I made a mistake...

Okay, so as I’m writing this, we’re wrapping up one of the worst years in history. It’s November 2020, and despite all the sadness, anxiety, and grief that we’re experiencing in the world, there was one bright side - mortgage rates have dropped tremendously!

A few years back in 2017 when I was looking for homes, I was lucky if I could lock in a rate of 4.0%! I ended up getting stuck with something much closer to 5.25% with points when I purchased my home, so you know that I got a crappy deal...and this was on a 30 year mortgage! 

At the end of 2019, mortgage rates started to drop, and I hastily locked in to a 3.25% 15-year refinance, because the math just seemed like a no brainer. I would save more than $115,000 in interest payments if I just paid the required monthly statement  until the mortgage was paid off. 

I figured, hey! I already add a bit extra each month to my mortgage payment on the 30-year, why don’t I just switch it to a 15-year and save a ton of money on interest if the monthly payments are still the same? 

To try to help make sense of this, I’ll use some easy hypothetical numbers:

Even if I added an extra $200 in each month, I would still pay an extra $70,000 in interest over 30-years! So locking in a 15-year rate at 3.25% with the same monthly note of $1000 just made sense! 

...Or did it… 

Now obviously, you can’t time when rates are going to go down. But, if I could go back in time, I’d go for the 30-year refinance. I was quoted 3.5% for a 30-year refinance at the time. I kept thinking to myself - it’s all about that rate! If I did the 15-year loan, I would be able to pay off the house faster, pay less interest overall, and finally be one step closer to financial freedom. 

What I didn’t consider was that economic crises can happen at ANY time. COVID-19 slapped 2020 silly, and suddenly my stable side hustles weren’t so stable anymore. Hiring freezes came left and right, and I started to freak out, thinking “what would I do if I suddenly got laid off or lost my part-time job?” 

Luckily, that didn’t happen, BUT other things came up like my girlfriend getting her hours cut and losing health insurance and my sister getting stuck jobless right after college. So, I had to build a safety cushion for all of us in case something happened. 

The problem was - I was now on the hook for the full $1000 every month instead of $800. I was obligated to come up with that extra $200 each month or risk late fees, tanking my credit score, or worse - getting behind on payments.* 

*Now of course, there are systems in place like loan forbearance, loan modifications, etc. that can help with these kinds of situations, which we’ll talk about in a future post, but the stress and anxiety from thinking about this is VERY real.* 

Too bad I didn’t discover Graham Stephan on Youtube yet, or else I would’ve crunched the numbers a bit more carefully. The 30 year loan at 3.5% was definitely the way to go:

Sure, the 30-year at 3.5% would’ve still cost an extra $14,000 in interest with extra payments, but I could’ve saved another $300 each month for an emergency fund in case I lost one of my jobs. 

Not to mention, I decided to pull the trigger on stock market investing and the power of compounding too late. If I had taken that $300 each month and put it into an S&P 500 index fund for the past 11 months, I would’ve averaged a 20% return! But we’ll explore that math in another post. 

My big takeaway is that I should’ve done the 30-year loan. With all the extra money, I could’ve put it into the stock market or other investments that would make more than 3.5%, not to mention I can write off all that interest as a deduction on my taxes! 

And I would’ve had nothing to lose because if I wanted to make extra payments, nobody would’ve stopped me! I could’ve still paid off my mortgage in 15 years (or less) and pay even less interest over time. 

Moral of the story: do the math.