The beauty of the 30 is that if something bad happens, again, that you have a low minimum payment to fall back on. The tough part is the discipline to make extra payments if you really want to be done in 15.
Mortgage Refinance Appraisal
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Even with a 30, won't the way the amortization rate setup still hinder your equity vs a 15?
The lower 30 year payment is nice however if you need it.
The lower 30 year payment is nice however if you need it.
One philosophy was that if you invested the cost difference b/w the 15 and the 30 in a low cost index fund, the compounded returns in the fund would be a lot higher than the reduced home equity, and more liquid in case of 'emergency'.
Presupposing you wouldn't spend the difference!
IOW, a 3.5% mortgage with tax benefit is ~2.8%/yr....do you think an index fund can beat 2.8% after expenses, i.e. 3.3%/yr assuming capital gains tax, over 30 years??
Stated still another way....if the tax discounted mortgage balance cost is close to (current) inflation, then your index fund just needs a barely positive real return (relative to inflation) to come out ahead.
Presupposing you wouldn't spend the difference!
IOW, a 3.5% mortgage with tax benefit is ~2.8%/yr....do you think an index fund can beat 2.8% after expenses, i.e. 3.3%/yr assuming capital gains tax, over 30 years??
Stated still another way....if the tax discounted mortgage balance cost is close to (current) inflation, then your index fund just needs a barely positive real return (relative to inflation) to come out ahead.
Looking at a 15 or 30 year refi now...I am currently at 3.375% 2 years in on a 15. This has been great for building much needed equity, but the big monthly nut has been a strain. All of my major assets are currently illiquid...house and 403(b) accounts. When my two kids get to college age starting in six years, the only way I could raise big money would be to refi then into a longer term mortgage (freeing up cash flow), and/or take out a HELOC (to use my then massive equity).
If I refinance into a 15, i could shave ~$200/mo off of that nut (after taxes), between the lower rate and a 2 year term extension. But saving $200/mo will not yield much of a college fund 6 yrs from now. And there is still the risk that refi and HELOC rates 6 yrs from now could be a lot higher.
Alternatively, I can go into a 30, and (after taxes) save ~1000/mo. In six years of savings, that could be $70-100k (invested in an index fund) up front AND $12k/yr to pay for college. And have no risk from rising rates. (but does have a risk with losing money if index funds crash hard b/w now and then, which I am frankly not worried about). And of course, I would have a lot less house equity.
Seems like a no brainer to go for the 30. Comments welcome.
If I refinance into a 15, i could shave ~$200/mo off of that nut (after taxes), between the lower rate and a 2 year term extension. But saving $200/mo will not yield much of a college fund 6 yrs from now. And there is still the risk that refi and HELOC rates 6 yrs from now could be a lot higher.
Alternatively, I can go into a 30, and (after taxes) save ~1000/mo. In six years of savings, that could be $70-100k (invested in an index fund) up front AND $12k/yr to pay for college. And have no risk from rising rates. (but does have a risk with losing money if index funds crash hard b/w now and then, which I am frankly not worried about). And of course, I would have a lot less house equity.
Seems like a no brainer to go for the 30. Comments welcome.
I have no faith in myself investing, nor do I have the strain of children. I pretty much try to learn off the wisdom of others, hence the 15 year, in hopes I'm not like all the older people I know that are still paying off home nearing retirement. I do have a 401k push come to shove.
Also I just got approved at 2.75% APR for 15, my 30 would have been around 3.6%. Like I said, I wouldn't expect myself to get ahead on the 30.
Also I just got approved at 2.75% APR for 15, my 30 would have been around 3.6%. Like I said, I wouldn't expect myself to get ahead on the 30.
I hear ya....don't think I can beat the market, but I think with an index fund I can track the market and beat inflation (over the long term).
My (combined family) 403b just passed my mortgage balance....if I retire in 15-25 years, i think my retirement account will be well ahead of any remaining mortgage balance.
Its all about liquidity....it looks like I will have a great retirement fund in 15 years, but be seriously short of cash to pay for two college eds before then. So, a 30 yr will allow be to 'borrow from the future' an amount roughly equal to what I see needing for my kids' college, and then I can pay off the mortgage balance when I retire (if it seems the right thing to do then).
My (combined family) 403b just passed my mortgage balance....if I retire in 15-25 years, i think my retirement account will be well ahead of any remaining mortgage balance.
Its all about liquidity....it looks like I will have a great retirement fund in 15 years, but be seriously short of cash to pay for two college eds before then. So, a 30 yr will allow be to 'borrow from the future' an amount roughly equal to what I see needing for my kids' college, and then I can pay off the mortgage balance when I retire (if it seems the right thing to do then).
Great discussion. I would love to be making the same decision but already burned my HARP ticket without knowing it.
Mitch Newton
Burning Hunk
Cost is not value. I think you need to make sure you get a qualified appraiser. By that I don't mean an appraiser that just hits the number. Dis-honest appraisers, predatory loan officers and lenders are what caused the meltdown. I know many appraisers and lenders that are now in jail. As an honest appraiser with 32 years experience I'm still in business. My advice is to go to a lender that uses an appraiser with a professional designation such as the MAI or SRA. The designated appraiser is required to have more education, experience, ethical training, and peer review that most basic appraisers. Kinda of like a bookkeeper or a CPA. Who do you trust the most? You get what you pay for. Stay away from the large lenders as they chose their appraisers based on the lowest fee. They will fill out the closing statement with a $500 fee for the appraisal. But the borrower doesn't realize that the appraiser just got $200 while the lender kept the other $300. Totally mis-leading.
My advice is to go to a credit union. They generally are all about the "Member" and will provide the best service.
My current mortgage holder hit me up again last week. The same 2.875 on a 10yr fixed from my current 4.75 on a 20yr - that in reality I'm in year 13 after 4yrs of extra payments.
I had them befuddled after telling them it was actually going to actually cost me an additional 2600 over the life of the loan to refi even though it was saving me ~3500 in interest.
And FYI they approved me for a no appraisal "rapid equity" loan LTV ~40%.
The phone call informing them I wasn't going to refi escalated through 3 levels of management each of them increasingly more frustrated that I wouldn't pay them an extra 2600 over the next 4yrs to lower my rate
It was almost as entertaining as bopping the car dealer over the head a few months ago
I had them befuddled after telling them it was actually going to actually cost me an additional 2600 over the life of the loan to refi even though it was saving me ~3500 in interest.
And FYI they approved me for a no appraisal "rapid equity" loan LTV ~40%.
The phone call informing them I wasn't going to refi escalated through 3 levels of management each of them increasingly more frustrated that I wouldn't pay them an extra 2600 over the next 4yrs to lower my rate
It was almost as entertaining as bopping the car dealer over the head a few months ago
An update....going forward on the 30 yr fixed refi, got a lock today @3.875. In terms of cash flow, it looks like it starts out net positive $1050/mo relative to the current loan with 13 years remaining. The monthly savings increase to ~$1300/mo 13 years from now (due to tax differences). Of course, with the new loan, I will still owe $230k on the house 13 yrs from now, versus being paid off with the current loan. (This means that I am cash flow negative for 17 years after that with the new loan).
So, the math problem is to ask what compounded rate of inflation do I have to earn on my savings over the next 13 years such that I am sitting on $230k cash (after capital gains). IOW, such that I could pay off the loan and be just 'even' in 13 years. I find that I need to make 5.5% before inflation. If you believe in safe 'perpetual annuity rates at 4% per year', this means real average returns of 4% after inflation, or more like 6-7%. Since 6-7%>5.5%, sounds like I have a high statistical probability of coming out ahead (i.e. it is a safer investment than a 4% annuity).
Of course, Since the proceeds will go toward college for two kids currently 9 and 12, under the current loan situation, rather than finding myself with no mortgage balance in 13 years, I might find myself looking at a >$200k Home Equity Loan I had to take to pay for college. So, if the proceeds of the new loan can pay ~$230k for college, then I remove my current risk that Home Equity loans have very high interest rates or are unavailable in 6-12 years. In the opposite case (rates fall further), then I can refi again to improve ROI. If inflation picks up (along with interest rates, home prices, nominal market yields but, say, not my salary) then I come out way ahead with the new loan, no surprise for a leveraged investment strategy.
Flame on.
So, the math problem is to ask what compounded rate of inflation do I have to earn on my savings over the next 13 years such that I am sitting on $230k cash (after capital gains). IOW, such that I could pay off the loan and be just 'even' in 13 years. I find that I need to make 5.5% before inflation. If you believe in safe 'perpetual annuity rates at 4% per year', this means real average returns of 4% after inflation, or more like 6-7%. Since 6-7%>5.5%, sounds like I have a high statistical probability of coming out ahead (i.e. it is a safer investment than a 4% annuity).
Of course, Since the proceeds will go toward college for two kids currently 9 and 12, under the current loan situation, rather than finding myself with no mortgage balance in 13 years, I might find myself looking at a >$200k Home Equity Loan I had to take to pay for college. So, if the proceeds of the new loan can pay ~$230k for college, then I remove my current risk that Home Equity loans have very high interest rates or are unavailable in 6-12 years. In the opposite case (rates fall further), then I can refi again to improve ROI. If inflation picks up (along with interest rates, home prices, nominal market yields but, say, not my salary) then I come out way ahead with the new loan, no surprise for a leveraged investment strategy.
Flame on.
You can't take it with you.
Helping your kids through school is an honorable thing to do. My old man did it for me, and I hope to be able to do it for mine someday (currently no kids). Just because you have a lower payment doesn't mean you have to pay a lower payment. Pay what you can on it if you have no other debt and some real-time cash available. Then, during the hard years of college bills, pay the minimum.
Also, if you're only making 4% in the market, you need to take a stock class.
I'm averaging about 60% returns gross this year alone. Freak year, admittedly. I got out last week and expect a massive pull back this summer.
After that, get yourself in some nice high-div stocks. 15-20% is not uncommon in the mREIT and BDC sectors. Happy to discuss some picks offline.
Helping your kids through school is an honorable thing to do. My old man did it for me, and I hope to be able to do it for mine someday (currently no kids). Just because you have a lower payment doesn't mean you have to pay a lower payment. Pay what you can on it if you have no other debt and some real-time cash available. Then, during the hard years of college bills, pay the minimum.
Also, if you're only making 4% in the market, you need to take a stock class.
I'm averaging about 60% returns gross this year alone. Freak year, admittedly. I got out last week and expect a massive pull back this summer.
After that, get yourself in some nice high-div stocks. 15-20% is not uncommon in the mREIT and BDC sectors. Happy to discuss some picks offline.
I think we are on the same page. The long term averages on low cost index funds are 6-9% including dividends and inflation, somewhat less than that after inflation. 4% is a pretty commonly used floor for real yield after inflation, likely to be exceeded, seldom not over a long span. I am just using it to say that my before inflation yield should be >5.5%.
But we disagree....if my mortgage is costing me 0.7*3.875 = 2.7% after taxes, and you are bullish on stocks, why would you send extra money to the mortgage...and not invest it. That is the whole point of my refi. Do you agree? If I became a perma-bear, I could still switch to prepaying the 'gage.
I admit to being a novice to some of this stuff but I agree that a mortgage is extremely cheap money. Taking advantage of the (current) tax benefits and low rates for a single family mortage means the only worse thing you could do with your money than paying down the mortgage is to keep it in a coffee can.
I appreciate the effort to be mortgage debt free. It would be great, but it isn't the best use of your money. I also am a vicitim of low liquidity. I have some assets that are not very liquid and it stinks.
I think that would vary based on your age.
younger, you may see better benefits of putting it in the market.
older, I think you'll see better benefit of paying off the loan faster.
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