Refinance dilemma


M

meh531

I currently have a mortgage of $495,000 with a rate of 5.875%.

I can refinance now to a rate of 5.3%.

Alternatively, I can pay off $78,000 in principal, bringing the
mortgage down to $417,000, and a rate of 4.875%.

It seems to me like the second option is best, but I don't know if I'm
missing something.

Any suggestions?

Thanks.
 
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A

Avrum Lapin

I currently have a mortgage of $495,000 with a rate of 5.875%.

I can refinance now to a rate of 5.3%.

Alternatively, I can pay off $78,000 in principal, bringing the
mortgage down to $417,000, and a rate of 4.875%.

It seems to me like the second option is best, but I don't know if I'm
missing something.

Any suggestions?
Information missing:-

what will it cost to refi - origination, processing, escrow and title
insc costs plus notaries, documention, filing etc etc. How long will
the reduced payments take to pay that off (hopefully under 4 years)

if you pay-off the $78K will you have enough of a liquid reserve to
cover a totalled car, a job loss etc.
 
J

JoeTaxpayer

I currently have a mortgage of $495,000 with a rate of 5.875%.

I can refinance now to a rate of 5.3%.

Alternatively, I can pay off $78,000 in principal, bringing the
mortgage down to $417,000, and a rate of 4.875%.

It seems to me like the second option is best, but I don't know if I'm
missing something.
Well, as Avrum suggests, if the $78,000 is all your liquidity, that's an
issue. Years ago, I pulled a similar move, and at the same time dropped
from 30 yrs to 20. The rate drop and large cash thrown at the mortgage
meant I still had a lower payment, and cut 8 years off the mortgage.
Since the cash took me below my comfort level, I added a HELOC to the
deal, figuring if the emergency Avrum offered had happened before I
built the cash back up, I'd not be in deep mud.

For what it's worth, the math works out to a 7.43% return on the
$78,000. That's the rate I calculate for the difference in payments
between your two choices. If that doesn't make sense, I can reply and
spell it out better.

Joe
 
A

Andrew Koenig

I currently have a mortgage of $495,000 with a rate of 5.875%.

I can refinance now to a rate of 5.3%.

Alternatively, I can pay off $78,000 in principal, bringing the
mortgage down to $417,000, and a rate of 4.875%.
Taking the 4.875% rate instead of the 5.3% rate saves you almost $150/month
in interest, at least at first.

So the question is whether you can afford to part with $78,000.

If you can't, can you get a second mortgage for that portion?

Right now, you're paying about $29,000/year in interest. If you refinance
$417,000 at 4.875%, you'd be paying a little more than $20,000 in interest.
So you could afford to finance the other $78,000 at a rate that costs you
$8,000/year and still be ahead. That works out to 10.25%, more or less.

In other words, if you were to finance $417,000 at 4.875% and take out a
second mortgage at 10% for the remaining $78,000, you would be paying the
same amount of interest overall as you are now.

You could then decide independently how fast you wanted to pay off the
$78,000.

Your first alternative is equivalent to paying it back immediately; the
second alternative foregoes the option of paying it back at all.
 
H

HW \Skip\ Weldon

Your first alternative is equivalent to paying it back immediately; the
second alternative foregoes the option of paying it back at all.
Here's a third alternative for those above 40-ish (does not apply to
younger homeowners): Live in a house you can afford.

In this context, "afford" means that you pay cash for all current
expenses, save sufficiently for things like cars, vacations,
retirement, emergency reserves, etc., and do it all without resorting
to debt.

I am not as dumb as I look and realize that this sounds extreme. The
fact that the above sentiment is the minority view explains why we're
having such an unpleasant contraction now.




-HW "Skip" Weldon
Columbia, SC
 
T

Thumper

Here's a third alternative for those above 40-ish (does not apply to
younger homeowners): Live in a house you can afford.

In this context, "afford" means that you pay cash for all current
expenses, save sufficiently for things like cars, vacations,
retirement, emergency reserves, etc., and do it all without resorting
to debt.

I am not as dumb as I look and realize that this sounds extreme. The
fact that the above sentiment is the minority view explains why we're
having such an unpleasant contraction now.
In many areas renting is more expensive than owning and there are no
"starter homes."
Thumper
 
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C

Chip

HW said:
In this context, "afford" means that you pay cash for all current
expenses, save sufficiently for things like cars, vacations,
retirement, emergency reserves, etc., and do it all without resorting
to debt.

I am not as dumb as I look and realize that this sounds extreme. The
fact that the above sentiment is the minority view explains why we're
having such an unpleasant contraction now.
Skip

Thanks for moderating this list and your patience with us, but I must
disagree, Yes, debt to savings ratio for the average American is
abysmal, but we certainly wouldn't be in this "unpleasant contraction"
(that is almost as good as "enhanced interrogation techniques") w/o Wall
St's and Gov's avarice, greed, ignorance, incompetence, arrogance, and
dare I say immoral behavior. So-called "free" market, unregulated
capitalism, bah! "Invisible hand", more like the raised 3rd finger.

I am well above 40, have a Ph.D, but little interest in financial
planning, (this list is about as close as I come to real financial
minds). I played my entire life by the above rules and still I am
getting royally screwed.

Chip
 
H

honda.lioness

Skip

Thanks for moderating this list and your patience with us, but I must
disagree, Yes, debt to savings ratio for the average American is
abysmal, but we certainly wouldn't be in this "unpleasant contraction"
(that is almost as good as "enhanced interrogation techniques") w/o Wall
St's and Gov's avarice, greed, ignorance, incompetence, arrogance, and
dare I say immoral behavior. So-called "free" market, unregulated
capitalism, bah! "Invisible hand", more like the raised 3rd finger.

I am well above 40, have a Ph.D, but little interest in financial
planning, (this list is about as close as I come to real financial
minds). I played my entire life by the above rules and still I am
getting royally screwed.
Chip, the following is not a comment on you but instead a thought on
what a PhD or advanced degree means.

Seems like there is some irony in the hand that many PhD'd (or master
degreed) quants played in this crash. They strike me as not so smart,
all told, because they failed to emphasize the assumptions on which
the theory they were trying to apply rested. When the value of
anything goes up and up, all socio-economic classes seem to be blind
to reality.

Academic degrees do nothing to ensure wisdom. This is something every
PhD should have drilled into him or her, reinforced with real life
examples.
 
C

Chip

Academic degrees do nothing to ensure wisdom. This is something every
PhD should have drilled into him or her, reinforced with real life
examples.
Agree in part. I only played the Ph.D card to show that I am stubborn,
dogged, and smart enough to play the system. I worked my way through
all my college and grad school days, with the help of the GI Bill and
assistantships. I have met my fair share of pointy head profs that I
wouldn't trust to walk my dog. BUT the vast majority I am more than
willing to support in any head-to-head "wisdom" competition.

Just because you got the degree doesn't mean you are an above the clouds
airhead. Heck, some of my best friends are Ph.D.s.

Chip
 
W

Will Trice

HW said:
Here's a third alternative for those above 40-ish (does not apply to
younger homeowners): Live in a house you can afford.

In this context, "afford" means that you pay cash for all current
expenses, save sufficiently for things like cars, vacations,
retirement, emergency reserves, etc., and do it all without resorting
to debt.

I am not as dumb as I look and realize that this sounds extreme. The
fact that the above sentiment is the minority view explains why we're
having such an unpleasant contraction now.
My only surprise is that you limited this to those above 40. This
sounds like good advice at any age doesn't it? Maybe not realistic for
those still in school, but after that...

-Will

william dot trice at ngc dot com
 
E

Elizabeth Richardson

Chip said:
I am well above 40, have a Ph.D, but little interest in financial
planning, (this list is about as close as I come to real financial minds).
I played my entire life by the above rules and still I am getting royally
screwed.
I'm sorry that has happened to you. My husband had no college and worked a
blue collar job all his life. I had 1 year of college and worked in
technical jobs. Neither of us were particularly well paid, just regular
working class people. We are both retired, several years before the normal
retirement age. We have a small house, on which there is no mortgage and
hasn't been for several years. We have no debt. My husband has a pension,
for which he worked hard and to which he had to contribute a portion. We
saved/invested. I did not know of Skip's advice above while we were working
our way toward retirement, but certainly there is something to it. Some 50
or so years ago, I remember my mother complaining about government spending,
saying they were borrowing money that would be paid by her grandchildren.
Sound familiar? We've been getting screwed by Washington for a number of
years, it's just that no one seemed to care. Now, apparently, people do.

Elizabeth Richardson
 
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H

HW \Skip\ Weldon

I am well above 40, have a Ph.D, but little interest in financial
planning, (this list is about as close as I come to real financial
minds). I played my entire life by the above rules and still I am
getting royally screwed.
It's Ok to disagree - that's what we do here. <grin>

Would you mind being more specific about what you mean by "getting
royally screwed"?


-HW "Skip" Weldon
Columbia, SC
 
J

JoeTaxpayer

HW said:
Here's a third alternative for those above 40-ish (does not apply to
younger homeowners): Live in a house you can afford.

In this context, "afford" means that you pay cash for all current
expenses, save sufficiently for things like cars, vacations,
retirement, emergency reserves, etc., and do it all without resorting
to debt.
"Annual income twenty pounds, annual expenditure nineteen nineteen six,
result happiness. Annual income twenty pounds, annual expenditure twenty
pounds ought and six, result misery." -Wilkins Micawber in Charles
Dickens' novel David Copperfield (pub 1850)

Dumb? Hardly. I love the above quote, although the sentiment is far
older that this. If the advice has been around so long, why can't we
embrace it? (Elle and Elizabeth both advocate more education regarding
finance in our schools, I'm agreeing that may be the solution. In
theory, we should teach this to our children, in reality, most parents
don't)

Joe
 
D

dapperdobbs

(Elle and Elizabeth both advocate more education regarding
finance in our schools, I'm agreeing that may be the solution. In
theory, we should teach this to our children, in reality, most parents
don't)

Joe
I didn't teach it. I just did it. The only things I recall saying are
perfectly normal, like "we can't afford that" "if you can't pay for
it, you can't afford it." (I have a degree in finance, can you
tell? :) Magically, it got transmitted across generations :) I was
actually surprised when I heard, "Do you need it, or do you just want
it?"

Not to get too esoteric, but some guy once said, "The harder I work,
the luckier I seem to become." It strikes me that a man who works at
what he loves gets to do what he loves to do. He loves, and is loved
in return.* A man who tries to take advantage of others, ends up on
the losing end. Simple. I believe Elle mentioned the word "wisdom" on
this thread. There is always something a man does not know. Maybe
that's the seed from which wisdom grows? I believe ethics or morals
have everything to do with living, of which financial planning is a
part. Too bad colleges don't teach more about how to see value in life
and in others, as well as in oneself.

*(With apologies for near-plagiarism of Vladimir Nabokov who wrote
opening words to his novel "Laughter in the Dark", as follows: "Once
upon a time there lived in Berlin, Germany, a man called Albinus. He
was rich, respectable, happy; one day he abandoned his wife for the
sake of a youthful mistress; he loved, was not loved; and his life
ended in disaster."
 
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D

Don

Not to get too esoteric, but some guy once said, "The harder I work,
the luckier I seem to become." It strikes me that a man who works at
what he loves gets to do what he loves to do. He loves, and is loved
in return.* A man who tries to take advantage of others, ends up on
the losing end. Simple. I believe Elle mentioned the word "wisdom" on
this thread. There is always something a man does not know. Maybe
that's the seed from which wisdom grows? I believe ethics or morals
have everything to do with living, of which financial planning is a
part. Too bad colleges don't teach more about how to see value in life
and in others, as well as in oneself.
Good thoughts. One thing about the current financial crisis strikes me
as being rather unusual and very beneficial: Large numbers of ordinary
American citizens are becoming extremely upset and concerned about the
ethics and morality of people in business and finance and are speaking
about loudly and condeming abuses in no uncertain terms. Perhaps I am
missing something, but the force of the outcry seems to me to be new
and different. There have always been criminals, scamsters, and less
than honest CEOs, etc in the financial realm, and such animals
certainly have played a role in past booms and busts. But I have never
seen anytthing like the extent to which the people have spoken out and
taken them to task at present, instead of sweeping things under the rug
as in those good old days.
 

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