Analysis paralysis with cash-in refinance

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Analysis paralysis with cash-in refinance

Postby Travel Bug » Fri Mar 15, 2013 2:12 pm

I’m from a long line of folks who made poor financial decisions in my pre-Boglehead days. Mine just happen to be more recent and are still costing me money.

I’m uncertain about the best course of action to take with my current mortgage.

Any insights, suggestions, or advice would be welcome. Thanks in advance!

Pertinent details:

- Currently 2 1/2 years into a 30-year FHA fixed at 4.8%

- Paying MIP of about $200/month

- LTV is about 90% (I’m ~$80k away from 78% LTV)

- Don’t qualify for any HARP programs

- Home value is likely close-to-very-close to last appraisal and purchase price (I’m in an area of CA where home prices are holding strong-ish)

- Wife and I are in early 30s and plan on living in house for at least 10-15 years

- Apart from mortgage, also have about $20k in auto and student loan debt. These are all below 2% interest.

- My wife and I are not struggling with payments, have secure jobs, and are able to max out work retirement plans and Roth IRAs at $46k/year

- Currently have $30k in non-emergency fund money available in non-retirement savings

--------------

Here’s where I get stuck.

Should I go all-out and try to save up enough as quickly as possible to refinance into a conventional loan at a lower rate and without MIP/PMI? This would require bringing at least $80k to the table. With the $30k I already have, it would take at least 1.5 years to come up with the rest. We could also stop contributing to retirement to get there faster.

The risk here is that for every $10k less than expected that the house appraises for, we’d have to kick-in another $8k.

Another option is to save enough so that when the 5-year MIP timeframe is reached (Aug. 2015) we can make a payment to get to 78% LTV and eliminate the $200/mo MIP. The benefit here is that the house wouldn’t have to be re-appraised (or so I’ve been told) and we’d know exactly how much we’d need to save between now and 8/2015.

What else should we consider?

Selling isn’t likely since we love the house and area and are not struggling with payments.

Thanks in advance for the advice!
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Re: Analysis paralysis with cash-in refinance

Postby MN Finance » Fri Mar 15, 2013 2:50 pm

I don't know that's it's a slam dunk to refi. You'd have to weigh the costs of the new loan w.r.t whatever rates are in 1.5yrs. It will likely save you money, but it doesn't mean that it's an obvious choice. I would continue to save up as much cash as you can and get an appraisal when you're ready and then see how the numbers work out. Assuming that you probably have decent incomes, you are saving money pre-tax now in a potentially higher tax bracket than when you retire and the mortgage is paid off... iow, you may be better to save taxes now and pay a bit more mortgage interest, than to pay taxes at higher rates (by stopping 401k contributions) and reduce your mortgage interest (by way of saving up 20% to refi to a lower rate). If you save $10k per year on taxes by saving into your 401k, yet pay an extra $4k in PMI and $4k in mortgage rates (vs refi) and would otherwise pay, say $2k on the eventual withdrawals of the money in 30 years at retirement, then those numbers are a wash (by design). I don't know if that's the case, but that's how you could look at it and plug in your own assumptions. I probably would only refi if you do so without reducing 401k savings. There's no obvious answer, which is good, because you probably won't choose a path that had a huge consequence.

PS - I'm 4 yrs into an FHA loan at 4.5% with about a 90/10 LTV and have cash to refi if I wanted, but for liquidity reasons - job change, I chose not to because the numbers didn't scream advantage - it was a small advantage, but not large.
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Re: Analysis paralysis with cash-in refinance

Postby Travel Bug » Fri Mar 15, 2013 4:56 pm

Thanks, MN Finance. I hadn't fully considered the tax implications as you pointed them out.

It seems like we should continue maxing out our 401Ks and Roth IRAs as well as continue saving towards a possible refi. That way, when we have enough in-hand to refi in a year or two, we can run the numbers to see if it makes sense.

It's just eye-opening to see the difference in total interest paid when I run an amortization calculator on our current mortgage versus one after a cash-in refi.

Has anyone else here gone through something similar?
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Re: Analysis paralysis with cash-in refinance

Postby swaption » Fri Mar 15, 2013 5:48 pm

Ok, if you refi, this is the summary of what you will save as a result of the $80k investment

- 4.8% interest currently being paid on the $80k of principal
- The PMI of $200/month, which comes out to 3% on the $80K
- Now here's the big one, let's say you can get a rate of 3.8% (for example) on the remaining 78%, so a 1% savings on your rate, which represents an additional roughly 9% return on your $80k investment per annum

For the sake of completeness, at your income level I think only the interest is tax deductible (not the PMI), so all told the after tax return on the $80K would be about 11.75% per annum. All of this admittedly back of the envelope, but I'd do my best to get this done, particularly now that rates are low.
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Re: Analysis paralysis with cash-in refinance

Postby seeingeyestrike » Fri Mar 15, 2013 6:03 pm

You could also looking into what kind of rates you could get if you refinanced now and keep the PMI. I was in a similar situation recently; I originally bought my house with only 5% down but had enough money to put 15% down if I were to refinance. Because of the lower loan to value ratio, my PMI payments would have gone down from ~$200 per month to about ~$100, as well as having a lower interest rate.

Fortunately for me, my house appraised higher than I was expecting and I was able to scrounge up a little extra money to put down the full 20%, but I had already decided the refinance was worth it even if I was only putting down 15%. Also, for me I was looking into no closing cost refinancing (for slightly higher interest rates) which I would recommend to anyone not yet at 80% LTV.
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Re: Analysis paralysis with cash-in refinance

Postby nydad » Fri Mar 15, 2013 11:59 pm

interest rates may not be this low again. I don't have a crystal ball, but they are historically low, and are now trending upwards. I'd get some quotes on no-cost refi, even with PMI, and then perhaps take 50% of planned retirement savings and put it towards getting to 20% LTV (if you're going to be in the house that much longer, no reason to just pay them extra every month in PMI)
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Re: Analysis paralysis with cash-in refinance

Postby MN Finance » Sat Mar 16, 2013 12:51 am

Post what you find. I doubt you'll find a jumbo no cost loan at much better rates than what you have, and it may not even be dramatically different if you get an 80/20 loan today, let alone a year or two from now.
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Re: Analysis paralysis with cash-in refinance

Postby Outer Marker » Sat Mar 16, 2013 8:58 am

I would look into a 15 year FHA refi. For 15 year loans with 90% LTV or better, there historically was no PMI requirement, but with recent changes there is nominal PMI payment (which will increase again in April -- so get going!)

Until April 1, 2013, the MIP schedule for new FHA loans is as follows :
15-year loan terms with loan-to-value over 90% : 0.60 percent annual MIP
15-year loan terms with loan-t0-value under 90% : 0.35 percent annual MIP
30-year loan terms with loan-to-value over 95% : 1.25 percent annual MIP
30-year loan terms with loan-to-value under 95% : 1.20 percent annual MIP

Current 15 year rates will save you a lot in interest over what you are paying now; and with a 15 year amortization schedule, you will get to the 78% LTV needed to eliminate pmi altogher much faster. I think you are much futher ahead locking in a low rate and starting to realize immediate savings.
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