Should I refinance my fixed 15 year 5% mortgage for a fixed 30 year 5.75% mortgage to free up cash flow?
I am thinking of refinancing so I can free up monthly cash flow to invest.
I have been looking at a refi from www.madrate.com (yes, 5.75% check it out!!!) and they offer a $289 fee (includes credit, doc prep, processing, underwriting, tax service & flood certification fees)
I have been reading various advisor recommendations to have a 30 year mortgage rather than a 10 or 15 so to free up investment cash flow. (www.ricedelman.com) Rates are still pretty low right now and are very attractive.
I know that when I pay mortgage interest, it is paid from my after tax income. It is also tax deductible at the end of the year.
I also know that when I earn interest in the stock market, this is pretax interest. If I earn 8% in stocks, my effective rate earned will be lower since I need to pay taxes on it at the end of the year as well.
I can handle the 15 year payment just fine
No PMI
Home is worth $300k – balance is $178k
I have 11.5 years left on the mortgage – got it in 2005
DUSTIN
ALVARO
How much cash do you want? A typical home equity loan or line of credit will get you $97600.00. Do you really want to extend your loan for 18.50 years? You didnt mention closing costs? Do you have to pay those if you refinance. Those can add up to thousands. You have a really good rate at 5%.
KEITH
I don’t recommend you to refinance because aside from everything, you will be paying a whole lot more over the long haul. If you can afford it, keep the 15yr; however, if its a must, then go for it, but instead of saving in stocks, look to invest in mutual funds. On average mutual funds have a 10% return, but you can get anywhere from 12% and up for the most part.
MANUEL
You are definitely on the right track with your thinking. I have been doing this for years. I currently have an interest only mortgage of about $150K @ 5.5%, and have been putting away the difference between that and the 15yr fixed each month into my brokerage account.
The trick is making sure that you make more in interest than you spend on the mortgage interest, dollar for dollar. If you can do that, and are willing to accept the risk of not being able to do so, then you’ve got a winner of an idea.
Assuming my current rate of return holds steady, I should be able to pay off the house (should I choose to do so) at just about the time that the mortgage resets. Of course, with a 30-yr fixed you won’t even have that to worry about. You can just keep plugging away until you’re paid off!
Most people never stop to think that their equity really doesn’t impact the rate of return that they get on their home. Besides the obvious– the reduction of the amount of interest they pay, it really does very little towards your net worth. It simply provides security for the bank should the bank have to ever foreclose on you.
Why not set aside the principal payments into equities that can make money for you instead, and if you ever get sick or injured you can fall back on the cash instead of trying to get the bank to waive your next mortgage payment because of all of that equity that you already have paid in.
Way to think outside of the box. Go for it!
Becoming wealthy is a matter of minimizing your risks while maximizing your returns.
JOSH
Great question. I think the answer here is not going to be right or wrong, but rather what fits your personality and lifestyle.
I personally advise staying with the 15 year 5% loan (great loan) as you have said you are able to meet the cashflow needs.
While you are probably able to beat the 5% return with a relatively conservative set of fund investments, you change 2 dynamics. The first is risk. You never know when the market is going to struggle. Life can be cruel. Just when the market takes a down turn, you are forced to draw cash for some reason. I hope this never happens, however. The second dynamic is where your personality comes in. The investment money would be visible and reachable, and you may be tempted. Equity in a house is invisible and harder to get at, except for expensive loans (HELOC for example, which it sounds like you will avoid). Someone you trust may approach you to participate (invest) in a venture and you may consider this if you can see the cash.
I am going for the paid off home loan first then investing later, just due to the risk . I don’t want to have to think about it. Perhaps too conservative.
Either way, you have an excellent prospect for the future, so good luck
MERLIN
I think you’re missing a MAJOR factor here.
Even if you’re successful in investing the difference over the remainder of the 15 years (that assumes that the earnings on the invested part, after taxes, is more than 5.75%)… will the earnings in years 16-30 beat what you could earn by investing the entire sum (since you would have paid off the mortgage).?
JEFF
NO, NO, NO, and NO.
Madrate will charge you a $289 fee but what they aren’t telling you is the $8000+ you’ll have to pay in order to buy the “points” needed to get that rate.
Plus if you can handle the payment, just keeping paying it. You’ll have already paid a significant portion of the interest on your loan.
I have a 30yr fixed loan 6.625% and I want to change my mortgage over to a 15yr fixed loan. I contacted Madrate because i was intrigued by your question, basically it would take me over 10 years to return that $9K investment needed to get that rate.
5% rate on your house and a pile of equity, you are sitting pretty sweet my friend. I wish i was in your shoes.
With the way housing is going, i would continue on the path you’re on. Rates will eventually get down to the level you have then refinance to free up the cash flow. But you can’t be putting out $8k -$9k in Point costs just to get a lower rate.
I would say this time next year is when you are going to want to pull that trigger. I’m in the same boat as you are in some respects, except i’m looking to go to a 15yr fixed. Rates will continue to fall through next year.
If you can afford the payment, pay extra, maybe you can pay it off in 8years. That would free up some cash flow. Plus keep in mind you are still getting a 5% effective rate of return on your extra money.
When housing value is going up = you want debt in your house
When housing value is going down = you don’t want debt in your house
more often than not housing generally goes up, but the time we are in is pretty rare. Get as much equity in your house you can, because you don’t know what is going to happen in the market. Plus if you were forced to sell your house do you think you could really get $300k?
Accelerate the debt down in your house, then in a year re-evaluate. Maybe refinance if housing starts to go up in value again, maybe wait 2 or 3 years till the housing market is cooking again. Then pull out a pile of money, invest it, and have the best of both worlds.
But that is what I would do, you need to find your own path