Four years ago, we made the decision to refinance our mortgage. We hit the time when rates were about the lowest they've ever been, and decided to get into a 15-year mortgage. This would increase our payments but lower our total interest. It would also move forward our mortgage payoff date.
From a financial perspective, the move has been a big win so far.
The Benefits Of Our 15 Year Mortgage
- Low rate – We got a 3.375% rate, if memory serves, so we are paying very little in interest and more toward principle.
- Modestly higher payments – Our payments went up a bit from our previous 30-year mortgage
- Getting in line my payoff date objective – I've always said that in an ideal situation, the mortgage would be paid off before our kids started college. This timing would actually have the payoff occur during senior year of high school for our oldest. I'd be 52 which is a pretty good target age to be mortgage free, all things considered!
However, with everything positive, there is a downside. It's only one item, but it's definitely a noticeable one.
The payment takes a big percentage of our take-home pay. Between the mortgage payment, and our tax and insurance payments, the payments take away about 33% of our take home pay. I learned by example (from my parents) the benefits that a 15-year payoff can have and have applied it via re-finances for my condo (back in my single days) and our current home.
I've read that the ideal number is around 25%, with the target range that most would suggest going no higher than 35%.
So, we're on the upper end and we definitely can feel the pinch at times. As I look back at the application of the lesson I learned from my parents, I realize that in principle, applying the practice is a no brainer, but from a situational standpoint, we have one big difference: Right now, we're a single income family. We made the choice for my wife to stay at home when we had kids, and we have no regrets on that, but we always knew there would be tradeoffs involved from a financial perspective. We're fine with that, but it does mean that we have to approach things from different angles.
Home Vs. Car
The reason I'm noticing this is that I'm starting to pay close attention toward our New Car Savings Fund. We save what we can toward new cars, and as our cars are 8 and 9 years old, the time is coming faster and faster that we'll need to address this. Over the years, the amount we've added toward this fund hasn't kept up with the combined cost of depreciation on our current cars plus the overall rise in cost as prices have gone up.
This means that if we were to buy a new car today, we wouldn't be able to meet the objective of being able to do so without taking on a new loan. And if we look at both cars, then we're definitely nowhere close.
Will The Mortgage Payoff Be Worth It?
So, I guess the question to ask is has it been worth it over the last four years, and will it be worth it over the next eleven years to have this situation? Some of the variables to consider:
- Income – We counted on our income to go up. This would lower our percentage of payment vs. income. With the recent economic slowdown, this hasn't happened to my projections.
- Other costs – In truth, the squeeze has been felt not so much from the mortgage, but simply because of the rise in other costs. Grocery bills have gone up as a lot of food costs have risen, plus our kids are getting older and eating more.
- Side income– My wife has a nice side gig that she's dedicated toward paying for a Disney World trip that we'll soon be taking, that is definitely a luxury. However, it's a trip that is a once-in-a-few year type thing, and now that the costs will largely be done, her income could help supplement other things….like bolstering the car fund!
- Money chunks – Tax refunds are always a good way to address big ticket items. They've helped us fund a new roof, landscaping, and other things we've looked to do. We need a new furnace. Plus, we'll have new cars to pay for eventually. The current ones won't last forever!
- Another refinance – One option would could certainly consider is refinancing again to another 15-year mortgage. The rates are higher and we'd be adding years back onto the end, but it would free up cash flow, and we could always pay the same amount as we were anyway.
Staying The Course (For Now)
As of right now, we're staying the course and I'm not looking into refinance options. I like the rate at which we're paying things down. I'd certainly love the flexibility in our cash flow. However, I want to make sure to look at all of our available options. Our family does a good job of balancing present needs with saving for the future.
Even though we do things like plan trips to Disney and camp frequently, we're not living on Easy Street. We aren't rolling in the dough, and with only one full-time income, we don't make decisions without careful consideration. Every decision we make includes a lot of potential trade-offs and variables that come into play.
Readers, how do you approach housing costs as a percentage of your take home pay? How does this play into other decisions on big-cost items like travel and automobiles?