Freed by 50

In my Goals for 2021 post I mentioned that I would consider refinancing again if the conditions were right. I looked at this from a lot of different angles, including riding out the mortgage I’d signed in 2019, sending one or more lump sum payments, overpaying the existing mortgage monthly, and refinancing. In the end, the refi won out.

Last year I had sent a single, large lump sum payment to my mortgage in August knocking my fairly new 20 year loan down to about 17 years. Doing this wasn’t exactly the most sound financial move, since the opportunity cost of not investing that money could be pretty high over 20 years, but this brought the balance down to a level where I felt much better, and it would then be paid off when I was 59.5. I had planned to do this again, but I realized I wasn’t comfortable sending tens of thousands at the mortgage again, and that by doing so, I wasn’t really saving as much as I could in interest if I just refinanced.

The same could be said for overpaying my monthly mortgage. I would save some money in interest, and it would slowly reduce the time on the loan, but it was a matter of laying out a lot more than I would save. This is truly a great strategy if you have some extra cash coming in and your goal is to reduce the length of your loan long term. My goal was solely to save money on the interest of my loan. At this point the length of the loan doesn’t matter to me.

Refinancing was by far the best return on investment. I reduced my interest rate by .5%, which doesn’t sound like much except that it was a 20% reduction on my existing rate. That’s significant. Over the next 15 years this will save me $38k in interest, and it cost me $5500 in closing costs. Incidentally it also knocked two years off of the loan.

Comparatively, I would have had to make a single lump sum payment of about $60k, or pay an additional $750/month ($9000/year) to save that much in interest. Compound interest really is the strongest force in the universe.

While it is now highly unlikely I will ever refinance this mortgage again, there are a handful of future circumstances where I would consider it.

The first would be if interest rates actually dropped to zero. At that point anyone who didn’t refinance would be a fool. I can’t see this ever happening in the US, but then again I never thought I’d be sitting on a 2.65% 15 year mortgage eight years after moving into my house. Stranger things have happened and I’ve learned not to question the economy anymore.

The other long shot circumstance would be if I decided to take the plunge in becoming a landlord and buy an investment property. Since you can only get a deduction on mortgage interest for your primary residence, provided it’s legal, I would probably borrow against my home for some if not all of the cost of the rental property. Of course SALT severely limits this for me, but I’m barely getting a mortgage interest deduction at this point anyway.

Having a mortgage until I’m 57 years old doesn’t exactly scream being “freed by 50,” but it is currently factored into my FIRE calculation. I’m way ahead of where I expected to be on the mortgage and with such a low interest rate I’m paying off far more principal than interest each month. I’m also investing much more than my total mortgage+interest+taxes+insurance payment each month and expect to be FI even with the mortgage long before I’m 57.