My family recently moved out of our townhome and into a single-family home back in January. About a month ago, I was spammed with an advertisement on a website I was perusing. The ad read something about lower interest rates.
Back in January, the interest rates were good, but not extremely low like they were a few years ago. Without buying points, I ended up settling on a 30-year fixed mortgage with an interest rate of 4.25%. Not too shabby, but it did bug me knowing that many people had refinanced to 3.5% or less within the last couple of years.
Back to the ad… It was one of those websites that shops the different lenders. I knew that as soon as I entered my information into this site I would be bombarded with emails and calls. But, I proceeded to enter my information. Within 5 minutes I was receiving multiple calls from lenders.
I picked up one of the calls and was quickly disappointed with what I had just done. I had to provide all of the information I just entered, which I get for security purposes. What I really wanted to find out is what interest rate could I qualify for? For the next two weeks, the calls from lenders continued to flow in. I kindly told them I was no longer interested and slowly, the calls begin to stop – that was until yesterday…
What I really wanted to find out is what interest rate could I qualify for? For the next two weeks, the calls from lenders continued to flow in. I kindly told them I was no longer interested and slowly, the calls begin to stop – that was until yesterday…
The call that could save my family thousands…
I took a call because it was from a local number. In my line of work, technical sales, you never want to miss a call from a potential customer. However, this call turned out to be in reverse – I was the customer. It was another lender.
Honestly, I am not sure why I didn’t politely inform the person that I was no longer interested in a refinance. I continued the conversation, and after being transferred a few times I was speaking to a certified loan officer for my state.
Interest rates on a 15-year fixed mortgage were at 3.25% – that is without buying any points. I advised the loan officer that I wanted to conduct my own research and that I would bet back to him.
I began putting together some information to see if this would be a good move for my family.
So could this call actually save me thousands?
The obvious answer is yes. I would definitely save money in interest payments over the years. Here is an analysis with all of the pertinent information I could think of to help guide my decision.
I compared the 30-year and 15-year mortgages. With the 15-year mortgage, my principal and interest portion of my monthly payments increased by $550. In the first row, I compared the interest I would pay over the life of each loan. If you want to do this yourself, here is the Excel formula you can use to run your own analysis:
In the first row, I compared the interest I would pay over the life of each loan. If you want to do this yourself, here is the Excel formula you can use to run your own analysis:
Next, I compared the interest paid over the first ten years. I did this because in the next line I ran a future value calculation. This future value calculation shows if I invest the difference in the monthly payment, $550, what I would have in my taxable account.
After 10 years I would have just over $100k, plus an additional $186k in home equity. If I go down the 15-year route, I wouldn’t have the additional cash in my taxable account, but I would have almost $297k in equity. So after ten years, I would essentially break even.
I like that I would have the $100k that I could pull out and only pay long-term capital gains.
The analysis continues…
After 15 years, you can really see the power of compound interest begin to flex its muscle. Sticking with the 30-year mortgage, my cash value plus my home equity surpasses the equity from the 15-year loan.
However, with the 15-year route, there is no more mortgage! This frees up $1,800/month I could begin to invest.
The last row of my summary above shows the results comparing investing the $550/month by sticking with the 30-year loan versus investing the entire mortgage payment – $1,800. However, with the ladder, I don’t start investing for 15 years and I only have 15 years to let the money compound.
From this analysis, it appears investing the $550/month wins because at the end of 30 years I have about $1.2 million. This is split $820k in my taxable account and $400k in home equity. With the 15-year, I have just over $1.0 million, which is split $620k in my taxable and $400k in equity.
Another spin on the analysis
This week, I read an article about HELOC Arbitrage from the MastermindWithin. In his article, he deconstructed whether it made sense to refinance his home to eliminate PMI and take out money against it to make a profit – arbitrage. You’ll have to check out the MastermindWithin’s article to learn more.
If I were to pursue the 15-year mortgage, I could implement a similar plan where I pull money out of my home and invest it. For example, if the market were to crash again in the next 5-10 years, I could take out some of my equity and hope I get a better return in the market.
The interest rates on these loans (HELOCs) scare me a little bit. They are often higher interest rates or they are variable.
For now, I will stick with my 30-year mortgage and continue funding my taxable account.