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Our refinance the mortgage dillema
Old 08-08-2010, 12:44 PM   #1
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Our refinance the mortgage dillema

I frequently look at mortgage rates to see what they are and to my surprise, our local credit union had a 30 year fixed for 4% with 1.75% in points. We refinanced about 18 months ago at 4.75%.

I've been pondering if we should refinance or not. I knew rates would have to go below 4.5% in order for it to make sense, and even then it was marginal, which is why the 4% took me by surprise. In a way, I really don't want to deal with refinancing. My goal, roughly, has been to pay off all of our debt before we RE, which will hopefully happen in about 10 years. But that's not a hard goal: right now, I'd prefer to have cash in the bank, which is why we don't pay extra on any of the mortgages. We want a bigger cushion.

Yesterday, I decided to get my wife's opinion. I asked her the following question: which would you rather have, $200k with a $1k monthly payment for 30 years or no debt/no monthly payment?

I was surprised by her answer, she chose the 200k with a 1k monthly payment.

Great, right after I figured I'd let it be, my wife decides she doesn't mind the debt. Don't get me wrong, that's a good thing - I love getting the spouse's input on these matters - but now I have work to do. So now I'm going through scenarios to figure out what we should do and I thought I'd ask others to get their opinion (spouse will also be reading this thread).

We have two mortgages:

1. 30 years fixed at 4.75% with $181k balance, 342 months remaining. $965/month P&I.
2. 10 years HEL at 4.99% with $33k balance, 8 years remaining. $426/month P&I.

Total P&I is $1391.

My thinking up to this point is that we'd keep the first mortgage until it becomes bothersome, no rush to pay it off. The second mortgage would be paid off by end of 2012. We have extra money coming in that has 80% chance it will be enough to pay off this debt. If that doesn't work out, then we'd use savings for the balance.

These are the options that I'm looking at. We're considering a 30 year fixed, but I've also added the 40 year since it's available.

It's also important to note that we'll be in this house for at least another 10 years, until the kids are grown. We've already been here 13 years and odds are high that we'll never sell this house unless we have to: kids leave town, neighborhood goes bad. We are not the type of move around.

1. Refinance both loans, pay costs in loan. No hit to savings and we'd have a 220k mortgage at 4% (~6k fees/closing costs) with P&I $1050. (40 year @ 4.375% has P&I $971 - this is almost what we pay now for our current 1st mortgage!).

2. Refinance first loan and focus on paying off second mortgage by end of 2012. If we include the fees in the loan, this results in 186k at $4% with P&I $888 (40 year @ 4.375% has P&I $821).

Running through the numbers for both of these:

1. At 30 years, we'll save $3846 with 70 month payback. At 40 years, it's better to keep the existing loans (save $1416). This is assuming a 3.5% pre-tax rate on savings and 10 years in the house.

2. At 30 years, we'll save $4439 with 60 month payback. At 40 years, it's still better to keep the existing loan (save $1248).

It looks like you'd only want to do the 40 year loan if you're really focused on cash flow. It is really appealing to think that we can maintain our current mortgage expense ($971 vs. $965). But if you go this route, you also have to believe that you can beat mortgage rate over 40 years.

Based on the numbers, it seems like refinancing would be a good move. I guess my question is, do we combine both the loans or only refinance the first mortgage. It looks like refinancing only the first mortgage is a definite winner (5 year payback). Consolidating isn't too far behind (10 month difference), but I'm not sure I like the additional $162/month P&I payment.

Is there anything else that I'm missing or should take into consideration?

As a side note, the piece I always have problems with are the fees. I've included them in the loan, so we won't have to pay them directly, but I know they're still there. Instead of paying the 5k, it'd be great to reduce the principal on the second mortgage by 5k. I know we get this back with time through lower interest payments, but it still irks me. Plus, we haven't broke even on our last loan, which makes it a tad bit more frustrating. Oh well, rant over.
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Old 08-08-2010, 01:30 PM   #2
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If you consolidate, you'll have to track home puchase interest, home equity interest, and points separately for tax purposes. Not saving much in tax complexity anyway.

I have no problem borrowing at 4% in order to invest in equities, so I'm all for consolidating into the lowest interest rate and even extending the loan period as long as it makes sense investment-wise.
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Old 08-08-2010, 02:09 PM   #3
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I would suggest visiting Home and giving his calculators a whirl. I think that Prof. Guttenberg's calculators are by fr the best out there and should give you a better idea of wethre refinancing makes sense.

I should also point out that your lender on the second would have to agree to resubordinate in order for you to refi the first. If they have a burning reason to want to be paid off, you could have an issue.
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Old 08-08-2010, 02:27 PM   #4
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Is there anything else that I'm missing or should take into consideration?
Yes. You can only refinance the first mortage leaving the second in place if the second agrees to subordinate to the first. Lots of times the second will not do so.
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Old 08-08-2010, 03:01 PM   #5
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My HELOC had no problem with subordinating again, however I did have to reduce the amount to stay within 80% while adding an extra $100k to the first mortgage. So it is not impossible.
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Old 08-08-2010, 03:04 PM   #6
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I would suggest visiting Home and giving his calculators a whirl. I think that Prof. Guttenberg's calculators are by fr the best out there and should give you a better idea of wethre refinancing makes sense.
That's been my primary site for all of the above calculations. He has a great set of calculators available.

The more I think about it, the more I realize my problem is figuring out how much of a monthly expense for debt I want to carry. I was just talking with my spouse and she's all for consolidating for 40 years.

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I should also point out that your lender on the second would have to agree to resubordinate in order for you to refi the first. If they have a burning reason to want to be paid off, you could have an issue.
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Yes. You can only refinance the first mortage leaving the second in place if the second agrees to subordinate to the first. Lots of times the second will not do so.
My HEL is through penfed and last time we refinanced, they didn't have any problems with the subordination. Maybe that's changed over the last 18 months?

If so, then it would make the question of consolidating a lot easier to answer.
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Old 08-08-2010, 06:37 PM   #7
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Wow, my CU is at 6% for some reason.
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Old 08-08-2010, 07:32 PM   #8
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You can dial in any interest-rate you want --- if you pay the points. In the extreme, you can have an interest rate of 0% (100% points). That 1.75 points looks terrible.

Since one can get 5% CDs nowadays, I don't see a reason to pay off a sub-5% mortgage.
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Old 08-08-2010, 09:15 PM   #9
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You can dial in any interest-rate you want --- if you pay the points. In the extreme, you can have an interest rate of 0% (100% points). That 1.75 points looks terrible.

Since one can get 5% CDs nowadays, I don't see a reason to pay off a sub-5% mortgage.
Where can you find a 5% CD rate nowadays? Thanks.
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Old 08-08-2010, 11:06 PM   #10
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a 30 year fixed for 4% with 1.75% in points.

You do realize that this isn't actually a 4% mortgage, don't you?

Points is just prepaid non-refundable interest. Doesn't matter if you pay them out of pocket or add them to the mortgage amount.
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Old 08-09-2010, 12:31 AM   #11
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a 30 year fixed for 4% with 1.75% in points.

You do realize that this isn't actually a 4% mortgage, don't you?

Points is just prepaid non-refundable interest. Doesn't matter if you pay them out of pocket or add them to the mortgage amount.
Sure, it's not 4%. I don't think I ever made that claim. But if you plan to hold the loan for a longer time, you'll save money by paying points to get the lower rate. You have to run the numbers to see if it makes sense.

The place I'm looking at right now doesn't have a zero point loan, so I cannot do a direct comparision. Instead, I used Penfed's 4.375 with zero points, even though it's still too generous since Penfed charges a 1% origination fee and the place I'm looking at doesn't. I'll also assume all other fees are the same.

According to:
The Mortgage Professor

Break even is 8 years. If I add in Penfed's 1% origination fee, then break even comes down to 3 years. I won't pay it off in either time frame, so it looks like an obvious choice.

If you know of a place with better rates, please let me know, but it's one of the best I've seen lately after taking fees, etc, into consideration.
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Old 08-09-2010, 12:36 AM   #12
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You can dial in any interest-rate you want --- if you pay the points. In the extreme, you can have an interest rate of 0% (100% points). That 1.75 points looks terrible.
Why's that?

It's not great, but they charge no origination fee and when I run the numbers, it comes out better than anything else I've found.

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Since one can get 5% CDs nowadays, I don't see a reason to pay off a sub-5% mortgage.
Where?

If I can get 5%, I'll up the principal on the refi and buy CDs with what's left-over. As I'm sure many others on the board would do.
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Old 08-09-2010, 09:54 PM   #13
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You can get 5% CDs from me. I'm not FDIC insured, but that shouldn't be a problem as I've never gone bankrupt before.
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