Should I refi to a 15 or 20yr?

Question

I have a condo in Seattle that used to be my primary residence in a location close to Amazon HQ. I've moved to the 'burbs and have been renting it out for the last 10 years. Here are the key stats:

$550k Zestimate (appraised at $600k last Aug for Heloc)

$232k remaining mortgage

4.625% interest rate

30 year mortgage, maturing in 2041 (21 years left)

$1,815 monthly payment: $565 principal, $900 interest, $350 escrow

$2,600 monthly rent collected

$600 HOA

$229k Heloc on the property at 4.75% (unutilized and applied for as cushion or if want to buy another property)

Aimloan, who the primary mortgage is through also, currently lists:

3.5% (3.617% APR) on a 15yr fixed rate refi of $232k for a $1,658 monthly payment

3.875% (3.955% APR) on a 20 yr fix rate refi for $1,390 monthly payment

both with ~$1k closing costs.

The current plan is to keep the condo as an investment property.

I'm currently paying $1,465 in principal + interest, so the 20 year seems like a good idea since I'm lowering monthly payments and shortening the payoff period by 1 year. The 15 yr is 1 whole point lower than my current 4.625 rate, and cuts off 6 years, but I'm paying $200 more per month.

I also want to make sure I can subordinate my Heloc, which is through Penfed. Even if I don't use it, it's great to have that buffer there. Has anyone had success subordinating their Penfed Heloc?

Should I refi?

Brian Hughes · Answer

@Jim Ying    Yes,  you can get lower rates with a 15 or 20 year - though how much lower does fluctuate.    My point with the 30 is you can get much of hte same benefit of the 15 or 20 (faster payoff) by just paying additional principal every month.   If you pay double the required principal amount on a new 30 year mortgage,   you increase your payment by only maybe 10-15% but for those early years you are essentially paying it off at the same rate as a 15 year.

Unlike a 15 or 20 year loan though,   if you do need the extra flexibility in a lower payment,  you can do it by just paying the minimum instead of being locked into the faster repayment schedule.

And with loan rates so ridiculously low right now,   you are still paying historically low rates even for the 30 year.

It totally depends on your plans.  If I were not planning/scheming to buy more property I may well have stayed with the 15 year repayment period loans.    But if you do want to buy additional property while retaining the condoo, then remember that when qualifying you for additional loans they don't look so much at the balance as they do at the monthly cost.   So having a payment obligation a few hundred dollars less for a 30 vs. a 15 directly translates into more buying power on another property.

But to be sure,  there is nothing irresponsible about getting a 15 year loan with an even lower rate, and paying it off faster.

Dave Skow · Answer

the likelihood of penfed   or even the  new proposed lender  allowing the  HELOC  to  remain in place is  low due to the fact the property is an investment  property and not your primary  .....if this element is  crucial  to your decision- focus on figuring this out first

if keeping the heloc in place is not  crucial -  I would recommend  refinancing the  the  20 yr fixed  versus the  15  and  just pay additonal as you want to

if you dont have a  heloc on your home in the burbs , I would suggest trying to get a heloc on this property  and not count on the  rental heloc

Todd Rasmussen · Answer

@Brian Hughes @Jim Ying

I have one point of disagreement with Brian. It IS irresponsible to get a 15 year loan and pay it off faster. (In most cases)

Jim,

Inflation by itself will nearly devalue your future mortgage payments enough to make up the overall repayment difference and you don't realize "savings" until well after you've completely paid off the 15 year mortgage. Your opportunity costs will incur from day one with the 15 year mortgage, when that fixed payment is the most valuable it will ever be.

I would consider what you could do with the monthly savings to generate more wealth and compare that to the difference in total repayments. If you can earn 6% return somewhere, that monthly savings could put you ahead by 200K after you incurred the added repayment expense.

This assumes you want to keep the property. No opinion offered to that end.

Todd

Brian Hughes · Answer

Level of risk tolerance is a factor here. @Todd Rasmussen 's proposal while absolutely valid, is essentially investing on margin. As such things go it is fairly low risk, but nonetheless. So if you are very conservative, the 15 year might make more sense, If more aggressive, or depending on what other asset type(s) you are interested in, someplace between that and what myself or Todd recommended.

(Of course, buying property with a mortgage is itself investing on margin)

(Of course,  buying property with a mortgage is itself investing on margin)

Edward Eloma · Answer

@Brian Hughes hey im in the same boat, I want to buy more properties but my first purchase I am in a 30 year at 1,751 dollars... about 3 years in... I looked to refinance for a 15 year and it would be the exact same as I am currently paying now.. if I do another 30 year it shows it will drop my payment to like 1,500... but ultimately it is also helping me with buying power. Becuase right now they are giving me a hard time about buying another house and limiting me to nothing. I’m thinking about refi out of my FHA and lose the PMI of 134 a month I’m paying.

Jim Ying · Answer

Incredible!

I thought about it and realized that to compare apples to apples, I should be looking 30 years out, and comparing:

A: 30yr refi

B: refi for 15 or 20 years and then invest the savings once the mortgage is paid off.

I added a column showing the accumulated savings from after year 15 (or 20) when I'd no longer have to pay a mortgage and it completely changes the result. Refinancing to 30 years becomes the worst option and the best option is actually to refi for 20!

$232,106.82

Term

Rate

Monthly payment (Principal + Interest)

Total Interest

Total Principal + Interest

Savings

Value of reinvested monthly savings

Value of investing savings after payoff (30 years)

Net impact after 30 years

Current

20

4.625%

$1,445

$131,405

$363,512

$ 204,496

$204,496

refi

30

3.875%

$1,094

$161,196

$393,303

($29,790)

$136,114

$0

$106,323

refi

20

3.875%

$1,395

$102,041

$334,148

$29,364

$22,275

$266,309

$317,948

refi

15

3.50%

$1,663

$66,723

$298,830

$64,683

($62,981)

$210,401

$212,102

https://docs.google.com/spread...

Jim Ying · Answer

@Todd Rasmussen That is an interesting argument. Based on that rationale, then the 'right' decision would be to refinance to a new 30year, pay the minimum, and invest the savings.

I ran the numbers and it looks like you're right! Here's a summary of the findings and a link the spreadsheet.

The benefit seem to be around $100k to refi to a 30yr and invest the savings (assuming a 6% return). It was surprising to me that the opportunity cost of refi'ing to the 15yr and paying $220 more per month basically wipes out any actual net benefit because I'm not investing that $220 in the meantime.

I have the creeping suspicion that I'm missing something though. For example,

Am I calculating the 'cost' of paying the extra $220 per month in the 15yr refi scenario correctly?

In the 15yr refi scenario, how do I account for paying off the mortgage earlier and getting to keep all the rent after 15 yrs as opposed to continuing to pay a portion of it in mortgage? Would I take the present value of investing that post-15 yr amount?

Also, are there tax benefits or fees that significantly impact the scenarios?

$232,106.82

Term

Rate

Monthly payment (Principal + Interest)

Total Interest

Total Principal + Interest

Savings

Value of reinvested monthly savings

Net impact

Current

20

4.625%

$1,445

$131,405

$363,512

refi

30

3.875%

$1,094

$161,196

$393,303

($29,790)

$136,114

$106,323

refi

20

3.875%

$1,395

$102,041

$334,148

$29,364

$22,275

$51,639

refi

15

3.50%

$1,663

$66,723

$298,830

$64,683

($62,981)

$1,702

https://docs.google.com/spread...

Brian Hughes · Answer

also,  if you are strapped for cash  (job loss,  etc)  you will find that you may not be able to refinance.  Lenders won't loan unless you have income.   So if you already have the 30 year and were just paying extra monthly,   you would not need to do anything except just start paying the minimum.

Also the loan rates you have quoted above seem quite high given current average rates,   but of course they vary based on type of property,  owner occupied status,  credit score,  and a zillion other factors.

Megan Shay · Answer

Seconding @Brian Hughes 's point about Seattle's laws. If you are considering selling in Seattle to buy elsewhere, consider Kitsap. Bremerton and Kingston have the fast ferries to downtown Seattle. Costs are much lower, and employment, while not as sexy as tech, is solid. 2 Navy bases (Bremerton & Bangor) and healthcare are the biggest employers on this side of the pond. Many are now looking outside the city for a lifestyle with more space to spread out, and WFH is going to be happening for a looong time. Amazon has already told employees to WFH till October, at least.

Jim Ying · Answer

Appreciate the response! PM’s for your broker’s info.

I’m curious to hear why refinancing to a 30 year might be preferable. If I can pay the mortgage off in 20 or even 15 years at a lower rate, isn’t that preferable? If I were strapped for cash, I could see refinancing to 30 to get more monthly cash flow, but the $1-300 extra per month doesn’t seem to outweigh the $35-100k extra I’d be paying in the long-run. (see chart below)

Remaining Term

15-Year Fixed Rate

20-Year Fixed Rate

30-Year Fixed Rate

New Term

246

180

240

360

Interest Rate

4.000%

3.500%

3.875%

4.000%

APR

4.058%

3.617%

3.955%

4.058%

Payment

$1,383.50

$1,658.53

$1,390.64

$1,107.60

Total Payments

$340,341.88

$298,534.95

$333,753.70

$398,737.25

Savings

$20,048.12

$61,855.05

$26,636.30

$-38,347.25

Should I refi to a 15 or 20yr?

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