Refinance Decision

[aprbrew244]

So I have a question for everybody that I have been pondering over for a couple months.
I purchased a house in Sept 09 for 111,000 @ 5.375% for 30 years. Currently the mortgage amount is roughly 87,000 and the FMV is roughly 170,000. (Foreclosure)
My plan was to do a cash out refinance this past Dec to total value of 100,000 @ a rate less than 4.375%. Unfortunately the rates jumped in Nov and I now am wondering what to do. My initial plan was to take the cash and add it to my Roth IRA for 2010 and 2011. With the lower rate my actuall payment would not have increased.

About me, 26, single, gross income 41,000, full time job since college, only other debt is 20,000 loan from my mom that I pay 2,400 a year for 10 years, (paid 2 years). Contribute to Roth 410K through work to recieve the company match, but I don't have enough money to fund my IRA.

As for looking forward I don't know, I don't plan on looking for a new position anywhere, but i have considered selling my house in two years and taking the profit (recieved the homebuyers tax credit) and trying to so the same thing, find a decent home in foreclosure. Problem is I really like the house I have now.
I guess I am wondering what others would do if they were in my position

[thyme4change]

Did you really think through the math on that refinance? Refinancing comes with fees that eat into the savings you get from a having a lower payment. Also, I'm guessing you would also be taking your principle and putting it back over 30 years, again, which means you aren't really saving as much as you are just stretching out paying for something.

I'm not against refinancing - but borrowing money from your house to invest seems like a game that you need to be very good at, and very good at math to do it. I just want to make sure you can tick and tie all your numbers before you start playing a shell game.

[aprbrew244]

Yeah I have looked at the cost of refinancing, and the amount I would save in interest would be minimal even over 30 years. From 90,212 in interest to keep the current loan to roughly 87,000 in interest paid already, refinancing costs and interest on the new loan. I guess the main reason is not to save on interest over the timeframe of the loan, but to fund my IRA for two years that I otherwise will most likely not be able to do.

[thyme4change]

If your budget is so tight that you can't eek out a couple hundred a month for retirement investing, you need to consider your entire budget. (By the way, you are light years ahead of where I was at 26.) You might want to consider renting a room in your house and using the income from that to fund the IRAs. Or maybe there is somewhere else you could cut. I'm just not sure that borrowing to invest, and then selling the asset for less profit in 2 years is the wisest move.

[aprbrew244]

I would consider my budget tight but 400 a month to fully fund an IRA is more than just eeking(12% of gross income). I definitely don't think I overspend as most people think I'm tighter than a sphincter. As for renting a room I have considered it and will if I can find someone I know and can trust, I will not go out and just find any clown. I guess I just have this crazy goal of 100K in retirement accounts @ 30.
Thanks for the replys

[The J]

If you can get the numbers to work out, I'd go for it.

[Deleted]

How much interest are you paying Mom? Even if it's cheap, I like to prepay the parental loan. You never know when you might need to borrow again. Was it to buy the house?

How much would the entire house rent for? Is there a reason you would have to sell in 2-3 years vs turning it into a rental and buying a new house?

[phil5185]

but i have considered selling my house in two years and taking the profit (received the homebuyers tax credit) and trying to so the same thing, find a decent home in foreclosure.

This doesn't really work - When you buy for $100k and sell for $200k, you feel like you have a $110k profit. But ALL houses rose to $200k during that time. So you have to spend your whole $200k to buy an identical house next door - ie, no gain.

My plan was to do a cash out refinance this past Dec to total value of 100,000 @ a rate less than 4.375%. Unfortunately the rates jumped in Nov and I now am wondering what to do. My initial plan was to take the cash and add it to my Roth IRA for 2010 and 2011. With the lower rate my actuall payment would not have increased.

That's what I would do - anytime that you can borrow long term low cost capital (<5%) and invest that borrowed money in long term 10% or 12% products (eg, your Roth) it is a powerful builder of wealth. And I would not try to keep the payment the same, I would increase it as much as you can, refi's are expensive, don't waste it. (When I refi our rental houses I go to about 80%).

But I would certainly borrow an extra $20k and use it to clear that loan to your Mom, it is kind of her to lend to you but I'm sure that she has better things to do with her $20k. And, with rates so low, there is no reason to impose on family - bring in new money from outside the family whenever you can.

[aprbrew244]

Sorry I haven't replied, been out of town couple days. The rate to my mom is 3.75%. Phil I'm confused by your first remark, since I bought the house in 2009 as a foreclosure I only paid 111k for a property that is currently worth 170K.

I never thought of turning it into a rental in a couple years, and finding another property for myself. That might be something to consider but I don't know how much it would rent for.

[phil5185]

Phil I'm confused by your first remark, since I bought the house in 2009 as a foreclosure I only paid 111k for a property that is currently worth 170K.

When you pay $111k for a home, live there a couple years, and sell it for $170k, then you need a home. If you buy an identical home (the one next door?) it will cost $170k. Ie, no gain, your financial position is identical - you have a $170k home.

Conversely, if you own several homes and the values go from $100k to $180K, you can sell them and make profits - the difference is that you do not need to re-purchase rentals but you need to re-purchase a home.

The rate to my mom is 3.75%

I would pay off Mom and roll the $20k into your 30 yr 4.375% loan, that costs $100/m. So you would have an extra $1200/yr to invest - plus you would not be borrowing from family.

[aprbrew244]

I understand now, thanks for the clarification.
Now I have to clarifiy what my plans might have been, the only instance I would sell my current home is to find another "deal" as in a property worth far more than I can purchase it for (foreclosure). I wouldn't buy a property @ equal value as I currently have and pay full price.

As for refinancing for more than 100K, I never thought of that either, but it does make sense, although over time I would pay slightly more in interest (20k at a slightly higher rate and 30 years instead of 10) but I would pay less now (free up some cash - 80$ a month) and I could invest the extra and potentially make more than I would lose in interest. Plus have the loan paid back to my mom which does bother me. She said it doesn't matter but I don't like it.

[phil5185]

although over time I would pay slightly more in interest (20k at a slightly higher rate and 30 years instead of 10) but I would pay less now (free up some cash - 80$ a month) and I could invest the extra and potentially make more than I would lose in interest.

Exactly. The payback on your 10-yr loan is $24,000. And the payback on the 30-yr loan is $36,000.
Investing the extra $100/m into your 401k or Roth at 11%/yr for 30 yrs is $265,000 - well worth the extra $12,000 that you pay for the 30-yr use of that capital. (Fortunes are made with concepts such as this).