The Case For Refinancing

15-year or 30-year mortgage? To pay off early or pay off on time?

These are debates that can elicit the full passion (wrath?) of the personal finance community depending on who you are talking to and what side of the debate you fall on at the time.

I take the stance that neither position is wrong! As long as it’s right for your family and personal finance situation at the time.

However, my husband and I have just recently decided to refinance our 30-year mortgage to a 15-year one and I’m here to explain our logic that led us to that decision.

The Original Mortgage

We bought our home in fall 2015 with a 30-year mortgage. It was a conventional loan with a 4.125% interest rate and we put 5% down. (I know, I know, not a good decision with such a small down payment, but what’s done is done).

We ended up paying $100 per month for PMI! It was a bad deal.

Gif with the caption that says "This deal," as in the one in which you walk away with all my money

When we bought, a 15-year mortgage wasn’t even really on our radar. The bank happily assumed we wanted a 30-year loan and we assumed that was what we were supposed to do.

We had heard “helpful” advice from others in the past of, “Don’t get the 15-year loan, get the 30-year loan and pay it off as a 15-year loan! That way, if anything happens you have extra room in your budget.” Or, “You can make more money by investing the difference in the monthly payment”.

We weren’t actively planning to refinance, but we’ve been noticing that housing prices in our town have been going up.

Much smaller homes have sold for what we bought ours for and we thought perhaps we should get our house appraised to have our PMI dropped.

Then, on a whim, one day I decided to check out refinance rates and came across a company that could offer us a full interest point lower than what we are currently paying. I asked for quotes on 15 and 20-year loans.

The 20-year quote came back at basically the same amount we were paying now. The 15-year loan was about $300 more.

Mr FC and I talked it over. When we initially bought our house we applied for our loan on much smaller salaries than we have now. We had just moved back to the Rockies from living in Nashville because I was finishing my graduate degree and had taken a job in my field. At the time, Mr FC had a remote job that he kept through the move but has since taken a job that also pays more.

Since we both make more now, we have more wiggle room in our budget. Why shouldn’t we take the 15-year loan and pay off our mortgage faster?

If you’ve read some of my other posts, you know I’m a fan of online calculators. So of course, I decided to run some numbers to compare different scenarios! I am a data person and a numbers nerd, so that’s what I turn to to help make decisions like this.

Here are some stats about how the two options stack up:

  • In the two years we’ve owned our home we’ve already paid over $16000 in interest! 🙁
  • We weren’t making extra principal payments and have only decreased our principal by about $7000.
  • If we stick with the 30-year mortgage we will pay over $145000 in interest over the life of the loan.
  • With the 15 year mortgage, we will pay about $50000.
  • $145000 (total 30-year interest) – $16000 (interest we’ve already paid) – $50000 (what we will pay in the 15-year loan) = $79000 in interest saved by switching to the 15-year loan.
  • If we invested $300 per month (the difference in the monthly payment between the 15 and 30-year loans ) for 15 years with 7% returns we would make about $91000.

To the people that say you can make more money by investing the difference – I concede to you on this point. It is possible. But not guaranteed. Saving money by paying off a fixed interest rate loan is guaranteed.

To the people that say you should take the 30-year loan and pay it off like a 15 – that just didn’t work for us. We weren’t paying extra principal because we have been focused on paying off other things like debt. It’s too easy to come up with excuses and reasons not to do it.

Plus, it shackles you with a higher interest rate. If we applied $300 extra to our 30-year loan it would take us 3 years longer to pay off our loan than it would if we switched to the 15-year loan. One point of interest can make a big difference!

What about using the mortgage as a hedge against inflation?

Proponents of keeping a mortgage like to use an argument that says when you take out a mortgage, it becomes cheaper over time. As inflation increases the cost of everything around you goes up. However, if you are locked in with a fixed payment and a fixed interest rate, it will actually make your mortgage payment cheaper by comparison.

I don’t disagree with this! However, I don’t have enough certainty about what my life will look like in 15, 20, 30 years to want to strap myself down for the sake of inflation.

While I don’t consider myself anti-mortgage, my vision of financial independence includes being mortgage free sooner rather than later.

What about the cost of refinancing?

This was a big concern for us and can make refinancing less worth it in some cases. But I think it worked out very well for our situation.

The lender we are going through did not charge any fees for the loan and we did not have to pay any points. They quoted our out-of-pocket costs at $645 for an appraisal, $1200 for the title fees, and $900 for setting up the new escrow account.

We ended up getting the appraisal waived. We were okay with this because the lender still calculated the new loan-to-value ratio with the increase property value estimate we gave them. An official appraisal might have come in slightly higher, but I felt like we got what we wanted out of the deal. It was enough to drop our PMI.

For the title fees, we decided not to go with the company they based their estimate on. We went with a local company and the title fees were cut in half.

We will have to have pay money out-of-pocket to set up the escrow accounts. However, we will get a reimbursement for the funds that are in our current escrow account so this should come out even in the end.

Final considerations

After weighing all these options, we came back to our budget. We’re purposefully deflating our salaries next year to increase savings and optimize taxes. Can we still meet our savings goals and pay our bills? I think we can.

Is a 15-year mortgage right for everyone? Of course not. It wouldn’t have been right for us even just two years ago. But things can change quickly, and I think for us it will pay off in the long term.

Sometimes it’s worth it to just take a look and see how it might affect things. You might be surprised by what you find!

Where do you stand on the 30 vs 15-year mortgage debate? Let me know in the comments!

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4 Comments

  1. Wow, this is great! What jumps out to me is just how thoroughly you’ve run the numbers to determine the best course, which I think is really the key behind this whole decision. For a lot of people the advice to keep a 30 year makes sense because they aren’t obligated to make the higher payments, but can pay extra when possible. If someone isn’t really focused on managing their money they may need that freedom so they aren’t ever in danger of not being able to make a payment when money is tight.

    You, on the other hand, seem to have it figured out thoroughly enough that I doubt you’re ever in danger of that. By building flexibility into your finances, you’re able to take on alternative approaches like this that will be a net benefit. I also think it’s a good point, as you noted, that sometimes the obligation to pay more (pay it down faster) is better because you wouldn’t find an excuse to do something else with the money. I mean, that’s the whole reason home equity is the major source of wealth for most Americans, simply because the mortgage payments are a form of forced savings.

    Also, wow, always amazed at the sheer amount of money paid out in interest over the life of a mortgage. Painful!

    1. It is amazing how much interest adds up isn’t it. I can’t imagine taking out a mortgage back in the days of 11-12% interest! The potential for rising interest rates was another factor for us in doing this sooner rather than later if it was going to happen.

  2. As a rule of thumb, ALWAYS go with loans with lower interest rates.

    There should be no debate about this intrinsic fact of math.

    The debate ensues when people are not in a position to get locked into a higher payment with a 15-year mortgage. Also, often times, after the closing costs and the marginal difference between a 15- and 30-year mortgage (4.25 vs 4.625% right now), it wouldn’t make sense mathematically to refinance, but aggressively pay towards extra principal.

    Glad it worked out in your favor.

    1. Yes, I think we refinanced at the last possible time before interest rates started climbing back up and we were lucky to have very low closing costs. For many people who took out mortgages during the low rates of the last few years, refinancing probably won’t look like a good option for a while.

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