Yay! I refinanced my house last week. All those signed papers lowered my interest by almost 2 points and reduced my mortgage payment by $332. Of course part of that reduction is from stretching out the term for another 12 years. If we keep the remaining term the exact same we lower our payment by $126. That’s the actual interest savings over the life of the remaining term. If we kept the rate the same and only extended the term our payment would drop by just under $200. So the longer term is really what’s driving the lower payment.
So when someone says to you “You can save hundreds of dollars per month by refinancing your mortgage!” you know the real deal. The real monthly savings come from extending your term, not by lowering your interest rate. Which as we all know, extending your term only keeps you in debt longer.
But, now that we have signed our life away yet again we have a few options. (Yay! Playing with numbers!!)
If we pay all our extra mortgage money towards our rental property first and then snowball that payment to our primary mortgage we will pay $62,000 in total interest and be debt free December of 2024.
If we do the reverse of that and pay all extra mortgage dollars to our primary residence first and then snowball it over to the rental property we will pay a total of $67,500 in interest and be debt free April of 2025. So it will cost us $5,500 to do it “backwards”.
Of course if we don’t snowball it at all and just pay both mortgages according to their terms we will pay a total of $120,500 in interest and be debt free April of 2042. No thanks!
So according to the numbers we should snowball with the rental debt being paid first. Unfortunately, numbers isn’t the only thing to be considered here. Having the house we are living in paid off is more important to us than having the rental paid off. If worst comes to worst I’d rather have the rental foreclosed on than our home. So there is that to consider as well. It’s not nothing.
Personally, I’m for paying the rental first and saving those extra dollars. But I’m not the only one making this decision. My husband would rather focus on paying off our home first. We will probably compromise and do a little of both. It’s not a decision that is worth getting into a fight over. At most, we are talking about $5,500 over the course of 12.5 years. That’s $440 a year. And since it’s tax deductible it’s even less than that.
Ok, for those out there who are going to tell me to take my extra mortgage dollars and invest in the stock market. Yes, that is an option too. Here is why I’m going to pay off the mortgages early. Firstly, this plan takes into account us maxing out our Roth IRAs. So that part is taken care of already. Secondly, if we pay the mortgages as according to the loan we will not be debt free until April 2042. I will be days away from turning 65 and my husband will 78. We can’t afford to have a mortgage after my husband retires. So the loans must be paid off in the next 20 years.
If we take the extra mortgage dollars and put them into a mutual fund earning 8% for the next 20 years we will have about $293,500. We will have to pay off the remaining mortgage balance which will be about $103,000. Which leaves us with a balance of $190,500. Of course we would have had to pay taxes on that growth which isn’t being included here.
Or we could pay off the mortgages as quickly as possible and then invest all the mortgage payments into mutual funds. Using 8% growth for 7.5 years (assuming it takes the 12.5 years to pay off both mortgages). This will give us an ending balance of $190,000. So when considering the risk I’ll take the guaranteed debt freedom. Again taxes are not being taken into account here and all numbers were rounded for easier reading.
I guess the moral of the story is that it doesn’t really matter what we do, as long we use the money to prepare for the future.