Refinancing questions

[backontrack]

First off, I go thru cycles of reading the MSN Money boards and this time found FB and this board – were the MSN Money boards shut down?

I need to low-down on re-financing. I looked into it a couple of years ago and put it off because I couldn’t decide about 15 yr versus 30 yr. Since then I have many times that most mortgage providers suggest 30 yr so that you have that “just in case” factor built in. And we’ve gone from two incomes and one kid to two kids and one income, so a lower monthly payment would be nice, though not essential.

Now I am paralyzed by “how do I know I have the best deal.” I filled out lots of paperwork before and compared, etc. The local CU had the lowest closing costs and a decent interest rate. But then I read about these ridiculously low rates online (on the MSN forums even). What do I really need to be on the lookout for to know I’ve got the best deal I can get?

[SVT]

Well, what's your purpose of refinancing? Everyone's situation is different so a great deal to one person might be different to someone else.

To find out if you're getting the best deal you can get is to figure out what the purpose of refinancing is and then shopping around, everywhere you can, to find a product/lender that offers the best 'deal' to you and your situation.

[backontrack]

Hmm, why do I want to refinance? I guess the driving factor is that our rate is 6.375 and we could get 5.125 on a 30 now. In short I want to not be paying more money (in the long run) than we have to.

A lower monthly rate would be nice, but it won’t break us if we don’t have it. When I run the mortgage calculators I *really* want to do a 15 yr mortgage and save $150k in the long run, but it is probably not really the best idea in our current position. We could afford it now, but with two kids and one income it seems a little risky to increase our bills unnecessarily.

[SVT]

Is the goal to be debt free and to pay the least amount of interest or to increase net worth?

It usually makes more mathematical sense to use low and long fixed rate debt and use the extra cash flow to invest the money in retirement and taxable accounts. You'll likely increase your family's net worth more by refinancing into a lower rate, 30 year fixed mortgage and using the extra money to contribute/max retirement accounts and put any extra in taxable accounts and investing in low cost, broad based index funds.

[Deleted]

LOL, the SVT is a believer!

Everyone has to run their own numbers and consider their own situation. For most people in their 20s & 30s SVT's advice is spot on; use the difference in mortgage rate money to make money in the stock market in the long run. Looking at historical averages the S&P 500 at 8%-11% (depends on how long you want to project your numbers) it's a no brainer that borrowing at 5% to 5.5% makes sense.

However as you start thinking about nearing retirement in your 40s and 50s it might make more sense to start pre-paying the mortgagein addition to your pre and taxible accounts so one doesn't have to generate so much retirement income. For people such as DH and me, it makes sense to seriously consider pre-paying the mortgage on the house we are going to move to when DH retires in 18 months. The interest rate is a reasonable 5 3/8% but if I look at what kind of return I get by paying off the mortgage (about 7.5%), I can't touch any kind of very safe return that approaches that rate given today's rates on CDs and government bonds . The trade off for me 1) I'm going to limit my investment options if things change and 2) I'm going to tie up about 20% of our NW in a single investment (my house) and that's generally not a good idea. But since I don't think rates on CDs and government bonds are going to vault to 9% over the next 7 years (how long I expect we'll live in the house) it's a gamble I'm willing to take.

But everyone's situation is different and folks here are great about bringing up risks as well as other financial considerations.

Good luck!

[SVT]

Feb 15, 2011 5:39:46 GMT -5 @bonnap said:

LOL, the SVT is a believer!

Sure am. ;D

[Deleted]

Do you have PMI now? If not, check out this government website to see if you can get a new loan without adding PMI:
www.makinghomeaffordable.gov/get-assistance/loan-look-up/Pages/default.aspx

It is too bad you waited when just 3-4 months ago the market bottomed at 4% on a 30year. The trend is rates moving up, so should do all the numbers and arrive at something soon. Also, any plans to move in the next 5 years? Don't dismiss a 5/1 ARM if you plan to move before then.

-Mark

[SVT]

Feb 15, 2011 12:31:44 GMT -5 @mmc said:

It is too bad you waited when just 3-4 months ago the market bottomed at 4% on a 30year. The trend is rates moving up, so should do all the numbers and arrive at something soon. Also, any plans to move in the next 5 years? Don't dismiss a 5/1 ARM if you plan to move before then.

-Mark

That's hard to tell. Rates could go down again over the next 3 to 4 months and go back to that 4% for a 30 year fixed. You can't really time it.

And 3-4 months ago, when the trend was rates are going down, someone could have looked at that and said lets wait a bit, maybe it will go to 3.75 or 3.5.

[Deleted]

Feb 15, 2011 12:38:38 GMT -5 SVT said:

That's hard to tell. Rates could go down again over the next 3 to 4 months and go back to that 4% for a 30 year fixed. You can't really time it.

And 3-4 months ago, when the trend was rates are going down, someone could have looked at that and said lets wait a bit, maybe it will go to 3.75 or 3.5.

None of us pull the strings so of course these are just our opinions of where rates are headed. I put the chances at 60/30/10; rise/stable/fall over the next 3 months.

-Mark

[backontrack]

Thank you!!! I have been away from financial boards for way too long. I had forgotten all of the background info needed to give me any real advice. J

• $160k mortgage at 6.375% with no PMI, on our seventh year of a 30 yr mortgage
  
• $7k HELOC variable currently at 4.25% - Currently not paying down aggressively
  
• House “valued” at $315k ish. (Though in the current local market probably wouldn’t sell at higher than $230k.)
  
• No other debt.
  
• Maxing out 401ks. (One maxed at the Gov’t limit. One maxed by company restrictions of 50% of income - part time work).
  
• Should be maxing Roths, but we slacked a little bit this year.
  
• Age: 33 and 35
  
• No plans to move. Ever. (Packing, decorating, etc, no way!)
  
• Kids aged 4 and 1. No college savings for them yet. (Considering taking the “saved” money from refinancing to start their college funds. )
  
• Not a huge amount of cash savings. No more than $10 - $15k at any given time.
  
• Risk: One and a quarter income right now, so a job loss would be a huge blow.
  

• Is there any reason I shouldn’t refinance?
  
• Should I combine the HELOC and regular mortgage if I refinance?
  
• Should I pay the closing costs up front or add to the mortgage?
  
• Should I go with my local trusted credit union (who previous was best locally in terms of closing costs and rate) or look for online deals? (Estimate from April 2009 was $2, 300 closing costs.)
  
• If I look for online deals are there any red flags or things I should refuse to pay for?
  

[Deleted]

Your closing costs at $2300 seem a tad high for a $160k loan. I paid $2500 for a $290k loan 18 months ago through BofA. But that house is in CA and there may be regional differences. You will need to find that closing estimate sheet in order to make an apples to apples comparison. List what's on the sheet and we can tell you whether the charges are bogus or not.

With what lender is your HELOC? It's going to need to be dealt with somehow, and every lender is going to handle it differently. What was it used for?

The options will be to pay it off, roll it up into a new 30 year mortgage, or (if the HELOC lender allows it) getting a subordination agreement from them. The subordination agreement allows a new 1st to take priority over the HELOC. Otherwise when you pay off the 1st, the HELOC assumes 1st position and your new mortgage becomes a 2nd. Most conventional lenders would price the cost of a 2nd much higher than a 1st.

Another consideration is getting a new 1st with a lender who will also give you a concurrent HELOC but be careful. HELOCs can be great tools but you don't want to wind up on a debt treadmill.

$10k-$15k is probably fine for your EF (How much is the monthly income from the primary breadwinner?), but I'll wait to see what you say about the use of the HELOC.

Definitely go with the 30 year based on your comment about the job loss.

After funding your 401ks I think the taxable account is the way to go. I think Phil recommends putting all your excess $$$ in a S&P 500 index fund (like Vanguard). He says he has found that the earnings far outweigh the risk of needing to sell shares in a down market for the occasional dip into principle. E.g. if the returns are historically at 8%-12% and once every 5 years you have to withdraw $ for a roof repair you will be better off under his recommendation. I think he's right. The main thing is accurately projecting your bigger expenses so you're not dipping in the fund every year.

Hope this info helps.

[backontrack]

Here are the Closing Costs from the local credit union. BB&T (who currently holds our mortgage) was over $3k. Keep in mind these are from April 2009 though, so if things have changed since then… I’ll get new estimates soon, I just wanted to understand better what I was getting into before I went through all the work again.

Credit Union Fees
Document Preparation Fee $245.00
Underwriting Fee $47.20
Total Credit Union Fees $292.20
Third Party Fees
Appraisal Fee $350.00
Credit Report $17.80
Flood Certification Fee $11.00
Abstract or Title Search $100.00
Title Examination $100.00
Title Binder Fee $40.00
Settlement or Closing Fee $300.00
Title Insurance - Lenders Coverage $438.80
Total Third Party Fees $1,357.60
Taxes and other Unavoidable Fees
Recording Fee $78.00
City/County Tax/Stamps (Mortgage) $134.95
State Tax (Mortgage) $405.00
Total Taxes and other Unavoidable Fees $617.95
Total Closing Fees $2,267.75

To answer questions, the HELOC is through Chase. It was used as a second mortgage instead of incurring PMI. Thanks for the info on subordination agreement. I wondered why it seemed to be necessary to combine the two. While we have never used the HELOC after purchasing the house, I really like the idea of having a $50k line of credit at a low interest rate available to us, like an emergency fund. If we close that for the refinancing I’d like to open another just to have it.
Breadwinner income (after taxes, insurance, 401k, etc) is about $4k a month.

And thanks for the advice about investing in an index fund. I have no problem diving in with the IRA and 401k, but the thought of investing in anon-retirement account is scary! If it’s just the same thing (Vanguard and index fund) as my IRA, it doesn’t seem as scary.

[runewell]

I'm not going to worry about the details, but I agree with getting a 30-yr fixed-rate mortgage. I was only at 5.5% and a couple of years I refinanced with Wells Fargo (who was not the loan originator) to 4.625%. According to Wells Fargo, I would come out even within 3 years. Their site now advertises 5.125% so it looks like (unless things change) you missed out on about a half-point in rate. In any case it is still a whole point lower than where you are currently, so I'm guessing you would break even in 2+ years which makes it a no-brainer.

[Deleted]

"State Tax (Mortgage) $405.00"

Wow, what the heck is that? Your state charges you a fee when you refi?

And the other question you should ask is why the CU is charging you both a doc prep fee + settlement fee?

Sounds like you get it.

Good luck!