Refinancing: extra $ better used to decrease monthly payment or to be invested now

[OBOYEAH]

We are planning on refinancing our 30 year mortgage with a 3.875% rate down to a 15 year mortgage with less than a 2.750% rate (still evaluating all our options). We know we will be refinancing, but we are wondering what the best way to do it is. We have paid off all loans (cars, student, etc.) except for our mortgage. We are not great at financial stuff, but are trying to take the best steps.

We somehow received bonus money even during this time of COVID due to continue productivity. We have an extra $40-50,000 to do something with currently. Is the best step to invest it? Should we put some of it towards refinancing to lower our payment? Without putting extra money other than closing costs, our monthly payment would increase by $500 which is doable for us. My question is not whether to refinance, but whether to use some of our extra bonus money to decrease monthly payments? Or is it better to just pay more monthly and invest. We could even pay extra each month above and beyond the increase mortgage payment. Too many possibilities with not enough financial knowledge. Any advice would be appreciated. I tried looking through the forums, but couldn't come up with the exact scenario. Thanks!

[Hank]

Great job paying off all debt other than mortgage debt and avoiding car loans, carrying a credit card balance, and other forms of consumer debt! Sounds like you are doing well on the income side, despite Covid-19.

Are you saving at least 20% of gross income towards retirement? Do you plan to retire at typical retirement age, or a good bit earlier? Will you have to pay for college for kids?

Generally if you’re saving at least 20% of gross income towards retirement and plan to retire at 60 or later, you just pay a significant amount in taxes and then you can do whatever you want with the rest of your income. Pay extra towards the mortgage, put more in savings or investments, take more vacations ( once it’s safe to do so), etc. You could set up a sinking fund to replace a car.

if you want to retire a good bit earlier, you’ll increase the amount you need to save towards retirement. Plenty of folks here can offer useful advice if you provide more specific numbers and goals.

If you have kids you’ll have to pay for college. Decide if you’re j hi ping to pay for in-state public school or private school. Undergrad only or med school or dental school too. Put several hundred per month per kid into a 529 and you’ll be fine.

[OBOYEAH]

Thank you for your reply. Yes, I am sure specifics will be helpful.

This was a second career from a very low-paying, no 401(k) job and a husband with a low-paying gov't job with his own 401(k). Started in academic medicine about 7 years behind our peers in terms of saving for retirement. However, we lived like a resident for these first few years out in practice, which is how we have no more loans. Now we have a surplus of money that we would love to spend towards more fun things, but we know that we are behind on some things.

Currently have maxed out yearly 401(k)/403(b) contributions and with my husband's pension, we are putting at least 20% gross income towards retirement each year. However, this includes contributions from employers, but that still counts towards the 20% correct ... money is money? No plans to retire early as I actually love my career. May reduce hours at 60, but if I can, likely will go until 70. We have one child that we will likely pay for private college. May be adopting a second. Have $30,000 in college funds between our funds and grandparent savings for our child. We have 6 months of expenses in savings.

Is it more useful to make a lump payment towards your mortgage (not during refinancing)? Or is paying some of the money now to lessen the monthly payment better? If we put $0 down besides closing costs to refinance, the total interest on our loan will be $87. If we put $40K down, the interest only goes down to $78K. Thus, it only saves $9,000 in interest, but we save $700 per month with mortgage payments. I guess I don't know what makes the most financial sense to do with our money when we could afford an increased payment.

We live well below our means and now that loans are paid off, we are not sure how to start allocating all the leftover money each month.

[hightower]

We are planning on refinancing our 30 year mortgage with a 3.875% rate down to a 15 year mortgage with less than a 2.750% rate (still evaluating all our options). We know we will be refinancing, but we are wondering what the best way to do it is. We have paid off all loans (cars, student, etc.) except for our mortgage. We are not great at financial stuff, but are trying to take the best steps.

We somehow received bonus money even during this time of COVID due to continue productivity. We have an extra $40-50,000 to do something with currently. Is the best step to invest it? Should we put some of it towards refinancing to lower our payment? Without putting extra money other than closing costs, our monthly payment would increase by $500 which is doable for us. My question is not whether to refinance, but whether to use some of our extra bonus money to decrease monthly payments? Or is it better to just pay more monthly and invest. We could even pay extra each month above and beyond the increase mortgage payment. Too many possibilities with not enough financial knowledge. Any advice would be appreciated. I tried looking through the forums, but couldn't come up with the exact scenario. Thanks!

Have you gotten any quotes on 30 year loans? We just refinanced our 30 yr at 3.85% down to another 30 year at 2.87%. I found that the 15 year rates weren't much better when I was shopping a couple of months ago. I like the flexibility that the 30 yr provides personally.

[Hank]

This was a second career from a very low-paying, no 401(k) job and a husband with a low-paying gov't job with his own 401(k). Started in academic medicine about 7 years behind our peers in terms of saving for retirement. However, we lived like a resident for these first few years out in practice, which is how we have no more loans. Now we have a surplus of money that we would love to spend towards more fun things, but we know that we are behind on some things.

Currently have maxed out yearly 401(k)/403(b) contributions and with my husband's pension, we are putting at least 20% gross income towards retirement each year. However, this includes contributions from employers, but that still counts towards the 20% correct ... money is money? No plans to retire early as I actually love my career. May reduce hours at 60, but if I can, likely will go until 70. We have one child that we will likely pay for private college. May be adopting a second. Have $30,000 in college funds between our funds and grandparent savings for our child. We have 6 months of expenses in savings.

One decent approach is to add the employer's contributions to both gross salary and to retirement contributions. If you have a nominal gross household income of $200K and you and your spouse get a combined $20K in employer retirement contributions, then you're looking at $20K in employer retirement contributions divided by $220K in gross income. Your employer is contributing 9% of gross income towards retirement, so you'll need to put in another $24K of employee income towards retirement to reach $44K per year, or 20% of the $220K total combined gross income. If you run out of qualified retirement account space, then put money into taxable investments for retirement.

If your husband's employer withholds part of his nominal salary as a pension "contribution", personally I wouldn't count that towards annual retirement savings. Furthermore, I might discount the expected value of the future pension. Federal government, I'd value at or near 100% of the promised benefit. Perhaps cost of living adjustments will be less generous in the future. State or municipal pension I would discount based on the credit rating of the state or local government. A promised pension from Utah is on more solid footing than a promised pension from Illinois, Detroit, or Puerto Rico. Promised corporate pensions also should be discounted and viewed with a somewhat jaundiced eye.

Adoption can be expensive. See if you have any incentives or assistance at your job and your husband's job. I'd recommend going with a good non-profit agency rather than a for-profit adoption agency. In our case, Catholic Charities was excellent. My wife and I aren't Catholic, but that isn't a bar to working with them. They currently do not, however, adopt to gay and lesbian couples. Once you know you have one or two kids to pay for college, run the numbers backwards to see how much you need to save each month to pay for college. Make sure to take full advantage of any state credits or deductions for 529 contributions.

Even if you plan to work until 60 or 70, it's possible that a health issue may keep you from working that long. Plan to reach financial independence sooner than that if at all possible. If you are lucky enough to be hale and hearty and keep working because you want to instead of because you have to, then you've won the game. Best of luck!