Cash Out Refinance Is this a good idea?

jetson930April 2, 2009

This is my first time posting here but IÂm confused about refinancing. I know this is a long, complicated questions, but I hope someone can help me with a good answer.

First, I just refinanced my mortgage in February. My mortgage balance is approximately $91,500 at 5% for 30 years. My house was appraised at $176,000. I have owned my house for 8 years and I have no plans of moving. I am paying extra principal with each payment and, at the rate of my current payment, my mortgage will be paid off in 19 years 6 months. At the time I refinanced, my idea was to get the amount of my mortgage as low as possible. It seemed to make sense at the time. I also have a home equity line of credit of about $2,800 with a current rate of 3.25%. I am paying $100 a month on the home equity.

Currently, my car is 11 years old and my plan was to start saving for a new car (probably a newer used car) in the future. IÂm estimating $20,000 for a car, or maybe less for a good used car. I have about $3,500 saved for a car purchase so far. I do not have any other debt such as credit cards, etc. Right now I couldnÂt afford a car payment in addition to my payments on my mortgage and home equity unless I pay off my home equity with my savings and quit paying extra on my mortgage, which I really donÂt want to do. (Yes, I do have other investments but I donÂt want to touch those, especially in this economy.)

After doing a lot of thinking and playing with a mortgage calculator, I determined that if I did a cash out refinance for $112,000, I could easily afford a new/used car with my current savings and using my current car as a trade in. If I refinanced again, I would definitely roll my home equity line of credit into my mortgage so I could apply that payment to my mortgage. (I included the closing costs for the refinance in the amount.) With this economy, the mortgage rates have now dropped to 4.875%. ThatÂs not a big factor in my decision, but itÂs better than 5%. I would never do it at a higher rate. My plan would be to pay $735 per month on this mortgage to pay it off in 19 years and 11 months. Using this scenario, I would have only one payment to make per month and I would only be paying $20 per month more than before and I would have a new car. Also, my credit score is over 800.

Also, in the 8 years that I have owned my home, I have made most major repairs on my house including siding, roof, furnace, air conditioner, and water heater. I donÂt see any major repairs in the near future. If I would encounter some unexpected expenses, I could quit paying extra on my mortgage.

I talked to a friend about this scenario and he thinks I have lost my mind for even considering this. Have I lost my mind or does this sound like a good financial decision? I would appreciate your comments.

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I didn't understand your post very well, but not your fault, it's an age problem with me. LOL Sorry, but I agree with your friends. I never ever mess with my mortgage except to pay extra on it when I can. I have seen to many of my friends lose their home because they wanted the cash for whatever. If you do what your are thinking about where will you be in a few years when your new/used car gets old? My husband's ex found herself homeless a couple of times because she wanted the equity. Not only once but twice, she didn't learn a thing. She lost her job and couldn't pay her rent.

    Bookmark   April 2, 2009 at 11:35AM
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I think the reason you're confused is that you're trying to make two decisions at once that can really be considered independently:

1) Should you refinance your mortgage?

2) Should you borrow money for a new car or wait until you've saved enough?

The answer to (1) is probably yes if you can get a rate that's enough better to cover whatever fees you'll incur in a reasonable time.

The answer to (2) is probably harder, because it depends intimately on your personal circumstances.

    Bookmark   April 2, 2009 at 9:41PM
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Hi Jetson,

Have I lost my mind or does this sound like a good financial decision?

Bluntly? You've lost your mind to even CONSIDER throwing away "extra money" bit-by-bit into your real estate equity BEFORE you've accumulated enough to even cover the emergency replacement of your working vehicle (let alone the more financially conservative, intelligent and responsible practice of leaving your mortgage alone and accumulating a seperate "Mortgage Freedom Account" to grow and accumulate UNTIL you can wipe away the entire mortgage in a single check.)

The simple, unwashed advice is to rebalance your equity OUT of your real estate... probably to at least 70-80% of the total value, and move the funds to safety reserves growing in a principal-protected/insured manner.

If its appropriate to replace your vehicle, do it in cash (I like the used car idea... good used vehicles are all I have ever bought, for cash, always.)

Dave Donhoff
Leverage Planner

    Bookmark   April 2, 2009 at 10:42PM
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Thank you for the blunt answer. I think that's what I needed. I like your advise about a "Mortgage Freedom Account". I like it so much that I already have one which would cover approximately 60% of my mortgage. When the economy was better, my "Mortgage Freedom Account" was enough or nearly enough to pay my entire mortgage. I have no intention of touching that money for many years unless I encounter an extreme emergency. Of course, that money doesn't include my IRA or my pension plan from work.

Thanks for your answer.


    Bookmark   April 3, 2009 at 2:02AM
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Personally, i'm in the you've lost your mind camp.

1) there will be closing costs to refinance again.
2) you're taking money from your house to buy a car. Essentially, you're financing the car over 30 years. I'm guessing it won't make it to the time you write the final check paying for it.

the difference in rate will save you a maximum of $150 this year, and will get smaller each year after that.

People borrowing against their houses for material goods helped get us into this mess we're in. You seem like you're in a financially sound spot, assuming your car isn't leaving you by the side of the road, save some more to buy the car.

    Bookmark   April 3, 2009 at 11:55AM
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Here's my question to you...

If you are driving down the road at 30 miles per hour, would you suddenly slam your car into reverse to pick up a silver dollar you saw lying on the street?

Here's another way to look at it...
If you had $100,000 in a tax free CD earning 5% per month guaranteed.. Would you pay $5000 to break that CD right now so you could invest the money somewhere else?

February was the time to make this decision about taking cash out... You appear to have awesome financial disciplne but need a bit of help in planning.. For example waiting until the car is 11 years old to figure out a plan to replace it. Finanically you can afford to buy a newer car at any point for cash if you spend about $15K... or instead of prepaying your mortgage every monthy use that to finance a car purchase.

    Bookmark   April 3, 2009 at 12:48PM
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Would never cash out unless the cash would put me in a better economic position (like the purchase of investment property). Buying a car just doesn't cut it.

Leave the mortgage alone, use your $3,500 and hopefully good credit to get a 0% car loan for the maximum period. Make the payment with the extra cash you are paying on the mortgage. Mortgage interest is deductible.

    Bookmark   April 3, 2009 at 12:53PM
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I have a girlfriend who is a real estate agent. She told us that refinancing is basically a scam because there are so many fees involved.

We were trying to decide whether to continue investing in mutual funds in this iffy market or pay off the mortgage, so we saw our financial advisor in January. He said that since the market is just as likely to go down as to go up, we would be safer paying off the mortgage, but if we buy mutual funds, we are buying at a low price, which is a good thing.

So we are doing 50 -50, investing and paying down the mortgage. It feels SO good to be paying off the mortgage. Will be done in two years or less, and we brought the house in 1992. (Didn't start adding to the principal until two years ago.)

I would not take cash out, nor would I refinance. The whole point is to pay off the mortgage, not make it last forever. Taking money out to invest might have made sense in the 90s when the market was booming, but not now. Everyone should manage their finances as if they might lose their job next month.

I have NEVER made car payments, so I agree with landmarker, you should have been saving for a new/replacement car. If you don't have the ready cash to buy a new car, I agree that you should buy a used car. You obviously know enough about cars (Congratulations!) to be able to pick a good one. Buy a used car, pay it down as fast as you can, then go back to paying down your mortgage principal but also save for the next replacement car.

You know what they say - the value of a new car drops as soon as you drive it off the lot.

    Bookmark   April 10, 2009 at 10:45AM
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I have a girlfriend who is a real estate agent. She told us that refinancing is basically a scam because there are so many fees involved.

Refinancing is not a scam, but it is true that the fees involved can be considerable. What you need to do is divide the amount of the fees by the amount that you will be saving each month with a lower interest rate. That will give you the number of months before you break even. If you think that you will own the house longer than it takes you to break even, then it is worth it to refinance. If, not then don't refi.

    Bookmark   April 10, 2009 at 8:33PM
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i agree with Chrisk327 there are many bad ideas there.

you just refi in february so you are looking at another set of closing costs.

next you want to refi to get a $20k car which appears you cannot afford. BAD IDEA. you never leverage your house (appreciating asset) to purchase a car (depreciating asset). after 2 years you will have financed a $20k for 30 years that is probably worth $11k. that is CRAZY!!!

your home equity is $2800. what is your income? that should be paid off asap. dont use your home as an ATM.

save up for a decent used car or save up the $20k. any extra you were paying to your mortgage use it to save for a car.


good luck

    Bookmark   April 11, 2009 at 9:59AM
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