Should I Refinance?

**brian71** · 06-08-2010, 03:16 AM

Should I Refinance?

I should also note that my second trust is currently about $33,000. Should I focus on just paying that down instead of doing a refi on the first trust?

**disneysteve** · 06-08-2010, 05:02 AM

The refi will cost you $24,000 and save you $400/month. That means it will take 60 months to break even. Do you expect to be in the house for at least 60 months (5 years)?

How long have you already lived in the house? If you have been there for a few years already, which I'm guessing you have since you have paid off $12,000 in principal, then by refinancing to a new 30-year loan, you are dragging out your repayment. I would look into a shorter term, like 25 years perhaps. You'll get a better rate and not extend your repayment period.

Forget about renting at a loss. That is not a viable option.

And absolutely, positively forget about "simply" walking away. That should NEVER be an option. You borrowed this money. You are legally obligated to repay the money. There was no contingency in the deal that said if the home drops in value, you don't have to repay the loan. Sorry but it doesn't work that way.

**Seeker** · 06-08-2010, 05:15 AM

Walking away from Florida mortgage doesn't always clear debt - St. Petersburg Times

**Seeker** · 06-08-2010, 05:57 AM

Originally posted by brian71 View Post

I am a first-time poster and would like advice on whether or not it makes sense to refinance my primary residence loan.

1) My first trust is currently at 6.875%, 30-year fixed. Original balance was $248,000.
2) Chase will allow me to refi at 5.5%, 30-year fixed. My current balance on the first loan is $236,000, however, I can only borrow up to $218,000, so I will have to bring $18,000 to the table. Also will have to pay between $4,000-$6,000 in closing costs. Total of $22,000-$24,000 in cash. Second trust would stay the same.
3) This would reduce my monthly payment from $2,100 to $1,700 (escrow included).
4) My home, like many in Florida, has lost substantial value since I purchased it four years ago. It's worth about $125,000 less than what I paid for it. I am current on all payments, however, and am not having any troubles currently making payments.

I have the following saved:
$86,000 in CD's, including no penalty CD's
$56,000 in Stocks/Funds/Bonds
$25,000 in Money Market

My thoughts are two-fold on whether or not to refi:

1) I have a young family and eventually will need a larger home. Doing this refi will reduce my monthly payment and I have the cash to do it. If the market hasn't recovered in a couple years when we need a larger home, I will be more likely to be able to rent it out with the reduced monthly mortgage.
2) Even if I can rent it out, I may not be able to get what I will owe on it monthly. If the market doesn't recover, my other thought has been to simply walk away from the home at some point. Not my ideal scenario, but I don't want to keep putting money into a home that may never recover its value. Having cash on hand would be helpful if I ever wanted to purchase another home before walking away from this one.

Thoughts?

How much would you have paid if you had rented instead? -- 1k/month? more? less? 4 years x 12k = 48k. The home has lost purchase price, but it does not mean that you have "lost" by paying on it. In other words, you and your family have to live somewhere; nothing is "free."

You're second posting makes a whole lot more sense than a refi would, at least under the terms you described.

How many years will it be before you may need a larger place? Walking away also means that getting another place might be severely hampered.

**jIM_Ohio** · 06-08-2010, 06:09 AM

You need to read Steve's post

The refi will cost you $24,000 and save you $400/month. That means it will take 60 months to break even. Do you expect to be in the house for at least 60 months (5 years)?

You only save money on two items

1) cash flow
2) interest paid

cash flow is obvious... about a 25% savings on payment.
interest saved will be "realized" when mortgage is paid in full.

You need to put life on a timeline (financial life on a financial timeline) and look at the following issues

1) If you plan on moving to a bigger house, why not take that cash and buy the house now (and sell the one you are in). You can probably get a similar payment to the refinance one, and that looks good.

2) If you refinance, and have lived in house for X years, and financed it originally for 30 years, you have 30-X=R years remaining on current loan. When you refinance you need to pay off the new loan in R years. Meaning if its a 30 year note, you are now paying for a house for X+30, meaning you might end up paying more interest because you focus on cash flow more than interest paid.

3) On the timeline, you want to list when house will be paid off (current loan), when it will be paid off (new loan) when you will move to bigger house, and when that bigger house will be paid off. List the costs of each and make sure you know where money is going and for how long.

3a) then change a variable, and see if it accomplishes another goal sooner on the timeline. For example if you refinance and make the R years payment, the current house is paid off sooner, with that money saved, you might be able to add on to your house or increase retirement savings.

If I this were me, here is what I would think about

1) Just buy the bigger house you want now, and use the cash (savings) to cover the balance owed on current house. If the price of sale is not good enough to pay off current note, look to add onto current house as part of the refi.

2) Refi current mortgage to a 15 year fixed. If you have been in current house for 10 years or so, this would be a better move anyway (keeps the term of mortgage payments constant) and the interest rate might be .125 or .25 lower too.

3) do house improvements (add a room) and use the cash to do it. Pay close attention to home values for larger houses and focus on trying to create about 18k in equity with about 30k of home improvements (very rarely do you get home improvements back dollar for dollar). Then once improvements are done in 6-18 months, refinance then to a 15 year fixed.

**jefffou** · 06-08-2010, 06:39 AM

Brian,

First, I'm with Steve on "walking away." I would not consider that an option now, or anytime in the future. You're young and you don't want to live with that for the rest of your life, especially when it seems you are able to pay back the debt for which you signed.

So, let's assume that you live in the house for a while, grow the family, and eventually decide to sell.

Of course you, or anyone else, would ever want to realize a $125,000 loss. To avoid this realization, you might:

1. List the home at a price more than the house will probably fetch, or
2. Wait until prices come back, at least partially, to avoid a six-figure loss.

Either of these two may keep you from selling the home within 15 months, the payback period on the reduced interest payments [$6,000 / ($2,100 - $1,700)]. So, there's a good chance that you'll be there longer than you think, provided you do not walk away. And of course, the longer you stay, the better the re-fi looks, at least on paper.

Think of it this way, Brian.

You put up 18k equity. In 24 months, you will return, not only the 6k in dead expense, but an additional 3,600 [(24 X $400) - $6,000] in interest savings. $3,600 / $18,000 equals a return of 20% or rough 10% year on your money. Not bad. And as above, my guess is that you are where you will be in a couple of years.

All of this, of course, assumes that the IRS, and unforeseen "life events" do not exist.

My $.02

**disneysteve** · 06-08-2010, 07:48 AM

Originally posted by brian71 View Post

I have a young family and eventually will need a larger home.

Also, you need to clarify this point in your own mind. You don't NEED a larger home. You WANT a larger home. And there is nothing at all wrong with that as long as you can afford the purchase. Just be sure you are distinguishing WANT from NEED.

**brian71** · 06-08-2010, 07:50 AM

Should I Refi?

Jeff, good way of looking at it. Thanks for the advice.

Given market conditions, selling the house - either now or likely any time in the next few years - is an impossibility. I don't want to bring $100K plus to the table to sell at a loss. My concern is that in a couple years we will need a larger house and having two mortgages really isn't an option. Renting out my home at a loss isn't an attractive option, either. This is the same situation many families are finding themselves in right now.

I'm financially very responsible. Just wanting to make the best use of my money.

**jefffou** · 06-08-2010, 08:10 AM

Brian,

Unfortunately, you don't have a lot of good options. At least with regard to the future use of your home.

If you like where you are, Jim's #3 "do house improvements (add a room) and use the cash to do it" may make the most sense here.

I don't blame you for feeling like you do. Walking away would definitely be the easiest thing to do. I just don't think (for a lot of reasons) it would be the best.

Either way, if I felt I was going to stay for a couple more years, I'd probably refinance.

Should I Refinance?