refinance or pay off mortgage?

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refinance or pay off mortgage?

Postby linuxuser » Tue Jan 15, 2013 11:09 pm

I am into the 2nd year of my 5/1 ARM which is 3.8%.
I was thinking about paying off the mortgage $65K later this year, but I received a letter from Third Federal Bank offering $595 closing costs and 2.91% APR on 5/1 ARM.

Should I go ahead and pay off the mortgage or refinance?
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Re: refinance or pay off mortgage?

Postby bourg » Tue Jan 15, 2013 11:21 pm

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Re: refinance or pay off mortgage?

Postby trees » Tue Jan 15, 2013 11:26 pm

It depends what the rest of your financial picture looks like, plus what your risk tolerance is. Do you have a 401k? Are you maxing it? Do you have money in taxable that you're planning on using to pay it off, or are you redirecting cashflow, etc? Without some of these variables, we don't have enough information to give a good answer for you.

As for myself, I chose to go the no closing cost refi route and am no longer paying extra on my 15 year loan to take advantage of the sub-3% rates. I'm what you call a serial refinancer (always no cost so can do it repeatedly with no downside as rates keep dropping), and reached the tipping point between paying extra and not right around the 3% range.
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Re: refinance or pay off mortgage?

Postby Daniel Sa » Wed Jan 16, 2013 12:45 am

Based on the information you provided, I would recommend refinancing and taking advantage of today's record lows FIXED rates. If you are currently at 3.8% on a 5/1 ARM, you can refinance into a fixed mortgage in the low 3's APR for a 30 yr fixed or in the high 2's APR for a 15 yr fixed. Unless you know for fact that you will sell your home within the next 5 years, I would not recommend another 5/1 ARM regardless of the rate. With rates as low as they are today, keeping a low rate mortgage is favorable, you can use the mortgage interest deduction to help offset your income taxes, and you can invest your cash in several diffent better ways than paying off your all time low rate mortgage.
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Re: refinance or pay off mortgage?

Postby Watty » Wed Jan 16, 2013 1:06 am

One thing that I would look at is if you pay it off then how much of your net worth would be in home equity? If it is less than 33%, or better 25%, then if it was me I would pay it off if I had the funds available and that wouldn't generate taxes like capital gains taxes, but that is just me.

bourg wrote:https://www.penfed.org/55-Adjustable-Rate-Mortgage/


The loan balance my be too low to qualify to get the no cost refinance. When I got that loan I vaguely remember seeing the lower limit was $70 or $75K but that was a while ago so it would be good to check on the numbers.

They also have a five year home equity loan at 1.99% that should have low or no closing costs.

https://www.penfed.org/home-equity-loan/

your local credit union might have good home equity loans too.
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Re: refinance or pay off mortgage?

Postby linuxuser » Wed Jan 16, 2013 9:36 am

Watty wrote:One thing that I would look at is if you pay it off then how much of your net worth would be in home equity? If it is less than 33%, or better 25%, then if it was me I would pay it off if I had the funds available and that wouldn't generate taxes like capital gains taxes, but that is just me.

So, you are saying that if home_worth / home_worth + all_other_assets < 33% then pay off mortgage ?

Also, can you explain about the home equity loans?
Are people taking them out to pay off the mortgage, then turning around and hoping to get better than 1.99% (Penfed) from other investments?
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Re: refinance or pay off mortgage?

Postby porcupine » Wed Jan 16, 2013 9:50 am

linuxuser wrote:
Watty wrote:One thing that I would look at is if you pay it off then how much of your net worth would be in home equity? If it is less than 33%, or better 25%, then if it was me I would pay it off if I had the funds available and that wouldn't generate taxes like capital gains taxes, but that is just me.

So, you are saying that if home_worth / home_worth + all_other_assets < 33% then pay off mortgage ?

Also, can you explain about the home equity loans?
Are people taking them out to pay off the mortgage, then turning around and hoping to get better than 1.99% (Penfed) from other investments?

Based on his response, I think Watty is using home_worth / (home_worth + all_other_assets - all_other_liabilities) for the calculation! ;-)

- Porcupine

Edited to add: +1 to Watty's suggestion on the Penfed 5-year HEL at 1.99%. I believe your only out of pocket closing cost would be the appraisal (should they require it).
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Re: refinance or pay off mortgage?

Postby linuxuser » Wed Jan 16, 2013 10:39 am

porcupine wrote:
linuxuser wrote:
Watty wrote:One thing that I would look at is if you pay it off then how much of your net worth would be in home equity? If it is less than 33%, or better 25%, then if it was me I would pay it off if I had the funds available and that wouldn't generate taxes like capital gains taxes, but that is just me.

So, you are saying that if home_worth / home_worth + all_other_assets < 33% then pay off mortgage ?

Also, can you explain about the home equity loans?
Are people taking them out to pay off the mortgage, then turning around and hoping to get better than 1.99% (Penfed) from other investments?

Based on his response, I think Watty is using home_worth / (home_worth + all_other_assets - all_other_liabilities) for the calculation! ;-)

- Porcupine

Edited to add: +1 to Watty's suggestion on the Penfed 5-year HEL at 1.99%. I believe your only out of pocket closing cost would be the appraisal (should they require it).


Ooops. Forgot those parentheses.

Fortunately, all_other_liabilities = 0.
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Re: refinance or pay off mortgage?

Postby Watty » Wed Jan 16, 2013 7:08 pm

linuxuser wrote:So, you are saying that if home_worth / home_worth + all_other_assets < 33% then pay off mortgage ?



The prior posts cleared up the question about the percentage. There isn't any magic right percentage but having a high percentage of your new worth in your home would be a red flag to me that paying off the mortgage might not be a good plan since you would not be well diversified.

Also, can you explain about the home equity loans?
Are people taking them out to pay off the mortgage, then turning around and hoping to get better than 1.99% (Penfed) from other investments?


Some people use that money to invest and a high percentage of the time it will work out well, but a lot of people did this in the dot com boom and the housing boom and they got slammed so this is not without a lot of risk.

It is important to remember that if you pay off the mortgage then you can also save your "mortgage payment" each month which will build up and get the advantages of dollar cost averaging.

The five year home equity loan would not be appropriate for this because that is too short a time frame. Using any ARM for this would also be risky since the rates can change.

If you wanted to do this then a 30 year fixed rate mortgage is likely the way to go but that makes your target asset allocation tricky to figure our since a mortgage is a lot like a negative bond. For example if you want to be 25% in bond, and 75% in stocks then if you have $100K in bonds, $300K in stock, and a $100K mortgage, then it is sort of like you are really 100% in stocks since the bonds and the mortgage cancel each other out. This is not exact but keeping a mortgage to invest the money is using leverage which always makes your investment riskier.
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Re: refinance or pay off mortgage?

Postby Pennstateclj1 » Wed Jan 16, 2013 8:51 pm

Watty wrote:They also have a five year home equity loan at 1.99% that should have low or no closing costs.https://www.penfed.org/home-equity-loan/


This. No closing costs as long as you don't pay it off in 2 years or something, it's in the fine print at the bottom. Then max all retirement accounts and taxable with leftover.
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