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Emergency Fund: $10k
Joint Income: $110k
Debt $86K ($82k Student Loan 4.8%, $4k Auto 1.99%)
Mortgage 223k 5/5 30yr ARM 4.25%
401K(5% Contribution + 4.5% Match)

Married
Age:31
No Kids currently although will be planning in 2-3 years

Budget:
Excess in current budget to apply to debt: $2500

Question: Should I refinance the mortgage to either a 2.75% 15 year or a 3.375 30 year? Increase in monthly payment between the two would be 540$.

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30 year mortgage

You should check the break-even for the points cost between that 3.375 you're looking at vs 3.625. I'd suspect it's ~5-10yr breakeven. Just as another option, you could avoid the up-front fees baked into that 3.375 you are looking at -- Which means if rates drop again for some reason (seems unlikely, but then 6 months ago, also seemed unlikely... and there is an election upcoming), you could then refinance again without additional costs. Or if you ended up moving within 10yrs you would also come out ahead.

Here's a points break-even calculator. http://www.mtgprofessor.com/mpcalculators/FRMBreakEvenCalculator... 

My $.02

I faced this same question many years ago when buying my home.  I ended up going with a lock for 30 years.  Reason being if I wanted I could always make extra payments during good years, and if I ever hit a bad point in my life I was not responsible for making the higher payment.  Fast forward about 14 years -- my house will be paid off in about 5 months - so I did the 15 years anyway was not stressed out having a higher payment and just made extra payments when I could (make sure you can do this if you are interested and make sure it is applied directly to the principle).

With a 30-year mortgage, you can always apply addition principal (unless you have what would be a rather odd mortgage, by today's standards); as such, it gives you the opportunity to pull back to a traditional 30-year mortgage payment due to the unplanned, like a long-term job loss or underemployment. Also, student loan interest is only deductible up to $2k/year, whether single or married; in addition, that $2k begins getting phased out at somewhat relatively low income levels (I am think it begins between $75k and $90k ballparks depending if you are single or married).

So, pay off those silly student loans unless one of you has a impending terminal illness, and stick with a 30-year mortgage. When you have the student loans paid off, you can apply that payment towards additional principal on your mortgage.

How many years are you into the current mortgage? Maybe refi a 20-25yr if you have already paid 5... You new payment isn't necessarily going down because you just got a great rate, you are now extending your purchase for an additional 5 years. Too many people get hung up on the payment decrease and forget about the extra 5 years again...

letsspendlotsofmoney said:   How many years are you into the current mortgage? Maybe refi a 20-25yr if you have already paid 5... You new payment isn't necessarily going down because you just got a great rate, you are now extending your purchase for an additional 5 years. Too many people get hung up on the payment decrease and forget about the extra 5 years again...
  That's not a reason not to refinance.  Only the new vs old rate is relevant (if is a negative cost), or the breakeven of the cost of new mortgage for new rate.
If you want to go and keep the same term as before, you can always go plug into a calculator what payment to make and make payments to end up paying off the mortgage on the exact same time period if you so desire, and just make slightly larger payments than are required.

Gear_Head said:   Emergency Fund: $10k
Joint Income: $110k
Debt $86K ($84k Student Loan 4.8%, $4k Auto 1.99%)
Mortgage 223k 5/5 30yr ARM 4.25%
401K(5% Contribution + 4.5% Match) ...
 

  I would be double checking my math...

That's a pretty high rate for a 5/5 ARM. Is it old or about to renew? I would 1) Do the math to see what the new rate will be if close to reset, and 2) try calling your lender to see if they'll do a retention offer like in the Penfed 5/5 retention offer thread going here. If you can lower the ARM rate and lock it in for 5 years I'd keep paying the minimum on that and throw the extra at the loans. Though if someone's going to stay home with the kids, you think it might be hard to qualify for a 30 year on one income, and you think you're in the home you want to be in until all kids are done with high school, I would lock in a 30 year, throw the extra at your student loans, then put the extra into 529 plans and never pay extra on the mortgage.

With OP's data, I may be tempted by the 15-yr fixed just because interest rates are pretty historically low right now at 2.75%. But only if OP plans on staying in the house for 5+ years. With a debt-payment budget of $2.5k, the $540 extra monthly payment is not as big of a stretch.

Sure it'd be nice to apply it to the student loan since that's the priority but even if you pay the 30-yr fixed in 15 years with extra payments (note a ton of people end up just blowing the money and not making extra payments), you still end up paying 0.625% extra interest over the course of the loan. You could think about taking the 30-yr fixed now to pay down student loans quicker but there's no guarantee that you'll find an equally good rate to refinance it later to a 15-yr fixed.

Of course, if OP plans to move when family expands in 2-3 yrs, then OP would need a new mortgage anyway so in that case, I'd take the 30-yr fixed now and take the $540 extra per month to put into student loan repayment.

If you can afford to pay it off in 15, get a 30 year. If you can afford to pay it off in 10, get a 15 year and save on interest. Either way make sure you have some buffer in case of emergency and with that rule you are also not buying a house you can't afford.

Keep in mind that although many here are recommending that you get a 30 year and paying it off early if you choose, it comes at a great cost.

You save several thousand dollars in interest if you just get the 15 year loan in the first place, as opposed to getting a 30 and paying it off in 15. Considering you still have 223K to pay off, the interest really adds up.

mapen said:   
You save several thousand dollars in interest if you just get the 15 year loan in the first place, as opposed to getting a 30 and paying it off in 15. 

  over the course of 15 years ...

Here: bankrate says this about your choice.  I am generally a proponent of short mortgages or no mortgage, but in your case, you have debt that is at a higher rate than either mortgage, so the 30 year probably makes the most sense for you so you can funnel as much cash as possible to that student debt. 

  • Your Costs for a $223,000.00 Fixed-Rate Mortgage
  • 15-Year at 2.75%
  • 30-Year at 3.38%


  • Your Monthly Payment:
  • 15: $1,513.00
  • 30: $986.00


  • Interest You'll Pay During First 5 Years:
  • 15: $26,411.00
  • 30:  $35,745.00


  • Interest You'll Pay Over Full Term of Mortgage:
  • 15:  $49,399.00
  • 30:  $131,915.00

Based on your inputs, the 30-year mortgage would cost you less $527.00 each month. However, the total interest for the 30-year mortgage would be $82,516.00 more than that of the 15-year mortgage.
 


15yrtotalcosts
Disclaimer

30yrtotalcosts
Disclaimer
bluegreenturtle said:   Here: bankrate says this about your choice.  I am generally a proponent of short mortgages or no mortgage, but in your case, you have debt that is at a higher rate than either mortgage, so the 30 year probably makes the most sense for you so you can funnel as much cash as possible to that student debt. 

  • Your Costs for a $223,000.00 Fixed-Rate Mortgage
  • 15-Year at 2.75%
  • 30-Year at 3.38%


  • Your Monthly Payment:
  • 15: $1,513.00
  • 30: $986.00


  • Interest You'll Pay During First 5 Years:
  • 15: $26,411.00
  • 30:  $35,745.00


  • Interest You'll Pay Over Full Term of Mortgage:
  • 15:  $49,399.00
  • 30:  $131,915.00

Based on your inputs, the 30-year mortgage would cost you less $527.00 each month. However, the total interest for the 30-year mortgage would be $82,516.00 more than that of the 15-year mortgage.

  The problem is that's ignoring any difference in up-front costs (points, closing costs), as well as inflation or opportunity costs of the mortgage funds.

If inflation averages 2%, then the effective interest rate on the 30yr is ~2% before even considering tax deductions.  And if you really held it for 30yrs, then one would probably expect returns that might be around the historical average which is 7% plus inflation for the S&P.  
With those 2 assumptions, the numbers change drastically. It's perfectly valid to look at long-term market returns since you're also looking at hypothetical 30yr "costs" of the mortgage, which is also long term. There's a much better calculator available here: http://www.mtgprofessor.com/calculators/Calculator9ci.html or here: http://www.mtgprofessor.com/ext/partners/ShopYourLoan.aspx (The first one wasn't working for me just now).
It does not adjust for inflation, but does account for opportunity costs.  I entered a 57000 down payment on a 280000 house to get to 80LTV with the 223000 loan value your example used, and a 25% tax bracket.

With 8% (that would be just 6%+inflation, using around historical averages) assumed return / opportunity costs, comes out to $190736 cost for the 15yr and $162404 cost for the 30yr, over only the first 15 years in the house, or $650K cost for 30yr vs $795K for 15yr loan with 30 years staying in the property -- $315k is a fairly big difference in savings for most people who end up owning a house but no retirement savings, pretty big difference from simply stashing the mortgage difference into a retirement account rather than paying more into their mortgage to pay it off.  With only 5% (WAY below the historical average of 7% plus inflation) opportunity costs, it's $120,854 (30 fixed) vs $121,630 (15 fixed) over just the first 15yrs or $360k (30yr fixed) vs $381k (15yr fixed) over the full 30 years in the house.  The 30yr still wins out with only 5% assumed opportunity costs.

I would go for the 30. You sound as if you are someone who could make wise decisions with the difference in monthly payment (applying to debt, savings and investing, etc.), so at those rates, utilizing the difference wisely without blowing on H&B, think you would be better off with 30. I've always preferred 15 over 30, but at rates these days, it really difficult to justify if you are disciplined. Plus, with planning for children, there are always things you can't plan for (ie., my son is autistic....$600 or so a month for past few years in therapy bills/copays). You'll want to fund 529 etc. You can always pay additional if you like, which would avoid interest altogether. My 2 cents...but it's good that you are atleast thinking it through when so many don't.

You guys are ignoring the significant interest savings that would be found with paying off the 30-year mortgage in a shorter term. In addition, you are also ignoring that this isn't just a discussion over a mortgage, but student loan debt that is at a higher rate than the mortgage and much more limited on how much, if any, of the interest is deductible. Besides, just using the mortgage amortization calculator on Bankrate, applying the different in the 3.375% 30-year and 2.75% 15-year payments towards the principal, we are talking about just a couple months difference in the payoff date, meaning the total interest difference would be extremely low... and since that additional interest is more readily deducted at the end of the year, it is even less significant.

Who's ignoring that?

The folks ONLY talking about the mortgage.

Take the 30 year. Difference in payments is ~$500/month. Put that money into paying down the student debt faster.

Take the 30 year and pay down the student loan then apply extra principal payments towards the mortgage.



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