Need help with re-financing house

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SKZee
Posts: 2
Joined: Mon Feb 12, 2018 3:05 pm

Need help with re-financing house

Post by SKZee » Mon Feb 12, 2018 3:16 pm

Hello fellow bogleheads,

I need some advice on house refinance.

I bought my house in October 2016 in San Diego, CA. Paid $752k.

I bought the house with 80/10/10 combo. I currently have 2 mortgages:

• First: 10/1 ARM @ 3%. Balance remaining: $587k
• Second: Interest only HELOC @ 6.5% (Prime + 2%). Balance remaining: $72k.

Current monthly payment: $2900

I am okay with 10/1 ARM as it has a great rate and I still have 8.5 years to go. I am not too thrilled with interest only HELOC specially when rates are on the rise. I was shopping around to see if re-financing would make sense. I don’t know where I will be in next 10 years. I don’t know if I am going to keep the house.

Most of the lenders/brokers want me to combine both loans into one. Best rate I got was - $661,000 @ 4.625% for 30 year fixed. No closing cost. Monthly payments: $3400.

My idea is to continue with current 10/1 ARM and refinance just the second mortgage. Best rate for an home equity loan that I got is 4.99% @ $80k or 5.69% @ $72k. Terms are 10 year, 15 year or 20 year with same rate. No closing cost. Plan is to payoff 72k in first 8.5 years. After 8.5 years, refinance to 15 year fixed.

I am inclined towards second option to get the home equity loan to payoff/replace interest only HELOC.

Arguments:

One loan @ 4.625% with 30 year fixed -> One fixed rate. Offers peace of mind, fixed cash flow.

Two loans - 10/1 ARM at 3% and 10 year Fixed rate Home equity loan @ 4.99% -> Still have 8.5 years to go in 10/1 ARM. That is a great rate and I have lot of time left. Would probably pay higher interest during the life of loan Will have to re-finance at some point. Rates are increasing. Do you want to take the chance? Is it worth the risk?

Some calculations:


First Option: One combined loan of $661000 @ 4.625% with 30 year fixed:
• Monthly payment: $3403
• Total interest paid: $562k

Second Option:
1) Two loans - 10/1 ARM at 3% and 10 year Fixed rate Home equity loan @ 4.99%. Payoff $72k in first 8.5 years.
• Monthly payment: 2500 + 800 = $3300
• Total interest paid: $161k + $21k = $181k
2) Refinance remaining balance of $460k to 15 year fixed. Assuming market keeps increasing and rates go to 2006 era, I will refinance $460k, 15 year fixed @ 7%.
• Monthly payment: $4135
• Total interest paid: 284k
3) Total interest paid over the life both loans - $181k + 284k = $465k. (assuming 7% interest rate after 8.5 years). Payoff the house in 25 years.

Now, I understand that I cannot compare both since I am making higher payments in second option - $4135 vs $3400. Argument can be made that if I added extra cash in 4.625% loan total interest paid will come down. so some more numbers :)

First Option: One combined loan of $661000 @ 4.625% with 30 year fixed:
1) First 10 years:
○ Monthly payment: $3403
○ Total interest paid in first 10 years: $280k
2) Next 15 years:
○ Monthly payment: $4100
○ Total interest paid in next 15 years: $206k
3) Total interest paid over the life of loan with extra payments: 280k + 206k = $486k. Payoff the house in 25 years.

I still end up saving ~20k in interest alone. What do you guys think? Does it make any sense to continue with second option? Am I over thinking this one too much?

I will probably have to refinance sooner if the rates reach 7% before 8.5 years.

Sorry for the super long question. Thank you for your time and advice.

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Watty
Posts: 14372
Joined: Wed Oct 10, 2007 3:55 pm

Re: Need help with re-financing house

Post by Watty » Tue Feb 13, 2018 6:41 am

A few things make this more complicated;

1) If interest rate go up then inflation is likely higher so a mortgage payment you make in 20 years will be made with inflated dollars.

2) If you are able to deduct your mortgage interest then the effective interest rates would be lower.
SKZee wrote:
Mon Feb 12, 2018 3:16 pm
• First: 10/1 ARM @ 3%. Balance remaining: $587k
• Second: Interest only HELOC @ 6.5% (Prime + 2%). Balance remaining: $72k.

Current monthly payment: $2900

I am okay with 10/1 ARM as it has a great rate and I still have 8.5 years to go. I am not too thrilled with interest only HELOC specially when rates are on the rise. I was shopping around to see if re-financing would make sense. I don’t know where I will be in next 10 years. I don’t know if I am going to keep the house.

Most of the lenders/brokers want me to combine both loans into one. Best rate I got was - $661,000 @ 4.625% for 30 year fixed. No closing cost. Monthly payments: $3400.
Part of what makes your numbers confusing is that you are using different mortgage payments and different length mortgages.

I would run the numbers as if you refinanced the HELOC to get a lower interest rate and make the additional $500 a month mortgage payment to pay it off then pay down ARM and then kept paying the $3,400 a month until the house is paid off.

gotester2000
Posts: 590
Joined: Sun Nov 12, 2017 1:59 am

Re: Need help with re-financing house

Post by gotester2000 » Tue Feb 13, 2018 9:11 am

I would club the two mortgages, refinance and avoid a fixed rate of 30 years - interest rate changes are cyclic Keep throwing more money at the principal and pay it off as quick as you can.

Carefreeap
Posts: 2409
Joined: Tue Jan 13, 2015 7:36 pm
Location: SF Bay Area

Re: Need help with re-financing house

Post by Carefreeap » Tue Feb 13, 2018 11:05 am

I'd probably just pre-pay the home equity as fast as I could and review your options in 8 years if you still own the house.

The 1/2 or 1% difference on a $72K balance isn't going to make that much difference. Throwing an extra $500/mth in principle will.

Lenders don't like to refinance smaller loans because they don't make enough money on them.

Good luck with your decision.

SKZee
Posts: 2
Joined: Mon Feb 12, 2018 3:05 pm

Re: Need help with re-financing house

Post by SKZee » Thu Feb 15, 2018 1:56 pm

Thanks guys for your valuable advice.

I will refinance the second mortgage of $72k (interest only HELOC@6.5%) at 4.99% for 10 years for now. I will try to pay it off as quickly as I can. I will track the rates meanwhile and review the situation in 8 years.

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