Should I refinance?

wigardenerwannabeAugust 2, 2010

For some reason I just can't wrap my head around this. I currently have a 30 year, fixed rate loan at 5.25. I owe 73,000 on it. It is appraised at 109,000. My monthly payment is $520 and I always pay $180 extra each month toward principal. I am in my mid-50s so feel like I would like to get this paid down. However, it has been nice to have a little wiggle room, so that if something came up I would only have to pay the $520 amount (although that has not yet occurred). I am currently facing the need to replace roof/gutters and have a portion of my driveway and sidewalk done. I have about $5,000 in an emergency fund which I can use toward this, but will fall a couple thousand short. I have a car loan of about $7,000 that I am also paying on. No other debt.

I could remortgage with a cash out at 4.87%, which reduces my payment to $450/month on a 30 year fixed; or take a cash out @ 4.76, which would reduce my payment to $550/month on a 20 year loan; or take a cash out at $4.37 and increase my monthly payment to $644/month. Closing costs are $1800. I have excellent credit history.

Is this worth it? Or do I look for some other way to come up with the amount of money I'm short for these home maintenance issues?

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maifleur01

A suggestion rather than refi and taking cash out is to pay for the improvements that you can afford now then save for the rest. Take half of what you are paying extra and put toward the costs for next year. Depending on where you are any loan under $100K is sometimes considered a subprime loan so the rate you think you would get probably would not be what you end up with.

I have a thing about refinancing and taking money out for expenses that should have been factored into your budget. If you don't redo your budget the next time a repair is needed you will be paying additional closing costs that could have been spent on the repair.

    Bookmark   August 2, 2010 at 11:20PM
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Billl

First - it sounds like you either need to shop these rates or find a decent broker who can do that for you. People with great credit should be able to get a 30 year fixed under 4.5% right now.

Second - are you sure this is the direction you want to go? It sounds like your goal was to pay off the mortgage in time for your "golden years", not go deeper in debt. Really consider if these expenditures can be put off or scaled back. You don't want to spend your emergency fund on items that aren't really an emergency. eg It is better to live with a cracked sidewalk then go deeper in debt.

Other than that, I don't think you are going to get good advice from people who don't know the rest of your financial picture and goals. Do you have other investments? Do you have retirement plans? Income? Expenses? etc. At your age, it is critical that you have an overall plan and aren't just making decisions in a vacuum.

    Bookmark   August 3, 2010 at 8:35AM
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pamghatten

maifleur - loans under $100,000 are not considered "Subprime". There are huge parts of the US where the housing prices dictate loans under $100,000.

    Bookmark   August 3, 2010 at 12:47PM
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maifleur01

It may be in some parts of the country but not here. When some of the various mortgage companies unloaded their loans anything that was under $100K was considered Subprime.

I will agree that there are many areas that housing is under $100K but in those areas you will not see the better mortgage companies advertizing for the business.

    Bookmark   August 3, 2010 at 9:01PM
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dave_donhoff

Hi WIgardenerwannabe,

I am currently facing the need to replace roof/gutters and have a portion of my driveway and sidewalk done.

"Functionally needing" to have it done, or "wanting now, but not of functional importance"?

If its a responsible mandatory maintenance issue, then its gotta be done, period.

If its a discretionary issue, perhaps it can wait.

I have about $5,000 in an emergency fund which I can use toward this, but will fall a couple thousand short.

Does this maintenence expense qualify as an "emergency" (I propose it does not.) You need to build & keep an emergency reserves fund equal to 6 months (preferably 12) of total living expenses (housing, food, travel, insurance, everything.) I am going to go out on a limb here & guess that you don't have that in place... no?

I have a car loan of about $7,000 that I am also paying on. No other debt.

At what interest rate?
At what amortization burden (how much of each payment goes to interest, how much goes to principal?)

Is this worth it? Or do I look for some other way to come up with the amount of money I'm short for these home maintenance issues?

OK... critical maintenance is critical maintenance, and you *MUST* find a way to get it handled if failing to do so in a timely manner means the potential for worsening problems & expenses (leaking roof? dangerous sidewalks? etc.)

NEXT... you *MUST* get a 6 months safety reserves account established.

NOW... you must begin to understand; Equity is Equity is Equity is Equity.
The dollar in your savings account is the same color as the dollar you've entrapped in yoru real estate, is the same color as the dollar in your 401(k), is the same color as the dollar in your stock brokerage account.

UP UNTIL NOW you have been "investing" in the concept of sending extra dollars into the value of your home equity, and the elimination of your home mortgage. The benefit of this is limited to the after-tax rate of mortgage interest (it makes no additional growth if your real estate appreciates.)

The downside of this strategy is 2-fold (at least);
A) its costly to re-access the funds when needed,
B) you have to qualify & get a bank's permission to access your own money.

REMEMBER;
The fastest & safest way to become debt-free is to accumulate a side CASH fund that grows to equal the entire mortgage amount BEFORE paying a single extra dollar to the mortgage... and then doing so in the stroke of a pen on a single check.

With a $109,000 valued home, and a current mortgage balance of $73,000, you don't have a WHOLE lot of room to wiggle... but as you go forward, I strongly urge yu to use the safer debt elimination principles above.

With a value of $109,000, you could potentially get approved to re-access as much as $103,500 of your own money... and probably in the middle-to-low 4%'s, on a 30 year term mortgage. Don't even THINK about 20 year or 15 year terms (remember above? The fastest & SAFEST ways to eliminate your debt? don't get tricked!)

Plan out your cash needs;
A) how much for the requisite maintenance now (vs later.)
B) how much for responsible safety reserves?

Add that to the payoff on your existing mortgage... MAYBE your car loan (if the amortization is faster than 15 years,) and add about $3,000 minimum for your financing closing costs as an estimate.

THAT is the new balance your mortgage will be if you get yourself safely set up for stability & future debt elimination. It may *feel* like backsliding... but it is not. You are not in a safe position financially, and any non-insurance covered emergency (REAL emergency) would wipe away all the hard work you have accumulated.

Hope that helps!
Dave Donhoff
Leverage Planner

    Bookmark   August 3, 2010 at 10:11PM
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wigardenerwannabe

Thanks for all your responses. This roof shingles are curling...my gutter system has been ineffective for a long time...and a settled driveway/sidewalk has resulted in water in my basement due to grading issues. I believe these are all things that need to occur.

I was trying to build up my 'emergency fund', and this is as far as I had gotten. My car loan is at an interest rate of 5.25% over 4 years, and was begun in 10/09. I have $6271 remaining on this loan, which I pay a small additional amount on each month.

Dave, are you suggesting that I take out a more sizable remortgage loan, not only to put towards the home maintenance issues I currently have, but also to put into an emergency fund so I have more ready access to it? And then in the future put the $180 (or whatever) into the emergency fund instead of toward paying off principal on my home? This would then continue to offer a tax advantage, and I can still put this 'emergency fund' toward the mortgage at such time as I have sufficient cash reserves to do so? Just want to make certain I'm understanding your thoughts on this. wig

    Bookmark   August 3, 2010 at 10:41PM
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dave_donhoff

Dave, are you suggesting that I take out a more sizable remortgage loan, not only to put towards the home maintenance issues I currently have, but also to put into an emergency fund so I have more ready access to it?

Yes.

And then in the future put the $180 (or whatever) into the emergency fund instead of toward paying off principal on my home?

YES!

This would then continue to offer a tax advantage, and I can still put this 'emergency fund' toward the mortgage at such time as I have sufficient cash reserves to do so?

ABSOLUTELY, YES!!! ;~)

Just want to make certain I'm understanding your thoughts on this. wig

You got it!

WHile you are at it, get enough (if you can) to pay off that car loan (rolling the 5.25% high amortization loan into a mid-4% low amortization loan with tax benefits.)

Everyone is wisely advised to get out of debt as fast as possible... but to do it safely and INTELLIGENTLY, as you are now getting an excellent handle on.

However we can help, let us know!
Dave Donhoff
Leverage Planner

    Bookmark   August 3, 2010 at 11:36PM
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wigardenerwannabe

Thanks. Is there any reason not to go through Lending Tree for rates?

    Bookmark   August 4, 2010 at 3:58PM
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dave_donhoff

Hi Wi,

Is there any reason not to go through Lending Tree for rates

Understand, LendingTree is merely a lead collector who pre-sells you as a lead to anyone who will pay them. They generally "distribute" your info as soon as you give it to them, to 4 different types of lenders (like one that specializes in FHA, another in VA, another in squeeky-clean conforming, and a 4th in difficult conforming.) In other words, banks are not *REALLY* competing for your business, since LT keeps THEIR clients happy (their clients are the paying lead buyers) by making sure they are NOT really competing amongst each other.

Hardly the best way to find a suitable professional... is it?

Professional recommendations from professionals you already know are the best way I know of to find a trustworthy & competent financial professional. Ask your CPA, or your attorney, for who they recommend as a mortgage broker (I generally suggest seeking a broker before falling back to a retail loan officer... only brokers are legally bound to work in YOUR best interest. Retail loan clerks work in the BANK'S best interest.)

Hope that's helpful.
Dave Donhoff
Leverage Planner

    Bookmark   August 4, 2010 at 9:52PM
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sushipup1

And ask the local real estate agents, too. They really know which loan brokers are good, because without a loan, there's usually no sale. Keep it local if at all possible. All you'll get from the internet is your email address on junk mail lists.

    Bookmark   August 4, 2010 at 9:55PM
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mariend

I would not ask a RE agent as they are trained to sell houses, not make loans. They usually have limited contacts and the fees could be more/higher, Just a thought:

    Bookmark   August 6, 2010 at 8:22PM
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sushipup1

No, I don't mean to have a RE agent involved in a loan. But ask RE agents what local loan agents they recommend. They know more local lending agents than anyone else. If an agent wants to get involved with your loan, then RUN the other way.

    Bookmark   August 6, 2010 at 8:46PM
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