53 comments

MMM Challenge: Get yourself a lower Mortgage Rate

It has been a while since we did an MMM challenge, so I’ve got an extra good one for you today, one which can save many homeowners out there $105,000 over a 15-year period. The challenge is: Getting yourself a better rate on your mortgage.

Looking at the ING Direct* website recently, I noticed that home loans were going for an astonishingly low rate of 2.99%. The last time I paid attention to mortgages, it was to refinance my own house a couple years ago, and at the time even the 5% rate seemed amazing to me. The lesson to me was that in this weird financial aftermath of the Great Recession, there are some sweet deals to be had for those paying attention. Any reader who has not recently refinanced to a lower rate should definitely do some shopping around.

But today I noticed there is an even more advanced strategy that has opened up. Check out the current APR spread on interest rates, which I just looked up on advisor.google.com/mortgages:

5/1 ARM loan: 2.972%
15-year fixed: 3.604%
30-year fixed: 4.410%

These rates include all fees as part of the APR number, so when comparing to your own interest rate, it should be equivalent to getting the rate above and paying no fees. Lender fees are silly and are often way too high from less reputable lenders. ING Direct seems to have some of the lowest loan fees overall. But again, the rates above supposedly are the effective rate over the life of the loan after including the fees.

Before I became mortgage-free this year, my strategy was always to go for the 5/1 ARM mortgage. That way you get the lowest rate for 5 years, and you can really go crazy paying off principal of the house because your interest cost is so low. If the rates start to creep up at the end of the period, you can always lock in for a longer period at that time.

Some people, out of fear of the unknown, like to go for a longer lock period. Thus in the United States, the 30-year loan is very popular. The issue with 30 year loans, however, is that they are stupid. They are deliberately designed so that you start off juuuust barely paying any principal at all, $263 per month on a $200,000 loan, so that you really just scrape along in debt for a good part of your lifetime. It is so close to the tipping point that if you cut the payment just $200, it would be a 100-year loan. A few dollars lower, and it would be an infinite-year (interest-only) loan. Going a few dollars higher, on the other hand, gets you out of debt drastically sooner.

Now, certain Advanced Mustachians will point out, “But I prefer an interest-only loan, because I can choose when to make principal payments on my own schedule. Of course I won’t really take 30 years to pay it off, but since the interest rate is low I want to stay leveraged to make bigger investments in stocks instead”.

OK, fine, for those people the 30-year is fine in some cases. But still not in today’s market. Because look how much lower the rate is on the 15 and 5 year mortgages!

Let’s say you have a mortgage right now: $200,000 at 4.5 % on a 30-year schedule. Your monthly payment is $1013/month, of which 750 is interest and 263 principal.

If you are too conservative to switch to a 5/1 loan, then I still recommend that you go out tomorrow and refinance your loan into a 15-year fixed loan instead. You don’t have to worry about interest rates going up after 15 years, because YOUR HOUSE WILL BE PAID OFF THEN!!

But can you afford the payments?

Surprisingly, because of the lower interest rate and the stupid almost-infinity nature of the 30 year mortgage, you can easily afford them! Check it out:

The monthly payment on a the same $200,000 mortgage with a 15-year schedule at the much lower 3.604% APR is only $1439! Only 426 bucks a month more, and all of a sudden your payments are doing this for you: $839 principal, $600 interest.

You’re paying $426 more per month, but your interest costs have actually dropped by $150 per month and your principal payment has more than tripled. Congratulations – you’re actually paying off your house, sukka!

Over the lives of the two loans, the 30-year holder will pay $165,000 in interest, but YOU will only pay $60,000 in interest.

I think almost everyone can find a way to scrape together $400 per month when such a wealth-building opportunity is at stake.. right? The frugality tips alone that have been shared by Mr. Money Mustache in the past month have already freed up more than that amount of money. Cut your cable TV, drop to a less expensive car, ride a bike for local errands, drink less beer, stop buying coffee outside the house. You’re already more than there.

If you still don’t agree, feel free to stop by my new retail location next to Mister Money on Main Street in Longmont for a complimentary PUNCH IN THE FACE!!! Because it might help instill some wisdom that is already quite obvious to me : $105,000 in additional wealth** over 15 years is worth working for!

 

**Some Fancy Math on the issue:
Using a simple mortgage calculator and fast forwarding to the end of year 15, the two examples above would have you in these positions:

30 year mortgage holder:
-paid $1013/month for 15 years
-has $182,000 in payments remaining to go.

15 year mortgage holder:
– paid $1013/month for 15 years PLUS an extra $426 per month
– $0 of extra payments to go
– this $426/month has saved them $182,000 of future payments.

Note: I had to change this footnote after an astute reader pointed out it was confusing.  Because these payments are stretched out over a long time, the actual equivalent return you’re getting on your $426 payments takes a bit of work to figure out. In the comments, you’ll see that I came up with a figure of 6.78%.  Still quite amazing for a guaranteed investment return, so Do it!!

  • Steve May 24, 2011, 11:37 am

    We considered financing a 15 year loan and saving an extra % on the interest. Instead we chose to take a 30 year loan and pay extra on the principle, for the piece of mind knowing that if our financial situation changes, we could always go back to a $750 mortgage instead of a $1,100 we pay. We are on track to pay off the loan in 15 years instead of 30.

    However, over the course of the 15 years, we will pay an extra $13.000 or $70 per month for the difference in interest rates. If I had it to do over again, I’d have gone with the 15 year loan and had the $70 extra cash flow to bank in case of emergency.

    Reply
  • MMM May 24, 2011, 11:58 am

    Hi Steve.. very interesting to hear that decision-making process, and I’m sure it is quite common among strategy-oriented people like yourself.

    But remember, you DO have it to do over again. Part of my idea of writing that article up as a CHALLENGE is to get people to go through the hassle of actually doing a refinancing. Sure, it takes about 8 hours of work by the time you make all the phone calls and fill out the silly forms.. But you are getting paid thousands of dollars per hour for taking on that hassle. That’s the ultimate way to “Unleash your inner Hasselhoff” as the earlier article with that title was trying to advocate ;-)

    As for emergencies – anyone who has any form of non-401K savings (even if it is in index funds) is fully taken care of for emergencies. Everyone has a certain level of comfort with risk, but I argue that most people are drastically compromising their investment income today in exchange for protection from a statistically very unlikely chance of slight income shortage in the future.

    Reply
  • Mr. Frugal Toque May 24, 2011, 12:54 pm

    Thanks a lot. Because of this post, I was led to discover that I can save over a thousand bucks by paying a penalty and getting a lower interest rate for the remaining few years of my mortgage.

    Now I have to go through all that “calling people” and “signing forms” crap.

    Jerk.

    Reply
    • MMM May 24, 2011, 1:38 pm

      Niiiice. Even better is the fact that you will probably do most of this calling from the comfort of your paid-employment office, meaning you are getting paid double for the time :-)

      Seriously though, even though I hate the inefficient nature of flapping mouths and fax machines, I have put myself through a lot of it in the interest of earning money. I was a mortgage-payer for about 10 years over several houses, and I probably refinanced and/or set up or closed lines of credit 10 times in those years. Each time it was somewhat annoying, and each time it was highly profitable.

      16 months ago, I spent a morning doing a round of re-researching and Hasselhoffing on all of my insurance lines – car, main house, rental house, even though there was no immediate need. It reduced annual premiums by $500 per year in total, which sounded like a small and vague future reward. But I did it anyway, and here I am, $700 or so richer and counting because of that one morning.

      Reply
  • Executioner May 25, 2011, 6:12 am

    Whatever mortgage one chooses, the primary focus should be to pay it off as quickly as possible. Interest rates are less meaningful when the debt is gone in 5 years or less.

    Reply
    • MMM May 25, 2011, 7:21 am

      Nice.. I like your style, Mr. Death To The Mortgage. I do think it is a valid strategy for people to just go nuts and pay off their mortgage immediately if they are conservative and very cashflow-oriented.

      But as an Early Retirement blogger I also like to present other options that mix it up a little since your odds of gain are still higher with other investments when you are trying to fund a 70-year-period of leisure as I am :-). But even given these odds, I still lean towards people paying off mortgages somewhat early, at least very early in their Early Retirement and preferably before.

      Reply
  • Steven May 25, 2011, 7:57 am

    Valid points Mr Mustache.

    Just don’t forget to take into the effects of inflation on the numbers. Interest paid 25 years from now is going to be worth a lot less than interest paid today.

    That said I still favor getting debt free ASAP.

    Reply
  • Sarah May 25, 2011, 9:21 am

    Alright Mr. Money, I have a question. We are getting ready to purchase a home on 2 acres. It is 2100 sq and is two apartments connected. We are going to remodel it. Currently it is worth (with the down economy) $250,000 and we are paying $180,000. Husband and 4 strong boys can remodel. Works for us. To do a 15 year loan it would cost $450 extra per month. Currently, with a 30 year loan it leaves us an extra $1000 a month. For a family of 6 we use an extra $300 a month (for clothes, shoes,..toothbrushes…new underware..). $800 in savings right? If we do a 15 year loan we will have to cut our savings in half. Is it still better to cut our savings in half, or keep a larger savings and go with a 30 year? On a 15 year note in 30 years we would bank $270,000. On a 30 year note in 30 years we would bank $288,000…. hmmm….

    Reply
    • MMM May 25, 2011, 8:57 pm

      Hi Sarah,

      Yahoo! Sounds like a great project for you and the family. Nice to hear you are getting your children to produce some monetary value themselves – I look forward to that day myself :-)

      YES, I believe it is better to get the 15 year loan, if the interest rate difference is as large as the figures I mentioned in the article. Because your extra $450 per month is effectively earning something like 10% when I worked out the numbers in the footnotes. This happens because you get rewarded not only get the plain old 4.5% you’d get by paying down your mortgage early, you ALSO get your whole balance dropped into a lower 3.6% interest rate tier – this acts like a multiplier effect on the reward you get for the $450 in the mortgage. And unlike the stock market or other investments, it is guaranteed.

      If you need more details, feel free to send me a private message on the contact section and we can figure out if I’m missing any key things form your calculations.

      Reply
  • Daniel May 25, 2011, 6:45 pm

    The thing that’s important to keep in mind is closing costs. Two years ago, I took out a 30 year mortgage. I’m on schedule to pay it off in the next 18 months or so, and possibly sooner.

    I probably should’ve gotten a 15 year mortgage (or even something shorter) but, on the other hand, my income has gone up significantly between buying the house and now, and the flexibility was worth the fraction of a percent of interest I would have saved.

    I haven’t crunched the numbers as to how much the interest rate would need to dip for a refi to be worth considering, but given my rate is already fairly low (4.75%) I suspect there is no rate available that would be low enough to offset the closing costs over the length of time I intend to keep the debt for.

    Reply
    • MMM May 25, 2011, 9:53 pm

      Hi Daniel,

      Yeah, you are in a special situation, paying off the 30-year mortgage in only a few years. I wholeheartedly approve!

      For most people with a larger balance, however, any closing costs are very quickly paid back with any rate drop over 0.5%. With a $200k balance, 0.5% saves you $1000 per year – so even a high $2000 closing cost is paid back in 2 years, a 50% annual rate of return on your closing cost investment. Depending on the bank, I have sometimes seen closing costs of only $400 for an appraisal (still a rip-off but hey, whatever), and $500 in fees for the bank. So $900 total.

      Also, as I noted in that article, the closing costs are actually INCLUDED in the effective APR of the rates I quoted – so for someone intending to keep the loan for its entire lifetime, that version of the APR means “It’s like getting a loan at this rate with closing costs of zero”.

      Reply
  • Bill May 26, 2011, 11:45 am

    Your math in “** Some Fancy Math on the Issue” is incorrect. You are confusing future an present values as well as calculating returns on the extra principal payments wrong. The return on the excess principal payment from a 15 year mortgage over a 30 year mortgage is simply the interest rate on the 15 year mortgage (assuming monthly compounding). Your realization that you get to “keep” your extra principal payments in a 15 year mortgage is not valid, if you had a 30 year mortgage with lower payments you would also have this $76,880 in cash still available.

    To correctly calculate what I believe you are trying to represent, the “return” from a 15 year mortgage over a 30 year mortgage, you would calculate the excess of the 15 year monthly payment over the 30 year monthly payment. Invest this amount monthly, using monthly compounding, and solve for the rate that would give you the remaining balance on the 30 year mortgage after 15 years. This will give your borrower the same cashflows in every period, prior to the loan, during the loan, and after the loan is gone thus returning a meaningful result.

    Reply
  • Bill May 26, 2011, 12:06 pm

    The savings from a 15 year mortgage over a 30 year mortgage comes solely from the difference in interest rates on the two products. Most personal finance advice gets this wrong. The “benefit” they claim a 15 year mortgage gives is actually a benefit of a faster amortization of the loan, it has nothing to do with a 15 year product. This is true in the United States where virtually every loan is prepayable without penalty, if that is not true the analysis would be different.

    You can see this clearly with a simple example. What is better a $200,000 15 year mortgage at 5% or a 30 year mortgage at 4.5%? A simplistic analysis would tell you that the 15 year loan will pay over $80,000 less than the 30 year loan over their lives.

    It should be obvious that this in no way makes the 15 year loan a better deal. You could instead get the 30 year and prepay a portion of principal each month to make its payments equal to the 15 year you considered. In that case the 30 year would pay about $13,000 less than the 15 year.

    If you had two loans at the same interest rate the 30 year would still be superior. At worst you pay it at the 15 year amortization rate and both loans come out identically, however with the 30 year you retain the option to pay less in any given month. An option that clearly has value.

    The fair way to compare the two loans in your example, a 4.5% 30 year and a 3.6% 15 year would be to amortize the 30 year more quickly so that your monthly payments between the two were identical. If you do that you find the 15 year loan disappears and the 30 year loan still has a balance of $24,500 in month 180. Which would you prefer the option to pay $426 less in any given month or to owe a $24,500 balance 15 years from now. In this case I would agree that the 15 year loan looks better. If the interest rate spread were only .25% instead of .9% I would probably not agree.

    Reply
  • MMM May 26, 2011, 3:12 pm

    Excellent explanations Bill. I appreciate the math checking and I agree that my Fancy Extra Math section is misleading because it does not clearly separate the benefits of standard principal payoff and the extra benefit of getting a lower interest rate.

    I liked the last paragraph in your second comment best – the person who selected the 15-year mortgage is about $24,500 ahead of the person who made the same $426 extra payment on a 30-year mortgage. (I get $23,500 from my mortgage calculator, but maybe we are differing on start-of-month vs. end of month somewhere – no big deal).

    Perhaps you could tell me if you agree with this attempt at explaining it.
    :
    For the stream of extra $426 payments, the 30-year mortgage holder has knocked his mortgage down about $109,000 compared to what it would be if he just made minimum payments. Exactly what you’d expect from investing $426/month at 4.5%

    But the 15-year mortgage guy also made the equivalent stream of $426 payments, and HIS balance is knocked his down by $132,500 compared to the 30-year minimum payer.

    To get a 15-year stream of $426 payments to compound into $132,500, you need an effective interest rate of 6.78%

    It’s still the best guaranteed return going these days, but I do have to edit the article to erase the incorrect stuff. Thanks again!

    Reply
  • scalawag May 27, 2011, 1:41 pm

    Ing Direct’s “solutions finder” gave me an estimated $3300.00 closing costs.

    With home prices falling, I have less than 20% equity, so the lender would require mortgage insurance. I’m looking at a 15 year fixed. I think I’d net about $30/month savings. Assuming closing costs in the above range….whaddya think? Doesn’t sound like I’d be benefitting much.

    Reply
    • MMM May 27, 2011, 1:46 pm

      Weird. Thanks for passing along that high number for closing costs. Yeah, in your situation a re-fi with those numbers is definitely not worthwhile. If you can recover the closing costs within 2 years, that’s more like it.

      I’ve never paid more than $1000 myself, so maybe any other readers with recent experience can share what they’ve been seeing and where?

      If ING is routinely non-competitive, I’ll have to change the logo for that article just to avoid helping them (I don’t get any advertising money for this blog, but I still like to reward good businesses and punish bad ones out of spite ;-))

      Reply
      • scalawag May 27, 2011, 2:31 pm

        Yep and for clarification I think that $3300 was for the 10 year fixed…and for some reason the loan amount wasn’t actually paid off in 10 years. Just a 10 year fixed interest rate I think. Could be wrong on that.

        Reply
  • Amy May 27, 2011, 3:04 pm

    I had thought about refinancing a while ago but I am not sure it is worth it. Our current mortgage is fixed 5.35% 5 years into a 10 year term 25 year amortization. The penalty to break the mortgage will be around $12,000. If we went with a 2.2% variable rate mortgage 5 year term 15 year amortization which included the penalty will will be only $17,000 ahead in 5 years. In the next five years I am sure the rates will go up so that will eat into that $17k.

    Reply
    • MMM May 27, 2011, 3:11 pm

      Hmm, very interesting! What country are you living in? I was writing from an overly US-focused perspective as usual, where we can just randomly send in extra principal payments whenever we like, and refinance to lower interest rates on a whim, sometimes with no closing costs at all in exchange for an only slightly non-prime rate.

      Reply
  • Wiiksi Wallu May 31, 2011, 1:55 pm

    Here in Finland mortgages are often taken with variable rates. I don’t know how common it is in the rest of the world but in here, fixed mortgages for ten or even just five years are fairly uncommon while the 12-month rate is the most common. My own mortgage is fixed rate, but only for three months at a time :-) At the moment, my rate is at 1.43%, including the bank’s margin (0.37%).

    I know that Mr. MM wants things to be mathematically sound. Well, using the shortest available rates makes sense, on average, as described on this page: http://ville.salmensuu.fi/euribor/index.en.html. The one who borrows money with a short, variable rate, carries the full risk of rates getting significantly higher from one period to another. The smaller the risk for the bank, the cheaper the rate for the lendee. It is like paying for an insurance: if you can afford to take the risk, you don’t need to pay for the insurance company to take it on your behalf.

    Needless to say, very short periods have worked beautifully for the Finns during the last few years. Unfortunately many have seen this as an opportunity to take extremely large mortgages, effectively making themselves slaves to the bank for the next few decades. Wiiksi Wallu is not one of those people.

    Reply
  • Josh July 11, 2011, 10:07 pm

    I couldn’t agree with you more. A 15 year mortgage is where it is at if you want to be free of a mortgage payment. You mentioned that you can usually come up with a few extra hundred dollars a month. My thought on this is if you can’t afford to pay the home off in 15 years then you can’t afford the home. This may seem a little extreme, but the interest you save on a 15 year opposed to a 30 year is huge. I did a break down on this on my site. http://www.grow2millions.com. I am probably on the 7 year plan. I have a 15 year mortgage, but I have intent to pay it off in about 7.

    Reply
  • JF October 27, 2011, 3:26 pm

    MMM, how do you feel about the role inflation plays; i.e. would it be cheaper to get the 4.5% mortgage for 30 years since over time inflation will make it cheap to the pay mortgage, and money not used to pay the principal could earn high rates of interest in the bank after the rates start rising.

    Reply
    • MMM October 27, 2011, 8:24 pm

      I definitely wouldn’t advise your strategy if there is still a big spread between 15 and 30 year articles, as described in the article, because the effective return on investment by switching to the fifteener is higher than you’ll probably get anywhere else. If the choice is just between paying and not paying a 30-year mortgage down quickly, you could use your discretion. If you are far from retirement and have a long investing time horizon, it could work better to invest.

      Reply
  • sumarie November 5, 2011, 8:22 pm

    A question for you, MMM:

    My sweetie & I are paying off a mortgage. At present we owe $148,000, at 4.25%, and our monthly payments are $738.00. We’ve been paying $1000/month. We’ve become aware of the idea of paying $500 twice a month, or making an extra payment, but now are wondering about tweaking it further by paying weekly or even daily. Our credit union allows electronic payments, and we were told our daily interest is about $17 per day. Sooo, is there any advantage to paying, say, $34 every day for a month? Would this be a way to contribute more to principal than paying twice a month, or weekly?
    Thanks for your help! (I realize you’re a busy man, so I appreciate your response to this, if/when it might appear.)

    Reply
    • MMM November 5, 2011, 10:41 pm

      The real key with those every-two-weeks mortgage deals is that they trick you into paying a bit more of your balance down each month – since there is really an average of 4.33 weeks in each month. The extra frequency doesn’t play a very big role in the paydown – just the larger number of dollars per month. They are still a fine idea, however.

      So, paying $34 per day would have you paying an average of $1034 per month (since the average of the month lengths is 30.41 days), whereas $500 every two weeks would get you to pay $1082/month. Bi-weekly would win.

      (Note that paying $1000 per month vs. $500 exactly twice per month would be a much smaller benefit, since you’re only paying $1000/month either way – the only benefit is the small interest savings of having $500 less loan outstanding for part of each month).

      Reply
      • sumarie November 7, 2011, 11:34 pm

        Thanks Triple M — very helpful!

        Reply
  • Rayuka January 12, 2012, 1:52 pm

    Well, I’m late coming to this blog, but after reading this post last night, I did some quick calls this morning. I was able to arrange an early renewal on my mortgage ($1000 charge), but changed from a 5.5% 5-yr fixed mortgage to a 2.99% 5-yr fixed mortgage. Maintaining the same bi-weekly payments $394.55, I reduced my amortization time from 190 months (15 years, 8 months) to 154 months (12 years, 8 months). So, with a 20 minute phone call to my trusty banker, I’ve cut off three years worth of payments. I’m feeling pretty fucking mustachy right now. Thanks!

    Reply
    • MMM January 12, 2012, 2:39 pm

      EXCELLENT!! Congratulations on that. I should re-run this post every few months because wrestling with banks over a mortgage rate is really one of the most valuable things you can do with your time. You earn thousands of dollars per hour.

      Reply
      • Rayuka January 12, 2012, 4:05 pm

        Well the way I see it, I saved 3 years of payments at $ 798.10/ month, which equals $28 407.60. Less the $1000.69 early renewal penalty equals $27 406.91 that I saved myself in less than one hour. (20 minute phone call plus 20 minutes typing and faxing a letter confirming my request)

        I still have a ton of debt, and before Christmas was thinking about saying screw it and filing bankruptcy despite the fact that I’m grossing about $115000 (Canadian) on my own. I’ve been the poster girl for bad money management, but somehow I picked up the book “Your Money or Your Life”, and that turned my thinking and my consumerist outlook around FAST. Being conscious of spending is pretty easy when you look at the real life trade off for it. I’m grateful to have found this blog too because it carries on where “Your Money or Your Life” left off, and has just the perfect “okay… time to pull your head out of your ass” spin that I need.

        Reply
  • Gipsy Queen January 13, 2012, 7:41 am

    Also late visitor, but this post just came up, and I have a burning question:

    How do you feel about RENTING a home?

    I don’t think it is wize to borrow for a house unless you plan to stay in it for at least ten years, and since at the moment I plan my life five years at a time…
    Meanwhile, my rent payments give me a roof over my head, the flexibility to leave it at a month notice (because of layoff, or better oportunities elsewhere, or just because I don’t like the place anymore), and the satisfaction of paying for what I get, as I get it, and owing NOTHING (since I don’t even have a mortgauge, I am effectively debt free).
    Obviousely, it also means that all I have is my savings, and that rent will be part of my monthly payments untill I buy a house.

    A penny for your thoughts?

    Reply
  • Stavros January 27, 2012, 2:38 pm

    Burning through post #1 on to the most recent, LOVING this blog! Definitely on par with my life-plan right now. Very inspiring, thank you!

    Just locked in my refi yesterday. Granted it’s on the 30 year, but that’s only because I’m using the extra savings to destroy all my short-term debt. The plan is to have it all paid off in 8 years, that’s the house to! These FHA streamlines are a ridiculous deal and everyone should do them if they can. This is why our economy is in trouble, listen to this deal:

    Bought my house in June at 4.375%, with MIP unfortunately. This refi, 8 months later, is at 3.75%, which is a $100 lower payment and the payback for the closing costs is 0. With all the credits and such, it’s set up so that my closing costs (actual $ to bring to the table) will be equal to my March mortgage payment. I won’t be making the one to the old bank, so it’s $0. On top of it all, my escrow at the old bank is coming my way for $3k. The only downsides are that my loan kicked out 8 months (no worries, 8 year payoff coming) and the balance went up about $2k due to the upfront MIP and a months worth of interest (March). Guess where that escrow money is going?!

    Reply
  • Cindy July 22, 2012, 11:06 pm

    Just wanted to mention one reason a 30-year fixed loan might make sense…for purchasing multiple homes to be used as rental properties. Lenders have a rule that they will not include rental income in their calculations of your debt-to-income ratios, unless you have already been a landlord for two years. So, to keep that ratio low so you can qualify to purchase more homes based on your normal income not including rents received, it’s helpful to have the lower monthly payment of the 30-year loan (even though the rental income allows you to pay off the loan at a much accelerated pace).
    Background: I recently paid off my home in full, but then realized that right now is a crappy time to be a saver with inflation-adjusted returns on short term savings negative. Now’s a great time to be a borrower, however, especially to borrow for the purchase of income producing assets (NOT to consume). So, instead of having 1 home 100% paid off, I will soon have 4 homes, each 25% paid off. (by refinancing the equity out of my paid off home and using that money as down payments on the other three).
    Homes are so cheap in my area now, that the monthly rent I receive is twice as much as my monthly 30-year mortgage payment, so there’s plenty of cash flow to pay down the mortgages on a very accelerated schedule.

    Reply
  • The Taminator August 9, 2012, 3:00 pm

    Pretty sure I’m doing alright at a variable rate of my lender’s prime (currently at 3%) minus 0.75%. I’m at this rate for another four years.

    Fantastic blog! I can’t stop reading it. I’ve started from post 1 and am slowly making my way through.

    Reply
  • Jeff September 13, 2012, 1:50 pm

    ING no longer has the 30-year mortgage. Shame. They’re the best. But I don’t blame them. I wouldn’t loan anyone money for the next 30 years when rates rates are this low.

    Reply
  • Kimberly V January 8, 2013, 11:25 pm

    Working my way through your blog from the start (started this week) and just had to chime in on my refi that I did last summer.

    To start with those who may still look down on my choice should know that I bought my house 4 years ago when I had what I thought was a good teaching job. In less than a year I lost that job and went on an income roller coaster that I call Home Child Care (at least it allowed this single mom to be home with her very young child!)

    So, last summer I refinanced my 30 yr fixed mortgage using the HARP2 program. Ended up going from 5.85% to a 20 yr fixed at 3.85% and the payments due every month are actually about $13 less than with the previous mortgage even though I cut 6 years off my loan. (I haven’t stopped paying that $13/mo of course… or more when possible). I was pretty proud of this transaction. Haven’t done the math on how much this saved me over the planned life of the loan (originally 140,000), but I KNOW it saved me. (Plus it happened to come at a time where I lost several clients at once for varying reasons, so not having to pay a mortgage payment for two months – the month I was already ahead and the month grace that comes in a refinance was a huge blessing. One of those months my pre-tax income was only $1200. Things are better now and I’m working on adopting some more frugal ways to put that money toward paying off my student loan faster.)

    Reply
  • Andy February 1, 2013, 12:56 pm

    Refi’d down to 3.25% fixed. No fees/no additions to principal.

    Reply
  • Carla April 18, 2013, 7:39 am

    I think it’s time to repost this article! Mortgage rates are fluctuating between 3.5% and 3.75% for a 15 year, which can save you $25-30K over a 30 year term if you’re currently at 4.5%. And shorter terms and ARMs are even lower. I just saw an interest only loan go at 2.125%…. Which is a little absurdly low, honestly.

    Make sure to advise people to check out local credit unions and savings and loans to get the lowest closing costs, and to never ever pay for title insurance.

    Reply
  • Brian May 12, 2013, 9:45 am

    Need some advice. I currently have a $356k 30 yr. mortgage @ 3.375% on my primary residence. PITI is about $1,956/mth. 15 yr. rates are now around 2.4%. I’d love to get the 15 yr. but my family of four depends solely on my post tax, post witholding civil servant monthly income of $6k ($8k pretax and withholding). I currently only save 5% of my pretax income into my retirement account (to get the 5% match) and we put almost nothing into our 10 and 8 year olds’ 529 plans. We are not able to build a large emergency savings fund. My wife and I have about $325k saved for retirement in various IRAs and Roth IRAs and my federal TSP. The only other debt we have is a $3k car loan @ 1.99% with a mthly. payment of $95. My question is, should we refi. into a15 yr. mortgage or just try to build our emergency fund as well as increase our retirement savings, because I don’t thnk we can do both until my wife re-enters the formal workforce sometime in 2014. Thanks.

    Reply
    • Mr. Money Mustache May 13, 2013, 8:06 am

      Keep reading through this blog! With $6k monthly take-home pay, you surely have loads of extra spending that can be improved to free up the cashflow to handle the higher-payment lower-interest mortgage. You can probably improve by over $2,000 per month.

      In fact, you’re in a position to end up a millionaire in 10 years or so if you end up with two earners in that income range, one you get the swing of things.

      Random shopping? Grocery optimization? Cable TV? Cell phones? Gym memberships? Electricity and gas use? Extra driving? A car that gets less than 35MPG? All of these things will fall under the magnifying glass and eventually the chopping block ;-)

      Reply
      • Brian May 13, 2013, 8:56 am

        Thanks MMM. BTW, I really enjoyed the Wash. Post article about you. It really hit home for me the value of saving and saving as a path to financial independence. Having said that, I understand the value of cutting things like gym memberships and reducing costs related to buying groceries, less driving, etc. But there’s got to be a balance, right? I mean, sometimes daily living necessitates some monetary spending in order to obtain some level of convenience on occasion. Otherwise, don’t you run the risk of always sacrificing for future gain (financial independence) rather than spending a little more now on some things that are of value to you in order to enjoy your present life? For example, I live close to a YMCA. I also do triathlons for fun and mental and physical health. The YMCA membership buys me access to a pool year round. I don’t know of any alternative to getting pool access other than paying for a Y membership each month. I could cut the membership and save $60/mth but then I’d probably stop doing triathlons. Sure I could do another form of exercise but it wouldn’t be the same for me.

        As far as my question about refinancing into a 15 yr. mortgage, I’ve been reading the other comments on your blog and there seems to be quite a difference of opinion about using “free” cash to pay off a home. There are folks who don’t believe in debt and pay their home off ASAP. There are folks who say to get as big a mortgage for as long as possible to take advantage of historically low rates, to use the mortgage as an inflation hedge, and to invest any “free” cash to earn a return that’s greater than the mortgage interest rate and to take advantage of the time value of money by investing sooner rather than after the mortgage has been paid off. At this point I’m leaning towards keeping my low 3.375% 30 yr. mortgage, mainly because I still need to build an adequate emergency cash fund (is it wise to depend on a HELOC for an emergency cash fund?) and because I currently don’t maximize contributions to my TSP (Thrift Savings Plan). From what I’ve read, most people say to first max out your retirement savings (either in a tax deferred account or a ROTH, or both – that’s another topic for discussion) then build an emergency fund worth 3-9 months of living expenses. Then, max out other tax advantaged savings vehicles such as a high deductible health savings account and a 529 college savings plan. Then, if there’s any extra cash you should either invest it or pay down your mortgage, depending on what side of that argument you are on. Is this the correct savings priority? Once my spouse re-enters the workforce in 2014, we hope and plan on banking her entire salary in order to catch up on lost retirement and college savings. Maybe by then we can refinance into a 15 yr. mortgage, if rates are still low in 2014. Sorry for the long response, but I do value your opinion on this. Thanks.

        Reply
  • Nathan November 8, 2013, 8:34 am

    Another great option that I have used is the PenFed Credit Union 5/5 ARM. With this product you get a fixed interest rate for 5 years and the rate will only reset every 5 years after that! The current rate is 2.875%. They do amortize the mortgage over 30 years, but obviously you should pay what you can to shorten the term.

    The best benefit is that PenFed pays ALL of the closing costs of the mortgage or refi. In my case this would have been over $2000 that I would have needed to bring to closing. They were very easy to work with, and sent a notary to my house to complete the paperwork.

    Although they are a federal credit union, anyone can join by making a small donation to their charity (assuming that you are not a federal employee or your employer is not on their “good” list).

    Reply
  • GeauxBig November 25, 2013, 8:29 pm

    We’ve been in our house for six years now and have refinanced 4 times.
    Went from 30yr to 20yr to 15yr to 12yr finally.
    From about 6.75% down to 3.5% presently.
    I’ve been with QuickenLoans since the beginning and they call me every year to check and see if a refi is cost effective.
    I pay an extra $200 on principal a month so I’ll have it paid off 2 yrs early at this pace.
    But after reading this blog I’m ready to kick it in the ass and use some of my “emergency fund” to knock some more off the principal.
    Thanks again for the interesting read.

    Reply
  • Debbie March 29, 2014, 8:25 am

    I have a 140,000 mortage at 2.99% for a 5 year term. I pay 200 a week to help take this from a 25 year mortage down to 18 years. I have to option to double each 200 payment each week if I want. My question: If I make one extra $200 a month payment on this mortgage, how much interest will it save over the 18 year term and how much time will it take off the entire 18 years left on this mortgage?

    Reply
  • AdventurousZ May 13, 2014, 10:16 am

    This was a great read. As someone looking to buy in the next few months and checking out loan options for the first time, I was happy to learn more about the value of a 15 year instead of a 30. Although I wished you would have gone into detail about the 5/1 Arm, as I would have liked to see how much the payment would be and how much interest vs. principal was. Thanks for keeping up the good work!

    Reply
  • Eric June 27, 2014, 5:29 pm

    My wife and I are in a $160k , 30 year loan. We already started tossing $1000 a month extra on principle, and after reading this I’ve got a quick question. We are working towards a plane to simply pay this loan off within 8 years (more going towards principle in about 2 years). Would it be wise to switch to the 15 year loan? Or just continue forward as is?

    Reply
  • Mjmartyn September 3, 2014, 12:26 pm

    Similar thoughts as Cindy above. Primary residence is on a 30yr fixed at 3.5%. We love our house and don’t intend to leave it. Its an older place with several projects, but we are confident that we will be happy living here indefinitely.

    We have gotten into rentals and now have 26 units that bring us on average 17% return on our equity in them. I struggle with the thought of paying down 3.5% debt when we could put those employees to work at 10-15%

    Interested in your thoughts.

    Reply
    • Mr. Money Mustache September 3, 2014, 8:05 pm

      Definitely keep up the good work! Advanced investment debt like that is the exception rather than the rule, but it sounds like you know what you are doing.

      The only advice I might have is to figure out how much money/cashflow is Enough, and simplify beyond that if you ever feel a need for a lower-stress and more resilient life. For example, I would personally rather have one single $500,000 building with no debt that brings in $4,000/month in profit.. rather than $2.5 million worth of buildings financed at 80% that bring in say $10,000/month in profit due to the extra leverage.

      The reason? Because $4,000/month is already way more than I can possibly spend, so beyond that I use the capital to buy peace and simplicity rather than still more income. The peace comes from needing to keep track of fewer properties and people, and being more immune to things like housing or financial crises.

      Reply
      • Mjmartyn September 4, 2014, 10:03 am

        Thanks a ton! Appreciate the thoughts. There is definitely something to be said for the simplicity of fewer units and properties. As you pointed out in an earlier post on rentals though, if you do your homework on moving in good tenants, it really reduces your workload down the road.

        Reply
  • EWW (Early Withdrawal When?) September 5, 2014, 2:02 pm

    I somewhat disagree with this article or at least how it is presented. Again, it all depends on your lifestyle and investment choices on which loan term to go with. These are my opinions as well:

    5/1 ARM:
    Good for someone that plans to pay off their loan within the 5 years of the fixed rate. I say this since we have to assume it will go up! It needs to be clear that these form of loans are actually 30 year loans too, just not fixed for the entire term. They readjust on an annual basis on the mortgage seasoning date. The only benefit then is the lower rate compared to an entirely fixed loan.

    15 Year Fixed:
    I personally never use this loan product. Sure, the interest rate is typically higher than an ARM and lower than a longer term fixed rate product, but I feel it is not worth the increase in DTI (debt to income). I would only recommend this to someone who is not planning to purchase multiple properties in the near future.

    30 Year Fixed:
    Traditional, yes, but still the best option if you plan to keep your home long term whether it is to live in it or rent it out at some point. Great for someone who plans to purchase multiple properties as it spreads the term out longer keeping DTI lower than other mortgage products. This is a great loan product when rates are their historical lows like now! You even get added benefit. The alternative is to pay the 30 year like a 15 year by adding the additional principal payment each month. You get the added benefit of paying it down quicker, but also can choose not to pay for a month or two if an emergency happens. Try doing this with a 15 year loan!

    Reply

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