I’d take the 7 or 10 year.
Interest rates can’t go much lower. But they can go a lot higher. If they do, doesn’t matter for a long time, you keep the house.
And then at renewal if rates are high you can either still afford the smaller loan, or you have enough equity that if you had to sell at a huge cut you aren’t upside down.
If rates are high the loan payment would go up. Unless you mean to refi and extend the term of the loan. In which case the payment could go up or down depending on how high the rates went and how much you extend the term by.
If you’ve been making minimum payments then even if you aren’t upside down, you probably don’t have that much equity.
But if your equity is still positive and you took a huge cut… you’ve just lost a ton of money and you have to move… which costs even more money! You’ll probably move to a much crappier home. which sucks.
I prefer to insure myself against those bad outcomes by having high equity in my home.
Is it an irrational fear? When I was growing up almost all of my close friends had to move away because their dads lost their jobs. I’ve lost count of the number of downsizings I’ve “survived”. I also can’t count the number of good co-workers I’ve lost over the years to the same thing. I’ve seen too many neighbors foreclosed on. I decided a long time ago that I wanted to have a secure and stable home, which is what I’ve done. If I ever do lose my job, I can get a job at Walmart and be able to cover my home expenses. My piece of mind has far more utility to me then the additional net worth I could build through investing on the collateral of my home. I’m also way more liquid now than I ever was when I had a mortgage. And if need be, I can call on the full equity of my house for whatever needs I might have.
That’s some underground high interest mafia loan BS
These feelings you have will keep you poor, or at least poorer than you could be.
These words like “peace of mind” and “personal utility” are pop psychology BS that stand in people’s way.
Nobody likes paying interest. But your choice to pay off $1 in interest prevents you from earning $2 in investment income. It is NOT an optimal strategy for maximizing one’s personal wealth.
Also, some of you seem to be implying that “all else being equal, I’d rather not have any debts.” Well, “all else” is not equal. I’m not advocating that you spend the money that you don’t pre-pay your mortgage. I’m saying put it in a diverse asset portfolio. Yes, losing your job may suck if it happens, but losing your job isn’t as bad when you have a few year’s salary in your accounts. Would you rather (1) lose your job and have no money but your house is paid for, or (2) lose your job but have a big bank account that could keep you afloat including mortgage payments for years?
Always trying to optimize your investment strategy (and FOMO) is stressful in itself.
Maybe. I bet he’s a lot calmer when the stock market tanks and his un-levered portfolio loses half its value though. If you’re significantly leveraged going through '09 you might sell at the bottom and you’re a lot worse off.
Did someone say it was? People get awfully judgy about this question IMO.
Similar recent discussion:
We are paying off the mortgage early, going to be done in a few months. Don’t sell investments or anything, but as money comes in, throw some extra at the mortgage.
My spouse stayed at home with the kids for many years, and started working again about a year ago. For many years I found it stressful that we depended on my income pretty critically. The freedom of having a house paid of and a spouse with an income that could cover all other expenses is very freeing, even though I find it very unlikely I would spur of the moment quit, I still enjoy the fantasy (kind of like when you buy a lotto ticket). I recognize Deep Purple’s point, that having a few hundred grand extra in the bank and the mortgage still there would have put me in the same position, but it does not feel the same. Feelz over realz I guess.
Or (3) have my house paid for and have a big bank account that keeps me afloat should something go wrong. I’ve chosen (3). I could (possibly) have a bigger bank account if I leveraged debt. The money just isn’t worth it to me. I’m very content with my choices.
I’m curious though, what exactly is my philosophy standing in the way of? More money?
Well, if you can do both, then definitely do both. The OP seemed to have a question regarding limited choices.
I appreciate that but my response was to DeepPurple and not the OP. I didn’t have those resources when I pursued my goal of paying off the house. What I did have was a home equity line of credit that gave me the option to leverage my home if needed. And interest rates were higher too. I think our first loan was at 8% and the last one at around 4.5%. Maybe I’d make a different choice if I was offered a 2% loan today. But I’m not a disciplined enough investor to be able to expect returns higher than 8% or even 5%.
It’s possible that DP was responding under the incorrect assumption that you also had limited choices.
That said, I agree that if you can get it done, with money to spare, sure that is a doable choice.
Wondering if, under DP’s strategy, one should ALWAYS have a mortgage (not as debt, but as a leveraged investment, as I suggested before he did). Even after paying off the first one. Or being, say, 10 years away from paying it off, one should (if optimal) re-fi for another 30 years and invest the rest.
But, we can hear from DP instead of me.
Sorry, I am withdrawing a little when Dara implied I was being judgy. I am sorry if I offended anyone. I was trying to convey that we (a group of mostly actuaries) should think actuarially about our personal finances.
Yes, I would refi to keep a mortgage around that protects me from inflation.
No need to withdraw! I think most everyone here knows it’s not financially optimal, but pretty much no one lives their life in a financially optimal manner anyway.
I always liked the econ answer that we just all have different utility functions so everything can be hand waved away by me maximizing my utility
Everyone is rational, we just have different information and utility curves
(Most people tend to disagree with me on that though)
I like having a mortgage where I pay the minimum and feel like I can earn more in other investments, but I haven’t hit any rough patches in earnings for me and my wife
In order to maximize your return, I think the answer is a large yes. In fact, you would want to leverage any equity you had built up in order to invest the maximum amount possible at all times. So you would want to re-fi any time your are able to get more additional money in a loan then what the cost of the re-fi is. Of course, this all assumes that the investment return exceeds the interest rate so there is substantially more investment risk in this strategy. It might also complicate any retirement plans as you will need enough retirement income to be able to pay the mortgage for your entire lifetime.