Wednesday, September 22, 2010

Refinance analysis Part 3

Still thinking about what is a better deal both in the long run and in the short term.

Interest rates are at historical lows, so getting as much money in hand is better than having it stuck in the mortgage.  However, 30 years is a long time to have mortgage payments especially if I have to pay interest.

So here's the breakdown as I see it:

Refinancing is the best option.  It reduces my mortgage payment as well as decreasing my total interest paid.

The questions is should I do 15 years or 30 years?  With an interest rate of 3.8% for 15 years and 4.375% for 30 years, the monthly payments are about $1,300 and $890 respectively.  That means I pay about $400 more to reduce it 15 years.  As I've done the calculation before, that $400/month put into any investment fund that averages more than 5% a year would make over 100k in 15 years, just enough to payoff the remainder principal at that time.  If that investment does better than 5%, say 10%, we'll have $150k, or $50k extra after paying the remainder of the principal. 

As some of the financial advisors have said, it all depends on what your situation is at this time.  Knowing that we'll have put 20% of our equity in our house, putting any more money in there might not be the best option.  So having some on the side for other purposes including: college fund, retirement fund, vacation fund, investment fund, new house fund, etc. might be better. 

For example:  You're 30 something, you have $150k in your house making zero (at least in this current market), but you could have this invested in some low cost stocks/mutual funds... that average out to 5-10% annually.  I know it's risky, but over the 15 year time frame, I think you can find at least 1-2 stocks that go up... 

Anyways, the key to this is DIVERSIFY.  Dave Ramsey says to payoff your house as fast as possible, i.e. ZERO DEBT.  Some say don't put all your eggs into one basket.  Spread out your investments, so you get tax break from the interest in your mortgage, etc. etc.  I think Ramsey is right because people are naturally stupid and greedy.  If they have money on hand, they'll waste it on stuff, which means those who stash their extra money away by paying off ALL debts might be the wisest thing to do. 

But alas, I do like having money on hand... but alas, I know if I do, I'll spend it.  Oh the decisions I have to make. :)

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