In 2011, we refinanced to a 15-year mortgage that had a 3.375% interest rate and I thought we were set. At the time, that offered us near the best rate that had ever been available, and it put us to a point where the payoff date would be right before our son would start college. I would be the ripe old age of 52, which seemed like a great number to be potentially mortgage fre. Yet here we are, about to consider a mortgage refinance.
So what changed that is making us consider another refinance? There are a few factors.
Rates Are Even Lower
We have great credit, so I think that we could easily qualify for the lowest rates on a 15-year loan, which would put us at 2.75%. A half-percentage point definitely would offer some advantages over the life of the loan.
A Mortgage Refinance Offers Cash Flow Flexibility
If we rolled over our current balance, we would extend our time to pay it off, but we would free up a few hundred dollars per month. Right now, with us being a single income household, we definitely have to watch every penny. Not that we wouldn't if we suddenly had a few hundred extra dollars per month that was not already accounted for, but it would give us flexibility. We could pay the same amount as we did and finish the mortgage off anyway, but if we chose to do other things, it would give us the flexibility to do so.
Heck, looking back at the last five years, if we'd have re-financed to a 30-year mortgage and put the cash difference into an S&P index fund, we'd likely be a lot further ahead in terms of our net worth. So, even using part of the difference to boost our retirement contribution is very well a consideration. The flexibility isn't only for spending!
We Re-Evaluated Some Goals
If we re-financed, we'd chart a path to pay off the mortgage when I was 57, and at the points where the kids would be
in or nearly done with college. Since I was pretty proud of our original goals with respect to age and the timing, my wife was surprised I was able to give these up.
Honestly, when I looked at things, neither turned out to be a big deal. I know I'll be working at 52. I know I'll be working at 57. So, when I really sat down and thought about it, extending the time to be mortgage free wouldn't be impacting any major life goals. I also look at it that the freedom and the savings we'd get along the way are an offset to the earlier payoff advantages. To me, re-financing would offer a little bit of the best of both worlds.
Our Itemized Deduction Advantage Is Expiring
Currently, we itemize our deductions every year. The amount of mortgage interest plus the other qualifying items add up to more than the standard deduction. Because we pay less and less interest each month, we're near the tipping point. A lower payment would drop us well below the standard deduction amount, but we'd get to capture that full amount anyway.
In fact, my goal would be to pull off the re-finance by the end of the year so that any closing costs could be itemized, giving us a nice big deduction this year.
It Seems Like Some Windows Is Closing
Everything is speculation, of course, but it seems like these low rates can't last forever. I've seen that the Fed may hike rates next month, which could start a gradual push upward of all rates, including mortgage. I've also seen that some economist think that Trump's economic plans could push up inflation. This would eventually send rates upward. I know it's been said before, but it seems like rates have a better chance of going up near term.
We Could Look At Some Home Improvements
I've never taken ‘cash out' of a re-finance. Ever. During our last re-finance the numbers came up that we were supposed to get something like $500 out, and I refused. I made them re-write it. So, my wife was very surprised when I suggested that we could take a modest amount back for improvements.
Here's the thing. I'm not opposed to cash out as long as the following hold true:
- You take out only a modest percentage of your equity. During the subprime crisis, people were taking out every penny of equity, which left them underwater when prices dropped. I think taking no more than 20-30% of your equity should be the cap. The number floating in my head is around 15%
- You put any cash out back into the house. My hard and fast rule is that equity taken out goes right back in. We'd basically be looking at doing some upgrades around the house. I'll cover some of the ideas that we have in a later post.
And quite honestly, I'm not even sure we'd take any equity out at this point. It would raise our monthly payments, reducing the cash flow benefit. It's just an idea.
Time To Make Some Calls
I've actually had all of my mortgages and re-finances through Citi mortgage, so they'll get my first call. Hopefully they give me the best rate, in which case it would hopefully be a quick and easy process.
If we can get this rolling soon and complete by the end of the year, we could be on the way to saving some money and having some flexibility.