Should I refinance, and to 30 or 15 year term? : personalfinance

Should I refinance, and to 30 or 15 year term? : personalfinance

Throwaway here because I’m going to be fairly descriptive of my finances.

My wife and I bought our first home a year ago. We paid $625k for the home, financed 595k at 3.625% interest. We got a conventional mortgage (non-FHA, etc) and pay $188/mo in PMI. With PMI, taxes, and P&I our payment is ~3600/mo and we pay $3800/mo. We just made our 13th payment yesterday.

Since we bought, our home has appreciated (per Zillow/Redfin estimates) from $640k to between $700-740k, and interest rates have continued to drop. I have spent some time looking around at refinancing options, with the goal of lowering my interest rate and removing PMI. I’ve gone through a pre-approval process with and they are offering these rates (both 30 and 15 year options are fixed rate):

30 Year Mortgage:

Rate Points APR
2.5 $10,467 2.668
2.625 $9,195 2.778
2.75 $7,377 2.880
2.875 $3,787 2.957

For a 15 Year, these are the options:

1.875 $14,336 2.261
2.00 $11,432 2.315
2.125 $8,010 2.357
2.250 $4,484 2.397

There are additional higher rates for both 30 and 15 year options, but these are the ones I’d be primarily interested in.

Our monthly combined take home is about $11,500, and I have both a pension plan and a 457b that I max out to the tune of $19,500/annually. Our other bills, including student loans, groceries, utilities, entertainment, charitable giving, cars, phones, etc add up to about $4,000/mo. My wife’s student loans, which we are currently paying at $1200/mo (double the actual payment, included in that $4000 number) will be finished within the next year. We also have a roommate that contributes about $900/mo to the mortgage.

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Our home is about 95 years old and although it’s in pretty good shape does have some things we know we need to take care of; we’re working on some foundation issues that are going to cost us about 10k, which I plan to put on a 0% interest CC and pay down over a few months rather than deplete our reserves. We also know we will need to replace the windows in the next couple of years, which will probably cost $20k+ (quite a few windows – have had 5ish quotes already). So there’s no shortage of things we can spend our money on if we choose.

Switching to the 2.125 15 year option would raise our monthly payment by around $1000. This is definitely doable in the long run, although it would certainly make things a bit tighter than they are now. My concern is that taking that thousand dollars out of our monthly budget will restrict our ability to a)Pay down the cost of the foundation work b)build our reserves (we keep ~$30,000 on hand for emergencies, but don’t have other significant cash savings) and c)do things like replace the windows or other unexpected maintenance issues. In the long run, though, the 15 year at 2.125 would save us $250k+ in interest over the life of the loan vs what we’re paying now.

The 30 year options would lower our payments by $3-400/mo. This would still reduce the amount of interest we pay over the life of the loan compared to our current mortgage, but not by nearly as much as the 15 year options. But it would free up cash to throw at the big ticket home repair/upgrade items I mentioned. I also looked at the numbers if I were to stick with a 30 year mortgage at the lower rate but throw additional money at it every month so I was opting to pay the monthly payment that would come with a 15 year, and even doing that I’d still be paying about $40,000 more in interest over the life of the loan than by going with the 15 year in the first place.

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Cash to close for our top choices (the 30 year 2.75 and 15 year 2.125) is around $13-15k each. I’d probably want to roll that into the mortgage to avoid depleting our reserves.

So my question is: what’s my best option here? I’m concerned that if I just stand pat the housing market will slow down or dip as COVID-related foreclosures pick up in the next year, and I’ll lose an opportunity to get favorable terms and ditch PMI. On the other hand, the status quo right now is allowing me pretty significant cash flow to get home repair/upgrade things done without worrying too much.

Any help or advice would be appreciated. If I’ve left anything out or need to provide additional detail, I’m happy to do that!

EDIT: this decision does not necessarily hinge on removing PMI. I would like to remove it sooner than later, of course, but lowering my interest rate significantly would ultimately outweigh removing PMI for me, since the PMI is temporary anyway but locking in a lower interest rate would have long term benefits.