2 Mortgage Questions (WWYD)?

[allhis]

We are looking to refinance our current mortgage which a 30 yr fixed at 5%.  We are 5 years into the payoff period.  
We escrow taxes and insurance separately, so the raw numbers as as follows:

Currently we pay $1541/month.

If we just refinance into another 30 yr fixed at 3.65%, the new payment will be $1200/month.  Am I correct in assuming that the 30 yr count down to payoff would restart from this point, so we would essentially "lose" 5 yrs of payoff?

Our other options are to refinance into a 20 yr fixed at 3.50%, where the new payment would be $1526/month.
Or we could choose a 15 yr fixed at 3.0%, where the new payment would be $1881/month.

All of the choices are very doable financially speaking.  Is the obvious choice to pick the 15 yr fixed, or will we deeply regret not having a mortgage related tax deduction in 15 years?  FWIW, we are currently in the top tax bracket and likely will not change, so there isn't really the variable of making more now vs. 15 yrs from now. However, by 30 yrs my husband will likely be retired so at that point having a tax deduction wouldn't be as helpful so maybe stretching payments out until then is better?  Though I think saving the additional 0.65% interest would probably offset the gains in tax deductions?

WWYD in this situation?  And are these decent rates currently?

Thanks so much for any help!

[candyland]

I would do what makes you sleep the best at night. My DH and I preferred paying the mortgage off sooner than the potential tax deduction.

[my3bears]

You're correct, doing a 30-year effectively restarts the mortgage again. I think refinancing to another 30-year after 5 years might not make sense, because you end up possibly paying interest for 35 years instead of 30! This is assuming you stay in the same house forever and don't pay any off early.

I think if it were me I'd refi to the 20-year. You can always pay extra off, too.

[krystee]

I'd do the 15 if it's comfortable and the 20 if it's not. A tax deduction is nice, but it's like paying the bank an extra $1,000 to avoid paying the government $250.

[allhis]

This is our "forever" house (at least until we are empty nesters). I guess I just want to do whatever will make the most financial sense in the big picture. Technically we could probably pay off the entire mortgage w/in a year or 2, but I'm assuming there is better use of our money in investment funds while deducting mortgage interest at the same time. I'm not great at the whole time value of money thing, so it is hard for me to fully grasp what is the best option in terms of making the most out of your money. (Spreading it out over 30 yrs at 3.65% and putting extra money into account that would hopefully earn more than 3.65%, vs. 15 yr at 3% to pay less interest vs. just paying it all off quickly)

[aurora]

Jan 29, 2015 21:05:53 GMT -5 krystee said:

I'd do the 15 if it's comfortable and the 20 if it's not. A tax deduction is nice, but it's like paying the bank an extra $1,000 to avoid paying the government $250.

This, exactly (and it's what we did a few years back).

[tealblue]

I would do the 15 or the 20 year. In 20+ years, the annual interest may not be enough for you to get any benefit from the mortgage interest deduction (plus, they talk about eliminating it all the time... Doubt they would but you shouldn't count on it).

I also wouldn't want to reset the clock and pay another 30 years.

[iheartbanjos]

I'd go 15 year if possible.

[Poppy]

First, the tax deduction decreases every year because you only deduct the interest paid, which is close to the rate times the remaining balance. But krystee is right that you only save in taxes a fraction of what you pay to the bank.

It's a gamble because you could invest the money instead of putting it toward the mortgage but stocks carry risk. If the bank could guarantee they'd make more than the mortgage rate, they'd do that instead of loaning you the money. So it's a matter of personal comfort.

We opted for 30 year to maintain a lot of wiggle room in our budget in case we wanted to have a SAH patent or go back to school. But it sounds like you have a lot of excess in your budget so you may be able to do a shorter term and still have margin.

[nextbigthing]

I was in similar shoes and we did the 20 year, so we knocked in our case 7 years off of the mortgage (3 years into a 30 year when we refinanced in 2013) for basically the same monthly payment

IMO none of the options are bad, it's just what you're comfortable with. We were comfortable with our monthly payment and now the house will be paid off before soon to be DS starts college and DH wants to retire

[spankswife]

I'd do the 15 year, for sure! So much less interest, compare it over the life of the loan.

Plus I'm in the camp that I'd rather save 100% of my money, then 30% (or whatever your tax rate is).

[patches31709]

We were in a similar situation. We went with the 20. We figured out that by making an extra payment or 2 a year, it would reduce the payoff to right around 15 years. We did that in case we find ourselves in a position where the lower payment amount would be better.

[imojoebunny]

We had a 15 year for a while at 2.8%. It was great and all that, but because of the tax advantage, when we bought our new house, we went back to a 30 year. It kills me that our rate is over 4%, but when you do the math, it makes more sense to invest the extra and get the tax deduction. We are in the same boat with the high taxes. We also have pretty high state tax.

[lys]

I would do the 15 or 20 year loan.

[randp1]

we refinanced frrom a 30 yr to a 20 yr at 3.25% and our payment stayed the same. i really wish we had refinanced at another 30 yr at 3.25% (which is what the mort. co. was offering). we could have had the extra $$ to invest in retirement, 529s for our kids, spend a little extra on life (vacations, etc) and not worry so much and give us some extra wiggle room. Over the long term 15-25 yrs, we would def. be able to earn more than 3.25%.

I also don't think we will be able to itemize this year on our taxes because our interest paid is less than the std. deduction (even with our other deductions - donations, etc).

[noodleoo]

Jan 29, 2015 21:05:53 GMT -5 krystee said:

I'd do the 15 if it's comfortable and the 20 if it's not. A tax deduction is nice, but it's like paying the bank an extra $1,000 to avoid paying the government $250.

I agree with this 100%.  If you run the nubmers, the amount of money you save in less interest over the shorter payoff period way offsets the tax savings.  Plus I'd jump for joy to be able to have my house paid off in 15 years.

[simpsongal]

How old are you? I'm guessing early to mid thirties based on the info.

IDK, for me the difference in rates between the 30 and 20 doesn't justify the 20. You can always make extra payments on the 30 year.

[FishChicks]

Since the interest paid is highest early in the life of the loan, have you used a calculator to see what you'd actually be saving going to a new loan versus finishing your remaining 25 years? You might be better of keeping your current mortgage and paying extra as though you'd gone with the 15 year. Probably not, but worth running the numbers on. Bloomberg has my favorite mortgage calculator to show those impacts.

Assuming a new mortgage does make sense at this point, I'm in a nearly identical space and am going with the 30 year with the intention of investing the monthly savings and using it to pay off the mortgage when the time comes. I like the flexibility of the lower payment, and at an interest rate in the 3s, I know i'm better off investing the money for 20 years, then paying the mortgage off.

[allhis]

Jan 30, 2015 13:08:38 GMT -5 simpsongal said:

How old are you? I'm guessing early to mid thirties based on the info.

IDK, for me the difference in rates between the 30 and 20 doesn't justify the 20. You can always make extra payments on the 30 year.

I'm nearly 32, but dh is 38. He is a physician so didn't start making money until 32 and has had a considerable pay hike over the past year after moving from an employed to a self-employed/production based system.  We never had to "worry" about how to spend extra money before (we weren't living paycheck to paycheck, but didn't have lots of extra) so these types of problems are new to us.

I know in theory we could do the 30 yr and make extra payments, but I'm kind of worried that we will find other places to put the money and not do this in reality.  That being said, maybe putting money other places wouldn't be that bad of an idea since even on the 30 yr the interest rate is still low and tax deductible.  We live in Iowa and farm prices are historically low right now so we have considered putting extra money into farm land which will return higher than 3.65% (my dad is a very successful farm manager so would take care of all tenant related issues for us).  But then again, I don't mentally like the idea of "starting over" on a 30 yr mortgage.

Basically I am as confused as ever b/c I totally hear some posters when they say not to factor in the tax deductibility b/c it is like throwing $1000 at something to save $250, so I'm kind of ignoring the tax implications altogether, but also understand other posters who have mentioned that we could likely make more than 3.65% elsewhere AND take the deduction make a lot of sense too.  

[sweetiesparkles]

We were in a similar situation with a 30 year and just refi'd to a 15.

[larzhope]

we were in a similar situation but the 15 year payment would've made us a teensy bit nervous if one or both of us lost our jobs, so we went for the 20 year. All-in-all, though, we place more value on being mortgage free vs any tax advantages.