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Refinance mortgage or invest?

stephasaurus 23 10 September 3, 2015 at 09:24 PM
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My current mortgage loan amount is $135,000 with 25 years left at 4% interest. P&I is $711 plus I'm paying about $60 for pmi each month & will be able to remove the pmi in about 5 years.

I'm thinking about refinancing & locked in a rate of 2.625% with 1 point for a 15 yr fixed loan. Closing costs are estimated at $4800 (including the $1350 for 1 point). P&I would be $911 & I wouldn't have to pay pmi.

I'll be paying $140 more per month (for the next 5 years anyway because of the pmi in my current loan) if I refi, but I'll own my home in 15 years instead of 25. When I first looked at the savings in interest, it seemed like refinancing was an obvious choice. After thinking more about it, I'm torn on whether investing $140 each month for the next 15 years might be better than refinancing (& paying $4800 to close). Can someone please advise?

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#2
The most important factor that a homeowner must keep in mind before deciding to refinance is the length of time he or she is intending to stay in the house. One should be able to calculate the payback period of a refinancing decision. The payback period is the time it takes for the homeowner to recover the cost of financing from the savings originating from lower monthly payments. If one plans to stay in the home beyond the payback period, it would be worthwhile to go ahead with refinancing.
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#3
As David mentioned and assuming you have no other debt, have a retirement plan in place, etc...I would do it unless you are barely scraping by.
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#4
Short answer refinance.

Long answer- If you look in 5 years the difference in your outstanding loan amount would be $21,600 if you refinance. Now you look at what it took to get there. That is $4,800 in closing costs and an additional $160 each month for 60 months, $9,600, for a total $14,400. So you would make out with roughly $7,200 in added benefit from refinancing today. Yes you are paying more money each month but that is going to the principle. If you look at 10 years you have additional equity of $45K and would have additional payments of $27,600 (60*160+60*220) for a net benefit of $17,500. Finally at 15 years you would have an additional equity of $70K but had payments of $40,800 (60*160+120*220+4800) for a net benefit of $29K.

The biggest problem is that your money is tied up in mortgage payments. If you can make the additional payments it is well worth it in the long run. I hope you follow my post.
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#5
Comparing paying of debt and using the money for investment is not sensible IMO. Investment has risks and paying of debt has zero risks (it is something you have to do). With refinance and getting the lower interest rate I will definitely pay off the mortgage first and reduce the chance of my investment money getting tied up and me going into panic mode if something bad happens (recession and job loss).
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#6
I would stick to what you have


which company are you refinancing with

some advertise rates with plus apr

pay down loan to remove pmi


you can refinance with zero ponts

check your credit score it might be hard to refinance


I see over 3% for refinances where are you looking


http://www.bankrate.com/refinance.aspx
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#7
I would go for investing your money for the next 15 years.
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#8
Refi, no question.

Paying debt interest robs your investment capital and cash flow anyway. Wait till you get your statement and you see you're paying about 75% of your monthly on principal and you'll know.

I refi'd in 2013 and my monthly pmnt went up $300. That extra money per month saved me $177,000 over time. I COULD invest that money and hope it returns more than that, but it's not guaranteed. Looks like I'm not the only one so far to point this out.
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Last edited by Bania September 10, 2015 at 09:41 AM

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#9
Quote from Bania View Post :
Refi, no question.

Respectfully disagree - this is far from a "no question" scenario.


Your home is an il-liquid asset, so while every $1 you put into it reduces your total P&I, it also is $1 you cannot transform into liquid assets quickly.


Yes, you can get a HELOC, but this effectively means you are paying a bank to borrow against YOUR OWN equity. Don't get me wrong - HELOCs are a powerful tool, but they come with an opportunity cost most people do not consider in their decision.


(Non-tax advantaged) investment accounts, while fully subject to market risks, can be converted to liquid asset very quickly. In addition, after-tax gains can be converted to safer positions if desired.


If OP has investment discipline (only works if you invest the $140/month that would have gone towards Refi), risk tolerance and time horizon to invest the $140 and values liquidity, investment may be the better option.


This is not credit card debt - this is a fixed 4% note. The 4% will never change (with decreasing opportunity cost as interest rates rise) while the invested $s can increase - even a safe vehicle like CDs may beat 4% in the future.


There is no single answer that fits everyone - just wanted to give a counter-example to anyone who believes that there is "no question" as to the right decision
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#10
Quote from megakimcheelove View Post :

Your home is an il-liquid asset, so while every $1 you put into it reduces your total P&I, it also is $1 you cannot transform into liquid assets quickly.
It's not an asset at all for many many owners. So, do you want to rent it from a bank or not? Given the opportunity, I don't; I want debt-independance and that's my motivation. Whatever lets you sleep at night the best.

Hopefully, for those that want out of mortgage debt faster, there's a huge snafoo at the upcoming debt ceiling debate here in October. They shut the gvment down which causes a panic in the bond markets and the dumb money goes all in on bonds and drives the 2's and 10's to the floor below the 2013 bottom. Yes, I'm dumb enough to bring another $10k to closing if I can refi on a 10 yr at 2%. Just me. Wink
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#11
If this is OP's first home, isn't all that mortgage interest tax deductible anyways? Why not focus on investments if you're able to set money aside for it?
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#12
Quote from Tarantado View Post :
If this is OP's first home, isn't all that mortgage interest tax deductible anyways?
The myth of tax deduction on mortgage interst is explained @37:27 in the following video
https://www.youtube.com/watch?v=bU7HEIs3IWw

Quote from Tarantado View Post :
Why not focus on investments if you're able to set money aside for it?
Because it involves risk. Not a valid comparison.
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#13
Quote from teetee1 View Post :
The myth of tax deduction on mortgage interst is explained @37:27 in the following video
https://www.youtube.com/watch?v=bU7HEIs3IWw



Because it involves risk. Not a valid comparison.
If you understood Dave Ramsey at all you know that the tax deduction is not a myth and he doesn't proclaim it to be. He clearly explains that staying in debt JUST for the tax deduction doesn't make sense -- which I agree with unless you have a liquidity issue.

So just to clarify for other readers. If you have a mortgage and will continue having a mortgage because you can't or shouldn't pay it off, then a tax deduction is a real and good thing. If you have tons of money not doing anything and you don't need it for investment purposes etc (I'm not listing all the scenarios so get over it) then holding the mortgage specifically and only for the reason of the tax deduction doesn't make a lot of sense.

So anyone wanting to purport a tax deduction as a myth and even more incorrectly state that Dave Ramsey believes that the tax deduction from a mortgage is a myth then the understanding is not there.

Sorry, but that was not going to be left alone in a finance forum as incorrect and flat-out wrong.
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#14
Quote from eekthecat View Post :
If you understood Dave Ramsey at all you know that the tax deduction is not a myth and he doesn't proclaim it to be. He clearly explains that staying in debt JUST for the tax deduction doesn't make sense -- which I agree with unless you have a liquidity issue.

So just to clarify for other readers. If you have a mortgage and will continue having a mortgage because you can't or shouldn't pay it off, then a tax deduction is a real and good thing. If you have tons of money not doing anything and you don't need it for investment purposes etc (I'm not listing all the scenarios so get over it) then holding the mortgage specifically and only for the reason of the tax deduction doesn't make a lot of sense.

So anyone wanting to purport a tax deduction as a myth and even more incorrectly state that Dave Ramsey believes that the tax deduction from a mortgage is a myth then the understanding is not there.

Sorry, but that was not going to be left alone in a finance forum as incorrect and flat-out wrong.
You misunderstood my message. The myth was referring to saving money by taking advantage of tax deduction, not the tax deduction itself.

Dave Ramsey did not proclaim tax deduction as myth, but claims saving money from tax deduction while there are money laying around is a lie in https://www.youtube.com/watch?v=7mMPsUgETVk

I thought it was obvious but I guess not to everyone.
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#15
Quote from teetee1 View Post :
You misunderstood my message. The myth was referring to saving money by taking advantage of tax deduction, not the tax deduction itself.

Dave Ramsey did not proclaim tax deduction as myth, but claims saving money from tax deduction while there are money laying around is a lie in https://www.youtube.com/watch?v=7mMPsUgETVk

I thought it was obvious but I guess not to everyone.
I know how to read if that is what you are implying. I'm clearly not stupid.

Quote :
The myth of tax deduction on mortgage interst is explained @37:27 in the following video
I think that pretty clearly comes across that tax deduction benefits are a myth in your opinion. I clarified in case someone else had the same perspective.
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