Mortgage Refinance Questions

[younginvestor2013]

Hello All,

There had been a thread posted early about a cash out refinance, which has got me looking into a refinance myself since rates are lower than when I closed two years ago.

My condo was bank owned and I therefore got a "good deal". There have been direct comps in my condo building $20-$40k more than what I paid only two years ago.

As a result of the higher comps, in addition to the lower interest rates now, I am considering a refinance. But I am contemplating a traditional refinance where I would refinance on the current balance of my mortgage, or a cash-out refinance where I could potentially walk away with at least $20k cash.

I'm curious to hear the ER Community's thoughts on this.

The cash-out option would, of course, leave me with a higher principal balance, but due to the lower interest rate, my monthly P&I payment would only go up $50 over what it is at now.

The traditional 30 year refinance option would lower my monthly payment by $100.

What do you guys think? I personally think the cash-out option is attractive, but only if I am smart with the money and don't just use it to go on a shopping spree. Given my long time horizon (I am 26) and low interest rates still, this seems like a relatively risk free option but I could see the case for not doing it.

Alternatively, I can pursue a 15 year or 20 year mortgage as well, but I'd rather do a 30 year given my time horizon and to take advantage of the tax deductions.

 

[sengsational]

If you're going to invest the money, then maybe do a cash-out refi.

If you don't have specific plans for where to invest the money, then no, don't do a cash-out refi. You've got "savings" that you'll turn into spending, which is against the nature of things on this forum.

Say you do have specific plans for how to keep that money as savings. Then I say "maybe" do the cash out because the only real saving option is in equities (to make anything more than you would have made paying off the mortgage with cheap inflated dollars). And if you would get "spooked-out of the market" when (not if) the market has a bad year or two, then don't do a cash-out refi. If you're certain that you'd save/invest and wouldn't get spooked-out of equities, then yes, a cash out refi would be advisable for a young investor that's currently got plenty of earning years in the future.

 

[ivinsfan]

Hello All,

There had been a thread posted early about a cash out refinance, which has got me looking into a refinance myself since rates are lower than when I closed two years ago.

My condo was bank owned and I therefore got a "good deal". There have been direct comps in my condo building $20-$40k more than what I paid only two years ago.

As a result of the higher comps, in addition to the lower interest rates now, I am considering a refinance. But I am contemplating a traditional refinance where I would refinance on the current balance of my mortgage, or a cash-out refinance where I could potentially walk away with at least $20k cash.

I'm curious to hear the ER Community's thoughts on this.

The cash-out option would, of course, leave me with a higher principal balance, but due to the lower interest rate, my monthly P&I payment would only go up $50 over what it is at now.

The traditional 30 year refinance option would lower my monthly payment by $100.

What do you guys think? I personally think the cash-out option is attractive, but only if I am smart with the money and don't just use it to go on a shopping spree. Given my long time horizon (I am 26) and low interest rates still, this seems like a relatively risk free option but I could see the case for not doing it.

Alternatively, I can pursue a 15 year or 20 year mortgage as well, but I'd rather do a 30 year given my time horizon and to take advantage of the tax deductions.

As far as tax deductions, you do realize the deduction takes the place of the standard deduction, so it's only the excess amount of interest that is really a bonus?

How much did you put down on this property? Are you in danger of being "upside down" in a housing turndown? A cash out refi would make this a possible problem if you need to sell or relocate. I'd take the 30 if no fees are involved and just pay the 100 bucks you are saving as an extra principle payment. If you have cash flow problems you have a lower payment and if you don't you won't miss the 100 bucks anyway as you already are paying that much each month.

People using their homes as banks is what escalated the housing problem last time....

 

[pb4uski]

One possibility might be to do a cash-out refinance and then use the proceeds to increase your retirement savings (401k if any, or IRA) for 2016 and future years.... assuming that you are not currently maxing these out.

 

[DrRoy]

I have personally taken pride in limiting my indebtedness, and in your situation I would probably refi at a shorter term for the same payment and have it paid off earlier. I paid off my mortgage a few years early and loved the improvement in my monthly cash flow.

 

[UpAnchor]

One possibility might be to do a cash-out refinance and then use the proceeds to increase your retirement savings (401k if any, or IRA) for 2016 and future years.... assuming that you are not currently maxing these out.

I was thinking exactly the same until I saw pb4uski's post. Of course this goes double if married, although I suspect OP may be single. This would have the additional advantage of "locking up" those funds, so-to-speak, thus eliminating the spending risk. In my twenties I was concerned over tying up my money where I couldn't get at it. Now, at 64, I would tell my twenty-something self to tie up my money where I couldn't get at it.

 

[Bamaman]

It would be so tempting to refinance and draw out some money. But it's triple tough investing right now.

I'm sorry, but my goal has been to get my house paid off as soon as possible as an ace in the hole for early retirement. Not having a house payment allows me to save more money and pay for cars, boats & toys previously financed.

I recently went the other way--cashing out some tax paid ETF's in order to purchase a very large house as an investment. I bought the house for 75% of what's it's worth from a credit union that had foreclosed on it. Now I've got my old house to sell.

 

[Walt34]

If you're going to invest the money, then maybe do a cash-out refi.

If you don't have specific plans for where to invest the money, then no, don't do a cash-out refi. You've got "savings" that you'll turn into spending, which is against the nature of things on this forum.

Say you do have specific plans for how to keep that money as savings. Then I say "maybe" do the cash out because the only real saving option is in equities (to make anything more than you would have made paying off the mortgage with cheap inflated dollars). And if you would get "spooked-out of the market" when (not if) the market has a bad year or two, then don't do a cash-out refi. If you're certain that you'd save/invest and wouldn't get spooked-out of equities, then yes, a cash out refi would be advisable for a young investor that's currently got plenty of earning years in the future.

What he said is the only possible justification for doing a cash-out refi. If there is the even remote possibility that you might spend it foolishly (hey, I was 26 once) then do not lead yourself into temptation.

Personally I'm in DrRoy's camp and like having the house paid off.

 

[younginvestor2013]

Thanks for the responses everyone.

To address a few of them, in no particular order....

1. I actually could pay off my mortgage right now if I wanted to (I could have paid cash for my condo). Due to my age and low mortgage interest rates, I chose not to do that. So, I can understand the viewpoint and value in having a paid off house for FIRE purposes. But, I think it makes more sense to have the mortgage and keep my taxable cash invested due to low interest rates (in my opinion), especially given my time horizon.

2. I have given this more thought and agree that I would need to be smart with the money and not use it as a piggy bank for a shopping spree. To that end, I think I would like to have a purpose as to what I will do with the money before I take any action (i.e., buy more taxable stocks, plow it into retirement funds, buy an investment property...etc). My goal would be to keep an accurate accounting and paper trail of it all so it doesn't become a slush fund. I would likely open a separate savings account for the funds so that way I can easily track it.

3. I am liking the idea of plowing it into retirement accounts, since I already have sizable tax free assets for my age. I currently have about $200k in taxable assets, and $85k in retirement accounts. My very conservative calculations are that if I can get $300k in today's dollars into my retirement accounts by 35 or 36, I could not touch the principal and it would be around $1m in today's dollars by the time I'm 60. So this whole cash-out refi would be a nice boost to that $300k target in the next 9 to 10 years.

 

[younginvestor2013]

There is also the concern that the appraisal will end up coming in way lower than I anticipated, which would not allow me to do that cash out refi route.

If that were the case, I could still do the traditional refi, which, although I couldn't do any of the ideas mentioned in my post above, I still would be saving around $100/month due to the lower interest rate.

So, it seems a no brainer that I should do some type of refi - the risk isn't in choosing to refi per-se, just which route I choose to go......

 

[l8_apex]

If you're diligent with your money and it sounds like you are, then do the cash-out if you think that investing that money will give you a higher rate of return than the interest rate the bank is charging you. You've got to try to factor in risk and tax consequences so it's not completely straightforward.

That being said, I've got a number of rental properties and all have a max mortgage on them (75% LTV) as does my own home as I wanted the cash to invest elsewhere. It's working for me right now, but it's far from guaranteed to be successful in the future.

 

[younginvestor2013]

Hi again,

Resurfacing this thread to gauge a last minute opinion from the ER folks.

I did go through with the refinance process, and recently had an appraisal done. The value came back much higher than what I closed at (as anticipated).

So now, I am left with deciding which path I should take. I would appreciate any feedback you guys could provide! See above for some background on my age and net worth.

Current Appraised Value: $240,000
Current Principal Balance Before Refi: $165,000
Current P&I Before Refi: $861
Years Left on Mortgage Before Refi: 28
__________________________________________________________

Refi Assuming Cash Out Option where I would walk away with approx. $24k

30 year fixed @ 4.25% P&I: $945 or $84 more a month than current mortgage
20 year fixed @ 4.0% P&I: $1,163 or $302 more a month than current mortgage
15 year fixed @ 3.5% P&I: $1,373 or $512 more a month than current mortgage

Traditional Refi assuming no cash out option

30 year fixed @ 3.875% P&I: $776 or $85 less a month than current mortgage
20 year fixed @ 3.5% P&I: $969 or $108 more a month than current mortgage
15 year fixed @ 3.125% P&I: $1,163 or $302 more a month than current mortgage

As I stated above, if I go the cash out route, my plan is to invest these funds. I am not currently maxing out my 401k (do not make enough/spend too much), so my plan would be to funnel the proceeds into retirement funds over the next couple years (essentially contributing an additional $7-$9k than I do now).

I am leaning towards the cash out option, with the 30 year or 20 year term. I anticipate promotions and raises at work in the coming year and thus the additional $302 more a month wouldn't be a huge hit, and I would still walk away with cash proceeds.

I welcome and would appreciate your thoughts!

 

[ivinsfan]

I'm kind of confused, in one of your posts you said you could pay off the condo now if you wanted to. How does that jive with your not fully funding your 401?

What is the interest rate on your current mortgage?

 

[younginvestor2013]

I could pay off the mortgage if I wanted to, but I am 26 and would prefer to keep a mortgage and keep my taxable funds invested for the long run given my time horizon.

My current interest rate is 4.5%.

I suppose my strategy is to maximize the "assets" side of my balance sheet (by pushing as much funds into retirement and taxable accounts) since I can get a fairly low interest rate on my mortgage, which, combined with my time horizon, seems like a smart thing to do.

 

[Fedup]

I never do cash out option, however I would refinance for cash flow positive.


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[ivinsfan]

I could pay off the mortgage if I wanted to, but I am 26 and would prefer to keep a mortgage and keep my taxable funds invested for the long run given my time horizon.

My current interest rate is 4.5%.

I suppose my strategy is to maximize the "assets" side of my balance sheet (by pushing as much funds into retirement and taxable accounts) since I can get a fairly low interest rate on my mortgage, which, combined with my time horizon, seems like a smart thing to do.

I still don't understand, if you have that much available cash (meaning that it's not tied up in retirement accounts) why aren't you maxing out your 401? That's what you said you would do with the "extra" cash from a new re-fi.

 

[younginvestor2013]

I still don't understand, if you have that much available cash (meaning that it's not tied up in retirement accounts) why aren't you maxing out your 401? That's what you said you would do with the "extra" cash from a new re-fi.

Because I don't want to essentially live off part of my taxable brokerage funds.

As I stated above, I currently do not make enough/spend too much to fully max out my 401k based off my earned income alone. If I were to "move funds around" from my taxable brokerage and essentially live off some of those funds every month, I easily could max out my 401k.

But I don't want to move more money from my taxable funds. My goal is to have those sit as long as possible and grow so I can use them to bridge the gap before I can access retirement funds

This idea to cash out refi essentially allows me to plow more money into retirement accounts without touching my taxable funds and only marginally/nominally affect my monthly cash flow.

I realize, though, that I am essentially taking on $20k in additional debt. But I don't see how $20k invested today in retirement accounts for 34 years (Roth 401K and roth ira) would not be worth way more than the interest on $20k, especially when you factor in the tax benefits of the retirement accounts, in addition to the extra yearly income tax deductions.

 

[ivinsfan]

Yes, but you do want to live off "borrowed money" because it's cheap? Why don't you finance the 401 out of taxable and give yourself a loan? You apparently are short of after tax spending money The money won't vanish in your 401 it's still your money. Are you funding the 401 for the max company match?

Or dial back your budget until you get those nice raises and promotions. ...I'd lower that interest rate with the straight re-fi and go with either the 30 or the 20 year. I notice you said taking on an "additional 20K" in debt,do you have debt in addition to your condo?

 

[Animorph]

This may not be a problem for you, but $24k cash out is deductible (up to $100k over purchase principal) for standard federal taxes but not for AMT. For AMT you want to document that you used the $24k for taxable investments, if that is your plan. Then you can deduct the interest as an investment interest deduction. That adds a bunch of complexity to your taxes, although it's still fully deductible in the end.

I took $100k cash out on my last refi at 3.25% and invested it, so if the paperwork is OK with you, go for it.

 

[younginvestor2013]

Yes, but you do want to live off "borrowed money" because it's cheap? Why don't you finance the 401 out of taxable and give yourself a loan? You apparently are short of after tax spending money The money won't vanish in your 401 it's still your money. Are you funding the 401 for the max company match?

Or dial back your budget until you get those nice raises and promotions. ...I'd lower that interest rate with the straight re-fi and go with either the 30 or the 20 year. I notice you said taking on an "additional 20K" in debt,do you have debt in addition to your condo?

My spending is pretty fixed. I can adjust it and live more frugally, but I would take a lifestyle cut that I don't want to take. While I do value saving, FIRE, and frugality, I am still on-track to attain FIRE at a young age, so I want to enjoy the now. I am already saving 18%+ of my gross income.

I'm not short on after tax spending in my current budget (income & expenses). My point is simply that I cannot max out my retirement accounts right now, based on my income and expenses ONLY (not factoring in my taxable brokerage account). I would like to max out my retirement accounts, but in order to do so, I would need to dip into my taxable savings and "move money" which I don't wish to do.

Yes, I would be borrowing against my house to fund my retirement accounts, but my argument is that would yield a better return than leaving the $20-$25k sit in my home equity over the long run or whenever I decide to sell my house.

 

[younginvestor2013]

Also, I have no other debts, just my mortgage.

 

[ivinsfan]

What ever works for you.....my problem would the higher interest rate on the entire mortgage that you pay over 30 years to get that 20K..you are going to need a higher return to break even due to that number.

 

[younginvestor2013]

The interest rate on the new cash out refi mortgage, for whichever term I go for (30/20/15 years) is lower than my current mortgage.

 

[ivinsfan]

Of course, but the lowest rates are for the refi only not the cash out, which was what I was referring to...the cashout option will cost you more in interest. But I think you are looking for nods to the cash out and aren't really even considering the refi only, so I am going to stop posting to this thread now. Either way you are doing fine, so good luck, just as a point of interest, keep us posted on the 401 and some markets returns if you end up going that route.

 

[tulak]

I would pick the loan with the lowest interest rate and skip the cash-out. Why pay more in interest?

I'd also select the term based on how long I plan to live in the condo. If I'm going to be there 10+ years, then I'd go with the 30 year loan. If it was a shorter time frame, I'd do a 5/5 ARM through PenFed CU.

But it sounds like you may have already made up your mind to take the cash.