Advice, 15 yr vrs 30 yr, shortened my term... - Posted by Tom

Posted by Tom (NJ) on March 14, 2002 at 08:59:54:

In hindsight, I would have done what you said but I didn?t know about this informative web-site until after I closed.
I really enjoyed negotiating with my mortgage broker and whole process. Thanks for the good advice, I’m glad to see I’m at least starting look at the right area of investing (flipping).

Thanks again for answering.

Advice, 15 yr vrs 30 yr, shortened my term… - Posted by Tom

Posted by Tom on March 13, 2002 at 14:58:43:

From a real estate investing perspective, did I do the right thing?

I refinanced to shorten my term to 15 yrs on my primary residence (not a rental). I figured let me get done with this ASAP.
That was before I got addicted to this site…Now I’m wondering if I did the right thing.
I went from a 30 yr to a 15 yr paying $135 more a month.

Now, I know you creative real estate problem solvers will have your reasons why shouldn?t have done this but I do believe I did the right thing. Here?s why:

1.) Home prices are out of control (at least in NJ they are), why buy now (unless you flip it), wait till the bubble bursts and then use a creative way by using other people?s money.
2.) I bought my home in 6-99 for $175,000 w/$10,000 down, it just appraised for 235,000, => $70,000 equity. Of the 70,000, my wife doesn?t believe that we should touch it to try something ?risky? at the prices of homes these days. (I?m studying Charltone Sheets, not her).
3.) Do what they do in the stock market, sell into strength, right now people that are selling their real estate are selling into strength. People that are buying are buying at record highs. I figure, shouldn?t we wait for a dip?
4.) Interest rates are at historic lows. By refinancing now to shorten the term, you?re taking advantage of the ?cheap money? lenders are lending.

You may suggest to take that $135 extra I?m paying for the 15 yr and invest it elsewhere?. I don?t think you can beat the refi cost savings:
From doing this I?m saving $198,000 in interest over the 30 yr term.

That of $135 X 12months = 1620 X 15yrs = $24,300?
Even if you made 12% interest every year for 15 yrs, ?=> $60,393
It STILL wouldn?t return as good as paying down your mortgage

That?s my Risk vrs Reward analysis.

For an investment, I?m thinking strictly flipping.
But even if I?m using other people?s money to buy an investment property, why should I buy an income producing rental, now?

Would you have done this? I?m new so be gentle :>)


Re: Advice, 15 yr vrs 30 yr, shortened my term… - Posted by Dave T

Posted by Dave T on March 13, 2002 at 18:51:14:

No, I would not have refinanced simply to shorten my term. You did not mention whether your new loan was the same amount as the old loan, so because your montly payment increase is only $135, I am assuming that you simply refinanced the existing balance.

Even if you did not have anywhere to invest the $135 per month, you could have still paid that $135 to your lender as an additional principle payment on your 30-year mortgage. While you don’t tell us what the interest rate was on your old loan, or how many payments were left on your old loan, I bet you could have paid off the old loan in 15 years or less by just adding $135 to your old monthly payment. Experiment with some amortization schedules to see if this would be true in your case.

One downside of your refinancing is that you are committing yourself to a 15 year payment schedule. You can not reduce the payment if your cash flow is squeezed one month. Keeping your old 30-year loan in place would give you the flexibility of not making an extra principle payment in a month when cash is tight.

Another downside is that you paid closing costs (and points?) to refinance. Just adding extra principle to your old mortgage payment to achieve the same goal would not have cost you anything out of pocket.

A third downside is that the IRS has a special treatment for the points you paid to refinance your loan. Points you paid for the refinance are not fully deductible as additional mortgage interest on your next tax return. Instead, you have to spread the points out over the life of the new loan. For a 15 year loan, you can only deduct one-fifteenth of the points you paid as additional mortgage interest on your tax return (each year until the loan is paid off).

A fourth downside is the amount of time you intend to hold on to the house. If you plan to stay in your home forever, then I can see understand why you felt the need to pay it off as soon as possible. However, if your circumstances change and you need to sell your home (for whatever reason), the perceived benefit of your refinance just evaporated. According to a national average, a typical homeowner only keeps his home five to seven years.

For the 30-year loan, one dollar of equity is obtained for each dollar of principle reduction you achieve. This is true for the life of the loan, even though the last mortgage payments are made with deflated dollars that may have only half of the purchasing power that your dollar had at the beginning of your loan term.

These are my reasons for not refinancing. Perhaps some will come up with more. There are reasons for refinancing, but I would not have recommended it in your case.

Re: Advice, 15 yr vrs 30 yr, shortened my term… - Posted by GL(ON)

Posted by GL(ON) on March 13, 2002 at 18:45:16:

It depends what your goals are. If your goal is to own your own home free and clear, period, you did the right thing.

If your goal is to invest in real estate and make some real money, you should use the $135 a month and the $70,000 equity to invest.

I don’t like to buy when prices are going frantic either. But you never know when they are going to stop. My rule is to buy only with positive cash flow, this keeps me out of the market when things are overpriced. I must admit I miss some glory years but I miss some stinkers too.

If you are thinking of flipping, the hot market is a good thing. Then the hard part is finding below market deals, but if you can sell them right away you can make money on a narrow margin.

Re: Advice, 15 yr vrs 30 yr, shortened my term… - Posted by Tom (NJ)

Posted by Tom (NJ) on March 14, 2002 at 08:54:31:

Ouch! And thanks so much for your insightful answers. A few things to follow up, sorry for not giving all the info:

My balance was 155K
I borrowed 165K, walked away with 2K at closing.
I didn?t pay points.
I went from a 7% to 6%, not a great jump I know.
I intend on living here for at least 10 years, great neighborhood and schools for my two kids.

My initial goal was to be done with the mortgage. Now that I?ve found this site (I can?t believe how great this is), my goals are changing. Now, I have to make good with my decision and find below market properties to flip.

Thanks again for answering.