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Refinance to ER?
Old 07-29-2010, 10:07 AM   #1
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Refinance to ER?

I'm close to ER and thinking about refinancing my mortgage to reduce my monthly expenses. Has anyone done this? What's your opinion? Details are as follows: I have 5.5 years left on a 15 year mortgage at 4.5% and have a monthly P&I payment of $2500. If I refinance to another 15 year mortgage at 4% by P&I goes down to $1100.
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Old 07-29-2010, 10:15 AM   #2
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Reducing the scheduled payment was one motivating factor for me when I refinanced. I went from a 15 year note with 8 or so years left and an $1833 payment to a 5/5 ARM with a $730 payment. Since I am stilla ccumulating, I make more than the scheduled payment (by a lot), but if the commode hits the windmill my minimum monthly nut is a lot lower now. I also dropped my rate by over 1%.
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Old 07-29-2010, 11:23 AM   #3
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I'm close to ER and thinking about refinancing my mortgage to reduce my monthly expenses. Has anyone done this? What's your opinion?
Heck yeah. You might even want to consider a 30-year loan instead of 15.

We've been serial refinancers over the last decade and we'll be doing it again shortly if we can work out the timing with our travel/vacation plans. It'll be our sixth refi on our primary residence and we've already done three on our rental.

Each earlier refi paid for itself before we went back for more, but our home's last refi won't hit payback for another 14 months. I don't know how long this latest series of low rates will last, though, and I don't mind shelling out a little more now to reduce our payments by another 7-8%. We've already reduced our mortgage payments by over 30% in ER and this latest refi wouldn't be paid off until I'm nearly 80 years old...
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Old 07-29-2010, 11:49 AM   #4
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I looked at the 30 year option, monthly P&I goes down to $770
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Old 07-29-2010, 02:09 PM   #5
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I refinance to lower the rate and to extend the home purchase mortgage payment period. I invest what I would have used to pay the mortgage off. I'm assuming I can make better than 4.375% in equities.

However, why did you get the short loan to begin with? It's always great to reduce your interest rate any time, but presumably you were concerned about paying off the loan fairly quickly when arranging your current mortgage.
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Old 07-29-2010, 02:29 PM   #6
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People are always getting 15 year loans because articles in the newpapers and Money Magazine tell them how much money they'll save. IMHO, the smartest thing to do with Money is to throw it in the trash unread.

My portfolio of preferred stocks is paying 8.8% dividend yield.
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Old 07-29-2010, 02:34 PM   #7
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People are always getting 15 year loans because articles in the newpapers and Money Magazine tell them how much money they'll save. IMHO, the smartest thing to do with Money is to throw it in the trash unread.

My portfolio of preferred stocks is paying 8.8% dividend yield.
Actually, I was quite happy to have 15 year notes. Not only did I have a lower rate than a 30 year fixed loan, but the higher payment helped with savings discipline since I HAD to make that payment. I wanted to build equity and pay off the house on an accelerated basis anyway, so it worked fine for me.
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Old 07-29-2010, 02:36 PM   #8
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Nun,
I used a "mental" accounting trick. I separated my portfolio into two accounts - one for the mortgage payment based on NPV, and the other my SWR portfolio. I withdrew the SWR from the portfolio account & paid P&I from the mortgage account. Try this and see if you meet your ER requirements. It will not make a difference if your mortgage duration is greater than 1/SWR years, but for a shorter time, it allows you to have a higher $ withdrawal based on your SWR.

I call it "mental" accounting because the entire amount was in the same bucket for asset allocation.
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Old 07-29-2010, 02:40 PM   #9
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I refinance to lower the rate and to extend the home purchase mortgage payment period. I invest what I would have used to pay the mortgage off. I'm assuming I can make better than 4.375% in equities.

However, why did you get the short loan to begin with? It's always great to reduce your interest rate any time, but presumably you were concerned about paying off the loan fairly quickly when arranging your current mortgage.
I took the existing 15 year, 4.5% loan out 10 years ago when I refinanced a 30 year, 5.6% loan. I wanted to reduce my interest payments and pay the loan off quicker. After seeing my equities plummet through 2008 I was glad that I'd paid down the mortgage by quite a bit. I'm still working and my philosophy is to put half of my savings towards the mortgage and half towards other investments, but in ER I'm more inclined to reduce my monthly expenses.
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Old 07-29-2010, 02:54 PM   #10
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Originally Posted by nun View Post
I'm close to ER and thinking about refinancing my mortgage to reduce my monthly expenses. Has anyone done this? What's your opinion? Details are as follows: I have 5.5 years left on a 15 year mortgage at 4.5% and have a monthly P&I payment of $2500. If I refinance to another 15 year mortgage at 4% by P&I goes down to $1100.
If you are retired, my thought would be its more expensive to extend the term than it is to keep current mortgage.

If you are w*rking and saving, this is the same as the payoff your mortgage threads. It depends.

The best way to answer question is create a timeline, and associate costs and times to various events.


You have a current mortgage
its cost is $X (mortgage balance) and $Y (monthly payment) and $Z interest paid
On same timeline, put retirement date, mortgage payoff date, and any other significant financial milestones (like FI, kids college or other).
In addition list the amount of money you invest, and how much an A% return will give you at each milestone (for example use 8% and note the account values when mortgage is paid off, when you retire and when kids go to college)

If you are already retired, document current SWR and withdraw amount and carry this through a portfolio reduction.


Make sure on that timeline you sum up all your costs.

Then create an alternate timeline

Use the same items as above (if kids college was on timeline above, include it on second one too, if you left something off above, leave it off the second one too)

Use the refinanced mortgage numbers
$X balance (should be same as above), $Y (should be less than above) and $Z interest paid (my guess is this becomes MUCH higher on refinance). Add in another cost here for refinance closing costs.

Make sure you take the savings from mortgage and invest them- so take the money you would invest above and add the mortgage savings into it (if working)

If you are retired, adjust withdraw rate to lower amount and carry through.

--
My initial reaction was you are "so close" to paying mortgage off it would not make sense to extend the repayment terms from 15 to 30 years (this usually doubles or triples the interest paid). I could see if you were retired, and needed to drop from a 5% SWR to a 3.5% SWR where this might make sense, but if it drops from a 5% SWR to a 4% SWR, I'd probably stick with higher SWR and in 4 years be mortgage free.
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Old 07-29-2010, 03:04 PM   #11
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--
My initial reaction was you are "so close" to paying mortgage off it would not make sense to extend the repayment terms from 15 to 30 years (this usually doubles or triples the interest paid). I could see if you were retired, and needed to drop from a 5% SWR to a 3.5% SWR where this might make sense, but if it drops from a 5% SWR to a 4% SWR, I'd probably stick with higher SWR and in 4 years be mortgage free.
As I only have $150k left on the mortgage and interest rates are so low (ie 4%) the extra interest payments are more than offset by projecting a 4% return on my investments. Of course if we have another recession and returns are low or negative it would pay to have paid off as much of the mortgage as possible while I am working.
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Old 07-29-2010, 04:54 PM   #12
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As I only have $150k left on the mortgage and interest rates are so low (ie 4%) the extra interest payments are more than offset by projecting a 4% return on my investments. Of course if we have another recession and returns are low or negative it would pay to have paid off as much of the mortgage as possible while I am working.
Keep in mind that it doesn't take a recession to have low returns. A good round of deflation will take care of it.
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Old 07-29-2010, 04:58 PM   #13
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As I only have $150k left on the mortgage and interest rates are so low (ie 4%) the extra interest payments are more than offset by projecting a 4% return on my investments. Of course if we have another recession and returns are low or negative it would pay to have paid off as much of the mortgage as possible while I am working.
I would consider locking in low rate (4%) but still make payment like you will pay off in 5 years.

In general when I refinance, I try not to extend my term. To me extending term adds risk, it does not remove it or reduce it.

I am sure there are points to the contrary, just not sure "why" anyone would want to pay for something over a 50 year period.
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Old 07-29-2010, 05:12 PM   #14
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Why? Because the mortgage doesn't exist in a vacuum. It's not the only thing in your financial picture. Remember, "The standard is not perfection. The standard is the alternative."

Simplistically, one alternative is to put money into the mortgage, and another is to put money into bonds, preferred stocks, etc. Right now a mortgage costs you around 4.5% and preferreds pay you around 8.5%.

So every dollar that you pay on the mortgage saves you 4.5% in interest but costs you 8.5% in dividends.
Simply: 100K at 4.5% times 50 years = $225,000. 100K at 8.5% times 50 years = $425,000.
Now can you see "why" someone might want to do that?
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Old 07-29-2010, 10:21 PM   #15
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Why? Because the mortgage doesn't exist in a vacuum. It's not the only thing in your financial picture. Remember, "The standard is not perfection. The standard is the alternative."

Simplistically, one alternative is to put money into the mortgage, and another is to put money into bonds, preferred stocks, etc. Right now a mortgage costs you around 4.5% and preferreds pay you around 8.5%.

So every dollar that you pay on the mortgage saves you 4.5% in interest but costs you 8.5% in dividends.
Simply: 100K at 4.5% times 50 years = $225,000. 100K at 8.5% times 50 years = $425,000.
Now can you see "why" someone might want to do that?
Ah, but you have one presumption. Borrowing the money never goes down, and likewise you started with the $100,000 on the day you could have paid the mortgage off in full. Those 2 times on the timeline are not the same. Or am I missing something?
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Old 07-29-2010, 10:59 PM   #16
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Why? Because the mortgage doesn't exist in a vacuum. It's not the only thing in your financial picture. Remember, "The standard is not perfection. The standard is the alternative."

Simplistically, one alternative is to put money into the mortgage, and another is to put money into bonds, preferred stocks, etc. Right now a mortgage costs you around 4.5% and preferreds pay you around 8.5%.

So every dollar that you pay on the mortgage saves you 4.5% in interest but costs you 8.5% in dividends.
Simply: 100K at 4.5% times 50 years = $225,000. 100K at 8.5% times 50 years = $425,000.
Now can you see "why" someone might want to do that?
I understand why someone wants to do that... but realize the time period is MUCH shorter (current house is paid off in 5 years).

So if current mortgage payment is 150k borrowed at 5% I calculate about $19841 left of interest payments. I have the monthly payment at about $2830.

In 5 years if the payment of $2830 is invested at 7% for 25 years, the OP in 30 years would have $2.5 M.

The "cost" of this is 60 payments of $2830=$169,800.


If that same loan is 150k financed over 30 years (extending the term). Monthly payment drops to $716 and interest over 30 years is $107,800.

The amount to invest in this case is only the different in payments ($2830-$716=$2114. The amount after 30 years invested is $2.5 M.

The cost of this is 360 payments of $257,000.

Conclusion on baselines- OP would get about the same final value, for higher cost if he refinances.

--
What I suggest is keep the term the same on the 4% loan (so pay enough on 4% loan so mortgage is paid off in 5 years).

This implies loan payment (150k borrowed at 4%) is $2762 (drops payments by $70/mo) then invests $70/mo for 30 years and $2830 for 25 years. This is an investment account of $2.5M.

The COST of this $2.5 M is much less- cost $165k.


I realize 4% loans are good and I am not questioning 4% loan vs probable investment returns of 7%+. That makes sense- issue is the current loan is paying 70-80% principal at this stage, so refinancing does not always make much sense that late in the term.

I am questioning the logic of keeping the debt longer than needed... I am suggesting
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Old 07-30-2010, 10:42 AM   #17
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I am sure there are points to the contrary, just not sure "why" anyone would want to pay for something over a 50 year period.
I'd take out a 1,000 year loan if the rates were attractive. Why not?

edit/add: What I really don't undertand, is why some poeple (not many on this forum) would pay XX% on Credit card loans, and then keep a few thoudand in an 'emergency' fund.

Well, I suppose you could get your credit card locked down so emergency funds wouldn't be available, but it seems people in this situation have more than one, and after paying down with their 'emergency fund', they ought to have more credit available.

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Old 07-30-2010, 11:48 AM   #18
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I didn't really want this to become a pay off mortgage thread. I'm not that interested in how much I'll have in 20 or 30 years, as long as it's enough, but in the short term reducing my expenses will allow me to retire with a bit more of an after tax cushion. If I ER and keep paying the $2500 in P&I I have today for another 5.5 years I'll be eating into my after tax money even with $2000 a month rent and 72ting $1000/month from my IRA. However, if I refinance to a 4.6% 30 year loan my P&I goes down to $770 a month. Assuming 4% annual return, $2000/ month rental income, $1000/month 72t my after tax money will actually grow.
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Old 07-30-2010, 12:31 PM   #19
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I'm close to ER and thinking about refinancing my mortgage to reduce my monthly expenses. Has anyone done this? What's your opinion? Details are as follows: I have 5.5 years left on a 15 year mortgage at 4.5% and have a monthly P&I payment of $2500. If I refinance to another 15 year mortgage at 4% by P&I goes down to $1100.
I would take the 4%/$1100 loan, and invest 1400/month or pay extra if you like. If you save all, you will have $92,400 at the end of 5.5 years and you can decide then to pay off or continue. This will be a larger amount if you can get 5-7% and a nice cushion to have if needed.
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Old 07-30-2010, 12:39 PM   #20
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I think, from reading, if you refinance, the difference in payment is ALREADY invested, and you are looking to not have to liquidate it to make the last 5 years payments. I think that you should probably refinance then, and prepay up to the level that your cash flow (72t and rental income) allows, and leave the after tax savings invested. You can always liquidate part of the invested savings up to the bottom of the next tax bracket in any given year and throw that at your mortgage, but the lower demands on your cash flow should let you manage that better and possibly in a lower bracket. Do it, and prepay with what cash is coming in at your comfort level.
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