Profile picture for greazer

Should I consider a refi to a 15yr mortgage or just pay extra principal on my young 30yr at 4.5%

My current 30yr is only about 2 yrs in.  It has a loan to value ratio of 63%.  I know I can pay extra principle to essentially turn my remaining 28 yrs into about 15. But would it make more sense to refi?
  • September 13 2010 - Snohomish
  • 1
    1Yes

  • Report a Problem

    Please enter a valid email address.

    Content flagged

    We will review this content. Thanks for helping make the site more useful to everyone. To learn more, read Zillow's Good Neighbor Policy.

    We're sorry. This service is temporarily unavailable. Please come back later and try again.

Be a Good Neighbor. Be respectful and on-topic. No spam or self-promotion! See our Good Neighbor Policy.

 
 

Answers (16)

Profile picture for sunnyview
4.5% is a great rate. I would pay extra instead of paying for a refi and locking yourself into a 15 year payment. This refi breakeven calculator here might help you run the numbers and you also might take a look at the early mortgage payoff calculator here to compare the two loans. You don't lose that that much in interest by keeping your 30 year at the low rate and I think you gain a lot in flexibility.
  • September 16 2010
  • 1Yes

  • Report a Problem

    Please enter a valid email address.

    Content flagged

    We will review this content. Thanks for helping make the site more useful to everyone. To learn more, read Zillow's Good Neighbor Policy.

    We're sorry. This service is temporarily unavailable. Please come back later and try again.

Pay extra on your present mortgage and save the cost of refinancing.  In the end, if you calculate the right additional principal payment, you'll end up in the same place as you would have with the 15 year mortgage. 
  • September 16 2010
  • 1Yes

  • Report a Problem

    Please enter a valid email address.

    Content flagged

    We will review this content. Thanks for helping make the site more useful to everyone. To learn more, read Zillow's Good Neighbor Policy.

    We're sorry. This service is temporarily unavailable. Please come back later and try again.

Prepaying the mortgage is a guaranteed 4% return with no risk , anything else currently yielding 4% or more has risk.
  • September 16 2010
  • 1Yes

  • Report a Problem

    Please enter a valid email address.

    Content flagged

    We will review this content. Thanks for helping make the site more useful to everyone. To learn more, read Zillow's Good Neighbor Policy.

    We're sorry. This service is temporarily unavailable. Please come back later and try again.

Profile picture for niced68
Congratulation, greaze! You make a banker decision - borrow low (3% real cost) and invest high, 5-10% return depending on the market. Wow, you even know to put the extras into index funds, way to go!

Majority people can only think of how much they save interest with 15 years term over 30 years'. They need bankers' mindset to realize how much they can make via investing using the reverse handling!
  • September 16 2010
  • 1Yes

  • Report a Problem

    Please enter a valid email address.

    Content flagged

    We will review this content. Thanks for helping make the site more useful to everyone. To learn more, read Zillow's Good Neighbor Policy.

    We're sorry. This service is temporarily unavailable. Please come back later and try again.

Profile picture for greazer
Thanks everybody for the thoughtful input!  In the end, I think investing the extra into something that will likely beat the effective interest rate I'm going to pay over the next 15 years seems like the most fiscally logical option (per several of you).  Yes, there is risk there, but I tend to believe that the country WILL come out of the recession and markets will prevail as they have for a very long time.  I mean, if the markets can't show an increase in value of a measily 5% in 15 years, then I won't be the only one who's hurting.

Yes, I realize that I shouldn't put all the extra in one or even a couple stocks, but if I put it in a simple US market index fund, the likelihood is pretty high that I'll be able to pay off my mortgage in 15 years AND have extra money in hand for other things. 

Am I missing something?





 
  • September 15 2010
  • 1Yes

  • Report a Problem

    Please enter a valid email address.

    Content flagged

    We will review this content. Thanks for helping make the site more useful to everyone. To learn more, read Zillow's Good Neighbor Policy.

    We're sorry. This service is temporarily unavailable. Please come back later and try again.

"or just pay extra principal on my young 30yr at 4.5%"
  • September 14 2010
  • 1Yes

  • Report a Problem

    Please enter a valid email address.

    Content flagged

    We will review this content. Thanks for helping make the site more useful to everyone. To learn more, read Zillow's Good Neighbor Policy.

    We're sorry. This service is temporarily unavailable. Please come back later and try again.

Profile picture for Netizen

If the tidal wave of newly printed currency from the Fed increases the money supply (trillions that have come off the "presses" since 2008) then the U.S. could experience hyperinflation in the near term. Hyperinflation is a mortgage lender's worst nightmare and a bonanza for 30 year fixed mortgage holders.

In normal times, inflation of currency causes the effect you may notice where, for instance, it suddenly takes $10 in 2010 to buy something priced at $1 in 1980. Back in 1980, someone with a $400 mortgage payment viewed that payment the way people in 2010 would view a $4,000 mortgage payment. That is why people making the final payments on their 30 year fixed mortgages this year, have such seemingly low payments... and why banks rely on their interest over 30 years to help level the playing field. (In my opinion people with mortgages still came out ahead due to inflation.)

In hyperinflation the 30 year mortgage is the worst investment a bank can make, and conversely a bonanza for homeowners. You want to hang on to it and enjoy the ride!

Hyperinflation considerations aside, the one thing you didn't mention is your current interest rate, which will help determine if refinancing is a sensible option.

  • September 14 2010
  • 1Yes

  • Report a Problem

    Please enter a valid email address.

    Content flagged

    We will review this content. Thanks for helping make the site more useful to everyone. To learn more, read Zillow's Good Neighbor Policy.

    We're sorry. This service is temporarily unavailable. Please come back later and try again.

Profile picture for niced68
an eye-opening option:

keep the 30 years loan and don't pay extra to principal. Put the "extra" (minus 15 years payment by 30 years payment) into a stock mutual fund. Your 30 years loan costs you about 3% (4.5 minus tax saving) and you can expect 6% return on the invested extras in 15 years. You can pay off the remaining of the loan in 15 years with the invested and leave with BIG remaining; Or keep do the 2nd half of 15 years like the 1st 15 years, you will have BIGGER remaining at end of 30 years. You can crunch the specific numbers by your loan amount.


There is risk, but the total stock market return about 10-11% since 1928 and 6% expectation is conservative. And we are talking about 15 or 30 years, LONG term.
  • September 14 2010
  • 1Yes

  • Report a Problem

    Please enter a valid email address.

    Content flagged

    We will review this content. Thanks for helping make the site more useful to everyone. To learn more, read Zillow's Good Neighbor Policy.

    We're sorry. This service is temporarily unavailable. Please come back later and try again.

It may or may not make sense.  It really depends on the loan size.  The smaller the loan size the less likely it makes sense to refinance.  Your rate is excellent but 15 year rates are currently 3.5% with my lenders.  Now at that rate you would be paying full closing costs.

Depending on your loan size it may be possible to go up to a slightly higher interest rate of say 3.75 or 3.875% and that higher rate could pay all or most of your closing costs.  You would have to have a loan size of about $200-250k for that to be doable.

So it's hard to say but if your loan size is at or over $200k it could make sense.  Even if you you are not dropping your interest rate by much if the cost is zero or very small it may make sense. 

Keep doing what your doing either way thought.  It is great that you are paying off your mortgage at a faster pace.  Another benefit of staying in your current loan is the lower payment should something happen and you your income is  diminished.  This way you can still possibly make the lower 30 year payment.

Good luck to you.
  • September 13 2010
  • 0Yes

  • Report a Problem

    Please enter a valid email address.

    Content flagged

    We will review this content. Thanks for helping make the site more useful to everyone. To learn more, read Zillow's Good Neighbor Policy.

    We're sorry. This service is temporarily unavailable. Please come back later and try again.

Since you're already at such a low rate....instead of refinancing, why not take the extra money you would put towards your 30 Yr Fixed mortgage and put it in an interest-bearing account?

That way, your funds are more liquid, and you can pay off your mortgage in 15 years (or less, depending on the rate-of-return and the compound interest you gain).

Just throwing out another option for you.
  • September 13 2010
  • 0Yes

  • Report a Problem

    Please enter a valid email address.

    Content flagged

    We will review this content. Thanks for helping make the site more useful to everyone. To learn more, read Zillow's Good Neighbor Policy.

    We're sorry. This service is temporarily unavailable. Please come back later and try again.

Profile picture for shapiroamg
4.5 is a great rate. I would suggest continuing to add extra payments. While it might make sense to refi to a 15 year, once that is done you are obligated to make the higher payments. keeping the 4.5 30 year loan will give you some payment flexablity if you have some months where making the reg 30 yr payment will help.
  • September 13 2010
  • 0Yes

  • Report a Problem

    Please enter a valid email address.

    Content flagged

    We will review this content. Thanks for helping make the site more useful to everyone. To learn more, read Zillow's Good Neighbor Policy.

    We're sorry. This service is temporarily unavailable. Please come back later and try again.

Depending on the fees required it could make sense, however it probably won't make a huge difference in your payment.  You leave yourself with more options if you stay in your current program and just make the 15 year fixed payments without refinancing.
  • September 13 2010
  • 0Yes

  • Report a Problem

    Please enter a valid email address.

    Content flagged

    We will review this content. Thanks for helping make the site more useful to everyone. To learn more, read Zillow's Good Neighbor Policy.

    We're sorry. This service is temporarily unavailable. Please come back later and try again.

Yes, it makes sense to refinance.
Assume your mortgage balance is $100K, 4.5% interest rate, you needed to pay $765 a month to pay-off the mortgage in 15 years, if you pay $765 a month for the 3.75% interest rate mortgage, your mortgage life is 14 years or 168 months, look for the no closing cost refinancing at 3.75% rate.
It is depended on your employment however.

  • September 13 2010
  • 0Yes

  • Report a Problem

    Please enter a valid email address.

    Content flagged

    We will review this content. Thanks for helping make the site more useful to everyone. To learn more, read Zillow's Good Neighbor Policy.

    We're sorry. This service is temporarily unavailable. Please come back later and try again.

It may make sense.  It all depends on the amount of the mortgage.  If your goal is to have it paid off in 15 years, the payment may be significantly less to refinance into a 15 year rate.  Those right now are under 4%.
What is the current balance of your existing mortgage?
  • September 13 2010
  • 0Yes

  • Report a Problem

    Please enter a valid email address.

    Content flagged

    We will review this content. Thanks for helping make the site more useful to everyone. To learn more, read Zillow's Good Neighbor Policy.

    We're sorry. This service is temporarily unavailable. Please come back later and try again.

15 year loans are not that much less expensive. Past monies you've spent to finance are irrelevant. What do you give and what do you get. So you give up the cost of refinancing - which you need to take your time and figure out all the costs from a lender GFE...and what do you get - you get the lower rate. So get some quotes on what the lower rate would be and how much it will cost you to refi. If you get paid back in 3-4 years (so the interest savings only take 3-4 years to accumulate to the cost of refinancing) and you are planning to own the property for a long time, it would make sense.

Smaller loans are not going to make sense because the "fixed" costs of refinancing are probably $3,000 regardless if a $80,000 loan or a $500,000 loan. + or -. You also would have loan origination points which are variable. So the interest savings are much bigger on a much bigger loan so it would make more sense.

Overall thought, figure out what you give....and what you get....and compare the two and decide.

If it doesn't make sense to refi...and either way, recall you are paying a very low rate for borrowing that money, even less after tax impacts...if you pay off your loan you are essentially investing money at that low low return..can't you find something better like some high quality bonds or mutual funds or might want to keep more cash on hand depending on cash stash you have. Good luck.
  • September 13 2010
  • 0Yes

  • Report a Problem

    Please enter a valid email address.

    Content flagged

    We will review this content. Thanks for helping make the site more useful to everyone. To learn more, read Zillow's Good Neighbor Policy.

    We're sorry. This service is temporarily unavailable. Please come back later and try again.

Probably not.  There will be costs to refi and the interest rate probably won't be enough lower to make up for the refi costs.  I would just pay extra on my loan that is in place in order to pay it off in 15 years.  The other good thing about that is that if you ever need to make the lower payment for a month, you are able to without risk to your credit.
  • September 13 2010
  • 0Yes

  • Report a Problem

    Please enter a valid email address.

    Content flagged

    We will review this content. Thanks for helping make the site more useful to everyone. To learn more, read Zillow's Good Neighbor Policy.

    We're sorry. This service is temporarily unavailable. Please come back later and try again.