Time to refinance?

[bjl584]

Here is my situation. I currently have a 15 year fixed mortgage at 5.25%. The original loan balance was $83,000. I currently owe around $65,000 on the loan. If I were to refinance to another 15 year loan around the same interest rate, my payment would drop about $150 a month. If I refinanced to a 30 year around the same interest rate, my payment would be roughly cut in half. My current payment is $668. I'm not planning on moving anytime soon. With the drop in interest rates, I am seriously considering making this move. Any thoughts?

[noppenbd]

I would only do this if you have an aggressive plan to invest the savings you are getting every month, and it would increase your overall savings level. If you do not have a serious budget, where you can account for every dollar, this plan will end up costing you more in interest.

[sweeps]

Interest rates have not dropped as much as you may think. What rate can you get?

Also realize your payment is going lower because you are restarting the clock on your mortgage. You will be back to a 15- (or 30-) year loan. The question is what you will do with that "extra" money.

[jIM_Ohio]

Where can you get 5.25% for 30 yr fixed?

I would keep the current mortgage at 5.25%. You might find 15 yr fixed at 4.75% (check out PenFed), but 30 year rates are nowhere near that low (5.675 is lowest I have seen 30 yr fixed).

If you do lower the payment, it only works in your favor if you keep the same repayment term (make sure you payoff new loan on same date as existing loan) and invest the savings from old payment to new one.

If you spend the savings of the payment, you will cost yourself time and/or interest. If you increase the date of repayment from old loan to new loan, you cost yourself time and interest as well.

[bjl584]

Yes, I realize that I would be starting over the mortgage. My plan was to invest the "extra" money. My goal really wasn't to increase my disposable income, rather to boost my savings.

[jIM_Ohio]

Originally Posted by bjl584

Yes, I realize that I would be starting over the mortgage. My plan was to invest the "extra" money. My goal really wasn't to increase my disposable income, rather to boost my savings.

What year are you on the mortgage?

My guess, just based on running the numbers for me, if that if I could pay off mortgage in less than 10 years, there is higher return paying off the mortgage, then investing the whole mortgage payment.

You need to look at 3 sides:

1) invest $150/month now for 15*12 months=$21600 invested*y
y is the compounding factor of deposits.
2) pay off mortgage, then invest $668 for x years*12 months= $8016x*z
(you need to fill in x for it to equal date in 1, z is the cmpounding factor for the deposits)
3) the interest cost of 1) and the interest cost of 2), plus closing costs of 1) as well

I think 2) wins out, as 15 years might let some of the early years double twice, but unless you are only 3-4 years into current 15 year mortgage, my suggestion is to pay off the mortgage on normal schedule, then invest the full mortgage payment.

The over under is usually 11 years in my calculation for me (meaning if I can invest money for 11 years or more, the compounding of lower deposits beats the higher deposits later for a given risk level)

2) clearly has less risk
time will make investing less risky, so one reason 11 years on over under looks good is it's possible money doubles twice in 11 years if there is a good bull market. That is probably not true for 9 and 10 year periods, if numbers on paper look good.

One other issue for me- I plan on taking my 2k+ mortgage payment and creating a dividend stream from it. It makes sense when doing this to delay taxes on the dividends now, and just invest a lot into dividend paying taxable investments for 2-5 years prior to retirement. I would then have 2-5 years of taxable dividends while accumulating, then those dividends become part of my income stream for retirement.