Should I refinance my mortgage?

[chasedream2002]

I am wondering whether I should refinance my mortgage. Currently I have 3% 15 years and balance is 170k. I am planning to refinance it to 30 years at 3.5%. My monthly payment will be lowered from 1600/month to 800/month. This can reduce my total monthly expense from 4100 to 3300.

After mortgage refinance, my bare-bone budget can be covered by 4-5% of my investment. Should I refinance to reach FIRE quicker? My current job may end after a few months, but I think I can find a lower paid job after a few months. If my investment can cover my monthly expenses with 4-5% withdrawal, then it can reduce my stress significantly. After I get laid off, I will look for another job as soon as possible, but it gives me a peace of mind if I know 4-5% withdrawal can cover the bare bone monthly bills.

I will appreciate it if you guys can give some insights.

 

[chasedream2002]

Should I refinance?

I am wondering whether I should refinance my mortgage. Currently I have 3% 15 years and balance is 170k. I am planning to refinance it to 30 years at 3.5%. My monthly payment will be lowered from 1600/month to 800/month. This can reduce my total monthly expense from 4100 to 3300.

After mortgage refinance, my bare-bone budget can be covered by 4-5% of my investment. Should I refinance to reach FIRE quicker? My current job may end after a few months, but I think I can find a lower paid job after a few months. If my investment can cover my monthly expenses with 4-5% withdrawal, then it can reduce my stress significantly. After I get laid off, I will look for another job as soon as possible, but it gives me a peace of mind if I know 4-5% withdrawal can cover the bare bone monthly bills.

I will appreciate it if you guys can give some insights.

 

[RetireBy90]

I would suggest that if you continue to pay the note at $1,500 you will have 0 mortgage cost, making it easier to afford FIRE. You will still have the taxes and insurance or escrow amount to pay. At some point, if you save more for retirement that savings will be needed once you FIRE to pay the mortgage. Seems like a wash to me.

Now if you look at this as a way to trim expenses due to projected layoff, that could be a good move.

Just one view

 

[marinauser]

How many years left on the 15 year mortgage? I probably would not do that since I would want the mortgage gone. If you have say 10 years left, then you are trading 10 for 30 - not 15 for 30.

 

[chasedream2002]

Thank you!

The main reason is my layoff is coming soon. This week is my last week on a billable project. I am not sure whether the employer allows me to do overhead work or not. The whole department is lack of work.

If I refinance, I can trim my bare-bone monthly expense from 4100 to 3300 and my current portfolio can generate 3300 a month with a 4-5% withdrawal rate. It gives me a peace of mind while I look for another job.

I would suggest that if you continue to pay the note at $1,500 you will have 0 mortgage cost, making it easier to afford FIRE. You will still have the taxes and insurance or escrow amount to pay. At some point, if you save more for retirement that savings will be needed once you FIRE to pay the mortgage. Seems like a wash to me.

Now if you look at this as a way to trim expenses due to projected layoff, that could be a good move.

Just one view

 

[chasedream2002]

I have 10 year left on my mortgage.

My main purpose of this is to lower my monthly expense so my portfolio can sustain my bare bone monthly expense while I look for a job. It may take a few months before I can land the next job.

How many years left on the 15 year mortgage? I probably would not do that since I would want the mortgage gone. If you have say 10 years left, then you are trading 10 for 30 - not 15 for 30.

 

[OldShooter]

... 3% 15 years and balance is 170k. I am planning to refinance it to 30 years at 3.5%. ... This can reduce my total monthly expense from 4100 to 3300. ...

I'm not sure I understand your post completely but refinancing a mortgage at a higher rate and slower amortization doesn't reduce your monthly expenses. It increases them. It does, however, reduce your monthly cash outgo by kicking the expense payments down the road and significantly increasing the total.

Find a mortgage calculator that will show you the total interest expense for each of the two mortgages. I think you will be shocked to see how much expense increase you are looking at.

(www.dinkytown.net has a lot of calculators. You can probably find one there.)

 

[chasedream2002]

Yes, I understand my total payments will be higher. However, it reduces my current monthly expense, so my portfolio can sustain my expenses after refinance. It may take a few months for me to find another job, so this can give me a peace of mind when I know my core expenses can be covered by 4-5% withdrawal from my total investment.

When I locate my next job, I will pay extra into mortgage and pay it off early. However, I am not sure when I can find the next job.

I'm not sure I understand your post completely but refinancing a mortgage at a higher rate and slower amortization doesn't reduce your monthly expenses. It increases them. It does, however, reduce your monthly cash outgo by kicking the expense payments down the road and significantly increasing the total.

Find a mortgage calculator that will show you the total interest expense for each of the two mortgages. I think you will be shocked to see how much expense increase you are looking at.

(www.dinkytown.net has a lot of calculators. You can probably find one there.)

 

[RunningBum]

Sounds like a short term solution to address an unemployment period, not a good solution to reach FIRE sooner.

I'd look at other ways to cut your budget.

Why are you waiting to look for a new job "as soon as possible" after getting laid off? Why not start looking now?

 

[CaliKid]

I force yourself to keep paying the bigger payments and get that baby paid off. You can always take out a reverse mortgage later.

 

[SeanPizzle]

Like mentioned above, by moving to a 30 year, your first 10 years, you will be paying more interest than principal every month. Also, expect to pay several thousand in closing costs that will be added to your loan. You mention 4 to 5 percent withdrawal rate from your assets that you can live on now. Did you run your numbers through FIRECALC? what did that say. You are still 8ish years from getting penalty-free withdrawals from your 401k/IRA (in most cases). Do you have cash to tap now?

I think 6 months of the lower 15 year payment savings is $4800. The economy is still pretty good, likely you can find work within 6 months. I would keep the 15 year and grind through these uncertain times.

 

[Vacation4us]

You should have an emergency fund to help pay the bills during any lay off.

Refinancing to a 30 year loan is a horrible idea.

A short term solution leading to a 30 year problem.

How many years do you have left on your current mortgage?

Where else can you cut your budget? Can you save more now to offset your short term needs when the layoff comes?

 

[Vacation4us]

Trading a 10 yr mortgage for a 30 yr mortgage is crazy.

What would be your withdrawal rate if you left it alone?

How about a roommate until your employed again?

 

[Gumby]

This is a case where the refinance makes sense. It improves your cash flow in a difficult situation. And the cost is an extra .5% plus any closing costs. You'll pay 4 times as much interest over the 30 years as you would over the 10 years, but you already know that.

I probably would do it and then, after I got another job, make extra principal payments to pay it off in ten years instead of 30. By my calculations, that will only cost you an extra $5k in interest over those ten years (plus any closing costs).

Will you be able to refinance if you are laid off? The bank might not do it.

 

[Gumby]

[MOD HAT ON]Nearly identical threads in two sub-forums have been merged here. Just a reminder to everyone that you should only start one thread on a topic or question. If the moderators think it is in the wrong sub-forum, we'll move it. [MOD HAT OFF]

 

[pacergal]

OP--
Can you get the refinance done before your layoff?
If you are being laid off, do you qualify for unemployment payments?
If you plan to find another job soon, would the UE and drawdown cover you for a few short months so you did not need to refi? That would be my first choice.

 

[Jerry1]

How old are you? How close in financial terms are you to being able to independent (able to live off your investments - retire)? Trying to get a sense of where you are in your life.

Generally, I would say no to the refinance. You already stated that you realize that you’d be paying more in total dollars with refinancing. Not a good recipe for financial success. However, if you are over 50 and you have poor prospects for a job going forward, then monthly cash flow may be more important. The younger you are, the firmer I would be on holding tight to the current mortgage.

 

[The Cosmic Avenger]

This is a case where the refinance makes sense. It improves your cash flow in a difficult situation. And the cost is an extra .5% plus any closing costs. You'll pay 4 times as much interest over the 30 years as you would over the 10 years, but you already know that.

I probably would do it and then, after I got another job, make extra principal payments to pay it off in ten years instead of 30. By my calculations, that will only cost you an extra $5k in interest over those ten years (plus any closing costs).

Will you be able to refinance if you are laid off? The bank might not do it.

I agree that obviously paying nothing extra would result in much higher interest payments, but if you are worried about being able to make the higher mortgage payments and think you will need the flexibility, go ahead and take out a longer-term mortgage, and start paying more when you can. Make it a goal to pay it off in 10 years, or even refinance to a lower-interest, shorter term mortgage later on once things stabilize for you, and then STILL pay it off in 10 years, but with less interest. That's basically what we did, although I refinanced with a really low rate ARM and paid it off before the rate changed.

 

[mrfeh]

Sounds like a short term solution to address an unemployment period, not a good solution to reach FIRE sooner.

+1

This is what emergency funds are for.

 

[RobbieB]

I would only do what you are considering if you were thinking of being unemployed for many months (or years)

A few months of drawdown will cost much less than a higher rate for a longer time.

 

[RunningBum]

Maybe open a HELOC while employed, that you could tap to access some of the equity if your unemployment extends.

 

[RetireBy90]

I would do the refi as it will buy you peace of mind. I understand all the comments that it will cost more and extend your obligation but not all financial decisions come down to maximizing your pile. If you are at the point where a 4-5% draw from investments can fund your expenses then you are doing good as far as having investments to fund your retirement. Not really great but well. Congrats on the success to this point.

I have taken similar steps for peace of mind. When wife and I retired from military I cut expenses and purchased a cheaper home that could be funded from our retirement checks as I was unsure about my employment after retirement. Turns out I didn't need to worry as I found employment that put us above our earlier income. Likewise when I was at the top of my income I contributed to my Roth 401K rather than pretax 401K as I wanted to get tax bill paid and I could afford it. Both times I traded a larger pile of $$ for peace of mind.

Now there is no doubt you know the pros and cons, make a choice that is right for you. There is more to life than how much $$ you can save. Just don't tell anyone I said that

 

[pb4uski]

.... If I refinance, I can trim my bare-bone monthly expense from 4100 to 3300 and my current portfolio can generate 3300 a month with a 4-5% withdrawal rate. It gives me a peace of mind while I look for another job.

I agree that a HELOC for liquidity would be the better path.

IMO, the OP is pushing the panic button way too early.

As I calculate it the OP has ~$660-990k of savings ($3,300/month divided by 5% and 4%, respectively)... so let's say $825k for discussion purposes.

There is no sense in sweating the extra $800/month of cash flow from the current mortgage with that level of assets.

New mortgage....... $800/month pmt - ~$496 interest ($170k * 3.5%/12) = $304 prinicpal
Current mortgage....$1,600/month pmt - $425 interest ($170k * 3.0%/12) = $1,175 principal

Current mortgage is $871 of principal better so while the cash outflow is $800 higher it essentially moving $871 from one pocket to another.... from the retirement savings pocket to the home equity pocket... the $71 difference is interest savings.

So let's say that it take the OP 6 months to find a job and as a result of keeping the mortgage they take $4,800 out of savings that they wouldn't not have if they refinance.... their home equity will increase by ~$2,000 so the net extra amount taken out is only $2,800... a pittance in the whole scheme of things.

 

[Gallaher]

I think I’d refinance.
In fact I did something very similar.
Was about to get downsized, so I:
1) took a mortgage out on a rental condo I owned free and clear $185K
2) paid cash for a house where I wanted to live....starter home to live in while I built a new home. $175k
3) sold my McMansion.
I am in process of building the new home. Once it is complete I will sell the starter home which has appreciated over 20% in 2 years.
The gain in equity on the starter home will pay a lot of mortgage interest.
At the point of sale of starter home I could pay off my condo loan.
However, I will probably use that cash to keep AGI low and get an ACA subsidy. That will save about $16k-$18k a year.
Debt is not always bad. It can be a valuable tool when used correctly.
By my math, my condo mortgage will cost me about $50k over 7 years but I will save/earn $125k in real estate appreciation and subsidies for ACA. Net gain $75k+.
Affluent people problems

 

[SnowballCamper]

Another consideration: Is this a forever home? Do you plan on keeping it until you die? Or do you think you'll sell at some point within a couple decades?

I took a big chunk (almost all) out of our taxable brokerage to build, and then pay off our home. But we'll be in this house until we die, or a natural disaster forces us out. This eliminated the monthly payment outflow which gave us peace of mind. However, this isn't the numerically optimal thing to do when you have low mortgage rates like the OP.

If you expect that you'll sell within the decade (or sooner) then the refinance is a tool to manage the monthly outflow down to a manageable level, while keeping the retirement savings in place (and thus not missing stock gains).