Housing costs are one of the biggest recurring expenses that anyone will ever have, so lowering those costs certainly frees up cash for other things. But is it worth refinancing to do so?
My husband and I have refinanced our current home two times. Now, we (meaning me, and my husband who would like me to stop talking about it!) are considering it again. We refinanced the first time to rid ourselves of primary mortgage insurance. The second refinance was to get cash out to pay for a rental property. (Long story on the rental property financing which is the subject of another post). The third refinance we are considering is to use the surplus to invest in pre-tax index funds.
Currently, we have about 12 years and $268,500 remaining on our mortgage, at an interest rate of 3.125%. We are considering refinancing to a 30 year mortgage at 3.75%. The difference would mean about $1000 more in cash flow each month. Below are the reasons we consider refinancing or not.
REASONS TO REFINANCE
- More Money. If we put the extra $1000 each month into an index fund, we will likely end up with more money in the long run. (We are pretty good savers and intend to invest the difference, but we are human and life changes. The benefit of sticking with our current mortgage is that it will be done in 12 years.).
- More Growth. Once the mortgage is paid off, we won’t have that money tied up in an asset that is only keeping pace with inflation. We already have a paid off rental property and about $100,000 of equity in our home, so I feel that socking more money into our house has big opportunity costs.
- Investment Potential. If we decide to eventually rent out our house, we could either cover or come very close to covering all of our expenses (mortgage, insurance, taxes, and maintenance) through monthly rental payments.
- Tax Benefits. By putting more money in pre-tax accounts and having a larger mortgage interest payment, we will lower our annual income taxes.
REASONS NOT TO REFINANCE
- Less Debt. Once we pay off the house, it can either become a stream of income for us as a rental property, or we are rid of the $27,000 worth of annual mortgage payments we currently make. (That number does not include taxes and insurance, and assuming a safe withdrawal rate of 4%, we would have to have a nest egg of $675,000 to cover that payment.)
- More Freedom. With this expense gone, financial independence becomes much closer for us. We can either ramp up our savings rate at that time or live on less money. An additional wrinkle is that in 12 years, my oldest son will be entering college. Ridding ourselves of this payment will also allow more flexibility to help fund his college education, which we plan to do.
- Security. I imagine that owning your personal home outright must be freeing. Also, paying down the mortgage allows for a guaranteed return. While we would almost definitely make more in the stock market, it is not a sure thing.
- The Cost. It isn’t free to refinance. We could roll those costs into the new loan, but the mental toll of seeing that number increase is a thing for us. Truth be told, this is minor, but it is a factor we consider.
I go back and forth on this question constantly. Do you have the same internal debate? Is there anything else you consider?