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I'm planning to refinance the mortgage given the low rates these days. Need to make a choice between a 30 yr fixed and a 15 or 20 yr fixed. Monthly household budget can accommodate any of the mortgage payments. Currently on a 30 year fixed with a $1600 payment

Choice 1. 15 year fixed rate with a $2100 payment. This would save ~$180k in total payments versus current mortgage. At the end of the loan, keep paying the $2100 as extra payments to retirement accounts (IRA, HSA, stocks/bonds) for another 15 years, anticipating 5-8% return.

Choice 2. Refi to a new 30 yr fixed rate with a new payment of $1450. This would save ~$60k versus current mortgage. Time to pay off closing costs is <4 years and we expect to be in the house for 10-20. Use the savings from the lower payment to increase contributions to retirement accounts as above, i.e. ~$150 per month for the 30 years. This means having a mortgage payment until I'm 79, but in 30 years $1450 will constitute a much smaller slice of the income pie.

Question 1. How do I calculate the overall benefit of each choice e.g. = sum (total $ cost of the mortgage ($-ve), total value of investment ($+ve)) over the time period? I feel like I'm 90% of the way to the solution already but just not certain.

Question 2. Am I missing any glaringly obvious factors, -ve or +ve?

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    Are you currently hitting your 401(k) and IRA annual contribution limits? If you choose the 15+15 option, you may have find you have ~$25k per year that you're saving for retirement and can't get into tax-advantaged accounts due to the limits. Or the tax laws on retirement accounts could completely change after the next election and all the planning is for naught. – Ben Voigt Aug 1 at 0:11
  • How many years are left on the original mortgage? That determines how much of te savings is due to extending the mortgage term. – mhoran_psprep Aug 1 at 12:03
  • Are you currently paying PMI on your mortgage? – Brian Borchers Aug 4 at 0:53
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4 years seems a little high for a break-even point. One rule of thumb I've seen is that you should refinance if you can reduce your rate by 1% or more. I assume you're rolling your closing costs into the new mortgage, which increases your principle and raises your payment, lessening the improvement.

If you can afford to pay $2,100 per month, then look at what you'd save by just increasing your monthly payment now (without refinancing). It will be somewhere between your current plan and the 30-year refinance (since you're still paying a higher interest rate) but it might be a good compromise without extending your loan back to 30 years.

Am I missing any glaringly obvious factors

Yes - risk. IRA returns are not guaranteed, but your mortgage payment is. So you might be better off in the end, but there's no guarantee. The longer your investment horizon, the higher your probability that you'll end up better off, but it's not guaranteed.

That's the main problem with the invest vs. pay debt decision - your expected investment returns will be a probability spectrum where you most likely will come out ahead, but there is a decent chance that it will be the wrong decision. The more certainty (less risk) you want in your investment portfolio, the less return you can expect. Only you can decide if you are willing (and able) to take that risk.

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    OK, answering the questions from the comments; 1. yes I'm at the limit for tax-free contributions (so "investments" in my case means after-tax). 2. I started the original mortgage in January 2019, so it's pretty much got 30 years left, which is why resetting to another 30 is fine. 3. I'll be in the house >4 years so I'm fine with the break-even point. 4.The rate change is 4.75 to 3.625 or lower. 5. No, I'm not rolling in the closing costs. At the very minimum, I'm going to refinance for the lower rate --> lower payment, so to the final point, yes, it comes down to savings versus risk. – Derek McQuarrie Aug 1 at 19:43
  • new 30 yr mortgage at a lower rate is a guaranteed saving. My assumption is I can buy an index fund with something better than the new mortgage rate (3.625) that's low risk. – Derek McQuarrie Aug 1 at 19:47
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The main questions are:

What's your interest rate (both before and after) ?

Are you going to invest the money you save ?

You're saying time to pay off closing costs is 4 years, but what does that mean ? Does that mean that it'll take you 4 years to get back to the same principal amount that you have now ? In that case it doesn't seem like it's worth it. Does it mean that you'd have the same principal in 4 years whether or not you refinanced ? In that case I would definitely do it.

Either way you're likely making far more money investing (S&P 500) than you're paying on your mortgage (likely more than twice), which means that if you're for sure investing the additional money you're likely far better off refinancing (30 year fixed) than the other options.

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