,000 @ 4.25%
Current Financial Status: $90k Income, 24% Tax Bracket, 90k Brokerage, 35k 401k, $5k roth, $10k cash, 0 debit.

I'm leaning towards a 30 year as it will allow more monthly cash flow for investments/flexibility. I don't foresee any huge pay increase without relocating. Plan to keep the house long term.

All feedback is appreciated, thanks!
Using an online calculator I get the following for monthly payments on each mortgage:

15-year = $1,114
20-year = $913
30-year = $694

Since you say the 20-year would be $50 less than you are currently paying, that implies your current mortgage is $963. You also say that if you elect the 15-year you won't be able to fully fund your retirement investments with some excess cash flow left over.

If in your shoes I think I'd go with the 20-year mortgage. Improves your monthly cash flow and also has the benefit of paying off the mortgage 3 years earlier. Otherwise, unless you are disciplined about paying extra principal payments along the term, you will be extending the term of your existing mortgage by 7 years if you go for the 30-year option. I'd try and avoid that.
Real Knowledge Comes Only From Experience
carolinaman
Posts: 4386
Joined: Wed Dec 28, 2011 9:56 am
Location: North Carolina

Re: Refinance 15/20/30 year?

Post by carolinaman »

I have done the math on this question before and there is a huge difference in total interest paid from 30 yr to 20 yr and 15 yr. Consider how much more interest you will pay. I would do the 15 year if I could afford it even if it slows down my investment. You will likely achieve salary increases over time that enables you to reinstate your targeted savings. I was able to pay off my mortgage in less than 20 years which freed up lots of cash for retirement savings. I just hate to pay more interest on loans than necessary.
User avatar
gr7070
Posts: 1535
Joined: Fri Oct 28, 2011 10:39 am

Re: Refinance 15/20/30 year?

Post by gr7070 »

illnevertell wrote: Sun Oct 11, 2020 9:34 pm With a 30 - Yes, 15 - no.
30 year then!

I'm a big fan of paying off a mortgage early. However, that's with taxable monies. Tax-advantaged investing > paying extra on mortgage.

Additionally, your discretionary income isn't high enough to justify increasing the percent of your house payment.

In other words, 30-some percent house payment is on the higher side unless you have a rather high income that much of your house payment is coming from discretionary income that you don't need for living expenses.
User avatar
grabiner
Advisory Board
Posts: 28244
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Refinance 15/20/30 year?

Post by grabiner »

carolinaman wrote: Mon Oct 12, 2020 8:45 am I have done the math on this question before and there is a huge difference in total interest paid from 30 yr to 20 yr and 15 yr.
However, the total dollar interest amount is the wrong comparison. One way to see that it is the wrong comparison is that it is not always a good deal to pay extra principal on your loan. The extra principal payment will reduce the amount of interest you pay, but you might have a better use for the money.

If you take a longer-term loan, you will pay more interest, but you can invest the money you didn't spend on the lower payments, offsetting the interest with earnings. In addition, the longer-term loan gives you the potential advantage of having locked in the rate; 15 years into the 30-year loan, you might pay it off because bond yields are 2%, or keep it and invest the money because bond yields are 5% while you are borrowing at only 2.75%.

The advantage of the longer-term loan for you is probably that it lets you invest more into your 401(k) and IRA, so you have a permanent benefit in tax-deferred growth. If you can max out already, so that the extra investments would be taxable, the benefit of tax-deferred growth is lower, which makes the
Wiki David Grabiner
absolute zero
Posts: 570
Joined: Thu Dec 29, 2016 4:59 pm

Re: Refinance 15/20/30 year?

Post by absolute zero »

Watty wrote: Sun Oct 11, 2020 8:09 pm The 20 year mortgage rate is barely lower than the 30 year rate so I would not consider that option.

Will you be able to max out all your retirement accounts(401k, IRA, Roth, etc) and have plenty of spare cash flow with the 15 year mortgage?

If not then I would go with the 30 year mortgage and contribute as much as possible to your tax advantaged accounts. You can crunch the numbers but the tax advantages should be worth a lot more to you than the lower interest rate would be.
Something seems "off" about this recommendation. I completely agree with the recommendation to max out *pre-tax* retirement contributions before paying off a mortgage, e.g. only take a 15 year mortgage if you can comfortably max out pre-tax space. But it seems inconsistent to say that a Roth should be included in this rule of thumb, since Roth contributions are only slightly better than taxable account contributions. After all, assuming 0% LTCG withdrawals on a taxable account, the only difference between taxable and Roth is tax drag which is roughly 0.3% per year (assuming 2% dividends and 15% dividend tax rate).

Surely a difference in returns of 0.3% per year between taxable vs Roth does not sway the needle enough to influence the decision of whether or not to pay a mortgage more aggressively. Would you agree or disagree?
User avatar
batpot
Posts: 1206
Joined: Thu Jul 11, 2013 8:48 pm

Re: Refinance 15/20/30 year?

Post by batpot »

MikeG62 wrote: Mon Oct 12, 2020 7:43 am Using an online calculator I get the following for monthly payments on each mortgage:

15-year = $1,114
20-year = $913
30-year = $694
With these numbers, if you got the 30 year, and put $420/mo extra to match the 15 year, you'd have it paid off in 15 years and 9 months.
Likewise, if you match the 20 year (+$219/mo), you'd have it paid off in 20 years and 3 months.
And paying an additional $201 on the 20 year = 15 years 7 months.

The 20 year makes little sense (they rarely ever do).

Personally, on a 2.75% loan, I would not sacrifice investment/retirement savings.
shelanman
Posts: 595
Joined: Tue Feb 27, 2007 8:35 pm

Re: Refinance 15/20/30 year?

Post by shelanman »

Honestly, at 2.75% interest that is tax deductible, it's hard to get too excited about paying the mortgage any faster than the slowest you can -- which means taking the 30-year and not prepaying anything.

That said, when faced with a similar situation, I went with the 15-year because I just don't like owing money, and so reducing the balance faster feels more like progress, even though I know intellectually that the 30-year produces more financial stability in the short term (where "short term" is still a number of years).

My key advice would be that you can always overpay, but you can't underpay, so don't sign up for a mortgage that leaves you with risk of being unable to make the payments in the face of an adverse outcome like a job loss.

And the 20-year seems like a bad value -- the extra 0.1% isn't enough to warrant the higher monthly minimum payment. You could always just make extra payments on a 30-year to simulate 20 (but have the freedom to stop if you have problems)
Topic Author
illnevertell
Posts: 9
Joined: Wed Aug 12, 2020 9:28 pm

Re: Refinance 15/20/30 year?

Post by illnevertell »

Thanks for all the replies! Moving forward on the 30 makes the most sense. I’m able to lock and get the rate down to 2.25% with $3k in points. Would you guys suggest paying the points? If my financial status changes I could always pay it off sooner.
User avatar
grabiner
Advisory Board
Posts: 28244
Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Refinance 15/20/30 year?

Post by grabiner »

illnevertell wrote: Tue Oct 13, 2020 5:24 pm Thanks for all the replies! Moving forward on the 30 makes the most sense. I’m able to lock and get the rate down to 2.25% with $3k in points. Would you guys suggest paying the points? If my financial status changes I could always pay it off sooner.
$3K in points sounds like about two points. Two points for a 0.5% mortgage rate reduction on a 30-year mortgage is a great deal; it takes only a little more than four years to break even. (More often, on 30-year mortgages, the reduction is only 0.125% per point, making the break-even more than eight years.)
Wiki David Grabiner
presto987
Posts: 223
Joined: Sun Aug 30, 2020 10:58 pm

Re: Refinance 15/20/30 year?

Post by presto987 »

In my recent experience on two refis, for which I shopped around extensively and got quotes from multiple lenders, usually a 0.125% reduction came with 0.5-0.6 points. For example, I'm currently locked on a refi where going from 2.75% to 2.25% would be a 2.2 point swing.

Relative to that, your $3k in points is a solid deal; I don't know if I would call it "great". Four years to breakeven sounds right though.

I personally would avoid points on a 4-year breakeven. So much can happen during that timeframe, which could include selling the house, or mortgage rates dropping further enough that it makes sense to refi again. If either of these scenarios occur before the 4 years are up, you would have been better off without points. On the other hand, if you really expect to keep the house and don't intend to refi again, then it makes sense to pay the points.
Admiral
Posts: 3085
Joined: Mon Oct 27, 2014 12:35 pm

Re: Refinance 15/20/30 year?

Post by Admiral »

At your age, maximizing retirement contribs at the cost of a longer mortgage makes sense. When you're 40 or mid 40s, then you could refinance to a 15 and still have it paid off well before retirement. That's what I did.

I would NOT, however, pre-pay. If you have $ left over after maxing retirement, put it in taxable. All those rates are crazy low historically so you will likely be fine whatever choice you make.
Topic Author
illnevertell
Posts: 9
Joined: Wed Aug 12, 2020 9:28 pm

Re: Refinance 15/20/30 year?

Post by illnevertell »

Thanks guys! Appreciate the responses.
deikel
Posts: 1145
Joined: Sat Jan 25, 2014 7:13 pm

Re: Refinance 15/20/30 year?

Post by deikel »

I would go with the 15 years (in fact I did just that last year)

I interpret your post such that this will have the same payment you currently have (?), so you are used to that and you will shave off 8 years of payments on the back end - that is a lot of principle payments you save. Make that calculation and see how much you actually don't pay the bank 15 vs 30 year new vs existing. Yes, a lot of that is 'future money' and no one knows where inflation will go, but it is still an eye opener IMO how much ytou pay the bank for the privilege to borrow their money.

Yes, your cash flow is locked into the house - but most likely you would loose the house anyway if you loose your job(s) for longer time period, so a somewhat lower monthly payment does not really help you in a crisis situation.

And the alternative to invest the excess money in your retirement accounts is nice - but left over money has the tendency to get spent instead of invested. Being leveraged is not always a good thing - see '08.
Everything you read in this post is my personal opinion. If you disagree with this disclaimer, please un-read the text immediately and destroy any copy or remembrance of it.
Admiral
Posts: 3085
Joined: Mon Oct 27, 2014 12:35 pm

Re: Refinance 15/20/30 year?

Post by Admiral »

deikel wrote: Thu Oct 15, 2020 3:18 pm I would go with the 15 years (in fact I did just that last year)

I interpret your post such that this will have the same payment you currently have (?), so you are used to that and you will shave off 8 years of payments on the back end - that is a lot of principle payments you save. Make that calculation and see how much you actually don't pay the bank 15 vs 30 year new vs existing. Yes, a lot of that is 'future money' and no one knows where inflation will go, but it is still an eye opener IMO how much ytou pay the bank for the privilege to borrow their money.

Yes, your cash flow is locked into the house - but most likely you would loose the house anyway if you loose your job(s) for longer time period, so a somewhat lower monthly payment does not really help you in a crisis situation.

And the alternative to invest the excess money in your retirement accounts is nice - but left over money has the tendency to get spent instead of invested. Being leveraged is not always a good thing - see '08.
Would you rather save half a percent (the difference b/w the 30 and the 15 year rates quoted in the OP) or save at 24 percent, which is the tax savings if the extra cash flow is directed to pre-tax savings? It's not "leftover money" that will be spent if it is deducted from the OP's paycheck. And that savings doesn't even account for investment gains over decades.

I am a fan of 15 year notes (and I have one myself) but mostly for those over 40 (closer to retirement) who have already saved a considerable amount for retirement, and when the rate spread is very advantageous.

None of those things are true in this case.
Topic Author
illnevertell
Posts: 9
Joined: Wed Aug 12, 2020 9:28 pm

Re: Refinance 15/20/30 year?

Post by illnevertell »

If I were to jump down to a 15 year (currently have 23 left) my current mortgage would hike up to roughly 43% of my disposable income. Which would be rather stressful for the next 15 years.

One of the big reasons I was able to save during the last 3-4 years was because I actually rented the house out and lived rent free while paying student loans and some credit card debit.

Between my brokerage and EF I have just over $100k - soon to be roughly $125k by end of year with a bonus and some company stock coming my way.
Post Reply