Refi or stay put?

We bought a 3/2 SFR a little over a year ago and the current 1st and only mortgage loan amount is $296000. We got a 7 year interest only loan at 4.5%,. No prepay penalty, and we pay extra every month to principal.

Back then, We were also offered 30/fixed at 5%, but took the 4.5% interest only loan since we were not sure if we would live in here that long. Do we switch to fixed or ride it out? We are not selling this house for at least 20 years! Maybe longer!

Your costs to refinance will be pretty high. A 30 year fixed at 5% these days will cost points to get that rate. I would stay put if it were me, but that’s just me. In 6 years, maybe a 15 year fixed would make more sense, depnding on your financial scenario.

Stay put. However, I would stop dumping your money into paying down the mortgage. If you know you’re going to be there for 20 years, start managing your equity rather than giving it to the bank.

Your house will appreciate, but any money you pay into the mortgage is lost opportunity. You keep it in some sort of investment account that earns a yield greater than the 4.5% that you are paying on the mortgage.

If you want a fixed rate loan, calculate the payment and put the difference between the fixed rate and what you are currently paying into your personally managed equity account. You will then have two assets growing rather than just your house. You would be amazed at how much you could have in total equity at the end of 7 years.

The power of compounding interest on your investment can multiply quickly if at the end of 7 years you pull your equity out of the house and refinance on another interest only loan. Then add that money to your equity account and before you know it, you’ll have more liquid assets than what you owe on your mortgage. Don’t worry about the rates when you refinance. If rates are higher, that also means that the economy is doing very well and you should be earning even more in your equity account.

Time and compounding yields are an amazing thing. You just have to make sure that you are always earning more than you are paying on the mortgage.

All of the interest you are paying is being written off anyways. Think of it like this. At retirement, rather than your tax liability increasing, this strategy can decrease your tax liability and increase your liquidity for a much more enjoyable retirement.

have fun! Good luck.


I had to delete my old account and reregister…
“personally managed equity account” is this term fancy wording for savings? I put 300 toward principal most months, the actual principal amount is 500. I also put 300 into savings account, currently around 26K. I do need to shop for a better return for the savings account though. I have access to a credit union, may check into that…So in 6 years, refinance, take equity out, and put it into savings? Makes sense to me, I did that before when we sold in 2004. Thanks for the tips!