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Considering refinancing at 15 year at 2.75% or 30 year at 3.5%. We can afford the 15 yr and still contribute to retirement accounts but with rates so low I am leaning toward the 30 yr and investing the difference. Is this a good plan?

We are in our mid 30s and our marginal rate is 37% We are disciplined enough to actually invest the difference in payments We may move in 5 years but may or may not sell the house (rental)

Jan 08, 2013 by Max from Encinitas, CA in  |  Flag
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26 votes

Max it sounds like you are asking yourselves the right questions. As planners, we like to plan for the certainty of uncertainty. Therefore, based on the possibly that you may not be staying in the home for a long period of time, and your tax bracket, the 30 year note and redirecting the difference seems like a good plan!

View all 4 Comments   |  Flag   |  Jan 09, 2013 from Denver, CO
Martin V. Higgins

Yes, reread my comments again. I recommend getting a 30 yr note and paying an extra payment equal to the 15 yr note if you so choose. That way you have flexibility if you ever need to reduce it, say you or your wife are unemployed, disabled, etc.

Flag |  Jan 09, 2013 near Marlton, NJ
Max

Thank you for the advice. I consulted with my accountant and he also recommended the 30 year. His recommendation is to only pay into the mortgage after I have fully funded all tax advantaged investment vehicles (401k, Roth IRA, and 529 college fund). He actually went a little further and suggested that after those investments are funded to take any additional excess income and split 50/50 between the mortgage and a taxable, conservative investment so I will be beating or at least matching the mortgage interest while preserving liquidity

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Flag |  Jan 11, 2013 near Encinitas, CA

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Peter C. Karp Level 20

Max, when deciding between a 15 year or 30 year mortgage the first consideration is being able to afford the higher mortgage payments. It also has to do with the opportunity costs of the money and your age. Since you are relatively young and have plenty of time before retirement, if you can earn over 3.5% over time given your investment strategy, you should probably consider going with the 30 year fixed mortgage. I would then suggest dollar cost averaging into a diversified growth portfolio. In order to give a more detailed recommendation I would need to know more about you financially, such as income, other investment portfolios and family demographics. It would also be wise to sit down with your tax consultant and obtain their input.

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Comment   |  Flag   |  Jan 15, 2013 from San Francisco, CA

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Jason Hull Level 20

I'll go against the flow here and say go with the shortest loan period you can and get super aggressive on paying that sucker off as quickly as possible. There is no such thing as "good debt" (http://www.hullfinancialplanning.com/there-is-no-such-thing-as-good-debt/), and while you might be able to invest the difference and make money, if you'd tried the same thing in the wrong time period in the past, you'd have some serious stomach ulcers wondering where that money disappeared to. I can tell you from personal experience that life is a he** of a lot better without a mortgage than with one. The sooner you don't owe anyone any money, the sooner you're financially free.

Also, people think that there's a mortgage interest deduction, but that's only if your itemized deductions are above your standard deduction. Then, it's only the difference between what the mortgage interest deduction gets you above the standard deduction. Don't let the tax tail wag your financial dog. Financial debt causes stress (http://www.freepatentsonline.com/article/College-Student-Journal/95356585.html) which has other negative outcomes.

Comment   |  Flag   |  Jan 22, 2013 from Fort Worth, TX

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Jonathan Foster Level 16

Hi Max,

It sounds like you are getting excellent advice from your accountant. It's really all about your discipline. If you have strong discipline, then taking down a 30-year mortgage and doing the above makes a lot of sense. There is nothing prohibiting you from turning a 30-yr mortgage into a 15-yr one by paying down early. However, should you run into hard times, I can't imagine the bank will allow you to turn your 15-yr mortgage into a 30-yr one!

-Jon Foster

Comment   |  Flag   |  Jan 26, 2013 from Santa Monica, CA

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