Refinancing, opinions?

lillyb · #1 (**permalink**) 06-01-2006, 08:30 AM

I'm following Dave Ramsey's plan, but have some reservations and would like some opinions.

Will try to wade through this mess and hopefully explain it well. We're trying to pay off debt. Right now we have a personal loan ($5,700 left, aim to be paid off by September '06), a student loan (of $18,500 @ fixed 5.35%) and a home mortgage (stupidly bought on an ARM for 25 years, $65,000 left at a rate of 9.5% now). Yes, yes... I know the mortgage is at a horrid rate. This is why I'm looking into refinancing.

Okay, so ignoring the personal loan because it will be paid off in 3 more months, I'm working on what we've got left. The next debt would be the student loan. It's at a decent rate, yes. At that amount it seems like it would take forever to pay off though. I'm not sure I'm comfortable waiting til it's paid off to save my 3-6 months worth of expenses for a fully funded emergecy fund. We've been living on a strict budget with only a $1000 emergency fund for the past 8 months while paying off debt. I feel like we've learned the behavior by now, no more debt!

I'm wondering what you peep's think about including the student loan in with the house refinancing? The student loan is sorta a secured debt, is it not? You can't file bancruptcy on it or default. They will get their money, one way or another. Yes, I'd be putting my home up for more risk... but... still plenty of equity, smaller payments monthly (which to me is less risk, I can pay that easier), pay off date in 4 years, and I'd fight tooth and nail to make a mortgage payment compared to a student loan payment. Job is very secure, we live way below our means.

We owe $65k on our home which is worth $120,000. I'm looking at ING's 5/1 mortgage rate at 5.95%, including the student loan for a total of $85,000 (rolling in closing costs). The student loan portion would be at 8%, the home at 5.95%. Right now we're averaging 8.585% interest for the two. If I re-fi'd and included the student loan the average would be 6.4% per year paid for the two. I'll be paying on them both regardless, wouldn't it be better to pay a smaller average. On top of which the payment would be less, even if I only re-fi'd the home and kept the student loan as-is. Freeing up cash per month allowing me to start paying down the mortgage huge chunks monthly starting as soon as January. (personal loan payoff in Sept, then saving up bigger emergency fund until January) We aim to have this home paid off in 4 years. The 5/1 mortgage from ING is an ARM mortgage BUT is firxed for the first 5 years, which would work for us since we plan on having it paid before that time is up. with a year lee-way in case life happens. There is no prepayment penalties. I'd be reducing almost $2k a year in interest payments, also.

This is about the math part and where I thought you guys would look at the numbers instead of being dead-set going Dave Ramsey way. Not knocking Dave's way, I'm following his plan. But it is also about personal finance and I can't deny the numbers sometimes.

We make around $68,000 per year, live on half our take home pay and the rest goes to debt. I know we're probably going to do whatever we decide is the right choice, but would love some input.

Guess I'm asking if it's okay, in this scenario, to include the student loan while reducing the mortgage interest?

(forgive the ramble, sometimes I figure out which way is better by putting everything out there. a sounding board, if you will)

sweeps · #2 (**permalink**) 06-01-2006, 08:46 AM

Quote:

Originally Posted by lillyb

This is about the math part and where I thought you guys would look at the numbers instead of being dead-set going Dave Ramsey way.

First off, definitely refinance your mortgage. If you can drop your APR by about 4 full points, it's practically a no-brainer. Nothing at all wrong with a 5/1 ARM especially if you plan on paying it off before year 6.

See if you can get a no-closing-cost refinance. This is what I've done with my broker several times. I pay an extra 1/8%, but I never pay closing costs.

I am a little puzzled by the student loan situation. Why would it go to 8% if you rolled it into your mortgage? Regardless, I would not roll it into your mortgage. A fixed 5.35% is very good, and student loan interest is tax-deductible just like your mortgage. It's true, you can't discharge a student loan, but you do have deferral or forbearance options if worse comes to worse.

lillyb · #3 (**permalink**) 06-01-2006, 08:52 AM

When I filled out the application it asked the balance on the current mortgage, the student loan amount went in seperate (I'm assuming they consider it a HEL or something similar). I may look into whether they will consider including it with the mortgage amount to get it in with the 5.95% also. Otherwise, what you said makes total sense!

And the closing costs I can include with the mortage (it was around $1400), so that is okay with me.

Thanks for the reply!!

Fern · #4 (**permalink**) 06-01-2006, 08:56 AM

I would not combine the student loan into the mortgage refinance at a rate higher than what you've got now. I agree with sweeps.

sweeps · #5 (**permalink**) 06-01-2006, 08:58 AM

Quote:

Originally Posted by lillyb

I may look into whether they will consider including it with the mortgage amount to get it in with the 5.95% also.

Ok, again, just to reiterate, I still would not include the student loan in your refinance. Mathematically speaking

it doesn't make sense to turn a 5.35% loan into a 5.95% loan.

I also did not mention that student loan interest is a so-called above-the-line deduction. You can claim it even if you take the standard deduction. That makes it potentially more valuable than the mortgage interest deduction.

slimcustomer · #6 (**permalink**) 06-01-2006, 09:07 AM

I'll also agree with sweeps on not refinancing the student loan. If you have available cash you can earn a higher rate on it at a credit union or bank. That should be your first choice before touching a low rate loan. Also, you might want to look into PenFed's 5.75% 5/1 ARM.

wwjdmsl · #7 (**permalink**) 06-01-2006, 09:21 AM

Refinance the house and stick with the snowball....that student loan should be paid off pretty fast if you rollover what you are paying towards the first debt after September..

slimcustomer · #8 (**permalink**) 06-01-2006, 09:29 AM

Quote:

Originally Posted by wwjdmsl

Refinance the house and stick with the snowball....that student loan should be paid off pretty fast if you rollover what you are paying towards the first debt after September..

Why sweat the student loan? It can have certain tax advantages as sweeps points out and its at a lower rate than the OP is likely to get on a new mortgage. Don't let some snowcone get in the way of doing what makes financial sense.