Last week, I announced that Kris and I have refinanced our mortgage at 4.96% for 30 years. In the comments, Ian expressed disappointment that we’d opted for the longer term when we could have afforded to take out a 15 year mortgage at 4.625%. “Starting your 30 years over is no way to get rich slowly,” he wrote.<\/p>\n
He has a point.<\/p>\n
Kris and I took out the 30-year mortgage because we wanted a safety net. We will continue to pay $2,000 each month toward our mortgage, so we could<\/i> have afforded the shorter term, but we opted to take a longer mortgage so that we had a cushion if something happened.<\/p>\n
But was this a smart move? How much will it cost us to do this? Let’s find out.<\/p>\n
You all know that I love to play with spreadsheets<\/a>. I pieced one together to run the numbers on our mortgage. Just for curiosity’s sake, I first looked at what might have happened if we had not refinanced at all and planned to repay the old loan on a normal schedule (you can play with actual mortgage rates<\/a> get current numbers):<\/p>\n Now, here are the totals if we were to pay the refinanced, 30-year mortgage without any sort of acceleration. Note that the payment amount does not<\/i> include taxes and insurance (which adds another $280.21 to our monthly obligation).<\/p>\n By refinancing, we’re saving $10,571.40, even if we don’t pay extra, and even if we stretch the loan out to 30 years. Next, I looked at a 15-year mortgage without any sort of acceleration.<\/p>\n Clearly, a 15-year mortgage is a better option \u2014 if<\/i> you can afford to make the payments, which in this case would cost an extra $504.61 every month. (And if inflation isn’t running rampant. I have not accounted for inflation in any of these scenarios.)<\/p>\n But Kris and I pay more than the minimum. We pay a flat $2,000. If we subtract $280.21 for taxes and insurance, that means we’ll be paying $1719.79 toward principal and interest each month. How does this affect our costs? Let’s look at the 30-year loan with accelerated payments:<\/p>\n This is the plan we intend to follow.<\/b> For us, there is a huge difference in the total we pay (and how long it takes us to pay it) between an accelerated and a non-accelerated 30-year mortgage. We save over $110,000 and 15 years by making extra payments.<\/p>\n But we will still pay more interest than if we had taken the 15-year mortgage. What about accelerating the 15-year mortgage? Let’s look:<\/p>\n Financially, this is the best option of all. But it only shaves 11 months and about $6,000 from the standard 15-year option. Ian may be right: it might have made more sense for us to take a 15-year loan.<\/p>\n Let’s assume that Kris and I are going to be able to make our $2,000 payments every month for the next 15 (or so years). If we had opted for the lower-rate 15-year loan instead of accelerating the 30-year loan, we would have the debt paid off five months earlier. What’s more, we would save $8,966.61 in interest payments, or roughly $640 per year ($53 per month).<\/p>\n Ian’s point \u2014 and it’s a good one \u2014 is that although Kris and I saved $250 per month by refinancing, we could have saved another<\/i> $50 per month (with no changes to our current plans!) by choosing a 15-year mortgage instead of a 30-year mortgage.<\/p>\n Did we make the wrong decision? Time will tell. If nothing happens along the way, then this will have been a poor choice. But if we experience some sort of financial setback, our caution just might save our bacon. With the lower payments of the 30-year option, we could live indefinitely on either one of our salaries alone.<\/b> As with all investments, lower risk brings lower reward \u2014 and that’s the choice we made this time.<\/p>\n What choice would you have made and why?<\/b> I suspect that many GRS readers opt for 30-year mortgages when they could afford the higher payments and the shorter term. I know that we’re certainly not the only ones among our friends who have done this!<\/p>\nExisting mortgage pre-refinance<\/h3>\n
\nInterest rate: 6.25%
\nTotal payments remaining: 303 (25 years, 3 months)
\nRegular payment amount: $1386.60
\nTotal repaid: $420,139.80
\nTotal interest paid: $213,794.47<\/b>
\nInterest\/Principal: 103.61%<\/div>\n30-year without acceleration<\/h3>\n
\nInterest rate: 4.96%
\nTotal payments: 360 (30 years)
\nRegular payment amount: $1137.69
\nTotal repaid: $409,568.40
\nTotal interest paid: $196,668.40<\/b>
\nInterest\/Principal: 92.38%<\/div>\n15-year without acceleration<\/h3>\n
\nInterest rate: 4.625%
\nTotal payments: 180 (15 years)
\nRegular payment amount: $1642.30
\nTotal repaid: $295,614.00
\nTotal interest paid: $82,714.00<\/b>
\nInterest\/Principal: 38.85%<\/div>\n30-year with acceleration<\/h3>\n
\nInterest rate: 4.96%
\nTotal payments: 174 (14 years, 6 months)
\nRegular payment amount: $1719.79 ($1327.97 final month)
\nTotal repaid: $298,851.64
\nTotal interest paid: $85,951.64<\/b>
\nInterest\/Principal: 40.37%<\/div>\n15-year with acceleration<\/h3>\n
\nInterest rate: 4.625%
\nTotal payments: 169 (14 years, 1 month)
\nRegular payment amount: $1719.79 ($960.31 final month)
\nTotal repaid: $289,885.03
\nTotal interest paid: $76,985.03<\/b>
\nInterest\/Principal: 36.16%<\/div>\nDoing What Works For Us<\/h2>\n