digest
Short Summary
Main recommendation: Pay off the mortgage faster by putting the mutual fund money toward principal and refinancing to a 15-year loan if the new rate is roughly 2.75% to 2.875%, with the caller's existing ~$20,000 emergency fund kept separate. The caller has roughly $132,000 left on a 3.6% traditional mortgage, $14,000 in mutual funds, and about $20,000 in a separate emergency fund. Dave Ramsey notes that refinancing just to shorten the term is not worth paying closing costs for, but a rate drop to around 2.75%–2.875% might be worth it.
Key Points
- Use the $14,000 in mutual funds as a lump-sum principal payment, which would bring the balance to roughly $118,000.
- Refinancing only makes sense for the rate reduction, not merely to change from a 30-year to a 15-year term; Ramsey would not pay refinance costs for the term change alone.
- Ramsey estimates a rate near 2.75% to 2.875% could justify refinancing, while he is unsure whether a loan this small qualifies.
- Once refinanced to a 15-year term, paying extra principal "as fast and as hard as you can" could finish the loan in about five to six years.
- The caller has an emergency fund of about $20,000 in a separate account, which Ramsey treats as a sound safety net before extra payments.
Details Worth Noting
- Concrete instructions:
- Confirm that you have a separate emergency fund (about $20,000 here) before applying extra money to the mortgage.
- Apply the $14,000 from mutual funds directly to principal, reducing the balance from about $132,000 to about $118,000.
- Get refinance quotes and compare them; target a rate around 2.75% to 2.875% (or about three-quarters of a point lower than the current 3.6%) before paying closing costs.
- If refinancing, choose a 15-year term and make extra principal payments as aggressively as possible.
- To estimate payoff timing, divide the remaining balance by the number of years you want to finish in: about $10,000 extra per year for ten years, or about $20,000 per year for five years on roughly $120,000.
- The caller's household income is about $60,000 per year, and the caller is retired.
- Ramsey's payoff estimate assumes sustained extra payments of roughly $20,000 per year, and he notes the caller may not qualify for a refinance on a balance this small.
- The caller also plans to pay off the daughter's car loan, a separate decision not part of the mortgage plan.
Bottom Line
Reducing the mortgage faster is workable here, but it depends on a meaningful rate drop from refinancing and on keeping the emergency fund intact while making large extra principal payments.
