Finance question

[tkim]

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I know it's not an EM question, but I trust the opinions of people I've read more of than others.

Haven't planned or funded anything for retirement yet, just graduated last year. Bought a house with a 30 year mortgage, and looked into a 15 year refi with an estimated savings of $450K in interest if I go that way.

Now, would it be financially more prudent to refi and save that half mil in interest, or stick with the 30 year mortgage and fully fund some retirement vehicle. By fully fund I'm thinking about 45K/year x 20+ years, which hopefully I can do.

Since I'm late to the retirement planning game, I've been told that my retirement mix should be more risky versus safe to maximize potential returns. Whatever that means.

My gut tells me that a guaranteed savings of half mil is better than fully funding a retirement plan, but I haven't calculated the loss of tax shelter if I refi instead.

Anyone else trying to maximize their pennies this way?

 

[EM_Rebuilder]

What is your current interest rate on the loan and what would it be today for a 15 year note?

As I understand, you can effectively turn a 30 year note into a 15 year note by making the same payment as if it was a 15 year note. Usually, 15 year notes do have slightly lower interest rates though.

I see what you are asking, and hopefully someone here will answer it well.. its going to take some complex math and ultimately depends on what type of returns you end up getting.

Most any financial gurus I have talked to or read about certainly push that 15 year notes are the only mortgage to consider....

 

[The White Coat Investor]

I'm a big fan of the 15 year mortgage. Lower interest rates, half the time to pay it off for a payment that's only 40% larger or so. Spend some time on mortgageprofessor.com and maybe even some time on my blog (see the sig.)

Consider this:

$500K loan for 15 years at 3.75% $3636.12/month Total paid after 15 years $655K
$500K loan for 30 years at 4.50% $2533.43/month Total paid after 30 years $912K

So after 15 years, the 15 year guy owns his house free and clear. The 30 year guy still owes $331,868.90.

Meanwhile, 30 year guy has an extra $13,232.28 per year to spend or invest. If he is disciplined enough to invest it, how much does he need to earn on average after taxes and investment expenses to beat out 15 year guy? It turns out more than 7%. Funny how that works isn't it?
=FV(7%,15,-13232.28)=$332K

But it's your call, do what you like. Guaranteed 7%, or take your chances in the market.

P.S. Why not get a 15 year mortgage AND max out the 401K? You seem to think you're in an either-or situation. You could always spend less or earn more and do both.

 

[DeadCactus]

I can't imagine paying extra on a 30 year mortgage to be anywhere near as worthwhile as refinancing to a 15 year mortgage. I would think putting extra money on principal is essentially investing it at the (rather low) mortgage rate. The percent or so less in interest by refinancing has a substantially larger impact.

In comparing the 15 year mortgage and 30 year mortgage, I think it's worth remembering that a home is an investment and not just a purchase. A cheaper mortgage at the expense of having no other investment vehicles just seems like a bad financial situation. It's not such a big deal for physicians because they are less likely to be forced into selling during a bad market, but it's still worth considering...

 

[tkim]

What is your current interest rate on the loan and what would it be today for a 15 year note?

As I understand, you can effectively turn a 30 year note into a 15 year note by making the same payment as if it was a 15 year note. Usually, 15 year notes do have slightly lower interest rates though.

I see what you are asking, and hopefully someone here will answer it well.. its going to take some complex math and ultimately depends on what type of returns you end up getting.

Most any financial gurus I have talked to or read about certainly push that 15 year notes are the only mortgage to consider....

30 year fixed @ 4.875, quoted 3.625 for 15. For $395K.

 

[tkim]

But it's your call, do what you like. Guaranteed 7%, or take your chances in the market.

If I were to get 7% real from the market, it would be a wash, but that seems to be a pretty optimistic number.

P.S. Why not get a 15 year mortgage AND max out the 401K? You seem to think you're in an either-or situation. You could always spend less or earn more and do both.

I will if I can. But the question is, before I start funding my retirement, is if I have only enough to do one, which one would it be?

The other concern would be still having a mortgage after my projected retirement age. Planning to retire in 20+/-3 years while staring at a 30 year mortgage gives me chest pain.

 

[dchristismi]

I'm a big fan of the 15 year mortgages, and just refied my 15yr to a lower interest 15 year. (And I plan to pay it off in 12, which makes up for the 3 I lost...)

I'd do both, if possible, but I'd probably refi if I could get that much better a rate. You may find that the payments are actually not that much higher. The first time I did it was on my very first home, and the payments went up a paltry $200 or something. Earned a lot of equity, granted, this was a decade ago, but one of the best financial decisions I ever made.

Good luck,
Danielle

 

[tkim]

I'm a big fan of the 15 year mortgages, and just refied my 15yr to a lower interest 15 year. (And I plan to pay it off in 12, which makes up for the 3 I lost...)

I'd do both, if possible, but I'd probably refi if I could get that much better a rate. You may find that the payments are actually not that much higher. The first time I did it was on my very first home, and the payments went up a paltry $200 or something. Earned a lot of equity, granted, this was a decade ago, but one of the best financial decisions I ever made.

Good luck,
Danielle

With taxes and and insurance the monthly goes up from $2667 to $3350. So the question would be whether the extra $8163/year would make a difference if I were to invest it versus pay it in mortgage for a shorter time at a lower interest rate.

The other question is whether to hold on to the present mortgage and pay aggressively against interest payments first couple of years, and save in refi costs. There's some confort in the flexibility in throttling back to minimum payment when you need that extra money for something unexpected, versus a required larger monthly payment.

My head hurts. I'd rather see a female aged 17-55 with 'abdominal pain' x 5 years than do this stuff.

 

[gman33]

Another thing to consider is whether or not you will be in that house for the 15 or 30 years.

It sounds great to refi and get a lower rate, but what if you move in the next 2-5 years? The math changes when you add in the cost of the refi.

If you really think you are going to be there for 15+ years, it's probably good to lock in the low 15 year rate now.

Try to find a good financial advisor or accountant to help you with these decisions. Someone you can pay a fee to who will then come up with a plan (not somebody just trying to sell you something to make a commision).

 

[deleted109597]

15 year note. Done.


Also, that female patient, you should treat her aggressively with zoloft.

 

[spyderdoc]

We did the 30 to 15 yr refi about a year ago. Our interest rate went down 1.25%, and our payment went up $1600/mo (SF Bay area gouging), but we plan to be here that long, and It'll be paid off on my 59th B-day. With your new payment and your attending salary, you should easily be able to max out your retirement savings plans and still manage to save some extra $$.....

One other thing to consider is that rates just went down a bit with the treasury bond rate decrease, so you may be able to get an even better rate than last week.....Good luck!

 

[docB]

Some of it has to be about how long you plan on being in the house. Any money put into a house over the next 2 - 3 years will be lost if you move before the market stabilizes and improves some. If I were planning to move in the next 5 years I'd put as little into the house as possible.

The bit about being more aggressive in your investments because you are starting late is a little counter to stuff I usually hear. The usual mantra is that how aggressive you can be is dependent on your age and how long you expect to be earning. If you are young you have time to make it back if you lose it. If you are older you have to be more conservative as you can't take a big hit.

 

[southerndoc]

I went with a 30-year mortgage because I wanted the security of making smaller payments if I were to become disabled or need to work less. I'm currently making double payments.