This question was posted in the HTM Facebook Group…
“Wondering if I made the right decision about my mortgage a while back.
I bought my house right before the pandemic with a 4% rate, 30-year term, and was paying PMI ($177/month). About 2 years later when the rates dropped and home values increased, I refinanced for 2.375% for 15 years and was able to drop the PMI.
The savings from the PMI and rate drop coupled with the shorter term meant I was only paying an extra $320/month. At the time I thought it was worth it to pay a little extra and finish that much sooner, but I didn’t think of the overall monthly payment difference.
I’m wondering if the shorter term was the right decision. I hated the idea of paying a rate higher than the 2.375% (although not significantly higher and still under 3%) but what I hated more was the idea of going from having 28 years left back up to 30.
Loved the idea of being mortgage-free in 15 years. But now I’m thinking, the 30 years would have allowed me to save and/or invest more. If I went from the remaining 28 years to a new 30 year term, my monthly payment would have been $720 less. Instead, I am paying $320 more.
Should I have used that extra $1040 somewhere else?”
Matt & Joel’s response:
Ooh, this one is tough. Because it’s kind of a hindsight is 20/20 question.
It’s incredibly difficult to predict the future of interest rates. Actually, it’s impossible over the long run.
When you refinanced, you made the choice to become debt-free in 15 years. A truly noble goal! Joel himself refinanced into a 15-year mortgage on one of his rental properties.
But locking in low-interest debt for longer seems even smarter today. I’d trade the 15-year loans for 30-year loans if I could go back in time, freeing up cash that you could earn more in just a basic savings account.
We never thought the market was going to soar like it did. Or that HYSAs were going to be paying upwards of 5% interest.
But, what’s done is done. It’s hard not to feel the FOMO and think it was a mistake in retrospect.
Look on the bright side
You can’t evaluate past decisions like that. The phrase ‘don’t look a gift horse in the mouth’ comes to mind here. Look on the bright side!
You got a 2.375% mortgage rate! That’s something people would kill for today, even if it was for 15 years and not 30.
And, you got rid of PMI. Which is a real money-suck when you first purchase a home. So the choice you made wasn’t a bad one.
This really might be looked at as something like a first-world problem.
Even if it didn’t end up being the most fully optimized route you could have taken, it is still a pretty darn sweet thing to have!
You’ll massively reduce the overall amount of interest you’ll pay. And that house will be paid off so much quicker. You are going to achieve your original goal of being debt-free in 15 years. It’s a good thing!
Good debt vs. bad debt
For those of you listening out there, you might be wondering why a person would want to be in debt for longer, not shorter.
Well, it all comes down to the interest rate. If you can lock in dirt-cheap interest rates for decades, you can use your excess savings to invest more today. Those investments will grow at a faster rate than your debt, so you’ll make more money in the long run.
When interest rates are low (say, anything under 5-6%), it’s usually smarter to choose a 30-year mortgage instead of 15. Locking in that debt for as long as you can means you can funnel those excess dollars toward more productive financial goals.
The crux of the matter is that you have to do positive things with the excess funds that aren’t going towards mortgage debt paydown.
The opposite is true for high-interest debt. We call this “bad debt”, and it should be paid off ASAP. Car loans, credit cards, and personal loans should have the shortest payback periods possible.
15 vs. 30-year mortgage
Choosing a 15-year mortgage typically means you’ll lock in a lower interest rate.
And since the loan term is cut in half, you’ll end up paying less interest overall on your house.
Owning a place free and clear after 15 years is an awesome feat. We truly love it when people are debt-free.
But 30-year mortgages give you much more flexibility. The monthly payments are lower, which means you have more cash flow during those payoff years.
This allows you to qualify for more expensive homes, and also invest in other assets with spare savings.
Probably the best part of choosing a 30-year mortgage is that you can pay it off just like a 15 if you so choose. Making extra principal payments will pay off that mortgage early, which you can choose to do at any time.
The Bottom Line:
Looking back, you probably would have fared better choosing a 30-year mortgage vs. a 15. It may have been the smartest financial move given your propensity to increase your savings rate.
But, you didn’t know that at the time! And at least you still got a killer deal locking in a cheap rate for 15 years and dropping the PMI. Many people today can’t fathom such a sweet deal.
I’ve made 1000 dumb financial mistakes in my life. It’s all a learning experience. Just focus on the things you do have going for you. And congrats on becoming debt-free sooner rather than later!
For the full version of this discussion, check out Podcast Episode #817 (it’s the last question we answer in the episode)
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