Refinancing analysis needed
November 2, 2010 10:39 AM   Subscribe

I'm looking at refinancing options and bogging down on the answers. In short, I think I've got an excellent refinancing quotes, but which refinancing option to take has me stumped. I can a) get a new 30 yr mortgage with the lowest monthly payment and pay more in the long run b) get a 15 yr mortgage and pay more monthly/get a better overall payment in the long run or c) pay off a lot of the mortgage first, then refinance and pay less monthly as well as get the best overall price.

I've got a house built in 1947 worth 200k, 2 bdrm with a studio rental attached. Our loan started at 171k, paid down to 154k. We pay a little extra per month on the mortgage, around 1k a month.

Our 5.625% loan can go as low as 3.75% depending on the refinancing we get. We have about 64k we could put down as a flat payment, bringing us down to 90k balance due.

A financial analyst said this was our best option. Get the amortization curve down low enough and the mortgage disappears in record time, like 9 years till free and clear. We'll be pretty much nailed to the house until then since that's the bulk of our cash assets.

Another way of looking at this is that the we're buying a payment, not an investment. The house is pretty much a money sink no matter how you wing it. I'd be better off keeping the cash and investing it and getting the lowest long term rate and payment available. Averages say we'll move before paying off the mortgage.

I've got the numbers, but not able to analyze the outcomes. Where can I go to get a better overall idea of my options and their outcomes? Forums, CPA's, online help....where do you go to get rational informed outlooks on refinancing.
posted by diode to Work & Money (9 answers total) 1 user marked this as a favorite
Depends what you think about inflation. High inflation coming, get the 30 yr. You really can't go wrong at 3.75%.

If you've got a super cheap mortgage (like negative real, which is what you might get at 3.75%) it actually isn't better to pay it down faster.
posted by JPD at 11:38 AM on November 2, 2010

I'd be better off keeping the cash and investing it
Are you sure about this?

Also keep in mind that if you do go through with the shorter mortgage then in 10 years you will have "free" shelter and alot of extra cash laying around.

The main questions are do you think you will want to stay in that house for awhile and can you make the higher payment comfortably. If so I would go with the shorter mortgage. You can crunch numbers all day but some of the varibale are personal preferences and not quantitative.
posted by Busmick at 12:54 PM on November 2, 2010

*variables (sorry)
posted by Busmick at 12:55 PM on November 2, 2010

Also dont use all of your liquid cash for the extra payment...keep and emergency fund...
posted by Busmick at 12:57 PM on November 2, 2010

You didn't say anything about other loans or your retirement savings or how much of a cushion of savings you're comfortable with having on hand.

What this financial analyst a financial analyst you just happen to know or someone you hired to give you financial advice?

My workplace offers financial planning seminars as part of our deal with our 401(k) company. I would definitely look into those, or consult with your company's 401(k) representative about your retirement planning and ask how your plans about the mortgage fall into it.
posted by deanc at 1:02 PM on November 2, 2010

What we did, and I generally recommend, is to get the 30 year mortgage and pay mortgage payments as if you got the 15 year. This admittedly does not give you the lower interest rate of the 15 year--but the rates are so low anyhow, and when we refinanced the delta between them was not as large as it had been, historically.

I like this option because it allows us to be flexible with cash flow. Not "I can afford that, I don't have to pay that all this month", but rather it gives us options if I were to lose my job or get hit with an unexpected expense. It is probably not a good idea for people who aren't good at not spending money.

It seems that usually the difference between paying off early and not doing so (and investing) is fairly minor, with variations depending on what the market does in the future. If you can predict that more power to you, but I can predict my return if I pay down the mortgage.

I've always thought that a good middle ground for people convinced that they could get a better return than their mortgage rate (and of course, disciplined enough to do it) would to be to invest the money *up until* their capital exceeded the mortgage balance, and then just pay it off. Yes, you could maybe continue the higher returns, but maybe not--and you get the cash flow benefit of not having the mortgage payment.

I would make sure I had a good cushion in case I were to not have a job for a while; if your only savings is that 64k I would not be spending it all on the house.
posted by RikiTikiTavi at 1:54 PM on November 2, 2010

Is there an option for a 30-year with offset account? That way you can throw all your cash in the offset and pay it off as quickly as you like without losing any liquidity.

PS: jealous of you over here in AU, our rates are more like 7%.
posted by polyglot at 3:34 PM on November 2, 2010

A 15 year mortgage makes the best financial sense, because you are paying WAY less interest over the life of the loan.

However, you reduce flexibility in that you have a higher payment every month.

And with interest rates at such low rates, there isn't a heck of a lot of difference between the two. 6% versus 8% is a slam dunk, 3.5% versus 4.2% not so much.

I would get the 30 year and add extra money in.

If you've got a super cheap mortgage (like negative real, which is what you might get at 3.75%) it actually isn't better to pay it down faster.

That is ONLY true if you can use that extra money for something else that makes you more money. If you are not paying down the mortgage just to keep the cash in a mattress, you are losing.

However, if you pay down other more expensive debt, or use that money to invest in something that gives you a return bigger than the interest rate + inflation, you are golden.

I think what the guy was saying is that if inflation is greater than 3.75%, then borrowing the money is better than keeping it. But I'm pretty sure that's not going to happen, because otherwise, a bunch of banks are going to be losing a lot of money. And inflation would have to outpace the inflation rate for the life of the loan for this trick to work. Area under the curve and all that.
posted by gjc at 3:38 PM on November 2, 2010

There are many variables at play: how secure is your job? How much money are you able to put away separately from the equity you're building in the house? How long are you planning to live in it? How far away is retirement, and is this where you want to be living free and clear by then? Do you believe your house will go up in value, down in value, or do you not care because your goal is to own free and clear? Can you make more money in other investments if you don't pay down the loan?

For comparison: in my situation, I can keep my current 30yr mortgage, pay as I have been (including additional principal), and it'll be free and clear the year before I plan to retire. Or, I can pay it down $21,000 and refinance for 15yrs, and it'll be free and clear at the same time for a lot less money overall, plus I'll have a lot more cash left over (after paying myself back the $21,000.) For me, then, it's a clear choice to refinance -- except doing so reduces my financial cushion (against job loss etc.) by a notable amount for the next three years. So, whether I do it or not will largely depend on whether I care more about my long-term financial health or my short-term disaster fund.

So what you need to do is figure out how important all those variables are to you, and then you'll likely have a clear choice that suits your goals.
posted by davejay at 6:16 PM on November 2, 2010

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