Mortgage Situation for 28 year old

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bigtex
Posts: 197
Joined: Fri Jan 26, 2018 10:34 am

Mortgage Situation for 28 year old

Post by bigtex » Tue May 14, 2019 7:08 pm

Hello,

For some reason I aggressively paid down on my mortgage when I first got it and also refinanced from a 30 year down to a 20 year. That said here is the current situation:

Mortgage is a 20year fixed at 3.75%. I owe 120k home value of 280k. If I make regular payments and nothing extra it is paid off in 12 years at age 40.

I currently save 20% for retirement. Should I just keep going and pay the house off by 40 or should I look into refinancing back into a 30 year so I can invest more etc? Is there anything wrong with paying it off on schedule from now till 40? What am I missing or overlooking?

lakpr
Posts: 1433
Joined: Fri Mar 18, 2011 9:59 am

Re: Mortgage Situation for 28 year old

Post by lakpr » Tue May 14, 2019 7:43 pm

Are you single or married? What is your tax bracket?

For MFJ status, the Tax Cuts and Jobs Act has made the mortgage interest pretty much non-deductible. That's because the SALT deductions are limited to $10K, and your other deductions, which are mortgage interest and charitable contributions, should exceed $14,600 for the mortgage interest to provide you any tax benefit. The 3.75% interest on a $120k balance = $4500.

So the 3.75% you are paying on the home mortgage interest is after-tax. Assuming that you are maximizing all other tax-advantaged space (you have contributed full $19K to your workplace 401k, have contributed $6K each for yourself and your spouse, have contributed $7K for HSA if your health plan is an HSA, etc.), then there is nothing wrong with aggressively paying down the mortgage.

If you are single, though, the standard deduction is just $12,300; so your property taxes + mortgage interest + charitable contributions must exceed this figure before the mortgage interest provides any tax benefit.

If there is no benefit, why refinance at all?

Topic Author
bigtex
Posts: 197
Joined: Fri Jan 26, 2018 10:34 am

Re: Mortgage Situation for 28 year old

Post by bigtex » Tue May 14, 2019 7:46 pm

No I am not able to max the 401k or IRAs. Also I am married.

megabad
Posts: 1634
Joined: Fri Jun 01, 2018 4:00 pm

Re: Mortgage Situation for 28 year old

Post by megabad » Tue May 14, 2019 7:56 pm

Obviously a personal decision but if I were you I would refinance to a 30. The interest rate is about the same and then you could max retirement accounts.

Grt2bOutdoors
Posts: 20456
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Mortgage Situation for 28 year old

Post by Grt2bOutdoors » Tue May 14, 2019 7:59 pm

bigtex wrote:
Tue May 14, 2019 7:08 pm
Hello,

For some reason I aggressively paid down on my mortgage when I first got it and also refinanced from a 30 year down to a 20 year. That said here is the current situation:

Mortgage is a 20year fixed at 3.75%. I owe 120k home value of 280k. If I make regular payments and nothing extra it is paid off in 12 years at age 40.

I currently save 20% for retirement. Should I just keep going and pay the house off by 40 or should I look into refinancing back into a 30 year so I can invest more etc? Is there anything wrong with paying it off on schedule from now till 40? What am I missing or overlooking?
Would you risk your home, the one you are living in by borrowing money, then take said borrowed money and go to the casino? How secure is your employment? If you lose your job and you have a large mortgage on your home, you fail to make the payments, the bank will take your house. You fail to pay the taxes, then the county will take your house. You borrow, invest in the stock market, lose your job - perfect trifecta and then the economy declines - now you have debt, no job and your investment is not worth what you put in the market. Do you feel comfortable in a situation like that? Now, go ask your wife what she thinks.......

IMO, continue making your payments on a regular schedule. Sleep Well at Night.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Grt2bOutdoors
Posts: 20456
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Location: New York

Re: Mortgage Situation for 28 year old

Post by Grt2bOutdoors » Tue May 14, 2019 8:01 pm

megabad wrote:
Tue May 14, 2019 7:56 pm
Obviously a personal decision but if I were you I would refinance to a 30. The interest rate is about the same and then you could max retirement accounts.
The interest rate yes, but what are the payments? Is he refinancing the $120K or is he cash-out refinancing?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

megabad
Posts: 1634
Joined: Fri Jun 01, 2018 4:00 pm

Re: Mortgage Situation for 28 year old

Post by megabad » Tue May 14, 2019 8:19 pm

Grt2bOutdoors wrote:
Tue May 14, 2019 8:01 pm
megabad wrote:
Tue May 14, 2019 7:56 pm
Obviously a personal decision but if I were you I would refinance to a 30. The interest rate is about the same and then you could max retirement accounts.
The interest rate yes, but what are the payments? Is he refinancing the $120K or is he cash-out refinancing?
I guess either one if you can get an attractive rate. The cash out refinancing will take a little more discipline to accomplish wisely since OP would have to save the cash and gradually move over into retirement accounts while facing a higher mortgage payment each year.

OP is young and my proposal is clouded by my own above average risk tolerance. That said, I do not believe a mortgage of 120k is significantly less risky than a mortgage of 224k. The primary risk is having the leveraged asset at all. If I can take a portion of the leverage and potentially get higher return, good on me. The tax benefit for a young person of a tax advantaged retirement account is very pronounced and is hard to pass up for paying down a mortgage in my opinion (or getting a shorter than 30 yr term mortgage).

SovereignInvestor
Posts: 180
Joined: Mon Aug 20, 2018 4:41 pm

Re: Mortgage Situation for 28 year old

Post by SovereignInvestor » Tue May 14, 2019 8:40 pm

Grt2bOutdoors wrote:
Tue May 14, 2019 7:59 pm
bigtex wrote:
Tue May 14, 2019 7:08 pm
Hello,

For some reason I aggressively paid down on my mortgage when I first got it and also refinanced from a 30 year down to a 20 year. That said here is the current situation:

Mortgage is a 20year fixed at 3.75%. I owe 120k home value of 280k. If I make regular payments and nothing extra it is paid off in 12 years at age 40.

I currently save 20% for retirement. Should I just keep going and pay the house off by 40 or should I look into refinancing back into a 30 year so I can invest more etc? Is there anything wrong with paying it off on schedule from now till 40? What am I missing or overlooking?
Would you risk your home, the one you are living in by borrowing money, then take said borrowed money and go to the casino? How secure is your employment? If you lose your job and you have a large mortgage on your home, you fail to make the payments, the bank will take your house. You fail to pay the taxes, then the county will take your house. You borrow, invest in the stock market, lose your job - perfect trifecta and then the economy declines - now you have debt, no job and your investment is not worth what you put in the market. Do you feel comfortable in a situation like that? Now, go ask your wife what she thinks.......

IMO, continue making your payments on a regular schedule. Sleep Well at Night.
But a 30Y mortgage has lower payments so if he was ever distressed he'd be LESS likely to default on lower 30Y payments than current higher 20 year payments.

He's not taking the money and blowing it he's building up his other investable assets.

Seems like a good move to refinance to lower payment and start aggressively building up asset base that provides more flexibility of you are ever distressed.

chevca
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Joined: Wed Jul 26, 2017 11:22 am

Re: Mortgage Situation for 28 year old

Post by chevca » Tue May 14, 2019 9:20 pm

So, you effectively have a 12 year mortgage at this point. And, you want maybe to refi to a 30 year mortgage? Personally, I would never more than double the time line of my mortgage without some emergency situation making it necessary to do so.

What was the "some reason" you paid it down aggressively when you got it? It wasn't just for the heck of it, right? If you're debt averse and don't want a mortgage, that's perfectly fine.

A quick check on Mortgage Professor says you have $29,202 in interest left to pay now letting it ride out for 12 years. A refi to a 30 year and let's use the same rate of 3.75%.... says you will pay $80,066 in interest if you let it ride for 30 years so you can invest more. Would you feel okay about those numbers?

KlangFool
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Joined: Sat Oct 11, 2008 12:35 pm

Re: Mortgage Situation for 28 year old

Post by KlangFool » Tue May 14, 2019 9:26 pm

bigtex wrote:
Tue May 14, 2019 7:46 pm
No I am not able to max the 401k or IRAs. Also I am married.
bigtex,

1) So, you choose to pay 10% to 20% tax in order to save 3+% mortgage interest. How does this make any sense?

2) Do not refinance. Just stop pre-paying the mortgage.

KlangFool

JGoneRiding
Posts: 1631
Joined: Tue Jul 15, 2014 3:26 pm

Re: Mortgage Situation for 28 year old

Post by JGoneRiding » Tue May 14, 2019 9:36 pm

megabad wrote:
Tue May 14, 2019 7:56 pm
Obviously a personal decision but if I were you I would refinance to a 30. The interest rate is about the same and then you could max retirement accounts.
I disagree. Its doubtful that he can find a 30 yr right now for that rate. Just pay as planned and adjust if the future requires it. No more extra though until the 401k and Roth's are maxed which might never make sense or exceed reasonable savings goals. You do need to live life too!

Slacker
Posts: 710
Joined: Thu May 26, 2016 8:40 am

Re: Mortgage Situation for 28 year old

Post by Slacker » Tue May 14, 2019 9:44 pm

First, you aggressively paid down your mortgage.
Now, you want to turn 12 years of payments into 30 years.

I believe you need to take some time to think about what your goals are and how you plan to get there along with what is your comfort zone. It looks like you at one point placed a high value on paying off your home and getting rid of that debt. What changed?

megabad
Posts: 1634
Joined: Fri Jun 01, 2018 4:00 pm

Re: Mortgage Situation for 28 year old

Post by megabad » Tue May 14, 2019 9:46 pm

JGoneRiding wrote:
Tue May 14, 2019 9:36 pm
megabad wrote:
Tue May 14, 2019 7:56 pm
Obviously a personal decision but if I were you I would refinance to a 30. The interest rate is about the same and then you could max retirement accounts.
I disagree. Its doubtful that he can find a 30 yr right now for that rate. Just pay as planned and adjust if the future requires it. No more extra though until the 401k and Roth's are maxed which might never make sense or exceed reasonable savings goals. You do need to live life too!
The going APR for a 30 is about 400 bps which is only 25 bps higher than his interest rate. Regardless, would you trade 25 bps for the capability to dump more into 401k/IRA? I would.

Snowjob
Posts: 1597
Joined: Sun Jun 28, 2009 10:53 pm

Re: Mortgage Situation for 28 year old

Post by Snowjob » Tue May 14, 2019 9:53 pm

Funny,

I'm in a similar situation as you. Age wise, mid/late 30's with about 14 years to go on the mortgage and retirement savings rate is down to about 15%. I used to save significantly more while renting and the change to a lower savings rate while still young eats at me. Every time I start questioning my current lower savings rate however, I have to remind myself why I chose to pay down the mortgage faster.

1.) I don't particularly like the idea of a.) a lot of debt, b.) seeing so much of each mortgage payment go to interest and c.) a timeframe that stretches into my 60's.

2.) We are 10 years into a massive equity bull market and while I don't know where the top is, I am quite certain we are closer now than we were in 2009. A refinance to 30 years while upping my investments is effectively taking on additional leverage to by stocks. I am quite familiar with leverage on the way up and down (2008/2009). Its only fun in one direction.

Flyer24
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Re: Mortgage Situation for 28 year old

Post by Flyer24 » Tue May 14, 2019 10:11 pm

I would not refinance. I would stop the extra mortgage payments until you have maxed out your tax advantaged accounts.

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Watty
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Re: Mortgage Situation for 28 year old

Post by Watty » Tue May 14, 2019 10:26 pm

There is a wiki on this choice.

https://www.bogleheads.org/wiki/Paying_ ... _investing

If getting a paid off home by the time you are 40 turns out to be the worst financial mistake that you ever make then you will be doing pretty dang good.

bigtex wrote:
Tue May 14, 2019 7:08 pm
What am I missing or overlooking?
1) The odds that you will actually live in the house for another 30 years is very low. The odds that will be in the house in 12 years is not all that great.

2) The APR on the new loan will likely be higher than 3.75%. I would not refinance into a higher interest rate unless there is a painfully compelling reason to do that.

softwaregeek
Posts: 58
Joined: Wed May 08, 2019 8:59 pm

Re: Mortgage Situation for 28 year old

Post by softwaregeek » Wed May 15, 2019 12:04 am

Alternatively, you could refi into a 10/1 ARM and make more payments to tax-deferred accounts. But I would only do that if you were rock solid about your job prospects, like if you were a lifetime goverment employee.

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