$100k - Refinance or Invest? Need Lower Payments!

[jIM_Ohio]

You all were kind enough to respond, so I will do my best to return the favor...

Starting from the top:



The $100k is earned income expected from my current job. As of the last pay check I have about $50k earning 5% in my FNBO bank account right now. I purchased the house with a VA loan, no money down April, 2007



I would expect to lower my interest rate. Hopefully to 5.5%



When we bought the house we did so knowing I would go to Iraq to make it more manageable. I live in California and things are expensive.



With the market down-turn I would expect that the house is now worth less than I paid one year ago. Probably by 10 or 15k.



Just one year. I don't have the statements in front of me, but I think our balance is still 297k or so.



According to my calculations, simply refinancing the existing balance from the current 6.5% to 5.5% would save me $193 a month. We have yet to see what we would qualify for this time around.



We paid approx. $14,500 in interest in 2007. We do itemize and take the interest as a deduction.


I couldn't tell you off the top of my head, but I my wife and I's combined income last year after taking the foreign earned income exclusion was around $105k.


I understand this concept and agree with it totally. My problem is, I'm looking at the monthly cash flow, not the total cost over the lifetime of the loan. I know that's not the smart thing, but that's the reality of the situation. I'm trying to find out if there is a way I could pull $700 to $800 cash from an investment monthly, and still end up better off than just dumping the whole thing into the mortgage now.





Thanks,

Cowpoke McStink

Thank you for answering some of the questions.

How much do you have set aside for retirement?
Are you a soldier in the armed forces? (if so- thank you).

Couple of responses to above:

I understand the cash flow issue. My suggestion would be to only use a portion of the 100k to pay down the mortgage and improve the cash flow.

As you indicated, refinancing can save you $200/month=$2400 year. The question is would you invest this money, have wife stop working, or spend that money? I am guessing the money is spent because you have cash flow issues.

I asked about mortgage interest (14k) and did not ask about property taxes. Can you itemize and use the property taxes as a deduction too? What were total itemized deductions?

105k gross income is in middle of 25% tax bracket. Do you know what your
a) taxable income was on tax return
b) adjusted gross income was on tax return

depending on the form used, there will be different lines.

You owe 297k, what is house worth? Do you own 20%?

[Snave]

If the payments on the last 10 years were 1 dollar. Just kiddin. 20 years is a compromise from 15, 30 you spend the first ten years paying rent. It's just a bad investment.

Thanks. I was just wondering. I guess I have a differnet philosophy. I do know that it is a down market, but over the long haul I feel that I can do better investing the money. If 100K were to earn 8% for 15 years, that would be 325K. If it earns 9% it is 383K. A 100K increase in my mortgage took me up $600/month = $7200 year or 108K over the 15 year period.

The reason I even asked is because we recently did this. We had put down about 60-65% on our house and decided to pull some out to invest (strictly invest - we are not spending it on a vacation, etc...).

[tripods68]

I don't think you need to put down $100K. When you refi and up-side down with current mortgage (owe more than what house currently worth) your home appraisal value is lower already, let say $270K and owed $297= $27K loss in value. Your down payment is now based on $270K @.20 down payment = $216K s/b your new balance + closing closing and fees.

Unless my math is wrong you only have to pay $54K (down payment to refi) and avoid PMI plus closing cost and fees. You save yourself remaining $44-27= $17K building your retirements or EF. Am I missing something here?

To add on this. $27K loss you have to pay, unless VA agrees to forgive. I doubt it. But you can claim investment loss in your taxes ($3000 per year) x 9 years = $27K.

[jIM_Ohio]

Thanks. I was just wondering. I guess I have a differnet philosophy. I do know that it is a down market, but over the long haul I feel that I can do better investing the money. If 100K were to earn 8% for 15 years, that would be 325K. If it earns 9% it is 383K. A 100K increase in my mortgage took me up $600/month = $7200 year or 108K over the 15 year period.

The reason I even asked is because we recently did this. We had put down about 60-65% on our house and decided to pull some out to invest (strictly invest - we are not spending it on a vacation, etc...).

The OP is not trying to solve the same financial problems as you or I.

My take is the situation is cash flow centric. Retirement savings and net worth are NOT his primary (or even secondary?) concerns. This is OK, but I think a portion of the 100k will be needed to pay down the mortgage.

I have a similar mortgage balance to the OP (mine is 282k). I paid similar mortgage interest in 2007 (total itemized deductions for me were 25k, which included interest and property taxes).

I am choosing to be in a cash flow crunch and invest my extra monies for higher net retirement savings. Our cash flow crunch really isn't bad, though. Both wife and I work, and even with twins coming in June, we both know we need to work to keep the same standard of living we have chosen when we built this house.

My guess is the OP could use some work on budgeting, cutting things out. Our taxable income last year was 103k (after 401k deductions). OP's is similar, I think. The issue is whether OP wants to look at budget and cut a few things to improve cash flow, or just take a one time windfall and "hope" that corrects situation permanently.

While 100k is a good amount, I do not think it is enough to save the OP enough to fix all cash flow problems now.

[Scanner]

Even without the PMI, I would still put down 20%. . .20% is kind of the magic "ante" you want to be at with owning a home. . .you don't seem to want to sell (and I agree) so this sounds like a home. . .so I say pony up 20%.

On a 300K home with 60K down payment, @ 5.5% for 30 years. . .you've reduced your loan payment to

$1362.XX

Much better than $2400.

And you still have 40K to invest.

If you invest it aggressively but yet diversified, you could expect to double that in 7 years (assuming you don't add to it)

If you equity accelerate (2 1/2 mortgage payments/month). . .you can knock about 7 years off the mortgage and probably get the loan principal down to 180K.

My opinion. . .I wouldn't blow it all on investing or blow it all on the house.

[Scanner]

BTW, I know this is a continual source of disagreement here but I'll forward my opinion on this - at this point of your life - your home is an investment.

I know many here don't view it that way.

And since your home is part of your "portfolio", that's why I think you should have some of your wealth tied up in your home and some part of your wealth tied up in other investments.

Right now. . .homes have the illusion of being a poor investment. . .but. . .over time they only underperform the stock markets by a little bit.

So by going 60/40 with your wealth, you are immediately diversified somewhat.

[maat55]

snave,

The reason I suggested that he move down in house was because he wants to afford it on one income so his wife can stay at home. He could use part of the 100k for a down payment. The 20 year note is so he can build equity making his home a better investment. This should leave him with, hopefully around 50k to invest.

Like most people he chooses to keep the house no matter what. He may end up living pay check to pay check until his income, hopefully goes up.

[jIM_Ohio]

Even without the PMI, I would still put down 20%. . .20% is kind of the magic "ante" you want to be at with owning a home. . .you don't seem to want to sell (and I agree) so this sounds like a home. . .so I say pony up 20%.

On a 300K home with 60K down payment, @ 5.5% for 30 years. . .you've reduced your loan payment to

$1362.XX

Much better than $2400.

And you still have 40K to invest.

If you invest it aggressively but yet diversified, you could expect to double that in 7 years (assuming you don't add to it)

If you equity accelerate (2 1/2 mortgage payments/month). . .you can knock about 7 years off the mortgage and probably get the loan principal down to 180K.

My opinion. . .I wouldn't blow it all on investing or blow it all on the house.

If OP can make a plan like this work, I think paying down 60k and investing 40k is a GREAT way to work this situation.

Should OP pay 60k to current mortgage, or pay 60k at closing when he refinances?

[disneysteve]

The reason I suggested that he move down in house was because he wants to afford it on one income so his wife can stay at home. He could use part of the 100k for a down payment. The 20 year note is so he can build equity making his home a better investment. This should leave him with, hopefully around 50k to invest.

Like most people he chooses to keep the house no matter what. He may end up living pay check to pay check until his income, hopefully goes up.

On a couple of threads now, your answer to the question has been to sell your house and buy a cheaper one. You say that as if it is an easy, painless and inexpensive thing to do. In reality, of course, it is none of those things. It is costly, time-consuming, potentially quite difficult in the current market and a real pain in the butt all around.

And the process is complex on both the buying side and the selling side. It took over 4 months from the time we started looking for a home until the day we made settlement. During that time, there were many, many hours spent looking at houses, meeting with the mortgage agent, meeting with our lawyer, compiling all the financial and legal paperwork, packing, hiring a mover, etc. And we weren't selling a house - just buying.

In this case, add in the fact that OP says the house has lost 10-15K in value since buying it. Selling would mean losing that much, plus all the expenses involved in selling the home and buying another, plus any money already spent fixing up this place. You're talking tens of thousands probably.

Add in the fact that OP is working in Iraq and that means his wife would need to handle everything on her own.

It is simple to tell someone to just sell the place, but it really doesn't seem to be useful advice in most cases.

[jIM_Ohio]

On a couple of threads now, your answer to the question has been to sell your house and buy a cheaper one. You say that as if it is an easy, painless and inexpensive thing to do. In reality, of course, it is none of those things. It is costly, time-consuming, potentially quite difficult in the current market and a real pain in the butt all around.

And the process is complex on both the buying side and the selling side. It took over 4 months from the time we started looking for a home until the day we made settlement. During that time, there were many, many hours spent looking at houses, meeting with the mortgage agent, meeting with our lawyer, compiling all the financial and legal paperwork, packing, hiring a mover, etc. And we weren't selling a house - just buying.

In this case, add in the fact that OP says the house has lost 10-15K in value since buying it. Selling would mean losing that much, plus all the expenses involved in selling the home and buying another, plus any money already spent fixing up this place. You're talking tens of thousands probably.

Add in the fact that OP is working in Iraq and that means his wife would need to handle everything on her own.

It is simple to tell someone to just sell the place, but it really doesn't seem to be useful advice in most cases.

There is always more than one solution to a given problem. Dealing with finances is no different than finding the fastest way to drive from NY to LA or trying to decide the best recipe to brew a beer.

The important thing is to listen/read the desires of the person asking the question. In this case the person did not want to move, and was trying to solve a cash flow problem. Then present as many ways to solve this problem as possible.

In this situation the OP only listed the house as the solution, and selling it is an option to consider. But insisting it's the answer, and suggesting it as the root cause to more than poster makes it suspect advice (suspect meaning get a second and third opinion).

[maat55]

steve,

I'm NOT new at buying and selling homes and moving. You make it a mountain, where I say it is a hill when done purposely. Having less home than you can afford is not a bad option. If you noticed the first paragragh of the poster. He's coming up short of getting the payment down to where he wants it.

Question is, is his goal a break even point or is he allowing plenty of room for hardships. My suggestion like most of mine are, is to step back and create breathing space. I have experience at this. His ability to afford this house on one income comfortably is in question here. You have your oppinion and I have mine. I don't agree with you all the time, but I don't poke at your advise. I never tell anyone to freakout and sell tommorow, no matter what it cost. The grief of selling and moving to a better plan, is better than staying in a difficult plan for a long period of time.

I'm comfortable with the advise I gave. He probably won't take it, but he heard it.

[Scanner]

JimOhio,

I have no opinion on throwing the 60K at the current mortgage or when he refinances.

Probably when he refinances for simplicity.

[InDebtInDC]

The real question is what kind of assets are you more comfortable managing? A house is an investment. A cash account is another type of investment. Each has its own unique needs and benefits.

A person who invests in a house likes to have a place to call home. You get the appreciaton in value, and it's nice to have a deed that clearly demarcates your real property.

On the downside, all real properties require maintenance, and are subject to damage. You should carry sufficient insurance coverage for all conceivable events, e.g. weather, neighbor burns down your house, drunk driver drives through your living room, etc.

The nice thing with managing money is that you don't have to maintain the account unless you choose to. Another advantage is that you can realize gains more easily instead of having to sell your whole house.

The downside is that you're susceptible to market risks, and if you're not careful you can lose the entire investment plus more.

You pick the combination that favours your strength and downplay your weakness. I personally am not good with real estate so I'm tentative with buying houses. I would rather take the cash and go play, but that's just me. I want the bank to bear the risk on the mortgage. If the house were to be destroyed, I would take my money and run. Let the bank foreclose. They have a lot more money and that's the risk they take for earning an interest.

My credit would be destroyed for life but at least my life savings won't be. I would rather have bad credit with money, than to have good credit with no money.

Again, this is not a decision to take lightly. I highly recommend you consider the pros and cons of each option before deciding. Sit down with a financial planner and calculate:

a) amount saved if you paid down your mortgage,
b) the total cost if you pulled as much equity out as possible,
c) net amount you can earn in the market after fees, taxes, etc.

If c dominates a+b, then definitely pull all of your money out and invest. If a+b dominates c, then don't invest and use the money to pay down your mortgage.

If a+b and c are in the same ballpark, you need to decide how much cash you need to allocate for each use.


These guys know I do not like to invest in real estate so anything I said will be skewed, but take it for what it's worth. At least you get some exposure to the spectrum of possibilites.

[cowpoke mcstink]

Back on Track

OP here.

Thanks again for all of the insightful discussion and advice.

Let's not forget though, I'm not looking for the "best" thing to do with this cash, or a plan to change my existing spending habits.. I'm looking for the best way to take $100,000 and use it to supplement my income by $736 / monthly.

$736 is the amount my P&I would be reduced if I refinanced today and put the entire amount down. I just figure that there must be a btter way to acheive the same effect, and maybe have something left over in 30 years instead.

I can't really give you all the tax specifics requested. This is our first year in a house, and taxes have yet to go through the CPA, so I don't know if we get to deduct property taxes. Hopefully, because it's over 5000 per year.

I am a contractor (ex-Air Force), the guy's in the service make decent money over here, but not this kind of money.


In the last 12 months my wife and I have already spent another 20k on improvements to our home, so selling is really out of the question.

The improvements included a remodel of a bathroom, the addition of a patio cover and landscaping. I'm going to assume that the only upgrade which may increase the value of my home is the patio and cover because they were permitted and the tax man wants to know all about them..

I think the value of the home is a moot point though, considering my existing VA loan and eligibility for whats called an IRRRL. Basically, the VA loan doesn't require PMI no matter what your down payment is, and the IRRRL program will allow me to refi one VA loan with another.

Like a lot of voices in this thread I like the idea of a simple compromise. I think it would be beneficial to my wife and I to put 50k into the refi. Assuming todays rates of 5.7%, that would put my Principal and Interest at $1451/month down from the current $1896.

So that's $445 back in my pocket.

After closing costs, discount points, and the VA refi fee, that would probably leave me with $42,000 and a cash flow defecit (from my goal) of $291 monthly.

So, all I need to do is find out a way to make 42k net me $3492 annually.

Now yesterday, a co-worker put a bug in my ear. He told me to buy investment real estate.

At first glance this appears very interesting, but I know it's a whole different can of worms.

[Scanner]

Cowpoke,

You seem to want to invest for income, not a bad goal.

So, all I need to do is find out a way to make 42k net me $3492 annually

I am just doing the math in my head. . .but you are looking to make about 8.5% return on your your money.

You aren't going to find low risk income at that high of a return but if you are willing to risk the prinicipal, I would shoot for utility stocks that pay good dividends. I don't have any recommendations but spreading that money across 5 to 10 stocks may make sense or find a utility stock mutual fund. Utility stocks as a general rule pay high dividends.

SO. . .pay down mortgage 50K. . .budget 8 K for closing coss. . .invest 42K in utility stock fund.

I think the value of the home is a moot point though, considering my existing VA loan and eligibility for whats called an IRRRL.

The market value of your home is never a moot point as it is an asset balanced by your liability which is your mortgage.

If you wish to remain highly leveraged on your home. . .you could put the entire kit n' kaboodle in a utility stock fund. . .but you are going to endure principal risk and market risk. YOu may average 8.5% in income but in some years, you could have losses.