Thinking about refinancing

[adela76]

Last year, I completed some home renovations that I paid for using savings and a HELOC. I added a screened-in porch, remodeled a laundry room and got a new roof. This is the first time in my life (I'm 37) that I’d taken on significant debt for “wants” instead of more practical reasons (student loans and a mortgage). While I’m totally happy with the results, I’m a little unsure of what to do next. I’m wondering if I should refinance my current mortgage or just continue on as I am.

I’m 4 years into a 30-year mortgage. The original balance was 156K and the interest rate is 4.25%. The current balance is 144K. Monthly payment is $1221 ($767 P&I, plus $454 escrow).

My HELOC balance is 49K. The current (variable) interest rate is 4.88%. I’m about 2 years into the 10-year draw period, where my monthly payment is interest plus 0.25% of the principal. My current minimum monthly payment is around $325.

My home value is between $225K and $250K.



I calculated 4 refinance scenarios:

1) 30-year refinance for 194K (roll the HELOC balance into the mortgage). Assuming an interest rate of 3.5%, my monthly payment would go up $105. With the HELOC, it’s hard to calculate how much interest I will end up paying (the interest rate could go up, or I could pay extra to bring the balance down faster), but if I assume I’ll pay 30K interest over the life of the HELOC, this would save me $3500 in interest over 30 years.

2) 30-year refinance for the mortgage balance of 144K only. If my interest rate drops from 4.25% to 3.5%, my payment will drop by $120 and I’ll save $4300 in interest over the life of the loan, but it will add an extra 4 years of paying a mortgage.

3) 15-year refinance for 194K with a 3% interest rate. My monthly payment would be only $250 more than my current mortgage+minimum HELOC payment. I would save roughly 75K in interest (again, assuming 30K interest on the HELOC).

4) 5-year refinance for 144K with a 3% interest rate. Monthly mortgage payment would go up $225, but would save roughly 58K in interest vs my current mortgage.

5) Do nothing.


I don’t think the Phil option of refinancing to pull out the maximum amount and invest it is an option here. My understanding is that whether I roll it in to the refinance or not, the HELOC counts against my loan-to-value ratio, and I wouldn’t get much, if any, extra cash out during a refinance, given my home’s current value.  I might even have trouble refinancing without rolling in the HELOC, but I ran the numbers because I was curious.

I’m not excited by the small savings of the 30-year refinance options. The savings in the monthly payment and lifetime interest hardly seems worth the effort.

I’m intrigued by the 15-year options because the interest savings is significant, and I could swing the higher payments. But I’ve been reading on YM for more than 15 years . . . I’ve read enough Phil posts to have internalized the message that a 15-year mortgage is not the best option when it comes to maximizing net worth.

I’m currently torn between option #5 and option #1. The variable interest rate on the HELOC is a bit of a concern. Not that I think my monthly payments will become unaffordable, even if they double, but not knowing how much interest I will end up paying is a question mark. And if/when my HELOC interest rises, presumably mortgage interest rates will be rising too and I'll have missed this opportunity to lock in a low rate.
But there's that emotional part of me that likes seeing my mortgage balance below 150K and doesn't want to add 50K and 4 years to the mortgage.

Help me YM! Which option would you choose and why? Is there something else I should be considering?

[justme]

How stable is your job given the pandemic?

[adela76]

My job is stable, I think.  I work for a large organization and the pandemic did cause a partial hiring freeze, but so far no talk of layoffs.  Since I'm anonymous here, I can say I'm exceptional at what I do and I think they'd want to keep me (knock on wood).  

[justme]

If I was refinancing I'd do everything together. Variable interest and then whatever the terms are after the draw... I'd prefer to lock in these really low rates.

If the extra money wasn't a burden and really confident the fallout of this mess wouldn't catch you up maybe consider a shorter term. Though I'd probably run it against the numbers of just paying more on the 30 year and see how it shakes out because that way you can always fall back on the lower amount.

[Regis]

Would options 1 and 3 possibly put you in a situation where you'd be paying PMI for a bit until you built up 20% equity?

[adela76]

Jul 4, 2020 6:51:38 GMT -5 Regis said:

Would options 1 and 3 possibly put you in a situation where you'd be paying PMI for a bit until you built up 20% equity?

Good point - I would definitely want to avoid paying PMI, I guess it would depend on how the appraisal came back.  I bought in 2012 for 150K, I refinanced in 2016 and the appraisal came in at 210K - I knew values in my area had recovered quite a bit and I wanted to get rid of PMI. If the appraisal comes back at 230K, maybe I'd only refinance 184K to keep 20% equity. 

[Tiny]

Have you been paying just the minimum on the HELOC for 2 years?   What's your plan for paying it off?    


But, you really asked what "I" would do in your situation.    
 
If I didn't have a way/plan to pay off the HELOC in the next 5 years I would refinance the mortgage and the HELOC into a new 30 year mortgage.   (I view HELOCs as short term debt... with a 5 year pay off it would mean I had plenty of money in my spending plan to allocate to the pay off without hurting any of the other things I was doing/wanted to do).  

Mortgages are generally the "cheapest" money you can buy.     


ADDED:  I don't think you can refinance JUST one of the "mortgages" on your house.   That eliminates some of your options. 

[adela76]

I finished the renovations in January 2020, so I've only been paying the HELOC since February and so far I've been paying the minimum.  Like any home renovation project, it cost more than I expected.  I also had 10K on a 0% credit card, which I'm on track to pay off before the 0% rate expires in October, so that's where my focus has been so far.

I haven't had a specific plan for paying off the HELOC.  The interest rate is only 0.5% higher than my mortgage, so I've been ambivalent about whether I should pay the minimum, pay as much as I can, or refinance.  Hence why I'm here.  I could allocate up to 1K to the HELOC, starting in 2021.  I could.  But let's say 800 instead - I could pay it off in six years.  That seems like a long time.  Or I could refinance, increase my mortgage payment by $100, and save/invest/spend the other $700.  

Maybe I'm having an early mid-life crisis . . . Tiny, you mentioned whether paying off the HELOC would be comfortable "without hurting any of the other things I was doing/wanted to do."  I'm not sure what I want to do next.

[phil5185]

and save/invest/spend the other $700.

$700/m, invested at 11% per year, grows to about $1,800,000 in 30 years (you'll have a paid-for house and an extra $1.8M at age 67).

In general -

*  Don't be anxious to prepay "long, low" debt - wealth comes from holding debt and applying your capital to the "highest and best use".

*  Avoid var loans, balloon loans, designer loans - always get fixed rate, fully amortized (full term) loans so that your source of capital stays safe (your 0%  credit card note is both a 'balloon' loan and a var).

*  Question - why do we over-pay our IRS bill all year to get $3000 refunded back to us at tax-time? (and many people carry that $3000 on a credit card).