Should I refi with MAX cashout????

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mattsd13
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Joined: Tue Jun 18, 2013 3:20 pm

Should I refi with MAX cashout????

Post by mattsd13 » Sun Nov 02, 2014 12:06 pm

Hello all, should I take as much out as possible on this refi?

Probably not, but I wanted to ask......

I am in the middle of a refinance and have been pondering taking cash out to invest in our retirement accounts. Its a very small refi (92k) from a 10 yr mortgage at 2.99 with 9 years remaining to a 30 year fixed at 3.625. My plan is to take the difference in monthly payment and put it towards tax sheltered accounts as we can not fill these up currently given our income. Our current mortgage payment on our ten year note is 965 and it would drop to 425.

Let me give you some quick stats on my wife and I.

Married (both 33), one child ( 4months)

-currently take standard deduction on taxes
-his income 40,000 hers 40,000 (will probably not rise dramatically anytime soon)
-his 401k 168,000 in vanguard 2035 target fund
-her 401k 20,000 in 2035 target date fund, 30,000 ESOP
-30,000 Penfed CDs at 3%
-35,000 in rewards checking at 2.5%

-student loan 16,000 at 2.75% (paid off in 13 yrs)
-deere loan for tractor 13,000 at 0% (paid off in 4 years)
-house value 225,000 and owe 92,000

I'm not sure if any of the above is noteworthy, but I wanted to include it anyway. YES, I have to much cash sitting there not doing much, but we have upped our 401k contributions to 60% this past year of our income so it is not as much cash as the start of the year as we have been dipping into cash reserves. My goal is to continue this contribution through 2015 as well. Perhaps not quite as high percentage though. Given our income and newborn son we will be able to take advantage of the EIC and savers credit for 2014 as well.

This leads me to my question...

Should I take out as much cash from my refi and continue to fund our tax advantaged accounts as much as possible and in turn possibly receive some of those credits if we do so along with the tax savings? For those who are not familiar with the earned income credit or savers credit, they are for lower income wage earners. Essentially, by diverting enough into tax advantaged accounts the odds are we would qualify for these as well. There are different thresholds depending on earned income for the year.

Running the numbers, we could take out 88,000 cash before we would reach the 80% ltv. This would leave our monthly payment the same as our ten year we currently have, but increase to a 30 year period. We would then invest this over the next few years through our 401k bringing down our earned income and reap the tax savings and possible other "low income credits."

Basically, getting that money invested NOW (or at least over the next 2-3 years) as opposed to say over the next 20 to 30.

Is it as simple as....."well if you think your investments will outpace the rate on your loan than yes, take the extra cash out"

My gut says no, but the numbers say.....yes?....at least I think they do.

Anyways, any replies, thoughts, would be great.

Matt

stan1
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Re: Should I refi with MAX cashout????

Post by stan1 » Sun Nov 02, 2014 12:15 pm

Just curious, why are you doing the refi? If you want the lower mortgage payment in order to help meet the increased expenses with children the last thing you would want to do is borrow even more. You are doing great and are on track to have your house paid off before your kid(s) are in college, there's no need to leverage up and take on unnecessary speculative risk.

The Wizard
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Re: Should I refi with MAX cashout????

Post by The Wizard » Sun Nov 02, 2014 12:16 pm

No, no, no.
That may not be the answer you want to hear.
The idea is to Pay Off your mortgage, not be in Eternal Debt.
And going from a low rate to a slightly higher rate is a bad plan as well...
Attempted new signature...

retiredjg
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Re: Should I refi with MAX cashout????

Post by retiredjg » Sun Nov 02, 2014 12:31 pm

mattsd13 wrote:I am in the middle of a refinance and have been pondering taking cash out to invest in our retirement accounts.
No. No. No. There are very few situations where it is smart to borrow money in order to invest. This is not one of them. And I think it might be illegal anyway.

In fact, the terms of the refi do not sound like they are in your favor. What's going on with that? You will pay literally thousands of dollars more interest going from 9 years at 2.99 to 30 years at 3.625.

Unless your 10 year mortgage is a balloon why would you even consider a refi in the first place? If you simply must refinance for some reason, I'd not go anywhere past 15 years - you'll get a better rate at 15 years than at 30 years.

Sounds like someone at the bank is trying to make some money...at your expense.

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grabiner
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Re: Should I refi with MAX cashout????

Post by grabiner » Sun Nov 02, 2014 10:27 pm

mattsd13 wrote: Its a very small refi (92k) from a 10 yr mortgage at 2.99 with 9 years remaining to a 30 year fixed at 3.625.
I don't think you are really gaining much with this refinance. Your 9-year mortgage is at close to the market rate for 10-year mortgages; if you refinanced to another 10-year, your rate probably wouldn't go down enough to cover the closing costs. The 30-year mortgage has a higher rate because the bank is taking more risk; if rates rise five years from now, the bank might be stuck with you paying the low rate for 25 more years rather than five. Thus the bank doesn't care much whether you use a 10-year or 30-year loan.

Since you take the standard deduction, higher interest rates have a greater cost to you than to most borrowers; therefore, I agree with other posters that you don't want to refinance to a higher rate.
Wiki David Grabiner

BigJohn
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Re: Should I refi with MAX cashout????

Post by BigJohn » Sun Nov 02, 2014 11:30 pm

Agree with all the comments above. You're close to the end of being in debit and it's unclear why you'd want to sign-up a 30 year mortgage at a higher interest rate. Yes your monthly expenses will be lower but you're signing up to pay that for another 21 years. Take a look at the amortization schedule and calculate how much total interest you'll pay by keeping your current mortgage vs your plan and remember the the difference between the two stays in your pocket.

Nukeboilermaker
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Re: Should I refi with MAX cashout????

Post by Nukeboilermaker » Mon Nov 03, 2014 12:40 am

I wouldn't do it, if you want to free up your cash flow to invest I would pay off that mortgage. You could use all that cash sitting there to make a large payment, some banks will recalculate your mortgage payment for free or a fairly small fee. But if you really wanted I bet you could pay off the mortgage by end of next year if you did that, or three years if you maintain your 401k savings rates.

P.S. Do you still have the tractor and student loans? Or is that really past tense and you are simply demonstrating your ability to payoff debt?

mattsd13
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Re: Should I refi with MAX cashout????

Post by mattsd13 » Mon Nov 03, 2014 9:11 am

I appreciate all of your feedback on my post and have read each post thoughtfully.

Thanks for talking some since into me!! After going through quite a few different scenarios I determined I would have to average a 6% annual return for 30 years to "breakeven" between the two loans considering all factors. Anything above I come out ahead, under, I lose. Possible? Yes, but I am very conservative in general so this does not appeal to me.

Now, I have paid for an appraisal already which I realize I will have to eat. My loaner officer should be receiving the appraisal today or tomorrow. Are there any other costs I should be forewarned on? I will be speaking with him today.

Thanks,

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ddb
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Re: Should I refi with MAX cashout????

Post by ddb » Mon Nov 03, 2014 9:26 am

mattsd13 wrote:I am in the middle of a refinance and have been pondering taking cash out to invest in our retirement accounts. Its a very small refi (92k) from a 10 yr mortgage at 2.99 with 9 years remaining to a 30 year fixed at 3.625. My plan is to take the difference in monthly payment and put it towards tax sheltered accounts as we can not fill these up currently given our income. Our current mortgage payment on our ten year note is 965 and it would drop to 425.
This doesn't sound like a good idea. Consider continuing to make your minimum mortgage payments on the existing loan, and then put away as much as possible for retirement after that. Along the way, bump up your retirement savings any time you get a raise. 9 years from now when your mortgage is paid off, then you can dramatically increase your retirement contributions even more.

- DDB
"We have to encourage a return to traditional moral values. Most importantly, we have to promote general social concern, and less materialism in young people." - PB

kaudrey
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Re: Should I refi with MAX cashout????

Post by kaudrey » Mon Nov 03, 2014 9:53 am

I would just STOP. Don't do the refi at all. Why would you refi for a longer period at a higher interest rate - you extend the life of your debt and will end up paying more interest over time.

Most of us try to get out of debt and shorten our mortgages at some point, so that we will get OUT of debt. Eat the cost of the appraisal, and walk away.

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