Refinance to do Mega Backdoor 401(k)?

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sapphire96
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Refinance to do Mega Backdoor 401(k)?

Post by sapphire96 »

Hi folks,

I am considering refinancing my 15 year mortgage to a 30 year, take the difference, and invest in my employer’s mega backdoor Roth account. Below are my details.

Age: 24
State: FL
Single, but in serious relationship.
Marginal Tax Bracket: 22%
Retirement Age Goal: 50-55 at 3.5% initial withdraw rate.

Balances:
Cash: $10,000
I Bonds (2nd Tier Emergency Fund): $15,000 ($5,000 of which was invested last month)
401k + Roth Balance: 110,000.
HSA: $4,200
Taxable: $3,000

Annual Contributions:
401k: $19,500
Roth: $6,000
HSA: $3,600

Current Mortgage:
Original Balance: $200,000
Current Balance: $191,500
Rate: 2.25% at 15 Years, 9 months in.
Payment: $1,310

Proposed Mortgage at Better:
$191,500 (73% LTV)
2.625% (credits offset costs) at 30 years.
Payment: ~$760

Logic for refinancing…
1) Be able to do megabackdoor. I do have a potential raise coming at year end which would double my cash flow into mega backdoor (if I go forward with this plan).

2) Lowers required monthly payment, which lowers my emergency fund requirement.

3) Inflation hedge.

4) I would not be retiring for at least 25-30 years from now.

I am open to all feedback on whether I should proceed or not, or if there is any “third” option. Thanks everyone!
Keep interest as your friend, not your foe. | Use money as a tool for bettering your life, not squandering it. | Stay the course, don’t deviate from it.
gougou
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Re: Refinance to do Mega Backdoor 401(k)?

Post by gougou »

Yeah a mega backdoor is a no-brainer. You should max it out.
tomsense76
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Re: Refinance to do Mega Backdoor 401(k)?

Post by tomsense76 »

Mega Backdoor contributions come out of payroll. Not sure that your employer will let you contribute a lump sum outside of your paychecks into the plan (I asked mine this question before and they said no). Given this, I'm not entirely following what the refinance accomplishes.
"Anyone who claims to understand quantum theory is either lying or crazy" -- Richard Feynman
cashheavy18
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Re: Refinance to do Mega Backdoor 401(k)?

Post by cashheavy18 »

tomsense76 wrote: Wed Jul 21, 2021 3:32 pm Mega Backdoor contributions come out of payroll. Not sure that your employer will let you contribute a lump sum outside of your paychecks into the plan (I asked mine this question before and they said no). Given this, I'm not entirely following what the refinance accomplishes.
My guess would be the lower monthly payments frees up those dollars to do the mega backdoor Roth.
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sapphire96
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Re: Refinance to do Mega Backdoor 401(k)?

Post by sapphire96 »

tomsense76 wrote: Wed Jul 21, 2021 3:32 pm Mega Backdoor contributions come out of payroll. Not sure that your employer will let you contribute a lump sum outside of your paychecks into the plan (I asked mine this question before and they said no). Given this, I'm not entirely following what the refinance accomplishes.
The refinance would adjust future cash flows, no lump sum investing or cash outs. Instead of $550 going to a mortgage debt, it would go into a Roth 401(k) via Mega Backdoor through payroll deductions.
Keep interest as your friend, not your foe. | Use money as a tool for bettering your life, not squandering it. | Stay the course, don’t deviate from it.
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sapphire96
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Re: Refinance to do Mega Backdoor 401(k)?

Post by sapphire96 »

cashheavy18 wrote: Wed Jul 21, 2021 3:35 pm
tomsense76 wrote: Wed Jul 21, 2021 3:32 pm Mega Backdoor contributions come out of payroll. Not sure that your employer will let you contribute a lump sum outside of your paychecks into the plan (I asked mine this question before and they said no). Given this, I'm not entirely following what the refinance accomplishes.
My guess would be the lower monthly payments frees up those dollars to do the mega backdoor Roth.
Exactly.
Keep interest as your friend, not your foe. | Use money as a tool for bettering your life, not squandering it. | Stay the course, don’t deviate from it.
ClassII
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Re: Refinance to do Mega Backdoor 401(k)?

Post by ClassII »

I like the idea. Yeah the total interest on a 30 year mortgage is going to be more than the 15. However, with rates that low it just doesn't seem necessary to pay a mortgage off ASAP. I'd put this squarely in the category of "using debt to work for you." Plus its a decent hedge against life's unexpected turns. A dramatic cut in pay, maybe have a baby, or car suddenly dies you have the lower monthly mortgage payment and could always slow down the 401k savings. With the 15 year mortgage you're paying the higher amount for the duration of the loan whether you like it or not.
retiredjg
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Re: Refinance to do Mega Backdoor 401(k)?

Post by retiredjg »

I think this is a bad idea. Mega-backdoor is icing on the cake. Having a low cost shorter term mortgage is the cake....and better than most cakes, by the way.

This idea strikes me as going for the glitter in the stream when the gold is already in the pan. I suggest that you do not do it.

At your age, you will have plenty of time to save for retirement, even with an early retirement planned.
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Re: Refinance to do Mega Backdoor 401(k)?

Post by retired@50 »

retiredjg wrote: Wed Jul 21, 2021 4:14 pm I think this is a bad idea. Mega-backdoor is icing on the cake. Having a low cost shorter term mortgage is the cake....and better than most cakes, by the way.

This idea strikes me as going for the glitter in the stream when the gold is already in the pan. I suggest that you do not do it.

At your age, you will have plenty of time to save for retirement, even with an early retirement planned.
+1

Using the longer loan will decrease your monthly payment, no doubt about it, but it will increase the total amount of interest paid over the term of the loan by around $50,000. Your current loan will cost you a bit over $35,000 in interest, and the proposed loan will cost you a bit over $85,000 in interest.

Finally, you're already doing spectacularly well. You're 24 and you've already got 6 figures in a 401k. I didn't make my first 401k contribution until I was 30, and I still managed to retire @ 50 years old.

Regards,
This is one person's opinion. Nothing more.
tomsense76
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Re: Refinance to do Mega Backdoor 401(k)?

Post by tomsense76 »

sapphire96 wrote: Wed Jul 21, 2021 3:35 pm
tomsense76 wrote: Wed Jul 21, 2021 3:32 pm Mega Backdoor contributions come out of payroll. Not sure that your employer will let you contribute a lump sum outside of your paychecks into the plan (I asked mine this question before and they said no). Given this, I'm not entirely following what the refinance accomplishes.
The refinance would adjust future cash flows, no lump sum investing or cash outs. Instead of $550 going to a mortgage debt, it would go into a Roth 401(k) via Mega Backdoor through payroll deductions.
sapphire96 wrote: Wed Jul 21, 2021 3:35 pm
cashheavy18 wrote: Wed Jul 21, 2021 3:35 pm
tomsense76 wrote: Wed Jul 21, 2021 3:32 pm Mega Backdoor contributions come out of payroll. Not sure that your employer will let you contribute a lump sum outside of your paychecks into the plan (I asked mine this question before and they said no). Given this, I'm not entirely following what the refinance accomplishes.
My guess would be the lower monthly payments frees up those dollars to do the mega backdoor Roth.
Exactly.
That makes more sense. How much are you squeezing to cover Mega Backdoor?
"Anyone who claims to understand quantum theory is either lying or crazy" -- Richard Feynman
Goal33
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Re: Refinance to do Mega Backdoor 401(k)?

Post by Goal33 »

Doesn't matter, you're going to sell this house soon anyway... statistically, at least. Especially since you're single, but in a serious relationship.

Edit: No. Just use your ~27k of taxable cash and investments to feed into the mega backdoor 401k
tomsense76
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Re: Refinance to do Mega Backdoor 401(k)?

Post by tomsense76 »

retired@50 wrote: Wed Jul 21, 2021 4:28 pm
retiredjg wrote: Wed Jul 21, 2021 4:14 pm I think this is a bad idea. Mega-backdoor is icing on the cake. Having a low cost shorter term mortgage is the cake....and better than most cakes, by the way.

This idea strikes me as going for the glitter in the stream when the gold is already in the pan. I suggest that you do not do it.

At your age, you will have plenty of time to save for retirement, even with an early retirement planned.
+1

Using the longer loan will decrease your monthly payment, no doubt about it, but it will increase the total amount of interest paid over the term of the loan by around $50,000. Your current loan will cost you a bit over $35,000 in interest, and the proposed loan will cost you a bit over $85,000 in interest.

Finally, you're already doing spectacularly well. You're 24 and you've already got 6 figures in a 401k. I didn't make my first 401k contribution until I was 30, and I still managed to retire @ 50 years old.

Regards,
Actually I'm curious about this. Why is it a bad idea?

The rate differential is this 0.375% so not really that big. Yes there is additional cost associated, but that cost is spread out over 30 years! Both rates are super low (particularly on the grand scheme of mortgage rates historically). Plus refinancing cuts the OPs mortgage expenditure roughly in half! OP seems to be making somewhere between the mid to upper 5 figures based on tax rate, the additional freed up income would be significant. Particularly if they need to cover some other emergency need (fixing up the house or car issue).

Would I do this for a Mega Backdoor Roth? Idk, but the flexibility alone seems useful. I suppose there is argument to be made that stocks should appreciate more than the 0.375% over a 30yr period. Of course that's not guaranteed, but if stocks don't go up at least that much over the next 30yrs we have bigger problems than what kind of mortgage to pick.
"Anyone who claims to understand quantum theory is either lying or crazy" -- Richard Feynman
tomsense76
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Re: Refinance to do Mega Backdoor 401(k)?

Post by tomsense76 »

Goal33 wrote: Wed Jul 21, 2021 5:28 pm Doesn't matter, you're going to sell this house soon anyway... statistically, at least. Especially since you're single, but in a serious relationship.

Edit: No. Just use your ~27k of taxable cash and investments to feed into the mega backdoor 401k
Yeah actually this would be where I would lean with Mega Backdoor Roth as well. Moving things out of taxable into Roth seems like a good idea to the extent it can be done.

It might be ok to refinance just to free up some cashflow, but Idk if it is worth it just to do Mega Backdoor Roth.
"Anyone who claims to understand quantum theory is either lying or crazy" -- Richard Feynman
bradpevans
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Re: Refinance to do Mega Backdoor 401(k)?

Post by bradpevans »

If long term, for retirement, investments can’t beat that mortgage rate we’re all in trouble

And, your workplace plan is dollar averaging for years.

If plan A is extra to the mortgage then extra to retirement
Then give me plan B: extra to retirement standard payment to the mortgage

Pay it back with future dollars
$ amount fixed while income goes up

You’re still building principal and still getting the appreciation on the house with the 30
pasadena
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Re: Refinance to do Mega Backdoor 401(k)?

Post by pasadena »

tomsense76 wrote: Wed Jul 21, 2021 5:33 pm Actually I'm curious about this. Why is it a bad idea?

The rate differential is this 0.375% so not really that big. Yes there is additional cost associated, but that cost is spread out over 30 years! Both rates are super low (particularly on the grand scheme of mortgage rates historically). Plus refinancing cuts the OPs mortgage expenditure roughly in half! OP seems to be making somewhere between the mid to upper 5 figures based on tax rate, the additional freed up income would be significant. Particularly if they need to cover some other emergency need (fixing up the house or car issue).
That's the old argument for 30yrs Vs. 15yrs mortgages. That's supposedly a question that OP already asked themselves 9 months ago when they took out the mortgage, and the answer then was "15 years at a lower rate". Why would that change now?
tomsense76 wrote: Wed Jul 21, 2021 5:33 pm Would I do this for a Mega Backdoor Roth? Idk, but the flexibility alone seems useful. I suppose there is argument to be made that stocks should appreciate more than the 0.375% over a 30yr period. Of course that's not guaranteed, but if stocks don't go up at least that much over the next 30yrs we have bigger problems than what kind of mortgage to pick.
I think OP needs to do the math.

(1) Cost of the current mortgage over the next 14 yrs and 3 months
(2) Cost of the new mortgage over the next 30 years (higher rate, longer duration)

How much more money are they going to funnel into the Mega Backdoor, for how many years --> how much should the portfolio grow every year in order for the gains to be bigger than the difference between (1) and (2) above, taking into account that this money may or may not stay in the Roth longer than the mortgage's term.

Note that if we assume that OP's income is going to grow quite a bit over the next few years (it should, since OP is only 24), we can assume that they will eventually make enough to max out the Roth with the 15yrs mortgage. So the benefit is limited to a few years of increased contributions and their compounding. Not the full 30 years.
Last edited by pasadena on Wed Jul 21, 2021 6:49 pm, edited 1 time in total.
Financologist
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Re: Refinance to do Mega Backdoor 401(k)?

Post by Financologist »

retiredjg wrote: Wed Jul 21, 2021 4:14 pm I think this is a bad idea. Mega-backdoor is icing on the cake. Having a low cost shorter term mortgage is the cake....and better than most cakes, by the way.

This idea strikes me as going for the glitter in the stream when the gold is already in the pan. I suggest that you do not do it.

At your age, you will have plenty of time to save for retirement, even with an early retirement planned.
+1
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retired@50
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Re: Refinance to do Mega Backdoor 401(k)?

Post by retired@50 »

tomsense76 wrote: Wed Jul 21, 2021 5:33 pm
retired@50 wrote: Wed Jul 21, 2021 4:28 pm
retiredjg wrote: Wed Jul 21, 2021 4:14 pm I think this is a bad idea. Mega-backdoor is icing on the cake. Having a low cost shorter term mortgage is the cake....and better than most cakes, by the way.

This idea strikes me as going for the glitter in the stream when the gold is already in the pan. I suggest that you do not do it.

At your age, you will have plenty of time to save for retirement, even with an early retirement planned.
+1

Using the longer loan will decrease your monthly payment, no doubt about it, but it will increase the total amount of interest paid over the term of the loan by around $50,000. Your current loan will cost you a bit over $35,000 in interest, and the proposed loan will cost you a bit over $85,000 in interest.

Finally, you're already doing spectacularly well. You're 24 and you've already got 6 figures in a 401k. I didn't make my first 401k contribution until I was 30, and I still managed to retire @ 50 years old.

Regards,
Actually I'm curious about this. Why is it a bad idea?

The rate differential is this 0.375% so not really that big. Yes there is additional cost associated, but that cost is spread out over 30 years! Both rates are super low (particularly on the grand scheme of mortgage rates historically). Plus refinancing cuts the OPs mortgage expenditure roughly in half! OP seems to be making somewhere between the mid to upper 5 figures based on tax rate, the additional freed up income would be significant. Particularly if they need to cover some other emergency need (fixing up the house or car issue).

Would I do this for a Mega Backdoor Roth? Idk, but the flexibility alone seems useful. I suppose there is argument to be made that stocks should appreciate more than the 0.375% over a 30yr period. Of course that's not guaranteed, but if stocks don't go up at least that much over the next 30yrs we have bigger problems than what kind of mortgage to pick.
I don't think "bad" is the right word.

To me, it's just riskier, as the OP is basically borrowing money (at a slightly higher rate) to invest more in his retirement accounts. It also has an emotional component since it will take him until 54 y.o. to pay off the house, instead of being done with it by 39 y.o. This new timeline might interfere with the stated early retirement date. If the current monthly payment was uncomfortable in any way, then I doubt the OP would be maxing 3 different tax advantaged accounts.

I suppose it's a personal judgement call, but I'm struggling to see why he didn't just choose a 30 year loan 9 months ago, if that's what he wanted.

Regards,
This is one person's opinion. Nothing more.
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sapphire96
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Re: Refinance to do Mega Backdoor 401(k)?

Post by sapphire96 »

Thanks everyone for the replies! Excellent points were made. It sounds like either choice has it’s pros and cons.

After consideration and talking with Better, I am leaning towards refinancing to a 15 year at 2%. The key is if I can get enough lender credits to cover costs (A+B+C+E on the loan estimate). If I really wanted to, I could take the (small) difference in payment and start the Mega Backdoor.

I agree with the earlier comment regarding I committed to a 15 year for a reason; refinancing to a 30 year temps me to increase my lifestyle (expenses!) due to increased flexibility. Plus it ensures I stay on track for paying off the house by 50/55… the 30 year pushes that envelope. Additionally, with a potential raise in the works, that extra income can go to the Mega Backdoor (the icing). Going to a 30 year may make better sense once I get married or have kids and have to move. This will likely not be my forever home, which is why I want a no-cost refinance.

Keep suggestions coming, still open to ideas, thank you!
Keep interest as your friend, not your foe. | Use money as a tool for bettering your life, not squandering it. | Stay the course, don’t deviate from it.
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anon_investor
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Re: Refinance to do Mega Backdoor 401(k)?

Post by anon_investor »

sapphire96 wrote: Wed Jul 21, 2021 6:23 pm Thanks everyone for the replies! Excellent points were made. It sounds like either choice has it’s pros and cons.

After consideration and talking with Better, I am leaning towards refinancing to a 15 year at 2%. The key is if I can get enough lender credits to cover costs (A+B+C+E on the loan estimate). If I really wanted to, I could take the (small) difference in payment and start the Mega Backdoor.

I agree with the earlier comment regarding I committed to a 15 year for a reason; refinancing to a 30 year temps me to increase my lifestyle (expenses!) due to increased flexibility. Plus it ensures I stay on track for paying off the house by 50/55… the 30 year pushes that envelope. Additionally, with a potential raise in the works, that extra income can go to the Mega Backdoor (the icing). Going to a 30 year may make better sense once I get married or have kids and have to move. This will likely not be my forever home, which is why I want a no-cost refinance.

Keep suggestions coming, still open to ideas, thank you!
Why do you have $10k sitting in cash outside your EF?
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Re: Refinance to do Mega Backdoor 401(k)?

Post by pasadena »

sapphire96 wrote: Wed Jul 21, 2021 6:23 pm Thanks everyone for the replies! Excellent points were made. It sounds like either choice has it’s pros and cons.

After consideration and talking with Better, I am leaning towards refinancing to a 15 year at 2%. The key is if I can get enough lender credits to cover costs (A+B+C+E on the loan estimate). If I really wanted to, I could take the (small) difference in payment and start the Mega Backdoor.

I agree with the earlier comment regarding I committed to a 15 year for a reason; refinancing to a 30 year temps me to increase my lifestyle (expenses!) due to increased flexibility. Plus it ensures I stay on track for paying off the house by 50/55… the 30 year pushes that envelope. Additionally, with a potential raise in the works, that extra income can go to the Mega Backdoor (the icing). Going to a 30 year may make better sense once I get married or have kids and have to move. This will likely not be my forever home, which is why I want a no-cost refinance.

Keep suggestions coming, still open to ideas, thank you!
I think a better way would be to increase your contributions, and live off your savings (not EF) and taxable account. Then you would essentially be moving money from taxable to tax free. If you really want to get hardcore, take a good look at your expenses to see if there's some easy wins there.

Or just wait until you make enough. You're super young, you will eventually get there soon enough.
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Re: Refinance to do Mega Backdoor 401(k)?

Post by tomsense76 »

retired@50 wrote: Wed Jul 21, 2021 6:05 pm I don't think "bad" is the right word.

To me, it's just riskier, as the OP is basically borrowing money (at a slightly higher rate) to invest more in his retirement accounts. It also has an emotional component since it will take him until 54 y.o. to pay off the house, instead of being done with it by 39 y.o. This new timeline might interfere with the stated early retirement date. If the current monthly payment was uncomfortable in any way, then I doubt the OP would be maxing 3 different tax advantaged accounts.

I suppose it's a personal judgement call, but I'm struggling to see why he didn't just choose a 30 year loan 9 months ago, if that's what he wanted.

Regards,
Ah ok. Fair enough. It's true it is riskier. It also relies on someone to be disciplined and save the difference, which has its own behavioral risks.

Yeah agreed. Still not sure it is a good idea just for the Mega Backdoor Roth.
"Anyone who claims to understand quantum theory is either lying or crazy" -- Richard Feynman
tomsense76
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Re: Refinance to do Mega Backdoor 401(k)?

Post by tomsense76 »

pasadena wrote: Wed Jul 21, 2021 6:52 pm
sapphire96 wrote: Wed Jul 21, 2021 6:23 pm Thanks everyone for the replies! Excellent points were made. It sounds like either choice has it’s pros and cons.

After consideration and talking with Better, I am leaning towards refinancing to a 15 year at 2%. The key is if I can get enough lender credits to cover costs (A+B+C+E on the loan estimate). If I really wanted to, I could take the (small) difference in payment and start the Mega Backdoor.

I agree with the earlier comment regarding I committed to a 15 year for a reason; refinancing to a 30 year temps me to increase my lifestyle (expenses!) due to increased flexibility. Plus it ensures I stay on track for paying off the house by 50/55… the 30 year pushes that envelope. Additionally, with a potential raise in the works, that extra income can go to the Mega Backdoor (the icing). Going to a 30 year may make better sense once I get married or have kids and have to move. This will likely not be my forever home, which is why I want a no-cost refinance.

Keep suggestions coming, still open to ideas, thank you!
I think a better way would be to increase your contributions, and live off your savings (not EF) and taxable account. Then you would essentially be moving money from taxable to tax free. If you really want to get hardcore, take a good look at your expenses to see if there's some easy wins there.

Or just wait until you make enough. You're super young, you will eventually get there soon enough.
+1 this will shift your assets from taxable to Roth, which is a better deal

I don't think it is worth it to try to mess with the mortgage especially since it will be the same term length and it is a brand new mortgage more-or-less. Lenders have been swamped underwriting new mortgages. They would likely pass on this or drag it out to the point of unpleasantness (one of the hosts of the Animal Spirits podcast has been going through this and it is basically a multiepisode saga now).
"Anyone who claims to understand quantum theory is either lying or crazy" -- Richard Feynman
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sapphire96
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Re: Refinance to do Mega Backdoor 401(k)?

Post by sapphire96 »

anon_investor wrote: Wed Jul 21, 2021 6:32 pm
sapphire96 wrote: Wed Jul 21, 2021 6:23 pm Thanks everyone for the replies! Excellent points were made. It sounds like either choice has it’s pros and cons.

After consideration and talking with Better, I am leaning towards refinancing to a 15 year at 2%. The key is if I can get enough lender credits to cover costs (A+B+C+E on the loan estimate). If I really wanted to, I could take the (small) difference in payment and start the Mega Backdoor.

I agree with the earlier comment regarding I committed to a 15 year for a reason; refinancing to a 30 year temps me to increase my lifestyle (expenses!) due to increased flexibility. Plus it ensures I stay on track for paying off the house by 50/55… the 30 year pushes that envelope. Additionally, with a potential raise in the works, that extra income can go to the Mega Backdoor (the icing). Going to a 30 year may make better sense once I get married or have kids and have to move. This will likely not be my forever home, which is why I want a no-cost refinance.

Keep suggestions coming, still open to ideas, thank you!
Why do you have $10k sitting in cash outside your EF?
Some of that is going to a tuition payment next month. $5,000 of I Bonds is within the one year lockup. Once that lockup passes, I’ll have more flexibility.
Keep interest as your friend, not your foe. | Use money as a tool for bettering your life, not squandering it. | Stay the course, don’t deviate from it.
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sapphire96
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Re: Refinance to do Mega Backdoor 401(k)?

Post by sapphire96 »

pasadena wrote: Wed Jul 21, 2021 6:52 pm
sapphire96 wrote: Wed Jul 21, 2021 6:23 pm Thanks everyone for the replies! Excellent points were made. It sounds like either choice has it’s pros and cons.

After consideration and talking with Better, I am leaning towards refinancing to a 15 year at 2%. The key is if I can get enough lender credits to cover costs (A+B+C+E on the loan estimate). If I really wanted to, I could take the (small) difference in payment and start the Mega Backdoor.

I agree with the earlier comment regarding I committed to a 15 year for a reason; refinancing to a 30 year temps me to increase my lifestyle (expenses!) due to increased flexibility. Plus it ensures I stay on track for paying off the house by 50/55… the 30 year pushes that envelope. Additionally, with a potential raise in the works, that extra income can go to the Mega Backdoor (the icing). Going to a 30 year may make better sense once I get married or have kids and have to move. This will likely not be my forever home, which is why I want a no-cost refinance.

Keep suggestions coming, still open to ideas, thank you!
I think a better way would be to increase your contributions, and live off your savings (not EF) and taxable account. Then you would essentially be moving money from taxable to tax free. If you really want to get hardcore, take a good look at your expenses to see if there's some easy wins there.

Or just wait until you make enough. You're super young, you will eventually get there soon enough.
I’ll probably wait until a future raise. I’d rather have too much cash than too little, to an extent.
Keep interest as your friend, not your foe. | Use money as a tool for bettering your life, not squandering it. | Stay the course, don’t deviate from it.
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