Invest $1k/mo or refi to 2.125% 15-yr mortgage

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justsomeguy2018
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Invest $1k/mo or refi to 2.125% 15-yr mortgage

Post by justsomeguy2018 »

(Not sure if this is still a good rate) but I could no-cost refi to a 15-yr for 2.125%. Current rate is 30-yr 2.75%. Mortgage is only 2 months old. The difference between the two options is $1025/mo extra for the payment.

By all accounts it seems like it would be better to invest the extra $1025/mo into the market rather than principal on a lower cost mortgage but curious on other's perspectives. Savings would be around $3k/yr in interest with the lower interest rate.

No idea how long we will live in current house - could be 2 years, could be 30 years.
vas
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Re: Invest $1k/mo or refi to 2.125% 15-yr mortgage

Post by vas »

This would be easier to answer if you could be more specific about your future investment returns. :wink:
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harikaried
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Re: Invest $1k/mo or refi to 2.125% 15-yr mortgage

Post by harikaried »

justsomeguy2018 wrote: Thu Sep 23, 2021 5:59 pmSavings would be around $3k/yr in interest with the lower interest rate
That's just the first year of mortgage payments. Assuming $450k current principal, on year 10, the 2.75% 30-yr is paying $9.5k interest with $339k principal left vs 2.125% 15-yr paying $3.9k interest with $166k principal left. So your annual interest savings increases from $3k in the first year to $4k in 5th to $5.6k in 10th to $7.3k in 15th saving a total of $135k interest with the 15-yr.

But yes, you could have more than $135k in gains over 30 years too.
Cantrip
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Re: Invest $1k/mo or refi to 2.125% 15-yr mortgage

Post by Cantrip »

Just musing here and I may be incorrect. 12k extra payment per year, with 3K interest savings sounds like a 25% immediate return. But then it only gets 2.125% for the next 14 years. Each future years 12k payment would get a little bit less immediate return but locked in for less time. Lets say an average 15% immediate return divided by 8 years to get ~2%. So your return on that money would be 2.125% + 2% = ~4%.

This would be a risk free return for you, and better than anything currently available that is risk free. If you are maxing your retirement accounts it sounds like a good deal. If you are not maxing your retirement account, I would do that first before the refi.
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steve r
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Re: Invest $1k/mo or refi to 2.125% 15-yr mortgage

Post by steve r »

This was cut from a similar thread where I calculated the return you must get from the lower payments to break even. Understand this math and I think you will get why the 15 year loan is a great option.

Assume a $100,000 loan. (Bankrate.com mortgage and savings calculators, deposit a .01 to start)

15 year at 2.15 percent payment of $782. The 30 year loan rate at 2.75 percent is $540 or $242 less. With this loan you will still owe $60,000 15 years out. See payment schedule.

What safe rate do you need to covert $242 per month in savings to grow to $60,000 in 15 years? 4.2 percent. That is a very good essentially risk free after tax rate. A "satisfactory return (see signature)." Of course, this depends on your ability to pay such loans / liquidity.

I would add that this allows you to slowly increase your equity exposure and reduce bond exposure in other accounts over time as your "safe" asset of home equity rises.

Finally, FWIW, IMHO the 30 year and the 15 year mortgage are the most competitively price mortgages available (best for consumers). The 10, 20 and 25 year equivalent loans are generally not as competitively priced and likely should be avoided.
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Metsfan91
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Re: Invest $1k/mo or refi to 2.125% 15-yr mortgage

Post by Metsfan91 »

You can do it if you wanna! I won't. I'll keep 30 years mortgage. 2.75% is a very good rate for 30 year term. I'll invest the extra 1025 every month into VTSAX - vanguard total stock market fund. it has returned 10.82% during last 15 years and 8.37% since fund's inception, according to Morningstar. 10.82% and 8.37% are a lot more than 2.75% or 4.2%. VTSAX is not risk free, but I am a calculated risk taker.
"Know what you own, and know why you own it." — Peter Lynch
Monsterflockster
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Re: Invest $1k/mo or refi to 2.125% 15-yr mortgage

Post by Monsterflockster »

harikaried wrote: Thu Sep 23, 2021 6:17 pm
justsomeguy2018 wrote: Thu Sep 23, 2021 5:59 pmSavings would be around $3k/yr in interest with the lower interest rate
That's just the first year of mortgage payments. Assuming $450k current principal, on year 10, the 2.75% 30-yr is paying $9.5k interest with $339k principal left vs 2.125% 15-yr paying $3.9k interest with $166k principal left. So your annual interest savings increases from $3k in the first year to $4k in 5th to $5.6k in 10th to $7.3k in 15th saving a total of $135k interest with the 15-yr.

But yes, you could have more than $135k in gains over 30 years too.
Wouldn’t he need to make that 135k in 15 years?

Years 16-30 of what would’ve been a paid off mortgage he could throw the whole mortgage amount in the market if he wanted.
elle
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Re: Invest $1k/mo or refi to 2.125% 15-yr mortgage

Post by elle »

Refi sounds like a great option here.

What is the hesitation? If the payment flexibility is concerning you could consider a no cost 20 year maybe?
harikaried
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Re: Invest $1k/mo or refi to 2.125% 15-yr mortgage

Post by harikaried »

Monsterflockster wrote: Fri Sep 24, 2021 12:58 am
harikaried wrote: Thu Sep 23, 2021 6:17 pmsaving a total of $135k interest with the 15-yr. But yes, you could have more than $135k in gains over 30 years too.
Wouldn’t he need to make that 135k in 15 years?
The "additional" interest expense of the 30-yr would only have happened if held for 30 years. If the 30-yr was paid off after 15 years, e.g., selling the house, the total interest paid would be $151k vs 15-yr's $76k.
Monsterflockster wrote: Fri Sep 24, 2021 12:58 amYears 16-30 of what would’ve been a paid off mortgage he could throw the whole mortgage amount in the market if he wanted.
Yes cash flow is freed up after 15 years, but the full comparison would also need to account for 30-yr having the $1k/mo invested starting today.

Similarly if OP's house has appreciated and wants to cash out refinance to a new 30-yr, there would be additional cash to invest day 0 as well as additional cash flow to invest monthly compared to the 15-yr with higher monthly payments. This would be to have even more invested on leverage hoping for higher market returns.
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Re: Invest $1k/mo or refi to 2.125% 15-yr mortgage

Post by JBTX »

justsomeguy2018 wrote: Thu Sep 23, 2021 5:59 pm (Not sure if this is still a good rate) but I could no-cost refi to a 15-yr for 2.125%. Current rate is 30-yr 2.75%. Mortgage is only 2 months old. The difference between the two options is $1025/mo extra for the payment.

By all accounts it seems like it would be better to invest the extra $1025/mo into the market rather than principal on a lower cost mortgage but curious on other's perspectives. Savings would be around $3k/yr in interest with the lower interest rate.

No idea how long we will live in current house - could be 2 years, could be 30 years.
The answer is entirely contingent on your overall financial situation. If you already have plenty saved up, maxed retirement accounts, HSAs etc, and have plenty of liquidity, I'd probably refi. If not I wouldn't.
harikaried
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Re: Invest $1k/mo or refi to 2.125% 15-yr mortgage

Post by harikaried »

justsomeguy2018 wrote: Thu Sep 23, 2021 5:59 pmit seems like it would be better to invest the extra $1025/mo into the market rather than principal
The shorter repayment period of the 15-yr is similar to a forced investment in bonds yielding 2.125%. For example in the first year, the principal repayment would be about $26k (assuming $450k 2.125% 15-yr mortgage) whereas the 30-yr only repays/"invests-in-2.75%-bonds" $10k in the first year.

How much do you have invested in bonds now anyway? If you are effectively net negative in bonds (your 2.75% debt balance is greater than all your bonds yielding ~1.3%), you could exchange some bonds (down to some minimum comfort level) for more equities as you expect the market returns to be better as you've basically already decided to borrow money to invest more in equities (than what you had available in liquid assets to invest without debt).

What have you been doing with the $1025/mo?
Money_Badger
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Re: Invest $1k/mo or refi to 2.125% 15-yr mortgage

Post by Money_Badger »

steve r wrote: Thu Sep 23, 2021 7:03 pm

Finally, FWIW, IMHO the 30 year and the 15 year mortgage are the most competitively price mortgages available (best for consumers). The 10, 20 and 25 year equivalent loans are generally not as competitively priced and likely should be avoided.
I dunno, I just did a no cost 20 year refi at 2.25%. Seemed super competitively priced.
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justsomeguy2018
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Re: Invest $1k/mo or refi to 2.125% 15-yr mortgage

Post by justsomeguy2018 »

Money_Badger wrote: Fri Sep 24, 2021 8:32 pm
steve r wrote: Thu Sep 23, 2021 7:03 pm

Finally, FWIW, IMHO the 30 year and the 15 year mortgage are the most competitively price mortgages available (best for consumers). The 10, 20 and 25 year equivalent loans are generally not as competitively priced and likely should be avoided.
I dunno, I just did a no cost 20 year refi at 2.25%. Seemed super competitively priced.
With who?
Topic Author
justsomeguy2018
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Re: Invest $1k/mo or refi to 2.125% 15-yr mortgage

Post by justsomeguy2018 »

elle wrote: Fri Sep 24, 2021 3:12 am Refi sounds like a great option here.

What is the hesitation? If the payment flexibility is concerning you could consider a no cost 20 year maybe?
Only the 15-yr was a competitive rate from Lenderfi.
harrychan
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Re: Invest $1k/mo or refi to 2.125% 15-yr mortgage

Post by harrychan »

I think you can do better. We just got quoted 1.99% for 15 years for our mortgage around $300k.
This is not legal or certified financial advice but you know that already.
invest4
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Re: Invest $1k/mo or refi to 2.125% 15-yr mortgage

Post by invest4 »

I would not give up the inflation hedge and optionality of a 30 year mortgage at historically low rate in exchange for a 15 year which limits my options and may also create additional hardship in the case of job loss. Having options is important...YMMV.
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justsomeguy2018
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Re: Invest $1k/mo or refi to 2.125% 15-yr mortgage

Post by justsomeguy2018 »

invest4 wrote: Sat Sep 25, 2021 8:53 am I would not give up the inflation hedge and optionality of a 30 year mortgage at historically low rate in exchange for a 15 year which limits my options and may also create additional hardship in the case of job loss. Having options is important...YMMV.

I agree. Seems there are a lot of opinions on this one but I get a sense the majority would stick with the 30-year. I also like having flexibility.

So I will probably do that. Unless an even better rate comes along.
Money_Badger
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Re: Invest $1k/mo or refi to 2.125% 15-yr mortgage

Post by Money_Badger »

justsomeguy2018 wrote: Fri Sep 24, 2021 11:34 pm
Money_Badger wrote: Fri Sep 24, 2021 8:32 pm
steve r wrote: Thu Sep 23, 2021 7:03 pm

Finally, FWIW, IMHO the 30 year and the 15 year mortgage are the most competitively price mortgages available (best for consumers). The 10, 20 and 25 year equivalent loans are generally not as competitively priced and likely should be avoided.
I dunno, I just did a no cost 20 year refi at 2.25%. Seemed super competitively priced.
With who?
Better Mortgage. Rates may have ticked up, I closed late August.
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grabiner
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Re: Invest $1k/mo or refi to 2.125% 15-yr mortgage

Post by grabiner »

steve r wrote: Thu Sep 23, 2021 7:03 pm This was cut from a similar thread where I calculated the return you must get from the lower payments to break even. Understand this math and I think you will get why the 15 year loan is a great option.

Assume a $100,000 loan. (Bankrate.com mortgage and savings calculators, deposit a .01 to start)

15 year at 2.15 percent payment of $782. The 30 year loan rate at 2.75 percent is $540 or $242 less. With this loan you will still owe $60,000 15 years out. See payment schedule.

What safe rate do you need to covert $242 per month in savings to grow to $60,000 in 15 years? 4.2 percent. That is a very good essentially risk free after tax rate. A "satisfactory return (see signature)." Of course, this depends on your ability to pay such loans / liquidity.
The difference between these two is that if you take out the 30-year mortgage and invest the difference, you will have a 15-year mortgage at 2.75% in 15 years. This may be a great deal if interest rates have risen, so that the present value of a future stream of 180 payments of $540 is much less than the $60,000 mortgage balance. T If rates don't rise, you can choose to pay off the mortgage.

So the premium you pay in a higher rate is for the bank to take this interest-rate risk; you might be buying bonds yielding 5% by then and still paying the bank only 2.75% to borrow. This is why the bank charges a higher rate, and also why long-term bonds yield more than intermediate-term bonds; the bondholder is taking more risk and expects to be compensated for it.

Presumably, banks offer a fair price for taking the additional interest-rate risk, so the question is whether the risk or benefit has a higher value for you. For example, if you aren't maxing out your 401(k), then reducing your mortgage payments will allow you to get more tax-deferred savings, which is a good deal. If you will have a fixed-dollar pension, then you are unusually sensitive to inflation risk, so having a long mortgage which has payments not increasing with inflation is desirable.
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