Mortgage Refinance 15 vs 30 year

[ivflight]

I'm going to be refinancing my mortgage to get a lower rate and pull some money out (with which I'll probably buy PM's).

Trying to decide between a 30yr at 4% and a 15yr at 3.375%

Seems like if I got a 10% return on the payments saved on the 30yr (and yes, I actually will invest it), then I'd start to surpass the money lost due to the higher mortgage rate after about 3 years. Plus the mortgage interest gets deducted at my marginal tax rate whereas investments would typically be deducted at the lower long term capital gains rate.

Right now I'm on a 15yr at 4.5% so I can't go too wrong.

Thoughts?

[TheNcredibleEgg]

I'd opt for the 30 yrs.

Mainly - because it's conceivable that the FED can keep interest artificially low for another 5-10 yrs without destroying the dollar enough to cause a panic. So that would be up to 2/3s of your mortgage (at 15 years) that you would not benefit vs refinancing rates.

But for 30 years - it seems very unlikely the FED will be able to keep rates artificially low for that long. So the 4% should look quite nice - especially on the latter half of the duration.

[smithtg]

stay with a 15 yr. I just moved and decided to take the higher payment. I just feel like its more about principals. Pay the bank for 30 years or pay yourself after 15? Do the math, its not even close what costs you more and who gets your money during the first 15 years. Plus, once inflation ramps up, you'll be glad you have the cheaper rate and once salaries catch up you will afford the payment easily (a broad assumption I know)

Also, if you have been trying to invest in anything the past 10 years, 10% is pretty damn optimisitic. It isnt the late 90's anymore....

I think the mortgage interest thing will go away within 5 years, just another way our handlers in DC will punish us

[ivflight]

One hangup is that I don't know how long I'll own the house (I don't see moving anytime soon). I think the average is 7 years.

I do really like the idea of being a debtor, and plan to pullout as much as I can.

[ivflight]

Also, if you have been trying to invest in anything the past 10 years, 10% is pretty damn optimisitic. It isnt the late 90's anymore....

It's also a time game. If I keep the mortgage for 5 years than I only have to make around 7%

[Seraphim]

To me it depends on your leverage.

If you are below 35% equity to debt, go 15 year if the payment is doable.

If you're above 35%, go 30 year and pour the extra money into other investments.

This is assuming this is your live in home and not a speculative investment.

[ivflight]

Well, I guess my rates are actually 4.25% for a 30yr and 3.5% for a 15yr when I pull money out (I could get 4 or 3.375 if not taking money out). Apparently, I don't have a credit score over 750, which is what they require to not charge me extra points. This all seems so silly to me since I have highly liquid paper assets worth 3 times the mortgage value.

Still leaning toward 30yr, I guess.

[John F Kennedy III]

30yr mortgage is the worst option. Go for 15 or less.

[brandon]

I would go for the 30 year mortgage. In 20 years your salary may be inflated enough that the mortgage payment is virtually nothing as a percentage of your income. But if you don't plan on working for another 30 years than maybe this won't make as much sense. I would aim to have my mortgage paid off before retirement.

[Seraphim]

I agree, but the current leverage is important.

If you are highly leveraged on real estate right now, drop that sucker down ASAP.

If the leverage falls within classically normal ranges for a house, I'd suggest extending the mortgage time frame.

If the equity to debt ratio is 35+%, a substantial drop in the housing market does not put you under water - take advantage of that and live life as a "normal" home owner.


Personally, I am on a 15 year fixed rate mortgage because my brother and I are 22 and 23 and bought the house with the 5% downpayment (and lost half of it to the stupid mandatory 6900$ insurance policy on sub prime mortgages...Canada)...

By the end of our first 5 year term (refi occurs Jan 2016) - I expect SUBSTANTIALLY higher interest rates. As a result I did not want to end my first 5 year term with little payed off. 1) I expect the price of my house to go down a bit (short of MASSIVE inflation, which is possible) and 2) the higher interest rates will be killer if the loan amount is not payed down quickly right now.

I'd much rather owe 170K in 5 years than 215K knowing the interest will DEFINATELY be A LOT higher.

In the mean time, we are trying to save as much possible in hard assets so that when it does come to refi, we can have some assets saved up to plunk down as a 2nd and REAL down payment, to ease the cost of the higher interest rates. We'd like about 50K saved up by then for the purpose of a 2nd down payment. This is based on an UNhealthy housing market. If the market is healthy we'll refi this house and rent it out, using our saved cash to purchase, each, our own house.

The goal is to pay THIS house off within 7 years.

I find it difficult to give advice to people without explicitly stating what I'm doing. Actions speak louder than words - so I hope this helps you...


30yr mortgage is the worst option. Go for 15 or less.

[RIPLEYMOM]

Don't go backwards to a 30. Most people with good intentions will not pay towards the principal. Stay where you are and pay extra to force your rate to 3.75; it's not worth the fee or hassle if less than 2% difference.

[ivflight]

No one seems to be commenting on the benefit of holding onto money due to a lower payment with the 30yr. If you can make a return on that cash then you'll end up doing better than going with the 15yr where you end up using that money just to save 3.5%. This is really where I'm kind of stuck.

[Seraphim]

re-read my first post :P:

If you're above 35%, go 30 year and pour the extra money into other investments.


No one seems to be commenting on the benefit of holding onto money due to a lower payment with the 30yr. If you can make a return on that cash then you'll end up doing better than going with the 15yr where you end up using that money just to save 3.5%. This is really where I'm kind of stuck.

[cubical]

If it makes sense for you to refinance then I would, but I would opt for the longer payment period.

[ivflight]

Anyone know what happens if you backout of the refi? Suppose rates drop lower before you sign anything.

[Zippyjuan]

Some of my thoughts. First is how much will the refi cost you? Include everything. Taxes, title insurance, points, whatever. Then look at how much you are saving in payments each month and see how long it will take you to get back the costs from those savings.

I used a mortgage calculator http://www.bankrate.com/calculators/mortgages/mortgage-calculator.aspx?loan=100000.00&prod=2&Zip=92118&rate=3375&hideHistory=false and on a $100k loan it says your payment at 4.5% would be $764 a month. Payment at 3.375 would reduce that to $708 a month or a savings of $56 a month.

Again using Bankrate, I tried to find an average cost of refinancing a mortgage. They indicate that on a $200k loan that would be around $3,000 not including http://www.bankrate.com/finance/mortgages/when-to-refinance-your-mortgage-1.aspx

taxes, insurance or prepaid items such as prorated interest or homeowner association dues.

Read more: When to refinance your mortgage http://www.bankrate.com/finance/mortgages/when-to-refinance-your-mortgage-1.aspx#ixzz1ddrYydn7

Some of these costs are fixed so we can't exactly divide that in half to come up with the costs for a $100k mortage but let us use that number for this exercise and assume that it cost us $3000 here. If that is the refi costs and $56 a month the savings of doing the refi- it would take 53.57 months (call it 54 months) to get back the costs via our savings from lower monthly payments. That is 4.5 years for our sample. You would not really have any "extra" money to invest until that time is up. You will have to run your own numbers but this may give you some idea.

I noticed you posted a higher interest rate on the 15 year- that being 3.5%. The monthly payment on that would be $715 or a savings of $50 a month and the break even would occur at five full years if costs are $3,000.

Next question is how far along are you into your 15 years? On any loan, the first years you pay a higher percent of the payment towards interest instead of going towards the principal. A new loan would start that over again- keeping the loan you have will get the loan paid off sooner. If you have had the loan for two years then you must include two additional years of interest payments into your cost calculations and add on to your break even time.

Curious why you would consider going from a 15 year to a 30 year. Over the life of the loan (if you follow the payment schedule) you will pay a lot more in total interest. Are you concerned by the size of the payment? On my mortgage, I could have gotten a 15 year loan but that would have made my finances tighter and given me little flexibility if I encountered any unexpected expenses or reduction in income so I opted to go with a 30 year loan. But that loan (and most other loans) allows for prepayment without penalty so I have the option of paying more if I want to and am able but I can also cut back as necessary. It was a good move for me- my company went out on a long strike (nearly five months) and that allowed me to still be able to make my regular payments without getting into serious trouble (it was not easy but doable- had I gone with the 15 year I would have fallen behind quickly). With my extra payments I have made when I was able, I will still probably get it all paid off before even the 15 years are up. A little more each month but for the financial flexibility for me was worth it.

Just for comparison, the payment on the 30 year mortgage would be $492 a month ($100k at 4.2%).

Using the same calculator and their amortization link, the 30 year would have you paying $77,000 in interest over the 30 years on $100k and the 15 year would result in $29,000 in interest over the life of the loan.

You already have a great interest rate (hopefully all those rates cites are fixed ones- I would definately not do anything adjustable given that the most probably direction of rates is more likely up than down though nobody can say for certain what the future will hold). The question is - what are the real benefits and costs of changing that?

This is my own experience- what is best for others may be different.

[MJU1983]

I'm going to be refinancing my mortgage to get a lower rate and pull some money out (with which I'll probably buy PM's).

Trying to decide between a 30yr at 4% and a 15yr at 3.375%

Seems like if I got a 10% return on the payments saved on the 30yr (and yes, I actually will invest it), then I'd start to surpass the money lost due to the higher mortgage rate after about 3 years. Plus the mortgage interest gets deducted at my marginal tax rate whereas investments would typically be deducted at the lower long term capital gains rate.

Right now I'm on a 15yr at 4.5% so I can't go too wrong.

Thoughts?

Don't forget to weigh the costs of the refinance (closing costs can be expensive).

I'd stick with the 15 year mortgage. For example, say you have a $150k mortgage. 30 years will mean $107,803.20 in interest paid. 15 years is "only" $60,302.24 in interest paid.

[Becker]

I'm going to be refinancing my mortgage to get a lower rate and pull some money out (with which I'll probably buy PM's).

Trying to decide between a 30yr at 4% and a 15yr at 3.375%

Seems like if I got a 10% return on the payments saved on the 30yr (and yes, I actually will invest it), then I'd start to surpass the money lost due to the higher mortgage rate after about 3 years. Plus the mortgage interest gets deducted at my marginal tax rate whereas investments would typically be deducted at the lower long term capital gains rate.

Right now I'm on a 15yr at 4.5% so I can't go too wrong.

Thoughts?

personally i would always opt for a short term commitment, you just don't know what will happen 15 years later.

[Becker]

Don't forget to weigh the costs of the refinance (closing costs can be expensive).

I'd stick with the 15 year mortgage. For example, say you have a $150k mortgage. 30 years will mean $107,803.20 in interest paid. 15 years is "only" $60,302.24 in interest paid.

yeah, but if I don't spend an extra $47K on interest, I won't save on deducting taxes!

[Jordan]

Don't forget to weigh the costs of the refinance (closing costs can be expensive).

I'd stick with the 15 year mortgage. For example, say you have a $150k mortgage. 30 years will mean $107,803.20 in interest paid. 15 years is "only" $60,302.24 in interest paid.


So does that mean that a 1-year loan with an APR of 100% is preferable to a 30-year loan at 6%?

[MJU1983]

yeah, but if I don't spend an extra $47K on interest, I won't save on deducting taxes!

Haha! :)


So does that mean that a 1-year loan with an APR of 100% is preferable to a 30-year loan at 6%?

That is a ridiculous scenario. BUT, a $150k mortgage for 1 year @ 100% would be $92,992.44 in interest paid. A 30 year mortgage for $150k @ 6% would be $173,758.80 in interest paid.

[Cleaner44]

15 for the win!

More than half of my monthly payment goes toward principle.

[Paul4Prez]

Well, I guess my rates are actually 4.25% for a 30yr and 3.5% for a 15yr when I pull money out (I could get 4 or 3.375 if not taking money out). Apparently, I don't have a credit score over 750, which is what they require to not charge me extra points. This all seems so silly to me since I have highly liquid paper assets worth 3 times the mortgage value.


If you have three times the balance in liquid assets, why not pay the sucker off now?

[Becker]

Haha! :)



That is a ridiculous scenario. BUT, a $150k mortgage for 1 year @ 100% would be $92,992.44 in interest paid. A 30 year mortgage for $150k @ 6% would be $173,758.80 in interest paid.

wait, why is 1 year 100% not $150K interest paid?

either way, still less than $173K, I am trusting you did that one right.

[Becker]

If you have three times the balance in liquid assets, why not pay the sucker off now?

because if he doesn't waste money on interest, how does he save money on taxes?

[Steven Douglas]

This is a funny thread. Have events in the past three years not made all of this an absolute no-brainer in favor of a 30 year mortgage any day?

The value of the dollar is tanking. Guaranteed! That will not stop. The Iraq war, the housing bubble burst with all the bailouts, quantitative easing, continued military operations and other trillions recently spent, with the debt ceiling raised, all of which are inflationary on an completely unprecedented scale, absolutely guarantees that in just ten short years the real value of the dollar will have fallen far more dramatically than it ever has in the past, possibly even more than it has over the past fifty years. That also means that whatever cash you have between now and then absolutely needs to be available for other uses - while it still has the highest value, even as you continue to pay off the mortgage over time in seriously devalued dollars.

I remember going to the bank with a friend of mine back in 1990, a retiree who was making the final mortgage payment on his house, and wanted to celebrate afterward. He was paying off a 30 year mortgage, I don't know all the terms, but the amount of the final payment was exactly $162.50. I will never forget that amount. That was for a gorgeous four bedroom, three and half bath Victorian on two acres, bought in 1960 for around $25,000 (which appraised in 1990 at $650,000 - about the same as it is now, even after the housing crash). He said that he seriously overextended himself to get that house. The mortgage payment of $162.50 in 1960 was an enormous expenditure, almost more than he could afford - nearly HALF of his net income then, which was about $340 per month, which meant taking on a second job. He said that within seven short years, the house was a minor expense, one that only became more relatively insignificant over time. All of those conditions are arguably the same for today. Don't look at relative prices, that has very little to do with value - especially of the dollar.

Given a choice between a 30 year and a 15 year mortgage, there would be no choice.

EDIT:

Two things to factor in: What will the effects of inflation be on the house - NOT the speculative value, but actual inflationary price change - a dollar drop that equals a rise in price only, with no change in the relative value by any other means.

In the case of my friend, he paid a total of ~ $57,000 over 30 years for a house that he bought for $25,600. Not only were his payments miniscule toward the end (paying with inflated dollars), but the house itself had risen in price by that very same metric (no change in value, just price as the dollar dropped in value). That is the double whammy of inflation. So a house that he paid $57,000 total when all was said and done, had an inflated value of roughly a little less than 100% in thirty years? Hardly. Not near any metropolitan area. In both 1990 and post-crash 2011, that house appraises at eleven times the total he paid for it. The only places that never would have happened are in remote rural and depressed areas with little economic activity. Then you have a case where it might be only worth two or three times what was paid, assuming the house was in good condition to begin with.

[Revolution9]

yeah, but if I don't spend an extra $47K on interest, I won't save on deducting taxes!

I heard that one from my business partners cousin when telling him Danny made a great move buying his cabin for cash instead of paying bankers interest. Explained the FedRes and monetary policy along with it. He later told Danny my views are whacked out over the phone.

Rev9

[airborne373]

IMHO ...

These are the lowest mortgage rates you are likely to ever see in your life. If there is a single benefit to the FED fiat scam and Market Socialism it is the ability to control real estate super cheap. The next thing to consider is if Ron Paul is right and the dollar is dying why not pay off your loan in inflated dollars?

The next point is a 30 year mortgage is a 6 mos mortgage a 1 year mortgage a 5 year mortgage a 10 year mortgage a 15 year mortgage. It can be any of these. Fact is rarely does any one really take 30 years to pay off a mortgage. (99% of all mortgages have no pre-payment penalty.)

If you have taxable income a mortgage interest deduction is one of the largest savings against income tax you have.

If it where me I would buy all the home I could possibly afford with the plan on living in it a long time and paying off the mortgage with inflated dollars over 30 years. Also I do not mind having a modest mortgage on real estate as a primary mortgage can often protect your property against civil law claims.


P.S. The real advantage can be found in not financing cars, credit cards, personal loans etc.

[Zippyjuan]

because if he doesn't waste money on interest, how does he save money on taxes?

The "tax benefit" of a mortgage deduction is getting back part of what you pay in interest. For example say you are paying $100 in interest and you are in a 25% tax bracket. That means you get $25 back at the end of the year. If you don't have the mortgage left, you are saving $100 instead of just $25. If you get a mortgage paid off (which happens sooner with the 15 year loan), then you are essentially getting a 100% tax deduction of your interest since you are no longer paying interest. Also once that place is paid for, you no longer have any monthly mortgage payments to make (assuming you keep the place). That means that your disposable income increases by the amount you were paying towards the mortgage. That is the same effect as a nice increase in wages or having a pile of money earning a return. My inclination is to get it paid off.

In the short term, the 30 year costs less (lower monthly payments) but over time it ends up costing you more (more in interest paid out).

[Becker]

The "tax benefit" of a mortgage deduction is getting back part of what you pay in interest. For example say you are paying $100 in interest and you are in a 25% tax bracket. That means you get $25 back at the end of the year. If you don't have the mortgage left, you are saving $100 instead of just $25. If you get a mortgage paid off (which happens sooner with the 15 year loan), then you are essentially getting a 100% tax deduction of your interest since you are no longer paying interest. Also once that place is paid for, you no longer have any monthly mortgage payments to make (assuming you keep the place). That means that your disposable income increases by the amount you were paying towards the mortgage. That is the same effect as a nice increase in wages or having a pile of money earning a return. My inclination is to get it paid off.

In the short term, the 30 year costs less (lower monthly payments) but over time it ends up costing you more (more in interest paid out).

I completely agree. Sorry if you didn't see my sarcasm :)

I'm sure people who opt for lower payments have their reasons such as "every penny saved at the moment counts" "can't risk missing a payment" or "I have better ways to invest the difference"....that's not my attitude, mine is "avoid debt, buy what I can afford, and don't worry about other people".


This below isn't directed at you, just to share with people:
Common misunderstanding is that "tax deductions" will save you money, it's a nice bonus if you were doing to do something anyway, but never a net savings, and hardly a reason to do something you otherwise wouldn't. In other words, you should never donate money, purposely make less or pay more interest with the intention of "saving taxes" but if you planned on doing the above anyway, know your rights.

[Steven Douglas]

In the short term, the 30 year costs less (lower monthly payments) but over time it ends up costing you more (more in interest paid out).

More interest paid out...in progressively cheaper dollars. Can't leave that part out of the equation, it really is critical. It is not a dollar-for-dollar value proposition over time. Especially not over that period of time. In the long run it costs you more in "price" alone, but much, much less in actual value expended.