Does it ever makes sense to refinance to a longer mortgage?

[sergio]

I was thinking about this a few days ago. Let's say you wanted to increase monthly cash flow (e.g. to buy a rental property, unexpected kid on the way, etc.). Has there been any discussion of the pros/cons of refinancing to a longer mortgage? For example, you're two years into a 15-year mortgage and you refinance to a 30-year. Nearly all the articles and discussions I see talk about refinancing to a shorter or similar-length mortgage, but are there cases where extended the mortgage as long as possible is a "good" idea?

 

[ziggy29]

There can be, but they are very specific situations. DW is a pastor, and because of the way the clergy housing allowance/exemption works, it is usually advantageous to keep a mortgage when you can. (In fact, we took out a mortgage rather than 100% cash because of it -- albeit only a 10-year with about 2/3 down). Similarly, because the housing allowance only provides an exemption for actual housing expenses, zeroing out the rent/mortgage line while still working as clergy would make us take a bigger tax hit as it would be much more income exposed to federal and state income taxes.

There may be other situations or occupations for which things like this apply. Needing a more flexible cash flow might be another, if the interest rate isn't much higher, but even then I'd recommend paying it on (say) the 15 year schedule instead of 30 when you have the cash flow for it.

 

[SecondCor521]

If you need cash flow flexibility and the rate on the 30 year is very close to the 15 year (like maybe within 1/4 point), then I could see it as a reasonable choice. Otherwise I think it's not such a good idea.

 

[BeachOrCity]

You mentioned buying a rental property as one example. The economics and reasoning would be very different for an investment vs an owner occupied property. If investment there are LOTS of times longer time period could work well. Primarily you would look at your return on equity and cap rate vs cost of capital.

 

[LRDave]

If it's the difference between makin' your monthly nut or not (hard times, right on the edge...) then yeah it might.

 

[Andre1969]

I'd say it would just depend on how badly you needed the extra cash flow, and how big the difference was. I just ran the numbers myself, out of curiosity. My current mortgage is a 3.875% 30 year fixed. Original balance was $472,500. The P&I part of it is $2,221.88 per month. I just checked online real quick, and it looks like it's not hard to find a 15 year fixed at 3.125% with zero points. The monthly payment on that would be $3291.48.


BUT, if I was 2 years into that 15 year mortgage, the principal would be down to around $422,000. A 30 year fixed at 3.875% with a 422K starting balance would only be about $1,984 per month...almost a $1300 savings versus the 15 year.


Depending on how bad I needed the cash flow, that might be tempting.

 

[sergio]

I'd say it would just depend on how badly you needed the extra cash flow, and how big the difference was. I just ran the numbers myself, out of curiosity. My current mortgage is a 3.875% 30 year fixed. Original balance was $472,500. The P&I part of it is $2,221.88 per month. I just checked online real quick, and it looks like it's not hard to find a 15 year fixed at 3.125% with zero points. The monthly payment on that would be $3291.48.


BUT, if I was 2 years into that 15 year mortgage, the principal would be down to around $422,000. A 30 year fixed at 3.875% with a 422K starting balance would only be about $1,984 per month...almost a $1300 savings versus the 15 year.


Depending on how bad I needed the cash flow, that might be tempting.

I ran some similar numbers, assuming someone maxes out their 401k, HSA, and Roth IRA. Another way to get $1300/month cash flow ($15,600/year) would be to reduce a 401k contribution (say from $19k to $10k) and forgo the Roth contribution (from $6k to 0). Doesn't seem very appealing. There's also a chance that going from 15 to 30 years on the mortgage doesn't change the rate much depending on when the original loan was taken out. Of course, you are paying more interest in the long run...

 

[Scuba]

We had a 3.25% 15-year fixed rate mortgage and a couple of years before ER, we decided to refinance it to a 3.375% 30-year mortgage. Our motivation was to give ourselves more flexibility and allow ourselves to delay taking my pension and/or SS since our mortgage payment was lower. Also we have no kids and no desire to pay off the mortgage as long as our investments are expected to earn above 4%, so extending the term made sense for us.

 

[Starsky]

We refinanced our mortgage just after retirement to do some home repairs and consolidate other real estate loans while interest rates were good. Our previous home mortgage was 15 years while we were working, to build up equity; and we went to a lower-interest 30-year mortgage to free up cash flow.

I don't know why I'd care at this point if the house ever gets paid off. Once we became on a "fixed" income, it became more useful for us to repackage our debt and free up cash flow with a longer-term loan that cost so little to hold - less than 4%/yr. - than it did to pay off cheap debt. It's just robbing Peter now to pay Paul when we're dead.

The advantage of a 30-year loan is that you can always choose to make it a shorter-term loan by doubling up on payments. OTOH, you can't make a 15-year loan into a 30-year loan whenever things get tight - or at least that's what the banks say...

 

[RunningBum]

It's not hard to see how a well-off ER'd person might have cash flow issues before age 59.5 or later. A longer mortgage would be helpful to keep their payments lower until they can tap IRAs, pensions, and social security.

 

[donheff]

About 30 years ago we refinanced our primary residence to get a significantly cheaper mortgage and we took $100K of equity out to buy water front land for a weekend house. We went from about 24 years to go to 30 years but with a lot smaller monthly payment.

 

[mystang52]

If it's the difference between makin' your monthly nut or not (hard times, right on the edge...) then yeah it might.

30+ years ago we stretched to move into our second home. No sooner did that happen when we were hit with a a few big ticket items. I took a second mortgage (15 year) and paid off those big ticket bills. This included a car loan, so one could say I had a 15 year car loan. But it gave me some needed breathing room, not to mention stress relief. I paid off that 2nd mortgage in 2 or 3 years, but I still remember the sense of relief I had when I first took it out.

 

[Jerry1]

Remember, just because you have a 30 mortgage doesn’t mean you have to take 30 years to pay it off. Therefore, having a 30 year mortgage provides flexibility. Let’s say you get let go from you work or you’re a seasonal worker. Taking the 30 year mortgage give you the option of a lower payment when you need it and you can always pay more When cash flow allows.

 

[Offgrid Organic Farmer]

The first four times that we bought rental real estate, we went for longer mortgages, because we wanted lower monthly payments. That was one way that we could cut out for ourselves a little slack in our monthly budgeting, in case of emergencies.

In practice, we nearly always made monthly principal-only payments on top of the regular P&I payments. So it came out the same way, but we had the option if we ever needed it.

 

[Perryinva]

As long as the money that would be used to pay off the house is making more net, than the interest is costing me, then I am just fine with my 3.75% 30 year. Our pensions & SS put us eternally in the current 22% bracket minimum, so it’s not like I can reduce my tax bill with less required income for expenses. A mortgage always allowed me to “earn up” to a larger home than I would “cash for”, which always ended up with more dollars in appreciation. We upsized in cost & size to our retirement home, thanks to that strategy, and my mortgage is roughly the same range as it’s always been.

 

[Aiming_4_55]

Just do the math for your personal situation.

A new mortgage on your personal residence may give you more cash and lower debt ratio for other loans, investment property. Personal mortgage rate will probably be lower than an investment mortgage rate too. Be sure to check your personal deductions vs rental expense deduction.