Pick the mortgage: 4% for 30, 3.8% for 20

HardDrive · 12-21-2011, 08:55 AM

Wife and I have a refi offer on the table. We are currently at 5%.

4% for 30 years, would lower our payment about $320 a month.

Or....

3.8% for 20 years, would increase our payment about $170 a month.

If we can afford the extra $170 a month, the 20 years seems like a no brainer. Huge savings over the course of the loan. Anything I'm not considering?

BRPORSCHE · 12-21-2011, 08:59 AM

How much really is $170 month? Seems like a minute amount.

I would much rather have the house paid off 10 years earlier.

Hugh R · 12-21-2011, 09:00 AM

Lets see:

$320 x 360 months = $115,200 you won't pay in interest.

$170 x 240 months = $40,800 in increased payments.

$115,200 - $40,800 = $74,400 you will be net ahead.

KFC911 · 09:13 AM

I'd probably "lock in" on the 30 year, but pay it off early. If you hit a "rough patch" then you have some leeway. I paid my first 30 yr fixed off in about 10 with that strategy...just an idea.

edited: ps: to be clear, by "pay it off early", I mean paying additional principle each month. The savings in interest would be trivial between the two options. I just opted for "more leeway" and kept throwing $ at the balance. It worked out quite well for me...

Gogar · 12-21-2011, 09:05 AM

If it's not difficult for you to pay, I'd always take the 20 if the fees are the same.

I had 22 years left on my 30 at 5.625%,
refi'd into a 15 at 3.25%

and my payment went up about $40. Love it!

Seahawk · 12-21-2011, 09:09 AM

20 and then pay that off early.

Hugh R · 12-21-2011, 09:16 AM

Last year, I re-fied what was left of my 15 (7 years) from 4.625% to 3.5% and ten years (least I could get). I'm taking the extra $500 per month and plowing it back monthly to pay it off in 7 or less. I'll save another $50K in interest that I won't be paying someone else. If you re-fi with more years, you'll screw yourself in the long run.

Neilk · 12-21-2011, 09:26 AM

Shoot, I see rates of 3.5% and and 3.25% and am annoyed that we only got 3.875% on our 20 earlier this year. We have been in the house a little over 5 years and refinanced twice already. 6.5--> 5.0--> 3.875.

We thought it wouldn't go lower than 5, so we jumped on it. Our payment today is about what it was when we got the house 5 years ago and we shaved 5 years of payments off the loan.

These low rates are going to create a class of homeowners that will never move, upgrading to a new house with higher principal and going from 3.5% to 5 or so will dissuade all but the most desperate from moving.

red-beard · red-beard's Garage

I just saw a 2.99% 10 year fixed commercial. Not sure of the other details.

timchar · timchar's Garage

20 for sure, eat out a little less or eliminate Starbucks... Tim

Noah930 · Noah930's Garage

I've been thinking of a re-fi as well. First time for us to do so. Other than the rate/term, is there anything else to look for in a provider? Or just go for the best deal?

Gogar · 12-21-2011, 02:34 PM

Quote:

Originally Posted by Noah930

I've been thinking of a re-fi as well. First time for us to do so. Other than the rate/term, is there anything else to look for in a provider? Or just go for the best deal?

Find out what bank will be 'servicing' your loan. I went to the small local bank that I had my original mortgage with just to get some personal attention. When they finished it up they immediately sold it to Freddie Mac and it gets serviced by US Bank. But, US Bank seems ok to me and there's one nearby if I ever need it for some reason.

RANDY P · RANDY P's Garage

take the 30 pay off in 20.

VincentVega · 12-21-2011, 07:54 PM

Quote:

take the 30 pay off in 20.

X2 neither is a bad choice but I would take the 30. Add extra and pay it off sooner and if/when you need the cash you have it.

crustychief · crustychief's Garage

I would probably take the longer loan as well. Pay an extra amount each month to principle and negate the "long run" but still have it available if something unfortunate happens.

LakeCleElum · 12-21-2011, 08:28 PM

Is that the house you talked about leasing out on here recently? Is that still on the table? Makes a difference ...........

Hugh R · 12-21-2011, 08:36 PM

Quote:

Originally Posted by Noah930

I've been thinking of a re-fi as well. First time for us to do so. Other than the rate/term, is there anything else to look for in a provider? Or just go for the best deal?

I did mine with cashcall no fees no points no appraisal nothing out of my pocket, other than a few hundred in closer fees from the old loan which they don't control. No complaints.

timchar · timchar's Garage

Problem I can see with 30 is, whenn you're not forced to pay more (most) won't typically pay more. If the 170.00 a month more is feasible for your budget , then you are right, it is a no brainer. Tim

Tobra · Tobra's Garage

Quote:

Originally Posted by KC911

I'd probably "lock in" on the 30 year, but pay it off early. If you hit a "rough patch" then you have some leeway. I paid my first 30 yr fixed off in about 10 with that strategy...just an idea.

edited: ps: to be clear, by "pay it off early", I mean paying additional principle each month. The savings in interest would be trivial between the two options. I just opted for "more leeway" and kept throwing $ at the balance. It worked out quite well for me...

this is smart strategy, you can still pay the extra dough toward the principle, but if you hit a deer in your car or something, you have a bit of slack in the cash flow. You just have to be disciplined enough to make those extra payments.

Porsche-O-Phile · Porsche-O-Phile's Garage

Get the 30. Unquestionably.

Why you would EVER want to commit to a higher monthly nut is absolutely incomprehensible to me. If the SHTF (job loss, medical bill, whatever) do you want a monthly minimum that you have a reasonable shot of being able to still make by scraping together income from part-time jobs, etc or a high payment that will almost certainly land you in foreclosure - and if that happens you lose all your equity and value made to that point by committing to the shorter term?

This is so simple it's almost not even worth discussing.

Obviously make certain there's no prepayment penalty.

Additionally, given the direction that interest rates are certain to go soon (and what's going to happen to the value of the dollar with high inflation) I would think that you may very well get to a point on the 30-year where you actually pay less in real dollars than on the 20 since the last ten years worth of dollars are likely to be so much more devalued than the ones in the first 20 years. This may very well offset the benefit of any faster pay-down of Principal. Obviously you should create a few models to verify this and see, but when I did it a year or so ago it was very convincing. If inflation over the next 30 years exceeds 4% on average per year (which it almost certainly will - handily) l'll save almost 1/4 of the value of the entire note with respect to how many "real dollars" I pay over the lifetime to pay the thing off. I strongly believe that in a couple of years 4% annual inflation will be a wet dream and the annual average 2010-2040 is going to be MUCH higher (more $$$ in my pocket if so).

I find it very helpful to make sure I'm paying just as much attention (if not more) to what happens in years 15-30 as in years 1-15. Most people don't. They tend to get bogged down in current conditions and aren't comfortable making projections on what pricing/rates/inflation are going to do. I'm not sure why as it's pretty obvious.

Short answer - commit to the lowest payment and longest term you can to minimize exposure and maximize benefit of dollar devaluation. Paying it off early is generally a good approach but I'll leave it up to you. I've read several recommendations from economists advising against making overpayments right now precisely for the reasons I've described right now (why pay more with today's dollars when you can pay with tomorrow's that are worth half as much?) The merits/detriments of this and the predictions associated therewith are another discussion perhaps - I personally split the difference and overpay by enough on each payment to effectively throw about 1-1/2 extra payments worth at mine each year... I'm hedging my bets... Worst case inflation stays low for a few years before exploding and I've spent a few extra bucks worth of today's dollars towards the Principal reduction. I see it as a win-win. Even if I do end up shaving a couple of years off the back end (when I'd see the maximum benefit from inflationary effect), I see nothing wrong with being in a position to tell the bank to go take a long walk off a short pier that much sooner. I'll still have derived plenty of dollar devaluation benefit and be sitting in a very nice spot in a few years.