Posted: 12/14/2012 7:37:08 AM EDT
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I'm looking to refinance my home from a 30 year to 15 year mortgage. I've been paying on my current mortgage for 4 years. We just got the paperwork back from the bank and are trying to weigh our best options.
If we refinance back into another 30 year loan it would save about $300 a month. We don't have any problems with paying now so the savings are not something I'm concerned about. Making the same payment I make now on the refinanced 30 year loan would have the house paid for in 17.5 years. If we refinance to a 15 year loan, I pay about $40 more per month. Would there be any benefit to keeping a 30 year term, but making the payments I currently have and having the home paid for in 17.5 years. Should any job loss come down the pike the lower payments would be a plus. Even with a minimum wage job at 40hrs a week one person would barley be able to make the payments on the refinanced 15 year loan. Thoughts? |
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I'm a real estate appraiser and am often asked these questions from my clients. Keep in mind, I'm NOT a financial planner. First thing I usually consider is how long you intend on being in the house. If this is the last place you'll ever live, paying it off as quickly as YOU CAN AFFORD is ultimately the best option. This limits the amount of interest paid, and frees up cash quicker.
However, if this is just an interim home, I see a 30 year mortgage as almost like paying rent. Just keeping yourself in the home until something better comes along. I'm actually in the process of a refinance myself and will be taking another 30 year loan. Another option. Do the 30 year term (and making sure there aren't any prepay penalties), make the payments you'd have if it were a 15 year term. Granted the rate is probably a little higher, but at least you have the option to make the payment of $300 less than where you're at now. You never know what life events may pop up. Feel free to shoot me a message if you're looking to ask other questions that may not be suitable for the board. Best of luck. |
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Temper this with a question:
How secure is your current job, and how much demand is there for your current skillsets and experience? For instance, I am an excellent machinist. I'm a second-generation machinist, having grown up in my dad's shop. Not as many jobs out there for a machinist with no CNC skills. So I ask you - how is your stability? If you go with stability, I'd say get the 15 year loan. If unstable, go with the 30, and convert the extra $300 each month to precious metals maybe. I think you'll come out ahead either way. 
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| I am in literally the IDENTICAL situation, we just signed the application for the 15 year two days ago. I was nervous at first, as I liked being able to overpay as I saw fit, and if I needed the money we could always drop back down to the minimum. But since interest rates have dropped SO much, our minimum payment is on $50 more w/ the 15 year. So, at the end of the day, we've got essentially the exact same financial obligations, but w/ half (or less) of the overall interest paid, and we can still afford to overpay every month. |
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I just did a 10yr re-fi at 2.75%
I'll be paying about $100.00 more every 2 weeks than I did with the 15yr loan. It's worth it becuase I have to get the ex-wifes name off the original loan. My cars are paid off and I have a small amount of debt from my divorce. When the credits cards are paid off, I'll start paying extra towards the loan pricipal. I hope to have the house paid off in 7 years and retire in 10. Go for it. The less time you owe, the better. |
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We are also in the exact same position with our house. We decided to refinance for a 30yr and free up over $250 per month.
Although we could save more money in the interest payments over the life of the loans, we are going to use that extra cash to help get out of debt. If we were already debt free, I would have refinanced for a 20yr and kept the same payments, or a 15yr with a slightly higher payment. That would have saved the most money in the long term. Look online for a mortgage calculator and run the different scenarios. It is shocking how much interest is paid on a mortgage. If you know that the house would be paid off in 17.5yrs, then I assume you have already looked at an amortization schedule (spelling??). That will really show you the difference in principle and interest. |
| We recently were in the same position as well. We stayed with the 30 year since my car was 9 years old and I was due for a new one. We paid the same amount we would have on a 15 for a while then I needed the money for the new monthly car payments. With all the new taxes come next year I'm glad I stuck with the 30. Plus if they follow thru on the threat to eliminate the mortgage interest and property tax deductions, my house will be worth half what I owe on it and I will probably need to walk away from it. |
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Thanks for all the feedback. I don't see us living in this house forever, but renting it out once we move on. It is out of town and because of the "not up to code septic" we'd have to invest 10-15K into a mound septic system if we were ever to sell it.
We have no debt aside from our mortgage and I am strongly leaning to just jump to a 15 yr. Like one of the other posters said, it leaves me in almost exactly the same position I am in now, except I hack 10+ years off loan. The ability to pay extra on the 30 year sounds good on paper but I don't want to get lulled into the "oh, I'll just use the extra this month to buy XYZ instead of put on the mortgage" and find myself back in the same position but with more worthless crap. |
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I looked at a refi to drop from 4.25 to 3.25 on a 30 year last week.
We currently overpay as much as we can each month. I plan to sell in 5 years. If I were to refi, I would own MORE $ on the house than if I stay at my current rate in 5 years due to having to start over on eating down on the interest all over again. It would take many more than 5 years before I would be saving any money just due to the interest compounding effect that starts over on a new loan. I was surprised. |
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Here's link to my favorite calculator. It allows you to add just about any variable that you can think of to run different scenarios. Karl's
As mentioned here already the wisest decision that fit my personal set of circumstances was to finance at 30 and then make extra payments. I paid my current home off in under 8 years and saved about 135K in interest as opposed to running the full 30 years. |
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I just refinanced in August. Similar situation but not exactly the same.
I deployed at 2 1/4 yrs into my mortgage and took my extra income and shaved the remaining 28 years down to 14 years at the 5.75% rate it was at. This, along with increasing housing market got me up to almost 50% equity in my house. Then, at the end of my deployment 2 3/4 yrs into the mortgage we refinanced the remaining 14 yrs down to a 10 yr fixed and payments stayed the same. I think a MAJOR concern would be PMI/down-payment situation. Do you have a full 20% down on your current home? If so, no concerns. If not, then consider that taking on a new mortgage might mean paying PMI etc. If there are no concerns there then you're one step up. As other said consider your job security and personal financial situation. My personal situation is no other outstanding debt except <$20k in low interest student loans my wife has yet and revolving monthly debt. Secure job, in a moderate demand field, however, with my resume I stand out far above most other candidates in my field. As a matter of fact, I was recently approached by a company that asked if I would come work for them if they can create an opening for me. I did not solicit any offer to them and they do not have my resume, they merely heard of my recent past work experience and some of the high-level projects I played a key role in. So I'm in pretty good financial/work condition. You may not be the same, only you can determine how secure your job is. And NEVER forget that if you're in a field where you perform physical labor or your job requires you to be mobile (and even if those don't apply) you can always be debilitate by sickness or injury and can't work. That being said, we don't plan to stay in our house forever but we have enough disposable income above the mortgage etc that we can continue packing away savings to buy land and build our dream house all the while paying down the existing one. That played a role in our refinance. If I could do it over again I would have done a 15 yr fixed and had a bit more "cushion' in there. The rate difference was minimal. If I may ask, what is the rate difference between the 15 yr and 30 yr you're considering? If it's minimal (<.25% IMHO) then I say go with the 30 just to give yourself cushion for all the things life may throw at you. |
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As mentioned here already the wisest decision that fit my personal set of circumstances was to finance at 30 and then make extra payments. I think that's a very valuable option. A refin at 30 years will save you $300 per month. If you want, sink that $300 back into the mortgage each month. Kid needs a clarinet? Car needs a new water pump? Found a great deal on freeze dried food? Don't pay the extra $300. Do you have enough money saved to weather an unemployment situation with the 15yr mortgage? What about a prolonged injury? |
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i have a question regarding inflation....
i just borrowed $180,000 to buy a house. at a standard inflation rate of 2.5 percent over 30 years, the same exact house would cost $377,562 in year 2042 dollars. It will take 2.09 times more 2042 dollars to buy the equivalent house. the interest paid over 30 years will total $97,588. so that's 54 cents in interest for every dollar borrowed. for every dollar i pay extra now i will not have to pay 54 cents in interest later. BUT... 30 years from now inflation will have doubled.... which means i will make twice as much in salary as well. is it better to pay that extra dollar now and not have to pay 54 cents later? or is it better to spend that dollar on something else now and pay the same $1.54 later using inflated dollars? and what if the inflation rate exceeds 2.5 percent per year. what if it does what it did in the 70s and shoots up over 8 percent per year? do i make out like a bandit because i did not pay the mortgage earlier? |
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Thanks for all the feedback. I don't see us living in this house forever, but renting it out once we move on. It is out of town and because of the "not up to code septic" we'd have to invest 10-15K into a mound septic system if we were ever to sell it. We have no debt aside from our mortgage and I am strongly leaning to just jump to a 15 yr. Like one of the other posters said, it leaves me in almost exactly the same position I am in now, except I hack 10+ years off loan. The ability to pay extra on the 30 year sounds good on paper but I don't want to get lulled into the "oh, I'll just use the extra this month to buy XYZ instead of put on the mortgage" and find myself back in the same position but with more worthless crap. It sounds like you are in a strong position. For what it's worth, I agree with your choice and your reasoning. Good Luck. |
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If I may ask, what is the rate difference between the 15 yr and 30 yr you're considering? If it's minimal (<.25% IMHO) then I say go with the 30 just to give yourself cushion for all the things life may throw at you. I was quoted 3.15% for each loan, 20yr, 25yr, and 30yr. By the way, Ben Bernenke had a press conference the other day and announced that the Fed is going to create about $84B per month (I have heard numbers less than that, but every number is a LOT of money) and most of that will be in mortgage backed securities. The goal is to keep interest rates low on mortgages. Another result is that the dollar will be devalued (he also announced that they will be holding less long term bonds...) |
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I had my 30 refi'ed into an 11 around 5 years ago and even though the rates were a tad higher then I have managed to pay on that mortgage to the point that I have about 2 years or so left. When you get to the point that I am now, you get real happy with the situation that you are in. |
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what if it does what it did in the 70s and shoots up over 8 percent per year? do i make out like a bandit because i did not pay the mortgage earlier? this is the question. 
if (IF) in your long term view there is high inflation on the horizon, you will be better off *not* pre-paying on your mortgage note. assuming (there is another word) that your wages more or less track inflation, you'll be paying your mortgage off with "cheaper" dollars. another way to look at this is whether you can better your tax-adjusted mortgage rate in the municipal or treasury bond market. right now the answer is no. for example, 10 year AAA-rated munis may be paying 2% yield, but even on a 3.5% mortgage note your tax adjusted rate is probably in the 2.5%. so, in this case you are better off pre-paying than taking that money and putting it into an essentially riskless investment. but, as you point out, in the late 1970's/early 1980's CD's were paying 12-13%. there is NO POINT WHATSOEVER in pre-paying a 3.5% mortgage when you can get 12% on a CD. ar-jedi |
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If I may ask, what is the rate difference between the 15 yr and 30 yr you're considering? If it's minimal (<.25% IMHO) then I say go with the 30 just to give yourself cushion for all the things life may throw at you. I was quoted 3.15% for each loan, 20yr, 25yr, and 30yr. By the way, Ben Bernenke had a press conference the other day and announced that the Fed is going to create about $84B per month (I have heard numbers less than that, but every number is a LOT of money) and most of that will be in mortgage backed securities. The goal is to keep interest rates low on mortgages. Another result is that the dollar will be devalued (he also announced that they will be holding less long term bonds...) All the same rate? No-brainer, go with the 30 as long as there is no prepayment penalty. |
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If I may ask, what is the rate difference between the 15 yr and 30 yr you're considering? If it's minimal (<.25% IMHO) then I say go with the 30 just to give yourself cushion for all the things life may throw at you. I was quoted 3.15% for each loan, 20yr, 25yr, and 30yr. By the way, Ben Bernenke had a press conference the other day and announced that the Fed is going to create about $84B per month (I have heard numbers less than that, but every number is a LOT of money) and most of that will be in mortgage backed securities. The goal is to keep interest rates low on mortgages. Another result is that the dollar will be devalued (he also announced that they will be holding less long term bonds...) All the same rate? No-brainer, go with the 30 as long as there is no prepayment penalty. Yes, all the same rate. I should now caveat my statement by saying that my quotes were before Bernenke gave his press statement for the Fed. Rates may be dropping again (if that is possible...). Also, I see all the neon signs for the banks showing a 15yr at a lower rate, around 2.65%. Maybe 20yr is the cutoff, or maybe the rates have dropped that much on all the loans. My quotes were from the papers I signed last week (before Bernenke). |
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My quotes were from the papers I signed last week here is the canonical source for MBS (mortgage-backed securities) pricing, and therefore the mortgage rates that consumers pay: http://www.mortgagenewsdaily.com/mortgage_rates/ note that these are "primary mortgage market" rates or "PMM" rates -- that is, the rate which your lender is paying to mortgage originators. as the end borrower, your realized rate will be slightly to somewhat higher than the PMM rate; how much depends on many factors. nevertheless, any trend (headed up or headed down) in the PMM rate will mirror the trend in your realized rate. and so the little bar chart at the top right of the link above shows, on a 52 week sliding window, where rates are today. as you can see the 15yr fixed has bottomed out against the last 52 weeks. because of implied long term interest rate risk, i think what you will see in the near- to medium term is less elasticity in 30yr rates compared to 15 year rates. this reflects a mortgage-backed securities market thinking that economic growth will be slow for quite a few years, but that inflation would (mathematically, therefore almost certainly) have to increase due to the federal gov't's continued deficit spending policies. for this reason terms on 15yr mortgages will be "better" than 30yr mortgages. said another way, the rate spread will be larger than typical. ar-jedi |
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Best consider whether your loan is "Recourse" or "Non-Recourse". Could save tons of grief if things go wrong... by definition a refinance means you are staying put under different mortgage terms; it's not like you are moving to a non-recourse state. ar-jedi |
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Best consider whether your loan is "Recourse" or "Non-Recourse". Could save tons of grief if things go wrong... by definition a refinance means you are staying put under different mortgage terms; it's not like you are moving to a non-recourse state. ar-jedi Prolly wrong. Often when a person refinances, [varies state to state], the terms of the default provisions change. That's a potential BIG fly in the soup for folks wearing blinders. 
And reading these sorts of posts the past few years -who doesn't???? 
All most care about is the interest rate and they pay little attention to other potential time-bms in the contract. Just like folks just want to know the monthly payment of a car they are infatuated with. People are generally financially STUPID. IIRC, usually, a non-recourse loan when 'refinanced' then becomes recourse, NOT a good thing if you get into financial problems later and have fewer options. In any event, it's nuts not to look into this when renegotiating your loan. But few do. 
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Add me to the rest of the ppl that were almost in the same identical position.. About 4 yrs into a 30 yrs - with extra payments (about $450/mth) we will be paid off in about 17 yrs..
We considered a refi to a 15 yr mortgage but with how the economy is decided to stay with our current mortgage - We can can always pocket that $450 if needed. On the 15 yr our 'extra' amount was like $60 or similar.. Brian |
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If you can afford it no problem go with the lower interest rate... If not go with another 30 year.
My last refinance was to a 15 year for the fact that we were saving a ton on interest as the rate was over 1% lower then the refinance rate for 30 years. Of course now we are selling and going to move but we have a lot of equity in our house even though we only lived in it for three years. (did not plan on moving.) It will be nice to come out money ahead when we finally close on the sale! (providing everything goes as planned knock on wood)
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IIRC, usually, a non-recourse loan when 'refinanced' then becomes recourse, NOT a good thing if you get into financial problems later and have fewer options. staying with the current mortgage and paying $300 extra per month, or $3600/yr, or $108,000 in 30 years doesn't make much sense either, does it? ar-jedi |
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IIRC, usually, a non-recourse loan when 'refinanced' then becomes recourse, NOT a good thing if you get into financial problems later and have fewer options. staying with the current mortgage and paying $300 extra per month, or $3600/yr, or $108,000 in 30 years doesn't make much sense either, does it? ar-jedi Nope...
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I AM a Financial Advisor, and I endorse these comments. If you finance for 30, but make 15 year payments, you'll pay off in 15 years and have flexibility if something comes up. Flexibility is a good thing.
I'm a real estate appraiser and am often asked these questions from my clients. Keep in mind, I'm NOT a financial planner. First thing I usually consider is how long you intend on being in the house. If this is the last place you'll ever live, paying it off as quickly as YOU CAN AFFORD is ultimately the best option. This limits the amount of interest paid, and frees up cash quicker. However, if this is just an interim home, I see a 30 year mortgage as almost like paying rent. Just keeping yourself in the home until something better comes along. I'm actually in the process of a refinance myself and will be taking another 30 year loan. Another option. Do the 30 year term (and making sure there aren't any prepay penalties), make the payments you'd have if it were a 15 year term. Granted the rate is probably a little higher, but at least you have the option to make the payment of $300 less than where you're at now. You never know what life events may pop up. Feel free to shoot me a message if you're looking to ask other questions that may not be suitable for the board. Best of luck. |
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I AM a Financial Advisor, and I endorse these comments. If you finance for 30, but make 15 year payments, you'll pay off in 15 years and have flexibility if something comes up. Flexibility is a good thing.
I'm a real estate appraiser and am often asked these questions from my clients. Keep in mind, I'm NOT a financial planner. First thing I usually consider is how long you intend on being in the house. If this is the last place you'll ever live, paying it off as quickly as YOU CAN AFFORD is ultimately the best option. This limits the amount of interest paid, and frees up cash quicker. However, if this is just an interim home, I see a 30 year mortgage as almost like paying rent. Just keeping yourself in the home until something better comes along. I'm actually in the process of a refinance myself and will be taking another 30 year loan. Another option. Do the 30 year term (and making sure there aren't any prepay penalties), make the payments you'd have if it were a 15 year term. Granted the rate is probably a little higher, but at least you have the option to make the payment of $300 less than where you're at now. You never know what life events may pop up. Feel free to shoot me a message if you're looking to ask other questions that may not be suitable for the board. Best of luck. Too much logic for some here... 
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given the typical difference in the interest rate between 15 and 30 years....go with the 15yr..... what rates were you quoted??? On page 2 he stated that he was quoted the same rate for all mortgage terms but rates have changed again. I recommened he keep with 30 if it's all the same rate. Usually the only advantage to going with a shorter term is that rates will usually be lower. That is because there is less rate-risk. |
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given the typical difference in the interest rate between 15 and 30 years....go with the 15yr..... what rates were you quoted??? On page 2 he stated that he was quoted the same rate for all mortgage terms but rates have changed again. I recommened he keep with 30 if it's all the same rate. Usually the only advantage to going with a shorter term is that rates will usually be lower. That is because there is less rate-risk. That was another poster. I was quoted 2.625 on the 15, and 3.5 on the 30. We still haven't decided which way to go. This is all through a local credit union that I've been at since I opened an account there when I was 14. What is a recourse/non-recourse loan as a previous poster mentioned? Now I'm confused again. |
An instant Google revealed so many hits. 
Here's the first one... http://banking.about.com/od/loans/a/recourseloan.htm Recourse loans are loans that allow the lender to come after you in case you default. You can contrast recourse loans with non-recourse loans, which create more risk for lenders. Let's take a look at recourse loans, how they work, and how to identify them. Recourse Loans - The Recourse Recourse loans get their name from the fact that lenders have power. They are allowed to go after you for amounts that you owe - even after they’ve taken collateral. If you default on a recourse loan, the lender can bring legal cases against you, garnish your wages, levy bank accounts, and try to collect the amount you owe. A legal action to collect money after foreclosure is generally called a deficiency judgment. •How Deficiency Judgments Work •How Collateral Works Non-Recourse Loans A non-recourse loan does not allow the lender to pursue anything other than collateral. For example, if you default on your non-recourse home loan, the bank can only foreclose on the home. They generally cannot take further legal actions against you. The bank is out of luck even if the sale proceeds do not repay the loan. Non-recourse loans create the most risk for lenders. Because they can only collect the collateral - and nothing else, they want to see lower loan to value ratios to reduce their risk. These loans may have higher interest rates than recourse loans. Identifying Loan Types You should consult your attorney or tax adviser be certain whether you have a recourse loan or a non-recourse loan. However, you can use the information below for discussion. State laws often dictate whether a loan is a recourse loan or not. California is best known as a non-recourse loan state that makes it hard for lenders to sue. Some states give lenders flexibility in how they pursue defaults, but many lenders choose not to sue because defaulting borrowers often don’t have much to sue for. |
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Also there are some important tax issues if you should default on a mortage...
I'm glad you asked this question OP, most posters with mortage questions disregard [to their financial peril] this aspect of borrowing when they ask about refinancing. This info is all the more important to you if you're in MN, and considering that Minnesota is a------ http://blog.chermacklaw.com/?p=151 Is Minnesota a Recourse State? February 21st, 2010 When a homeowner is worried that they might lose their house to foreclosure, they are usually also worried about whether their state is a “recourse” or “non-recourse” state. In a non-recourse state, if the funds from the sale of the mortgaged property (the house) are not enough to cover the outstanding debt (the amount the homeowner owes on the mortgage), the mortgage-holder may not have recourse against the borrower (through a deficiency judgment) after foreclosure. In a recourse state, the homeowner remains responsible for any remaining debt through a deficiency judgment. Minnesota is generally considered to be a “non-recourse” state, although in certain situations mortgage-holders (or other creditors) may seek a deficiency judgment. Generally, if a foreclosure sale of a home is done by advertisement in Minnesota, no deficiency judgment is allowed. If, however, the homeowner has more than one mortgage on that property (a second mortgage, for example), then that mortgage-holder may sue for a deficiency judgment. In Minnesota, most foreclosure sales are done by advertisement. Minnesota permits deficiency judgments in cases of a foreclosure by action. A foreclosure by action occurs when a lender forecloses on a property in court. This is a rare occurrence in Minnesota, but if your house is foreclosed on in this manner, it’s important to know that a deficiency judgment is permitted. This is pretty confusing, right?" moar... |
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given the typical difference in the interest rate between 15 and 30 years....go with the 15yr..... what rates were you quoted??? On page 2 he stated that he was quoted the same rate for all mortgage terms but rates have changed again. I recommened he keep with 30 if it's all the same rate. Usually the only advantage to going with a shorter term is that rates will usually be lower. That is because there is less rate-risk. That was another poster. I was quoted 2.625 on the 15, and 3.5 on the 30. We still haven't decided which way to go. This is all through a local credit union that I've been at since I opened an account there when I was 14. What is a recourse/non-recourse loan as a previous poster mentioned? Now I'm confused again. thats a no brainer.........use one of the calculators linked above and see the difference in interest you'll pay....i just refied a 30 year note we were doubling up on each month....would have paid off in 13.5 years......refied at 2.75 and will pay a couple 100 more each month than the new payment to equal what we were putting towards it each month before and pay off is down to 10 years |
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given the typical difference in the interest rate between 15 and 30 years....go with the 15yr..... what rates were you quoted??? On page 2 he stated that he was quoted the same rate for all mortgage terms but rates have changed again. I recommened he keep with 30 if it's all the same rate. Usually the only advantage to going with a shorter term is that rates will usually be lower. That is because there is less rate-risk. That was another poster. I was quoted 2.625 on the 15, and 3.5 on the 30. We still haven't decided which way to go. This is all through a local credit union that I've been at since I opened an account there when I was 14. What is a recourse/non-recourse loan as a previous poster mentioned? Now I'm confused again. thats a no brainer.........use one of the calculators linked above and see the difference in interest you'll pay....i just refied a 30 year note we were doubling up on each month....would have paid off in 13.5 years......refied at 2.75 and will pay a couple 100 more each month than the new payment to equal what we were putting towards it each month before and pay off is down to 10 years I agree with this. At that large of a rate difference I say 15 yr. You will likely pay similar payment to what you're paying now and your mortgage duration will be chopped down severely. |