We plan to refinance our house. We currently have a balance of 143k on a 30 yr fixed loan which we got in 2001 at 7%. The current payment is 950, excluding taxes and insurance. The current value of the house is about 290k.
We will be here at least 8 more years when I will retire.
Our choices:
143k, 30 yr fixed @ 5.875% , about 845/mo.
Or, we have about 50k just laying around doing nothing. If we put it towards the balance and got a 100k loan, the numbers would look like this:
30yr @ 5.75, 590/mo, 87k balance in 8 years
15 yr @ 5.25, 803/mo, 55k balance in 80years
The way I see it, putting the extra money down is like guaranteeing a 5% return on the 50k at a time when the stock market is very uncertain.
Not a bad idea, if they are generally avilable. That would be a payment of $1072/mo, assuming the same 5.25%. That would leave about 25k after 8 years.
You can pay as large of a payment as you like on any loan…IOW you can pay that $1072/month on a 15 year loan, and you’d have it paid off in 10 years. The purpose of shorter-term loans is to get a lower interest rate.
Also, please don’t forget that property value can go down, so your 5% return (and how did you calculate that?) isn’t “guaranteed”.
My feeling has always been to get your debt as low as possible as quickly as possible. But I tend to play it safe. Here is something else to consider:
If you take that 50k and use it as a 10k down payment on 5 other houses each presently valued at 100k, you will have 50k collateral in real estate and owe 450k. That part is obvious.
Suppose the real estate market in the area goes up 10%. Now each of those houses are worth 110k, and you now have collateral of 100k (you owe 450k, but the houses are worth 550k).
In other words, the effects of an increase in real estate are MULTIPLICATIVE if you diversify the funds.
As I said, this isn’t something I would do. But if you are a somewhat daring sort, investing in real estate is RARELY a bad idea and the growth could be pretty substantial.
I would not put the 50K into the house at this time. As LordVor states you can take a 15 year loan and pay it in 10 if you so desire but you would not be locked into the larger 10 year payment if something unforseen happens. . If you are going to move after retirement then keep the money in the bank or some interest bearing account.
Another vote for applying the $50K and refinancing the balance for 10 or 15 years. Where else can you get a certain return of 5+% these days?
Of course, rates could rise in the future and 5% might not look so good years from now. But you are likely to be so far ahead, it’s hard to see how overall this would be a bad decision. Besides, you are comfortable with this idea and that’s what money is for anyway.