Refinancing Mortgage, same rate for 30yr vs 15yr (with closing credit)

Question

I'm 49 years old, currently have a VA 30yr @ 3.75% mortgage with 26years left. (We moved across the country for a new job in 2017). Remaining balance 254K, No PMI, have approximately 100K in equity.

Looking at VA IRRRL refinancing, best mortgage broker I've found so far has both 15 and 30 year mortgages at 2.25% with costing cost of about $3,220 ($1,284 of which is the VA funding Fee (0.5%)). The difference is that for the 15yr, there's a $3,541 credit towards closing...meaning I'd end up getting about $220 at closing for the 15yr.

Difference in payment ..

 - Cur  $1269
 - 15yr $1672
 - 30yr  $986

Was leaning toward the 15yr, since it'd be since to have the house paid off when I'm 65 rather than 80. But it seems like I should be able to find a better use for that $700/mo.

Wife and 2 kids (14 & 13). Collage and driving are on the horizon for the 13yr old, but likely not the 14yr old.

The wife and I both contribute to 401k past company match (think I'm at 11% or so).
Emergency funds, probably not as much as they should be about 10K currently.
And we have a couple credit cards, both under 10%, but with about 30K total on them.

I had looked at refinancing with cash out option...maybe I need to look some more at that. But the VA IRRRL was so much quicker and lower cost from what I initially was seeing.

EDIT So I'm back reconsidering my options....instead of the quick & easy VA IRRRL, I'm considering a refi with 30K cash out to use to pay off the credit card debt (which is at 10%).

I really like the idea of dropping from 3.75% to 2.25%, so those are what I was looking at.

            P&I
VA 30 yr - 1125
VA 20 yr - 1524
VA 15 yr - 1927

Those number are likely a bit high as the mortgage website was calculating a 3.6% VA Funding fee and I think it should only be 2.3% as this is my first refi.

I couldn't get a standard 30yr at 2.25 currently. Only 15. Really not fond of the idea of a 30yr. (especially if I've rolled up credit card debt into it)

So two questions..

1. Good idea to get the cash to pay of the CC?
2. what do you think of a 20yr mortgage?

Answer 1

Stop worrying about the sunburn (reducing 3.75% to 2.25%) when your hair in on fire ($30K debt at 10%).

Facts: you've got $10K in cash, and can afford a $1927 monthly mortgage.

@RonJohn still thinking about this...added another option, what are your thoughts?

My thoughts:

1. Immediately throw $8K at the CC. That reduces it to $22K.
2. Immediately apply an extra $1927 - $1269 = $658 every month (above your current payment) to the CC for however long it takes you to refi.
3. Refi to 30 years at $986.
4. Now you have $941/month above your current payment the CC debt. Two years later, the CC debt is paid off.
5. What to do with that extra $941 (plus your current CC payment) per month? $600/month to build up your emergency fund, and the rest extra on the mortgage. 14 months later (about 3.5 years after "now"), your emergency fund is back to $10K, and you can throw the extra $941/month at the mortgage (for a total of $1927/month).

That'll pay it off in about 17 years.

• Of course, none of this will do you any good if you keep spending unwisely (if that is in fact how you racked up that much debt). Develop a reasonable (not a Dave Ramsey beans and rice) budget, and stick to it.
• Live below your means.

Answer 2

But it seems like I should be able to find a better use for that $700/mo.

Yes. That is the heart of the matter. Specifically, can you find something to do with the money that gets a better rate of return than 2.25%? If you put it into the house, you are guaranteeing yourself a 2.25% return. That is fairly low. It's certainly better than putting that $700/month under a mattress (i.e. a saving account that pays basically 0% interest), and it's better than say buying 10 year treasuries (at 1.1% as of this answer). But there's certainly some else better out there. Specifically:

And we have a couple credit cards, both under 10%, but with about 30K total on them.

Then it's a no brainer. If you use the extra $700/month to pay off the credit cards, you guarantee yourself a 10% rate of return. If you put it towards the house, you get 2.25%. This is an easy decision. Pay off the credit cards.

At 700/month, it will take you several years to pay off the $30k. When that is paid off, then you can always pay ahead on the house if you want to. Or you can probably find some low risk investments that pay better than 2.25%.

Note from Mod: This answer reflects the wisdom of the Q&A Oversimplify it for me: the correct order of investing I'd suggest you read the answers there as well.

Edit

added some alternatives, does that change your answer?

Cash out refinance to take care of the credit card debt is probably a good idea. Consolidating that debt to a lower interest rate will save you a lot of interest in the long run. However, make sure that you don't immediate rack up another $30k in credit card bills. Pay the CC bill in full every month.

Really not fond of the idea of a 30yr.

I've known a lot of people that really struggle with this. But a 30 year is almost always the better option. Even if you had zero credit card debt, and the only other thing that you could possibly do with your money was to stuff it in a mattress, I'd still recommend a 30 year over a 15 or 20 year. And here is why: in the US, the majority of mortgages do not have any pre-payment penalty. That means you can always turn a 30 year long into a 15 year loan by paying ahead, but you cannot easily turn a 15 year loan into a 30 year loan.

For example, let's say you get that 30 year loan. The payment you listed is the minimum payment, but there is no maximum. If, at the end of the month, you have an extra $700 cash sitting around, pay it towards the house. Do that every month for 15 years and you've paid off your 30 year loan 15 years early. But now, let's say one month an emergency comes up. For some unexpected reason, you need cash right now. Then you just pay the minimum on the loan, and use the rest for whatever you need. If you'd taken the 15 year loan though, you don't have the flexibility. You have a higher minimum payment, and if you don't pay it all in full every month, you're delinquent. If some emergency comes up you're out of luck.

Bottom line: 30 year is the best.

Answer 3

Oversimplify it for me: the correct order of investing really goes a long way to answering your question. But of course, you offer details that are important to address.

The 15 has its place. The risk averse investor that leans toward "I'd sleep better knowing I have no debt at all" for one.

But. As the 'correct order' shows, I'd be paying off that credit card debt before the mortgage, and before retirement deposits above the match. The question of how that came to be in the first place can't be overlooked or swept aside. Advice to cash-out to pay it off might be mathematically sound, but I'd be careful to have a budget in place to guarantee within reason that it doesn't happen again.

The best way to do that is to take the 30, and build up a decent emergency account, enough so the usual common emergencies don't become an 18%+ debt. New transmission, new heating system, etc. The roof? Not an emergency. Mine was $25000, and planned for, years in advance.

The 'cost' of the 30 is the slightly higher rate. But the benefit outweighs that cost quite a bit. The benefit, if not obvious, is the higher monthly cash flow helping to avoid the 18% interest on credit card debt. Consider 1/2% difference (common spread between 15 and 30 year terms) on $250K is $1250/year. But that number is the interest on just $6250 of credit card debt at 20%. To repeat - The cost for the 30 for the person who should have taken the 15 is far less than for the opposite situation.