Coffee heat rising

The refinance is here

Yesterday M’hijito and I signed the papers on the refinance for the Investment House. It drops our payments about $200 a month, not quite as much as we’d hoped, but better than a hit on the head.

It’s a 30/15 loan: the payments are calculated on a 30-year basis, but the balance is due in 15 years. We don’t expect to own the house that long-the initial plan was to hold it for five years; we’re now thinking we may keep it 10 years, to give the real estate market time to fully recover. But it’s unlikely he will keep it much longer than that.

If the house is actually worth $250,000 today (I’ll believe that when I see it) and it accrues in value at 5%, a reasonable figure, in 10 years its value will be $407,200. We will owe $176,000 at that time, giving us equity of $231,223. Sounds great, till you figure in the $105,808 we will have paid in interest.

However, let’s suppose he realizes he wants to stay in that centrally located neighborhood for more than ten years, and suppose he wants to get out from under the mortgage:

According to Quicken, if he makes the regular payments on the new mortgage, in 15 years we will owe $147,860.

If he continued to pay at the old rate, putting the extra $200 toward principal, in 15 years he would owe $92,695.

If he paid $300/month toward principal, in 15 years the balance would be $65,112.

And an extra $500 a month would reduce the balance to $9,948 over 15 years and would completely pay off the mortgage in 15 years and 6 months.

Financially, one would no doubt be better off putting extra money into the stock market, unless one wanted to own a piece of property free and clear. Fifteen years is a long haul, and during that time compounding interest will probably grow a mutual fund more than the value of the house itself will grow, especially since it will probably take five years or more for the real estate market to fully rebound. By then he’ll still be twenty years shy of retirement and he will be earning a lot more money, and so there really would be no need for him to own property free and clear. Investing the difference between the old and the new loan would be smarter than paying off the house.

M’hijito has talked about renting instead of selling. I think we could rent the house even now for the mortgage payment, especially if we desert-landscaped the yard. Within three to five years, the amount of the mortgage will be well within the going rate for house rentals. It might make sense, if the house is to be used as a rental, to pay down the mortgage so that a future renter will, in effect, pay off the loan completely before we’re ready to sell the place.