Many questions on refinancing

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Topic Author
Big Heart
Posts: 52
Joined: Mon Apr 26, 2021 8:42 pm

Many questions on refinancing

Post by Big Heart »

Hello, I am moving towards refinancing my home and have many questions. I appreciate this forum so much, as in just a few short months, I have really learned a lot and changed a lot in my financial situation.

I owe about 80K on the mortgage for a house valued at $270K and I am paying 3.25% in interest. I have 10 years left on my mortgage.

I am doing some home renovations, a combination of needs & wants, that cost about $16,000. (All windows and doors in a sunroom need replacing but I am replacing them at higher quality than is needed.) I do not have the cash on hand for this purchase. Their financing is for 0% for a year. My plan was to accept their 0% offer and then at the end of a year pay about half of the balance in cash that I would have built up over the year, and put the rest on my HELOC and pay it off over a few years at $300/month. (I understand this is not boglehead-approved since the bogle way is to pay full cash for everything, however, for many reasons this is how I have decided to proceed with these purchases.)

I have been lazy about putting in the effort to refinance but I realized that I could use this expenditure to motivate myself to get with the program on refinancing. . . so that's what I'm investigating.

So far, the best refinance offer I've received is from Interfirst. Their rate is 2.24 (APR 2.325) for $96,000 over 10 years. When I ran this through the comparison calculator, it looks like, due to the longer term of financing that 16k, I would end up paying slightly more interest (about $400) total than I would if I refinanced only 80K and kept my strategy of paying for the improvements through the 0% offer + HELOC. But even including paying that extra, overall refinancing would save me about $2500 compared to keeping the same mortgage + 0%/HELOC strategy.

The lower monthly payments from this strategy would allow me to get back to maxing my 401K sooner, and I think that given the tax advantage of that, this strategy would make me more than $400 richer . . so I am liking this approach.

Another option that has presented itself is a 15 year mortgage, which would *really* lower my monthly payments and allow for more investing, but I think I'd just as soon keep the same mortgage term & have all my cash flow open up sooner.

Questions:

Are there considerations I am overlooking?

Is there any reason to wait on the refinance until I have burned through more of the 0% timeline? This strategy 'starts' my interest payment on the 16k balance sooner (the net is still a gain). I felt like acting now might be a good idea rather than counting on interest rates staying so low . . is this wise?

I am noticing people talking about 'lender credits' but no lenders have offered me any credits. How do you get 'lender credits'?

From the refi thread, I noticed people talking about an AMEX bonus. I don't have an AMEX card and don't want once but 2k would be wonderful. Is the bonus a sure thing? If so, which AMEx card is the best one for someone who is going to turn around and cancel it? (I would rather avoid annual fees). My credit score is about 790 so I don't think opening a new card will create issues but perhaps I am wrong?

Thank you for any information or perspective you have to share.
harikaried
Posts: 1799
Joined: Fri Mar 09, 2012 3:47 pm

Re: Many questions on refinancing

Post by harikaried »

Big Heart wrote: Tue Sep 14, 2021 12:05 pmI owe about 80K on the mortgage for a house valued at $270K and I am paying 3.25% in interest
What's the monthly payment? Is there a desire to have the mortgage paid off in some time frame?
Big Heart wrote: Tue Sep 14, 2021 12:05 pmcost about $16,000. … I do not have the cash on hand for this purchase. … at the end of a year pay about half of the balance in cash that I would have built up over the year, and put the rest on my HELOC and pay it off over a few years at $300/month
This seems to indicate during the year you'll have cash flow of about $650/mo (in excess of current mortgage to save up ~$8k) before HELOC, and afterwards it drops to only $300/mo? Where has the cash flow been going now? Do you have a taxable account with investments? What's the HELOC rate and any existing balance?
Big Heart wrote: Tue Sep 14, 2021 12:05 pmThe lower monthly payments from this strategy would allow me to get back to maxing my 401K sooner
Seems like 10-year 2.24% would have ~$900/mo payments. And quickly checking other terms show potentially 15-year 2.375% $640/mo, 20-year 2.5% $510/mo, 30-year 2.875% $400/mo. If cash flow is important, the longer terms can be useful at the cost of higher total interest paid. But theoretically over the long term, the extra money invested will return more.

If the $900/mo is an acceptable monthly payment, cash out refinancing $200k could get a 0.25% better rate, e.g., 30-year 2.625% $800/mo or 20-year 2.25% $1040/mo. This might be pushing the cash flow limit, but you would have an extra $104k to invest. How would you invest the extra money or do something else with it?
Big Heart wrote: Tue Sep 14, 2021 12:05 pmI am noticing people talking about 'lender credits' but no lenders have offered me any credits. How do you get 'lender credits'?
This might already be included if you're looking at "no cost" refinances where you end up with $0 out of pocket because the lender is covering those costs with lender credits / negative points (1% of the loan amount). You could just ask for more lender credits that typically come with an increased interest rate.
Topic Author
Big Heart
Posts: 52
Joined: Mon Apr 26, 2021 8:42 pm

Re: Many questions on refinancing

Post by Big Heart »

Thank you harikaried.

The mortgage payment now is $827 and it would go up to $927, to be more specific.

My son is 4. If the mortgage is paid off before he goes to college, it would be easy to cashflow his college. So, keeping with the 10-year term would mean I'd have a few years to get ahead of the curve before he launches. However, a 15 year term would also allow me to pay cash for college, I would just have to be sure to save extra to cover that first year of both mortgage + tuition. It would mean building a 'tight year' into my plans rather than a few loose years to get everything into gear for the next big step. Or, he could take a gap year.

I don't have excess cash flow of $650, it's rather that I can pay for about $4400 of the windows/doors from my emergency fund (there actually was an emergency); and save $300/mo for a year; getting me to 8k by the time the 0% offer runs out.

Putting the entire balance for the repair onto my refinanced mortgage would also allow me to keep that money in my emergency fund, which would feel more comfortable. My emergency fund is presently about 11k and I add about $150/mo to it.

The HELOC rate is 3.5%. It does not have any existing balance.

By "lower payments," I meant that the refinanced mortgage would result in lower monthly payments than the original mortgage + HELOC repayment strategy, which was my start point. $927 is less than $1127. Of course, I could take longer to repay the HELOC and have that flexibility. I don't like having extra payments to make, which honestly is a huge incentive to pay it off as quickly as I can - for me that weighs even more strongly than interest payments. Also the HELOC is a variable rate. I love having everything very simple . . but this year has been so complex.

My tight cash flow situation is really about this year and next year. Last year I scrimped on childcare because nannies are so expensive, and with Covid, I didn't feel safe having him in group care. I am a single parent and not having adequate childcare is hurting my career. So this year I found an outdoor preschool and hired a nanny for the days they aren't open. I decided to fully invest in childcare. Now, I'm spending about $2k/month. I knew it would be tight, and then a car accident happened and these repairs/upgrades, and now it's very very very tight.

Once my son is vaccinated, childcare expense will go down a bit because I won't need the nanny as much. Once he's at public school, childcare will go down a lot, I'm expecting to have $1500/mo freed up (still have to pay for aftercare). So in just 2 years I am expecting to be in a very different situation.

I am trying to balance taking care of our situation now, with not digging us into any holes for the future.

If I got a 15 year mortgage, the same lender said the interest would go up to 2.64% and payments would be about $670. I have to admit that would make the next two years easier. But, would I be putting us in a negative situation in terms of financing college. .

I don't know about cash-out refinancing simply to invest like that . . it boggles my imagination. I guess with that money I would fully fund my 401k, do a backdoor Roth, fund a 529 up to the state tax deduction limit (4k), and put a good chunk into savings for some big expenses coming down the pike (saving up for new roof, new sewer line, etc.), and put the rest in taxable.

However, I think that would be a strategy for more advanced investors than me. I am still learning the basics. I only really figured out how to save enough for my true expenses 2 years ago, and I only started figuring out how to save and invest last year. Right now my biggest personal finance goal is to be maxxing my 401k while getting into a place where I can cash flow big expenses like a car, replacing windows, roof, other emergencies so that we can have a bit more stability in our lives when such things happen. For instance, up until 2 years ago, due to financial illiteracy, I did not even have an emergency fund! The EF has already made a big difference in our lives. So I am still trying to build out the basics.
harikaried
Posts: 1799
Joined: Fri Mar 09, 2012 3:47 pm

Re: Many questions on refinancing

Post by harikaried »

Big Heart wrote: Tue Sep 14, 2021 3:40 pmpaid off before he goes to college … allow me to keep that money in my emergency fund … I don't like having extra payments to make, which honestly is a huge incentive to pay it off as quickly as I can … I love having everything very simple
Sounds like there's a desire to have the mortgage paid off with a comfortable emergency fund for extra liquidity over the next couple years, so going with 10 year term which also comes with the lowest rates and a little bit extra cash out could be the simple approach. A cash-out refinance for a $107k 10-year 2.24% mortgage has $1k/mo payments, so this extra $27k cash out increases the emergency fund to $38k.

The available current cash flow seems to be ~$1250/mo (mortgage, savings, emergency) increasing to ~$2750/mo in a couple years. So paying an extra $250/mo pays off the mortgage in 94 months instead of 120 months (and saves $3k interest). Adding in the $1500/mo after 2 years then pays off in 58 months (saving $6k interest relative to original 10-year). So it seems like in less than 5 years, you'll be debt free and have $33k/year to save/spend.

Of course you can be less aggressive in paying off the debt to do things like maxing out your 401k. And also you can still take advantage of the 0% loan.
Topic Author
Big Heart
Posts: 52
Joined: Mon Apr 26, 2021 8:42 pm

Re: Many questions on refinancing

Post by Big Heart »

I'm learning a lot- thank you harikaried - I got a lot out of this post. Just following the way you organize chunks of money is very illuminating.

I hadn't considered using the cash-out to buttress my EF. I really like this idea.

The higher *fixed* mortgage payment in the strategy you recommend scares me a little given how tight everything feels and how my money flow seems to be changing a lot from month to month in the past 6 months. I am doing a good job being consistent with savings, but I'm not at the point where I want to be legally contracted for higher fixed monthly expenses even if doing so means operating with fuller EFs.

I am thinking of getting 107k over the 15 year term, which would both buttress my EFs and lower my monthly payments. With the lower monthly payment, I can then increase my 401k withhilding by a bit (with the option to lower contributions if something horrible happened that exceeded my EFs -- or if we had some big new life event to deal with - unlike a mortgage payment).

I found an early repayment calculator and if I am calculating correctly, it looks like if I added $500/mo to the mortgage payment in 2 years, when childcare winds down, then I'd pay the mortgage off about a year earlier than I am currently scheduled. It also looks like this would allow me to increase my retirement contributions by a little bit right now, and then by quite a bit more in 2 years when that money frees up.

I tossed and turned all night about this since it's the opposite of lowering debt. And can I be trusted with more money sitting there. etc.

However, I looked at my reports and in the 2 years that I've been learning personal finance, I have made huge strides, improved our situation, and have developed a good structure for managing the money that comes in. I think I can trust myself to take this money, fund my EFs, use my EFs only for actual emergencies, ease my cash flow, increase my retirement savings by a bit right now, and then in two years, lean back into the higher mortgage payments with the goal of wrapping that expense up when he's a teenager.

I'm also remembering how a past self put tons of money into early mortgage payoff (without even having an EF and without fully funding my retirement :oops: ) So in a way this decision rebalances some decisions made in the past .

If I am missing something big I would love to hear your response. Otherwise - thank you so much for helping me look at this refinance moment through a very different lens.
Last edited by Big Heart on Thu Sep 16, 2021 8:18 pm, edited 1 time in total.
SanAntionetta
Posts: 138
Joined: Fri Apr 06, 2018 1:42 pm

Re: Many questions on refinancing

Post by SanAntionetta »

Not to be a bummer, but my 4 year old just started kindergarten, and I am saving a whopping $400/mo switching from full time daycare to before/aftercare. Then it's extra for all the days off/holidays. Also the activities/extra-cirriculars go up. I've been so excited to "lose the expense" of daycare, and it's kind of a letdown to see that it's no walk in the park when they start school.

In your shoes I would do the cash-out refi. And I would do it NOW and not worry about the 12 months of free financing. If you are a day late in getting it paid off you will be charged (most likely extortionate) interest for the full term. i would also do the 15 years and start a 529 with some of the savings for his first year in college. Alternatively, if you can progress in your career and have more cash flow you could pay an extra $250/mo towards the mortgage and easily have it paid off in 14.
Topic Author
Big Heart
Posts: 52
Joined: Mon Apr 26, 2021 8:42 pm

Re: Many questions on refinancing

Post by Big Heart »

Oh yes that is a bummer.

I see some parents saying similar on this forum but I really can't wrap my mind around how the savings couldn't be much bigger. In my town, the fancy aftercare is $400/month. Even if I added another $450/mo for holiday coverage . . I'd still be saving over $1000 compared to what I am spending now . . .

Can you break down what you were paying for childcare and what you are paying now?

Thanks for the perspective around the cash-out refi. It feels intense to do this so your perspective is meaningful to me. I think this is doable and will simplify things and YES help me grow my career.
Last edited by Big Heart on Thu Sep 16, 2021 1:26 pm, edited 2 times in total.
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hand
Posts: 1742
Joined: Sun May 17, 2009 8:42 pm

Re: Many questions on refinancing

Post by hand »

Big Heart wrote: Wed Sep 15, 2021 9:58 am I tossed and turned all night about this since it's the opposite of lowering debt. And can I be trusted with more money sitting there. etc.
IMHO this is the key question.

If you can't be trusted not to spend the money (and kudos to you for knowing yourself) this is a behavioral finance issue and your best course of action is likely to take the course that involves putting as much equity into your house as quickly as possible.

If you can be trusted to be responsible with the money, then this is more of a financial question and best outcome is most likely (though with some risk) to use the equity in your home to max retirement contributions now (and college savings if you have excess).

Keep in mind that total amount of interest paid is not a meaningful number - what you should care about is real interest paid, but that is unknowable without knowing future interest rates.

You may also consider filling out a mock FAFSA to learn about college aid - larger retirement savings and a mortgage is likely advantageous vs. a paid off home and less retirement funding.
Topic Author
Big Heart
Posts: 52
Joined: Mon Apr 26, 2021 8:42 pm

Re: Many questions on refinancing

Post by Big Heart »

Very good points.

I will look into the FAFSA.

Thank you.
Last edited by Big Heart on Thu Sep 16, 2021 6:13 pm, edited 1 time in total.
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