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Non-Hosting Related: Refinancing & Long-Term Financial Goals

Hi all! This question is not directly host-related, but there are a lot of homeowners on here and you all give great advice.

My husband and I are considering refinancing our mortgage from a 30-year to 15-year loan to take advantage of low interest rates and further our goal of paying our house off as soon as possible so we can own it outright, and perhaps invest in a rental property or vacation home down the road.

We bought our house in 2010, during the recession, and between our renovations and the market recovery, we suspect our house has nearly doubled in value. However, we have no plans to sell. Our home has everything we need. It is in a great location near the city center but away from the noise of the nightlife, and the house itself is big, so we have room for our AirBnB and growing family. With our first baby on the way, we are excited we live within the boundaries of some of the best public schools in the region. If work requires us to move in the future, we plan to rent the house out because we could currently charge $500-1000 more in rents than what we currently pay for our mortgage, and rents are only going to go up while our mortgage rate remains fixed.

We met with a mortgage specialist at our credit union, and told her our goal with refinancing: to pay our house off as soon as possible so we can own it out right. We wanted to know if refinancing to a shorter loan term would help us meet this goal. We asked: when we would pay our house off on the current mortgage if we skipped refinancing and continued to over-pay on our 30 year loan? How much would we save on interest during the life of the loan if we refinanced, compared to how much interest we would pay on our 30 year loan? The mortgage specialist acted like these were questions she had not been asked before and had trouble answering them.

We were able to answer these questions ourselves through further research, and indeed we could pay our house off a bit early, and spend less overall (even including the refi fees). But the mortgage specialist’s reaction to our questions left us doubtful. The question I have for you all: is it unusual that our goal is the pay our house off early? Is it unusual that we’d rather pay more now to spend less during the lifetime of the loan? Is there something we are missing? It seems logical to us to spend more now to save more later, but we were wondering if we were missing something. Are most homeowners interested in having a smaller monthly payment than eventually paying their house off? Is this why the mortgage specialist may have been so unprepared for our questions?

Most of my friends (millennials) are renters and have decided (despite my encouragement to save) that they’ll never be able to afford a home, so I haven’t been able to ask my peers for advice. I am inspired by my parents, who despite having blue-collar jobs paid their house off when they were in their 30s, and have had great financial freedom since then, but I don’t want to ask them for advice because my dad can be a bit meddlesome and get mad if you ask for his advice and decide not to follow it. My in-laws, though they are highly educated, have generated a lot of consumer debt that they folded into their mortgage during several refinances, and they now owe more on their house than what they paid for the house 20-something years ago. Their goal is to have a small monthly payment and they don’t care about paying the house off. Is my in-laws’ financial philosophy more representative of how most homeowners view finances?

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Your questions are totally out of the norm for today. But very in line with the Dave Ramsey philosophy (which is what my husband and I are working through). My main thought would be unless you’re really getting a much better interest rate, you’re at the point in your mortgage where the amortization schedule is about where you’d be if you’d refinance into a 15-year. It’s not as exaggerated as with a 30 year, but you’d still be around the same place.

Nowadays people are thinking “can I afford the payment” not “can I afford THIS”. Which is why your questions totally threw the mortgage person off. Hardly anyone is getting a 15-year nowadays which is sad. If you know you can save money long-term by refinancing it’s probably a good idea, but in reality just paying down like crazy may end up being the same. We recently got a 30-year mortgage because we have other debt we want to snowball first, but we are on track to have our mortgage paid off in 20 years instead of 30 because we’ve decided to stop eating out and live on a tight budget so that when our kids reach college we can afford to help them a bit and then TRAVEL!!!

But I think most people’s goal is to have their house paid off when they retire, not live mortgage free for most of their lives. So bravo, way to go in having those goals. Live like no one else so you can live like no one else.

Just be sure you can hide that you do STR so you don’t get denied or a higher interest rate!

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Ah, I love these kinds of questions!!!

So, the only reason to refinance is if you will get a significantly lower APR on the new mortgage. If the rate will not be lower, don’t refinance. If the rate is at least 1 % point lower, then it is worth the closing costs. Closing costs are a real cost and have to be factored into your calculations.

If the rate the bank is willing to give you is fundamentally the same as the rate you are paying now, pay as much extra per month as possible when submitting your mortgage payment. We have actually set ours up as an automatic deduction with the extra funds. What your mortgage “specialist”, i.e., the person who want to make money from a sale to you, neglected to mention is, every extra dollar you send in with your mortgage payment pays down the CAPITAL!!! Think about that. What does paying down the Capital really do for you? Why it lessens the amount of interest you are paying. If you do this consistently, you will not only pay off your mortgage early, you will also pay significantly less interest.

We did refinance to a 15 year mortgage several years ago, and have a rate that may never be seen again. We pay extra every month and expect to have our house paid for about 6 years early.

There is a down side however! The best tax deduction in the US Tax Code is that mortgage interest deduction. If you are paying less interest, you will pay more in taxes. For us, when I ran the numbers, it is worth it.

I don’t think a mortgage “specialist” is the right place to ask these questions. I would suggest finding a Financial Advisor who you pay for time, and doesn’t make a dime on his/her investment strategies.

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What a great question to be raised. I am in my early 30’s and YES there are some of us in our 30’s don’t think in monthly payments. The only payment I am okay with is my student loan. We focus our goal in " freedom". of movement, of time, of money. Paying off mortgage faster than 30 years is more like a “DUH” to us. So it IS not abnormal to want a 15 yr loan. Especially you even have further plans! way to go and hope you get a reasonable rate on the refi.

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As others have said, you should not refinance from a 30 year to a 15 year unless you get a significantly lower interest rate (at least 1%). You can pay your mortgage off sooner and pay less overall by making additional principal payments every month. As your first child is on the way, unless you have significant savings you shouldn’t commit yourself to a higher monthly payment as you might need funds for emergencies.

Also, bear in mind that the mortgage interest rate is lower for your principal residence. If you move away and rent out your house, your lender has the right to call your loan and force you to refinance. To everyone who is about to chime in to say it hasn’t happened to you, this is because the prime interest rate hasn’t increased in quite a while.

The first point is one I agree with. While I don’t plan on buying anything on credit in the future (but instead save up and buy in cash) I definitely agree that if it comes down to a minimal difference it is worth the peace of mind knowing you can make a minimum payment here and there during tight months.

And we have a house we can’t sell because we’re underwater due to the housing crisis that is now a rental. We’re working hard on getting to a place where we can start drastically overpaying on it because I’m worried about when the interest rates rise and getting forced to refinance. Because right now after the expenses we only make like $50/month on it as a LTR. So if we get forced into a refinance with our current tenant on a 3 year lease it would HURT.

I can’t wait to be debt free.

@Xena - that is totally a ‘normal’ question - or should be. Maybe our culture has gotten so debt-crazed that no one is asking it anymore?!

Here’s one thing to think about beyond all the great advice you’ve already been given.

We started with a 15 year loan in the year 2001 with the goal of being to having the house paid off before my first-born went to college - she was 1 at the time.

We later refinanced for a much lower rate, but, we financed for 30 years - and here’s why…

The payment for the 30 year loan was less than $500. (we purchased before the big bubble - thank God) However, we are still paying the same amount each month as if we did have a 15 year loan. This gave us flexibility when we 1) adopted our daughter 2) adopted our son and 3) did some construction on the b&b portion of the home. Though we have still consistently made the higher payment we were not locked in so had flexibility to do other worthwhile things.

It’s true that we won’t have it paid off by the time little junior-bit goes to college, but that’s in part because she will graduate hs early. Also, hey! We adopted a daughter! We adopted a 12 year old boy from China - so - you know… (In case you don’t know adoptions are hugely expensive, especially when they involve all of us going to China)

So compare the rates and the payments of the two loans and see if you may want to keep some flexibility in your budget for illness, loss of job, LIFE. Put it in the budget to pay the greater amount each month, and don’t look back unless something urgent comes up.

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Thanks for the great advise, everyone! We would be able to get an interest rate more than 1% lower than what we’re currently paying, and the minimum monthly payment on a 15 year-loan would be less than what we’d need to pay monthly to overpay our current 30-year loan to pay it off in 2031. We calculated we’d save maybe $20,000-30,000 in interest over the life of the loan after refi fees, which is not as much as we’d hoped, but that is also factored against the risk of having a higher minimum monthly payment. We are currently at a similar point in our amortization schedule to where we’d be with a 15-year refi.

We are fortunate enough not to have any other debt besides our house. We drive hand-me-down cars, went to cheaper public colleges (thankfully graduating before the recession), grow much of our own food, and travel on a shoe-string budget. Our lifestyle may change with the baby, however.

As @EllenN noted, we may not want to be locked into a larger monthly payment. We have always overpaid our loan, but if we have an emergency, we would not be able to cut back to a smaller payment as we can with our current 30-year mortgage. We do have a bit in savings (equivalent 4-5 months of our non-AirBnB income) but that may quickly be depleted with unexpected baby expenses. We of course hope and pray for a healthy baby, but you never know what could happen. Loss of job is always a worry, too. Fortunately, we can make a good amount of rental income on our house even if we are living on site, but layoffs are a possibility in both of our fields.

@smtucker I think what you call capital we call principle here: the base amount of the loan that is not interest. When we first bought our house, I learned that paying down your principle can save you five or six figures in interest, so I was motivated to always overpay.

@dcmooney you have been able to do so many awesome things!

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Yes to everything you said! The only thing I will add is that some banks are sneaky and apply additional funds (over the payment amount) to interest unless you specify that they are to be applied to the principal.

That’s what we’re currently working on. We have our “beginner” emergency fund ($1000), and now we’re focused on paying off all our non-mortgage debt. Then we’re going to focus on getting a 3-6 month true emergency savings fund and then focus on our mortgage. I wish that we’d not gotten to the point where we are in debt, but we fell into the credit trap and wanted to get to where are parents were in just a few years instead of the decades it took them… The American Dream! All the new stuff you can fit into your too big house and debt to your eyeballs! Thankfully we’re digging out quickly with the addition of our Air income which goes 100% to overpaying on our debt.

And if your numbers are correct I’d be jumping on a 15 year mortgage. I’m almost wishing we’d have done one when we bought our house in February but with the tax deductions on mortgage interest we figured we’d be in better shape paying more interest up front on this house and focus instead on our stupid, no benefit debt.

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The taxes are the one variable we have not calculated. I may need to hire a financial planner to get that broken down for me, but it is probably worth the cost!

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If you’re at the same point in the amortization schedule with a new mortgage, the taxes should be negligible. Maybe in the tens of dollars a year as far as tax benefit. I think the freedom of being debt free is worth it even if it was maybe $100 a year.

The other thing you can do, if your goal is just pay off the loan, is pay 2x your mortgage payment monthly. This way you don’t pay any extra fees, or new closing costs for a refi. Obviously it depends on your current interest rate :grin:

I am a Gen Y’er as is my husband and we’re paying down our mortgage ASAP. We refinanced in 2014 on a 30 year term to roll in my student loan debt. We are on track to pay it off mid-2017. My husband had the mortgage for about 10 years prior.

My advice is similar to others. When shopping for a mortgage (or refinance), do not go to the mortgage specialist at your bank, but an independent mortgage broker. Their job is to understand your needs and to find you the best mortgage deal. It is vital to understand how they’re remunerated first to understand and check whether they’re getting you the best deal or themselves the best deal. If you’re not that confident in setting out a plan or keeping the mortgage broker honest, it may be useful to get an independent financial advisor.

The good thing about an IFA is they will also look at other areas like diversification on your investments and help you come up with a holistic plan to make your money work harder within your comfort zone.

It is worthwhile to shop around for your mortgage every so often (and other things like utilities, credit cards, etc.) Could you get a 30 year loan with a lower interest rate to keep your minimum monthly payments the same?

@Xena If you are not familiar with this blog, I highly recommend it. http://www.mrmoneymustache.com/

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Thanks K9! I hadn’t seen that website, but his philosophy of living simply and below one’s means is similar to mine. I don’t know much about investing, so I’m excited to see what he has to say.

One piece of research I’ve been having trouble with is figuring out when my current mortgage would end if I increased my overpayment. The overpayment calculators online don’t account for changing your overpayment in the middle of your loan. This was another question the mortgage specialist was unable to answer.

We went to a credit union rather than a bank. Is the mortgage broker still getting a commission in this case?

If I recall, he has blog posts about paying off houses early and lots of things in addition to investing. His main thing is retiring early and it’s too late for that for me but I still enjoy his site.

On my account (Bank of America) I could find that info online as I made the payments. So you could hold off on refinancing, make an extra payment or two and see where you get.

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