Refi?

PurpleGuy

I'm looking for advice from people smarter than I am about money. We started looking into refinancing our home a couple of months ago when we (being nosy) check the records to see what our new neighbors paid for their home. Long story short, we contacted our finance company and got an appraisal. We actually have significant equity in the house. If we refi we can pull enough cash out to payoff some lingering medical bills from the cancer fight ($10k), student loans ($8k), and some nickel and dime credit cards (less than $1k). Of course we will reset the clock on the payoff but we've only been here for 30 months and plan on selling when I retire in 2020. It makes sense to me to refi, lower the mortgage payment and pay off several hundred $$ in monthly expenses that just seem to be never go away. At this point, if we want, we can make additional principal payments in the amount saved and pay the house off (get more equity) sooner. 

I acknowledge that I can sometimes act impulsively and would like any and all input before we finish this deal. 

frillyfun

Run your numbers..you only have $18K in debt, and are empty nesters with a combined income of $120K (according to your triage).  

What would the closing costs be on the refinance?  Would it be at a smaller interest rate than what you have now?  What is the interest rate on the other debts?

Where can you trim your budget to save otherwise?

Theoretically refinancing to get rid of the debt sounds like a good idea, but if you're racking up credit card bills then you need to look at what's causing that, and fix it too.

RebuildingHusband

I close on my refi in a week. My sit is different tho. W and I plan to stay in this house and goal is to pay it off before S1 graduates HS (he's 3 now). I am 7 years into a 30yr at 5.50%. We are cutting down to 15yr at 2.750%. It makes sense for me and gets our home loan gone sooner. Plus I'm positive on my amortization schedule in 13 months (putting some of the closing costs in the loan). 

In your case, you've got a lot more moving pieces. At the very least, I'd venture that the interest rate on your mortgage will be considerably lower than your existing debt. You should be able to build payoff spreadsheets in Excel and figure out exactly what rate you need to make it economically feasible. 

The biggest caution is what @frillyfun highlighted. If you are not going to rack up new debt then it will likely work in your favor. If this just resets you back to 0 and you start accruing high interest debt again, you're just kicking the can down the road. 

PurpleGuy

The closing costs did concern me but would be made back in 14 months. Credit cards are not a problem as we pay cash for most things. The existing debt is literally nickel and dime. $200 for new swimsuits and dresses for our vacation, $60 for additional magazines for my Glock, she bought a Fitbit on sale at Kohls and got an additional 20% off to use her Kohls card. I'll pay that off next week.

There has to be a significant advantage to buying on credit like 18 months no interest at Home Depot for our lawnmower and 48 months no interest for our furniture. Why use my savings to buy things I need if I can use somebody else's? I simply take the purchase price, divide by the terms of financing minus 2 months (18 months is paid off in 16) and set up an automatic payment through my bank. We definitely don't rack up credit card bills. Finances are tightly controlled and use of credit is judicious. Our credit scores are both over 800. 

I'm more concerned about the hidden problems. Adding an addition $700/month to my retirement accounts while maintaining my current lifestyle seems like a no brainier but I have made bad financial decisions before and this one could be huge if I'm missing something.

We would be lowering our interest rate by 1.375%. It's not about of saving, it's about saving more. 

JellyBean

There are quite a few places that offer no-fee refi. 

frillyfun

There has to be a significant advantage to buying on credit like 18 months no interest at Home Depot for our lawnmower and 48 months no interest for our furniture. Why use my savings to buy things I need if I can use somebody else's? I simply take the purchase price, divide by the terms of financing minus 2 months (18 months is paid off in 16) and set up an automatic payment through my bank. We definitely don't rack up credit card bills. Finances are tightly controlled and use of credit is judicious. Our credit scores are both over 800. 

 From your triage in June:
We do manage two vacations every year (spring and fall) to celebrate our anniversary and her birthday as well as weekly nights out and expensive home cooked meals (kobi steak or lobster etc.) I'm a decent cook and love to create delicious meals. We have a nice custom build home in the burbs, two paid for cars and a Harley. It seems like everytime we start getting ahead something goes bad. This year it was the septic tank. This wiped out our emergency fund and ran up our emergency credit card. 

This.  This is what needs fixing.  You said your emergency funds regularly run empty, you'll be retiring soon, and you have debt.  Buying new furniture, hosting large dinner parties, weekends in Las Vegas, and stuff like that shouldn't be a priority.

If you're running up emergency credit cards you don't have a big enough emergency fund- particularly if you're homeowners, and parents.  Ours is 6 months of expenses- plus we set aside a certain amount every month for home maintenance because invariably something breaks every year.

Why tap savings, or pay a big markup on an "interest free" purchase when you can probably find something useful on Craigslist or at a thrift store?  I have a lovely couch that was $150.  Our washer, and drier was $40 on Craigslist.  We just didn't have the money, so we bought what we could afford.

With a credit score of 800 you should be able to find a better refinancing deal. I think you also need to take a realistic look at your budget, see exactly where your money is going, and examine your priorities.  

It may feel like you can't get ahead, but it adds up.  It all adds up.

Always look for a better deal because there usually is one.

frillyfun

Someone here will probably recommend Dave Ramsay for budgeting.  There's a lot to like about his systems.  

I also like Mr. Money Mustache.  He advocates a very frugal lifestyle in favor of early retirement.  Some of it is a little extreme (DIY haircuts for example), but there's some great substance on his site.

This article in particular is good for you:
http://www.mrmoneymustache.com/2012/04/18/news-flash-your-debt-is-an-emergency/

Poke around on his site- see what's doable in your situation.

Also- what is your plan for housing after you retire?

HildaCorners

The important things to remember when rolling debt into your mortgage are:

- you still have the debt, it hasn't gone away. All you've done is move it from in-your-face payments to almost invisible ones.

- the total cost of borrowing money at moderate interest for a short time in *not* more expensive than low interest for a long time. [I can't run the numbers right now, try $10,000 at 15% for 3 years (typical credit card) vs. $10,000 at 3% for 30 years]

- to paraphrase from You Need a Budget, "emergencies" are often events you know will happen but can't predict when. You know the septic tank will need work eventually, you know your house will need a new roof, you know your car will need $$$$ repair work ... these are not emergencies, and you can set aside money in advance for them.

- if you have a frugal lifestyle, and have covered all predictable "emergencies", but get hit with debt from something truly unpredictable (a meteor hit your house during the 3 days you had no insurance because you were switching companies), debt is ok, as long as you make it a priority to pay off the debt. That means no $200 swimsuits, Kobe beef, or lavish parties until you clear that debt.

PurpleGuy

And this is why I brought this here. To get input from disinterested 3rd parties before signing another $.25M contract. I tend to get tunnel vision sometimes and need a reality check. 

@HildaCorners, @frillyfun - just for the record we don't thrown lavish parties or any other kind of parties. Kobi steaks or lobster dinners are in place of date night. I can put a lobster dinner for two with wine and everything for around $30 per person ($60), kobi is more expensive (about $50/pound) so it's around $75 total. I buy restaurant quality food from a restaurant distribution company. I also stock my freezer with chicken breast, 0.89/pound, and cheaper beef a $1.99/pound that are bought in 100 lb boxes. It's a lot work twice a year but I save thousands in food costs. The $100 food saver and $150 deep freezer I bought 4 years ago has saved us untold money on food costs. 

We don't "run up credit cards". While we use them frequently it is for points and everything is paid off monthly. All internet purchases are made via a specific card that has a small limit. This limits our exposure if the card gets hacked. Yes, you anticipate things to go wrong but you don't expect to have to replace an entire septic system less than 18 months after it was installed. Even though it wiped us out it was paid off and our fund was replaced in less than a year. We cash flow any vacations or extras via our Visa and pay it fully every two weeks. This allows me to easily keep tax records and know exactly where/how our money is spent. 

My current focus is retirement. I will get my full pension and benefits as well as have access to my 457 account in 2020. If a ROAD program is offered I would probably take that. By then Wife should have her CCFNP but if not she will have the experience to be a traveling BSN. We will buy a small cottage somewhere in TN, FL, or TX and take the contracts we want. We received an ad yesterday offering $600/shift (12 hours) post taxes with a housing allowance in a hospital ER in TX, that's up to $2400/week take home, or about $31k, for a 13 week contract. Similar pay is available in Seattle and S. Florida. Most travel companies also offer benefits and a travel allowance. 

The extra $700/month savings will allow us to max out my wife's 457(b) that is coming online next month as well as open/max out another Roth. She currently has a 401k at 4% with a company match. 

I need to run more numbers. We aren't scheduled to close until mid-April and if we decide not to follow through we are only out $500 for the appraisal and initiation fees.

HildaCorners

Sounds like you do have everything under control! In that case, go for the refi with your eyes open.

It's hard to know someone's full financial picture from a single forum post ... or even a few posts. We give advice based on what we read, with a large helping of our own past histories.

PurpleGuy

@HildaCorners - I understand. While I don't fully agree with Mr Ramsey I give him and Clark Howard full credit for the turnaround in our financial lives. Live within a budget and name every dollar really makes you notice how much is wasted on BS. That $2/day coffee habit turns into $40/month. I can feed a family of 4 a healthy tasty dinner for a week on $40. I don't have cable and don't know how much it is but Netflix, Hulu, and prime are $28. I don't think I can get cable for that. 

Luckily the oldest got an MBA on a free ride academic scholarship and now makes well into 6 figures at a fortune 500, the youngest is in nursing school but won't accept a dime in assistance, we pay her car insurance. When she finishes she may be able to get someone to payoff her loans in exchange for an employment contract. I'll probably give her my 97 pickup with 225k miles to get her through school when her 02 sedan finally dies. My son is military and should have his BS in December courtesy of the tax payers. 

I'm not comfortable with the numbers on the refi. The 3% VA funding fee would take over 6 years to recover in interest savings. The student loan is locked in at 1.99% and the medical bill is 0%, those would actually be a loss with a 3.125% fixed mortgage. 

A lot to think about. Monthly savings now or have more equity when we sell in 2020? 

Tennee

IMO:   VA, HUD, FFHA, etc. loans - they're all fee heavy with loads of hoops.  I think private sector money is far cheaper and easier to deal with, but that's me.  

If you're 2020 date is pretty firm, based on what you put above in terms of the cost of your existing debt currently, I don't see the point in a refi right now.    Attack the debt structure like a madman, make it go away ASAP, then you sell and move in 2020.  Based on your states, you're moving to a lower cost of living state with no state income tax - so I assume that protects your pension. 

Why a Roth?  Are you planning on making more in retirement?  Serious question - are you planning to work in another field, 2nd career, etc. after you go in 2020?  I seem to remember your current career; so your pension is probably pretty decent with solid med and other bennies.   So, if you double-dip, and wind up increasing your net with your pension AND new career, ok.  But a Roth doesn't make sense IMO for many, many people, especially funding it through a ReFi as described above. 

My $.02

PurpleGuy

I was thinking Roth because Wife should be making substantially more that she is now. If we travel I would not work or work minamially. Moving every 6-26 weeks would preclude anything steady. I have considered contract work because many of my particular skills are in demand right now. I need to talk to a financial planner before anything else. I have access to free services through my employer. 

My my pension is 60% at age 55 with over 20 years, benefits are OK but expensive. A ROAD/DROP program is being discussed by the powers and would be a good plan or backup. There is no advantage to staying past 20. 

One reason for moving is lower cost and taxes. Even if we have to stay here I would still want to downsize. We don't need 3500 feet with 1.5 acres of grass. I spend 5-7 hours every other week just keeping the yard in the summer. If I had found MMLS earlier I would never have bought this house. The old one is sufficient and will payoff in 2021. 

Tennee

OK, just working with what you've posted here, I'm inclined to say "BZZZZZZZ.  Nope" to the ReFi.  You're borrowing money to invest, essentially, at a higher interest price-point than your currents debts.  That fails on two counts:  1) borrowing to invest 2) refinancing debts at a higher rate.    I don't know if y'all itemize or not, so would the higher mortgage interest help there?  I probably still wouldn't do it regardless.

Y'all are still relatively young, and she has a longer work horizon and you've said there's a chance to seriously up the gross income.   I don't know that loading a Roth for a 36 - 48 month horizon really buys you anything (your 2020 date).   You have a long time to dollar-cost average for your later years - so make all the debts go bye-bye, downsize when you pull the plug, and take that equity and do some smart things with it - like a cash purchased house with no mortgage (dunno what kind of $ we're talking about).  And max whatever 457/403/401(k) whatever it is y'all have access to now through work with the match. 

HildaCorners

Something I'm thinking of for my retirement is to buy a multi-family house, live in one unit, and fix the other(s) up so they earn "luxury" rental rates. If I play my cards wisely, I can cover my own housing expenses forever ... and split the costs of yard work/snow plowing.

PurpleGuy, you might want to consider a variation of this plan yourself.

Husband3point0

The one advantage to having a big mortgage versus other debt is that it's fully tax deductible. As your income increases, your tax rates go up and your write offs phase out, so mortgage debt begins to become the only thing left that you can use to offset income. 

Borrowing to spend is horrible. Borrowing to save can be a bad idea, but isn't necessarily so. It depends upon the stability of your income, your current savings rate, your marginal tax rate and your event horizons. Four years might be too short to reap the benefits, but crunch the numbers. 

Eightbit

I know this is old, but a couple of things:

1. The past few years we've paid so little in interest on a 240,000 loan that  our itemized deduction is less than the standard.

2. I never, ever, ever think it's a good idea to take unsecured debt and put it against your home.

3. This:

 the total cost of borrowing money at moderate interest for a short time in *not* more expensive than low interest for a long time. [I can't run the numbers right now, try $10,000 at 15% for 3 years (typical credit card) vs. $10,000 at 3% for 30 years]

Is just wrong.  In terms of straight dollars of interest paid it is true of course but it is completely ignoring the time value of money.   15600 in three years is worth far more than 24500 in thirty years, assuming at least a 3%discount rate.

Another way to view it is, all other things equal would you rather earn 15% on 10k for the next three years or 3% for the next thirty?