Another Re-Fi discusion - help me think this through

[Ellien C]

Let me start with the basics.

We've been in our house 10 years and plan to stay for the rest of our lives. The house is worth considerably more than we owe and we have generally good credit with limited debt.

I need to have at least $20K in roof repairs done and we only have about $12K liquid. The repairs only include the exterior and not the damage to the interior due to the leaks.

Our current rate is 5.25% and DH thinks we can go down to 4%, take $15K in equity out of the house (I think), pay $150 less per month and have a 15 year mortgage. I think this is OK but I suggested  that we keep paying the same amount and hopefully pay the debt off in 10 years when our oldest goes to college.

This is the first time we've EVER taken equity out of the house and I'm very nervous - but I think it needs to be done. Doing the re-fi would also allow us to fully fund our Roth IRAs this year which we would not be able to do with the roof repairs. I also think I need like $1500 in dental work.

There are other things that we need/could do with the equity money like new windows (house is nearly 100 years old with original windows) or even just new insulating blinds.

Other options I guess would be to pay cash for the repairs and see if they can put us on a payment plan for the remainder. I would probably be paid off in 6-9 months. We also have a new baby so our tax refund should be a little higher but I'm not sure how much. This means we would not fully fund our Roth IRAs but we do both have 401ks that would continue to be funded.

What are your thoughts?

[Annie Mac]

Here are my thoughts:

Your roof needs doing, regardless of how or where you pay for it. You don't have enough in liquid assets to fully cover it, so you're going to have to finance it somehow. For me, it comes down to what is the cheapest financing option? Could you get a low interest line of credit secured by your house, vs a full re-fi? You probably wouldn't incur any penalties that way, and you could pay it off as fast as you like. Whether or not you do other home repairs would be entirely up to you, but I'm a fan of protecting the home/investment. A little money spent now is better than a lot of money spent later. If I were you, I would gather up all the financing options available and just weigh them and decide, seeing as how you're going to be at least a little bit in debt to someone anyhow. And personally, I would feel safer leaving my liquid assets sitting in the background, just in case. That's my 2 cents.

[Ellien C]

Thanks for the reply. We might be able to get a HELOC - but that still leaves us with 5.25% interest rate for the next 12-14 years. Seems to me like we would/should refi to the lower rate and then the question is whether or not to take equity out.

[Annie Mac]

So, if I understand you right, your options are:

1. Re-fi & borrow a larger amount to pay for your house repairs.

2. Re-fi, use your savings and a secondary source of financing to pay for the repairs. This will be offset by paying a smaller mortgage payment each month. 

It's really going to depend on the interest rates and the calculation methods. If you haven't already, find a good mortgage calculator on the net, to help you properly assess the costs. Another option is doing the re-fi AND getting a fixed term personal loan (often those have good rates, especially if they're secured, but in this economy, who knows). The advantage of a fixed term loan vs a long term mortgage is that you're done in 5 years and as a result, you've paid less interest. If you use your savings, you're only looking at 8k, which is pretty manageable. 

What's the bigger concern for you, monthly payments or overall interest paid out? Sometimes it comes down to that. Even if the longer term mortgage is actually more expensive in the long run, it's more affordable in the here and now. 

If it were me, personally, I'd refi with a larger amount and get the roof done, and maybe something else that would either increase the value of the house and/or save me money. The windows sound like a good bet there. But your situation is going to be different than mine. 

[Ellien C]

All very helpful. Thanks. The biggest concern is overall interest. We are meeting our payments on the house just fine and managing to put quite a bit away each month on top of that for retirement. It's just that the repairs are enormous. I guess I have some other weird options like borrowing against the 401K but that seems absolutely horrible to me.

[mnnice]

This might be a bit off topic, but I think I would engage in some belt tightening and/or slow my retirement savings in order to beef up my emegency fund. 

Twelve grand might seem like a lot to some people, but apparently it's less than a roof and would only be 6-10 months of COBRA for most of families.

Edited by mnnice - 12/2/10 at 11:37am

[Ellien C]

Well, in a true emergency, like both of us were out of work for an extended period of time, there are some investments that we could sell and I would totally refi to a longer term on the house - like 20 or 30 years. I'm just not sure I want to do that for the roof. This year I was off work for 3 months due to maternity and then DH took 8 weeks (6 unpaid) after I went back to work and stayed home with the baby. Childcare is obviously most expensive in the first 2 years and will then go down, so I really think we are covered for any extended outage. In that case, I WOULD borrow against my 401K in that case and cash out a 401K from an old, old job. We would only need COBRA if both of us lost our jobs at the same time.

My biggest concern I guess, over montly payments and interst rates is retirement. DH is in his 50s and I feel he is underfunded. It's mostly because of me that we are putting anything into Roth IRAs for him. I really wouldn't want to put anymore in liquid assets as it would be giving up interest. We do have some mutual funds that I guess we could sell for the roof but that would be retirement money. These are the funds that would not incur an early penalty.

[heatherdeg]

If you can still maintain at least 20% of equity at your home's current market value (in this economy/market), I really wouldn't worry about taking money out of the house.  I know that might not be a really popular answer, but I would actually probably look to fund the entire roof repair against the house that way if it could be done with maintaining that equity cushion.

First, it's a capital repair.  I absolutely would never fund anything other than that against a house--and not even this if you couldn't maintain an equity cushion.

Second, if you only have $12k liquid, I wouldn't dare touch it for anything other than floating your family if either of you is out of work.  I realize people try to play the odds on the likelihood of this, but it's called an "emergency" fund because it's an emergency--meaning, you can't foresee or plan for it.    You have no idea what kinds of things could come up to eat that money up faster than you can imagine.  I'm hoping that $12k is at least 3mo worth of bills for you guys.

I also would refi into a 30year mortgage and just pay the payment amount for a 10- or 15-year loan.  You will save nearly the same amount of interest in the same amount of time this way without the commitment or obligation of the larger payment if the day comes that you can't pay it--even if only for a few months (which is enough to land you in foreclosure proceedings).  Here's a good mortgage calculator for you to explore all of this:

http://www.drcalculator.com/mortgage/

The difference in the interest or time saved by doing an actual 10- or 15-year vs. paying the 10- or 15-year payment on a 30-year is so minimal that it's hardly worth the risk.

I would NOT fund the retirement against the house.  For that, I agree with the pp that said that you should cut something else out to afford these things.  Not just now, but on an ongoing basis to fund a "sinking fund" for things like the dental work and a budget line item that funds your IRAs each year.

JMO

[mnnice]

I wouldn't count on being able to refi if you had no documentable income or only unemployment as income.

I am dubious enough about the future of the stock market that I am not entirely convinced that cash won't do better anyway (but that's it's own whole thread).  I also think as we age we need more cash reserves because more stuff comes up. I do see you point too. You are a in a bit of a crunch/sandwich  with a new baby and 50 year old husband.

[heatherdeg]

Oh--missed that refi remark.  Ummm... yeah... notsomuch.  I was in that position when I realized that they couldn't confirm employment and I therefore couldn't refinance for lack of income.  And that was in early 2001 when prospects of being re-employed were WAY better.

[Ellien C]

Thanks for all your help. I'd like to get away from the Emergency Fund discussions.  I feel we are well-funded there and we would have some options in the event of long term unemployment - like one of us out of work for more than a year. 

Onto the refi.

We would have well more than 20% equity in our house even taking out the money for the roof. And yes - we could acutally fund the entire roof repair and still have an equity cushion. Heather brings up a good point about refinancing into a 30 but committing to paying it off early - HOWEVER, I fear my husband does not have the discipline to actually do that. He was totally comfortable going into a 15, whereas I want it paid off in 10 by the time the oldest is ready for college. So it's kind of a compromise for us to take a 15 but pay in 10. I really fear that if went into a 30 - we'd TAKE 30. Honestly - it just terrifies me.

On an ongoing basis we each contribute to our 401ks AND we have put the maximum toward our ROTH IRAS each year for the last 10. There's no reason this can't continue. This money will continue and is outside of the roof repairs and refi. This year was a little tight for the Roths, AND the roof because we each went a period without a paycheck.

[Ellien C]

Originally Posted by Ellien C 

Doing the re-fi would also allow us to fully fund our Roth IRAs this year which we would not be able to do with the roof repairs. I also think I need like $1500 in dental work.

Ahh - I see the problem here. The $12K we have set aside is generally for our Roth IRAs ($9K total) and then there is usually $3k-$4K tax refund (don't ask - see DH and discipline above. If it were up to me it would be a lot less). So that gives us about 5K in liquid savings per year. Except this year we would need to whole 12K plus next years refund (say 4k for the new baby) and then need to find 4K for the roof - and that leaves no Roth money.

So the options are:

1) Take equity out of the house to fund the repair and continue to make retirement contributions.

2) Suspend ROTH contributions, spend all of our savings (plus tax refund) and find or extend payments for the last 4K. I think the roofer would allow us to pay over time and I think we could pay it off in 4-6 months - don't know if he'll have finacing charges. This eliminates any immediate cusioh, but it would be built up quickly - within a year.

3) HELOC (but I still think we should refin into 4% down from 5.25%)

4) Divest some other investment - not a true retirement vehicle, but mutual fund money I have.

See, the issue with #1 is that I pay that stupid roof off for the next 10 years. Whereas if we don't take it out of the house I think we could pay that last 4K within a year. But then we'd have no ROTH funding this year.

[nd_deadhead]

It sounds to me like refinancing makes sense for you - 5.25% is a pretty high rate right now. For now, let's just look at that:

For the sake of argument, I assume your mortgage was initially $100,000. Obviously it was something different, but the relative calculations are the same. If your mortgage was $250K, multiply all of my numbers by 2.5, for example.

Assuming you have made just the required payment of $552.20 for 10 years at 5.25%, you still owe $82,141. This is the amount you need to refinance. At 4% interest for 15 years, your new mortgage payment is $607.59 - slightly more than what you're paying now. The difference in interest paid (assuming you kept paying for 30 years) is $23,715.

What happens if you increased you mortgage payment so your existing loan is paid off in 15 years (the same as the re-fi)? Your payment goes up to $660.31, and the total interest paid drops by $14,225. The difference in interest between paying off your existing loan in 15 years and paying off a 4% loan in 15 years is $9591.

Keep in mind, however, that refinancing is not free. You can expect to pay about $2000 to refinance the $80K (more for a larger loan). Since you don't have a ton of cash on hand, you might roll that expense into the mortgage - at an interest cost of $331 per thousand dollars.

What about the extra $15K for the roof? As someone else noted, that has to be paid for somehow. Adding it to your re-fi for 15 years at 4% would add $111 to your monthly payment, and cost $4972 in interest.

I don't know what kind of a rate you can get on a HELOC, or if you can even get a fixed rate. That would be ideal, because as low as interest rates are now, they've got nowhere to go but up - the only questions are when and how high. Assuming you can get a fixed-rate HEL at 4% for 10 years, your payment would be $152/month, with a total interest cost of $3224. The interest savings over adding that to the re-fi is $1748, but that's $50/month you could be putting toward retirement.

I know I threw out a lot of numbers - I hope some of it makes sense! If you want me to run the calcs on you real numbers, just ask.

[heatherdeg]

Originally Posted by nd_deadhead 

What happens if you increased you mortgage payment so your existing loan is paid off in 15 years (the same as the re-fi)? Your payment goes up to $660.31, and the total interest paid drops by $14,225. The difference in interest between paying off your existing loan in 15 years and paying off a 4% loan in 15 years is $9591.

Keep in mind, however, that refinancing is not free. You can expect to pay about $2000 to refinance the $80K (more for a larger loan). Since you don't have a ton of cash on hand, you might roll that expense into the mortgage - at an interest cost of $331 per thousand dollars.

To your first point, the OP noted her husband's lack of discipline in accomplishing this.  I'm not sure how to fight that, but maybe someone else has ideas.

But yeah, you're right that refinancing is not free.

OP, if you feel you have very liquid emergency funds elsewhere, then I wouldn't tap the house.  You might call the mortgage company and ask them to change your rate if nothing else.  Sometimes they can do a "streamline refinance" where it doesn't cost you anything to refi because you're doing it with them and you're an existing customer in good standing, but I tried that 2 years ago and the banks were so overwhelmed with people trying to renegotiate their loans and being bailed out that my particular bank's attitude was "Eff you--you're paying your mortgage--I don't have time to deal with you."  Nice, right?  I understand your husband's lack of discipline  (seriously--I FULLY understand it because I was one of those people), but I'd sooner take my chances with that than get into a situation where I'm locked into a 10- or 15-year payment obligation.  JMO 

If this is the only year you haven't been able to fully fund your ROTHs, I would leave it alone.  I had a hard time writing that, but then I thought about the fact that you'd be pulling money out of one type of equity to fund another.  My background is real estate and so I have a much easier time leaving my equity there than in a ROTH.

[cschick]

Originally Posted by Ellien C 

Thanks for the reply. We might be able to get a HELOC - but that still leaves us with 5.25% interest rate for the next 12-14 years. Seems to me like we would/should refi to the lower rate and then the question is whether or not to take equity out.

Refinance and set up a HELOC as part of the same process. We've done that. At current rates,  you might be able to get down into the 3.5-4% range on a 15 year, it's worth looking into.

(Edit: did I miss this? How much time left in your current mortgage?)

[Ellien C]

 

If this is the only year you haven't been able to fully fund your ROTHs, I would leave it alone.  I had a hard time writing that, but then I thought about the fact that you'd be pulling money out of one type of equity to fund another.  My background is real estate and so I have a much easier time leaving my equity there than in a ROTH.

Again, thanks for the dialog. I'm not sure what the above quote means. What gets left alone? The 12K in savings goes to the roof, we re-fi anyway into a lower rate and then "find" the last of the money needed for the roof? And then just suspend Roth contributions this year?

I think we have about 13 years left on a 20 year mortagage. Given that, I don't feel it's too bad to be locked into a 15. We're already kind of locked in. I was intending to pay extra once youngest is out of day care and have it paid in 10 years and that really won't change that much

We've received a quote from our current company (USAA) but now that I have the specifics from DH it seems REALLY, REALLY high. $6500 in closing costs which include 7/8 point to get us down to 4% interest. DH says rates are starting to creep up so we're hot to get the refi done. He wants to take out 26K in equity to completely fund the roof and the closing costs. Then 9K goes to Roth IRAs and we have a 3K cushion until our tax refund when it would be more like a 7K cushion. (And this excludes other investment vehicles like mutual funds that could be divested if really, really, needed).

We've never used a mortgage broker but are considering it this time. In the past we just went to the bank or the credit union and I saw a lot of people get steered into those ARMs by sleezy brokers.

Just a HELOC would require extra payments and I feel like we don't have that right now.

[mnnice]

I know there are huge regional differences in closing costs, but I've refi a couple of times and the total fees were less than a grand each time (both time borrowing between 100k and 150k).  $6500 sounds insane and is about a third of your new roof right there.

I think I'd bite the bullet and sell some of the afformentioned stocks or forgoing a year of Roth  and hunt for a better refi deal at your own pace.  I think Heathendog is saying she would pay for the roof by not funding our Roth's this year vs. selling mutual funds in taxable accounts just so that you can get a new roof and fund your Roths.

[cschick]

Originally Posted by Ellien C 

We've received a quote from our current company (USAA) but now that I have the specifics from DH it seems REALLY, REALLY high. $6500 in closing costs which include 7/8 point to get us down to 4% interest. DH says rates are starting to creep up so we're hot to get the refi done. He wants to take out 26K in equity to completely fund the roof and the closing costs. Then 9K goes to Roth IRAs and we have a 3K cushion until our tax refund when it would be more like a 7K cushion. (And this excludes other investment vehicles like mutual funds that could be divested if really, really, needed).

 

Rates have been creeping back up, but I think the word to focus on here is creeping. You may want to talk to a broker and define your terms. Things like closing costs do differ by region, and a good broker would be able to tell you what is normal for your area.

I know that when I last talked to a friend who is also a broker (maybe 6 weeks ago?) she told me that she could probably get us a 3.5-3.75% on a 15 year, only problem is that we'd have to escrow. But she's also pretty aware of our credit standing and etc, since she's officially run the numbers for us a couple of times over the years.

[heatherdeg]

Originally Posted by mnnice 

I know there are huge regional differences in closing costs, but I've refi a couple of times and the total fees were less than a grand each time (both time borrowing between 100k and 150k).  $6500 sounds insane and is about a third of your new roof right there.

I think I'd bite the bullet and sell some of the afformentioned stocks or forgoing a year of Roth  and hunt for a better refi deal at your own pace.  I think Heathendog is saying she would pay for the roof by not funding our Roth's this year vs. selling mutual funds in taxable accounts just so that you can get a new roof and fund your Roths.

Yes... that's what I meant.  Thanks, mnnice.

The closing costs sound the same as what mine would be in NJ or northern IL.  In fact, they sound a little lower than what I'm dealing with right now in northern IL (but not in Chicago--about an hour out).  But ask what that's made up of because chances are it's including funding an escrow account with a quarter of property taxes and 3-12mo of homeowners insurance.  If you're not currently paying these things in your mortgage payment, that could be rough.  If you ARE already paying these in your monthly payment, then you have an existing escrow account that will be refunded to you when you pay off the old mortgage.  So you'll get some of that money back... making your true closing costs lower.  BUT, also consider that when you're paying significantly less mortgage interest, it's going to affect your tax situation such that you have less of a write-off at the end of the year--so your withholding may need to be changed.  I would talk to your accountant about THAT.  Not that it should make the decision for you completely, but you should know how it's going to affect you overall.  It may be the straw that breaks the camel's back in one direction or another.

And I think that you already made your mind up about the loan term, so I'm going to stop pleading my case on it.  :)  I'm never going to agree that it makes sense to lock into a higher payment when you could achieve the same results without that obligation, but 1) I'm not dealing with your husband's discipline factor;  and 2) I clearly am not comfortable with the same level of risk that you are.  Neither is wrong, just different.

Oh--and agreeing with the pp that said that interest rates are truly CREEPING up.  Due to relocation, we've been involved in following the rates for what will now be our third attempt to buy a house since March.  We're in the process of buying a foreclosure that has been delayed (which was expected) enough to lose us our last locked-in rate and frankly, the current rate isn't significantly different.

[velochic]

Originally Posted by cschick 

Originally Posted by Ellien C 

Thanks for the reply. We might be able to get a HELOC - but that still leaves us with 5.25% interest rate for the next 12-14 years. Seems to me like we would/should refi to the lower rate and then the question is whether or not to take equity out.

Refinance and set up a HELOC as part of the same process. We've done that. At current rates,  you might be able to get down into the 3.5-4% range on a 15 year, it's worth looking into.

(Edit: did I miss this? How much time left in your current mortgage?)

I agree with this.  You need to figure out closing costs as part of this, as well (not sure if someone mentioned this already) even though you're planning to stay in your house forever.  Depending on the amount financed and the term you decide upon, those closing costs that you are quoting might wash out the benefits.  I know that at the local credit union the refi for 12 years is 4.125 and closing costs are $750.  (Yes - seven hundred and fifty... I didn't leave a zero off of that.)  The closing costs you have been quoted seem like highway robbery to me!!!!

A HELOC is going to be a couple of points lower (maybe even as low at 2%) than a conventional fixed mortgage, but it's going to be a variable rate most definitely.  However, interest rates, *I* don't think are going to go anywhere soon.  My opinion, and in any case is a gamble, albeit a fairly safe one.  Check that out and explore using that for the roof.

I would refinance your existing mortgage to get the rate and term down.  Use the HELOC to finance the roof and pay that sucker off ASAP, ahead of everything.  I wouldn't hold off on ROTH contributions.  I tend to think of these things in long terms.  Your earnings on investments compound, so you're not giving up $10,000 right now... you're giving up $50,000 down the line.  That is, I wouldn't look at your Roth contributions as the initial investment, but what it will cost you in the long run.  A HELOC is going to cost you a lot less than the potential compounded earnings on investments.

Under no circumstances borrow against your 401(k).  That's just my 2 cents and I'm literally typing my thoughts and not proofreading it, so I hope it makes sense.  Good luck!  You sound like you know what you're doing, so go with your gut.