Refinancing personal home - 15/20/30 year?

Question

Looking to refinance my personal home before starting to invest. Currently owe $585k and six years into a 30 year mortgage @5.25%. Rates have obviously come down. What makes the best financial sense? Taking out a 15 year even on a lower rate would increase my monthly payments which doesn't make me comfortable even if it would get paid off much earlier and paying less in interest. Another 30 year mortgage would significantly reduce my monthly payment but would restart the clock 6 years into my mortgage and would eventually pay more in interest but does that really matter if i don't plan on staying in the house past another 12-15 years? Do I take the savings and plow it right back into paying the principal? Or is a 20 year mortgage an option? Perhaps net monthly payment is the same but i reduce say 4-5 years of my mortgage. Appreciate everyone's thoughts. Thanks.

Russell Gronsky · Answer

I've always wondered why people take 15-year loans. Why not take 30-year loans and make extra payments? I think that would be advantageous because if you fall on hard times, you can always scale back to the standard monthly mortgage payment. With a 15-year note, you're paying the higher monthly payment, no matter what the economic conditions are at the time.Thoughts?

Account Closed · Answer

My initial thought on this would be a 20 year loan as it would most likely keep your payment the same based on the rate you currently have as opposed to 15 years that would increase your payment.

Russell Gronsky · Answer

Yes, @Roberto Ramirez. Have the bank provide you an amortization schedule. For example, if your monthly payment is $1,000 for 30 years, for every extra $1,000 you pay towards it, you can cross a payment off the end of the schedule. Pretty soon, you'll see the benefit. I'm oversimplifying a little but you get the idea, right?

Roberto Ramirez · Answer

I guess I just need to do the math on this one based on the expectation of staying another 12 years. Even if I take out another 30 year and make the extra payments monthly, I would assume putting an extra $10k a year for 12 years towards the principal would help.

Maria Keating · Answer

I think it depends on what your goals are. But since you said you are not comfortable with a larger payment, you already have your answer. I just refinanced my home to a 15 year. My reasoning is that I want to be done paying for it by the time I retire and 15 years puts me just about there. The other is that I will always own this place, even if I move on, I will just rent this one out, so I am not going to sell and move on. However, I do know that I will be able to rent this place and break even at this 15 year mortgage payment, make money even in a couple of years. That was a big consideration. As for 15 vs 20, I was told that the interest rate between 30 and 20 year loans are not vastly different, but 15 vs 30 does make a difference.I am planning on buying another property as a rental and will likely take a 30 year mortgage to make sure I can at least break even for a couple of years if I rent it out.It's good to hear everyone's thoughts and rationales and then decide what rings true for you.

Russell Gronsky · Answer

I'm sure you can find a lender to refi to a 20-year loan.If you don't plan on staying in the house for longer than 12-15 years, does the change in monthly payment offset the closing costs you would pay to refi to the 30-year loan? If so, I don't see why you wouldn't? You free up cash flow today (which is worth more than cash will be in the future thanks to inflation) and you don't care that you restarted the loan after 6 years of paying on the current one since you're getting out of it in 12-15 years anyway.Also, I'd think with a 30-year, it gives you options to possibly cash flow off rent if you decide to go that route instead of selling after that 12-15 years you mentioned. Plus, you'd be able to cash out on the equity and use it towards buying another house.Good luck.

Sean Roustio · Answer

I have limited experience so take this for what its worth but you seemed to answer your own question by saying higher monthly payments would not make you comfortable. Are you going to use the extra money available to invest in other properties/investments? Seems to be an argument I see often as some say to pay off loans free and clear and others will say the best way is to leverage your capital to acquire more properties. By taking another 30 year mortgage you have additional income that you can invest. Its all about your own personal risk tolerance.