T Nation

Refinancing Home


#1

I'd like to get rid of my mortgage insurance, I was talking to a co-worker the other day, and he was floating the idea of me refinancing my home in order to lower my monthly payments.

Purchase Date: March 2013
Purchase Price: $130k
% Down: 3.5% (FHA)
Interest Rate: 3.375%
Current monthly Payment: $963 (was $915 for previous year)

My payment went up recently due to escrow. I currently owe about $121k on the house. I would like to get rid of mortgage insurance. AFAIK I need to own 20% in order to get rid of the mortgage insurance. So my coworker was suggesting that if I refinance on the homes new value of (let's assume) $155K, my owner ship would then be ($155K-$121K) $34K which would be ~21.9%. I do know that if I were to refinance, I would have a new interest rate (what ever it happens to be the day of the REFI, if < 4% then I think that would be acceptable).

Should I look into refinancing?
If so who do I talk to (mortgage broker, my current mortgage holder/bank)?
Is this just stupid and I should stay where I'm at?

I would consider throwing money at the house with the way things are, but to me that doesn't make sense UNLESS I have enough money to get me to the 20% which I currently do not have.

If I were to get rid of my mortgage insurance, it would reduce my payments by $120/mo.

I would be staying in the house for a minimum of 2 more years.


#2

It could be my lack of financial accumen, but refinancing @ a higher amount would mean you owe more and own less. Put a smack down on your principal with available cash to bring down the monthly.


#3

I’m also no expert, but agree with Skyz. Increasing debt while decreasing equity does not sound wise, and remember that a refinance comes at a cost - probably enough to fund the insurance for at least several months.


#4

The answer is always “it depends,” i.e., it depends on the lender. You can get a new appraisal, but this is going to cost you probably $500 or more, and not all lenders will consider a new appraisal instead of the original sales price or appraised value when deciding whether you meet the 20 percent equity threshold (often the present mortgagee will want to stick with the original appraisal, so you may need to look at competing lenders). That $300-$500 could go further towards reducing your present principle balance on the loan.

I would never take on more debt through a refinance. If it means you take on more debt due to a higher interest rate, don’t do it. When refinancing, you can shop around; you are not bound to borrow from the original mortgagee/lender that financed the original purchase.

Be mindful that refinancing basically always includes closing costs, and sometimes those costs can approach or exceed $1000, including the cost of an appraisal, which the new lender is going to require. If more debt is going to be acquired from a refinance, the more sensible option is to cut back on monthly discretionary spending immediately and throw all available extra money towards the principle that you currently owe.

Once you’ve lowered the principle by a more substantial amount, eventually you’ll be able to refinance, without the insurance, at a rate that will leave you in the black and free and clear of the insurance. Mortgage rates probably aren’t going to increase substantially in the near term.


#5

Your co-workers method is convoluted.

You have two choices, you can pay down your existing loan so you have %20 equity ($104,000) or you may be able to get an appraisal to show your home is worth $151,250. Your mort docs will let you know whether the second method is acceptable to your lender.

If the second method is acceptable, they may require you to refinance but you wouldn’t be taking money out. You’d simply be refinancing the PMI away.


#6

I would second that you should try and just focus on paying down the balance so that it is 80% of the original purchase price. At that point you should be able to ask your lender to just cancel the PMI.

I don’t believe that refinancing based on a higher home value will increase your debt other than if you roll in closing costs and appraisal costs. I’m in a more expensive market, so that may color my experience, but from what I have seen closing costs can be several thousand dollars. And if you want to refinance there really is no way around that.
Look at how far away from getting the PMI off if you just focus on paying extra principle, consider how much you’ll pay in PMI over that timeframe, and see if it really is worth the money to refinance. You’re not that far from having 20% equity anyways, so it seems like a couple grand to refinance won’t be worth it.
I assume you’re doing this more from the standpoint of best longterm financial solution and not because you need extra cash now.


#7

Good feedback

When I looked into accelerated payments (or whatever its called), the amount that it would shift my normal payments towards the principle and away from the interest was too miniscule. I think when I looked at throwing $1000 in a lump sum, my principle only went up by like $10/mo, so to me it doesn’t seem worth it until i can comfortably throw a larger amount at it, maybe $3k, or $5k.

Aso I can’t imagine how refinancing the house at a larger value would hurt me, besides the closing costs (forgot about that). I wouldn’t be doing it to (irresponsibly) pull cash out, I would be doing it to leverage the increased value of the home to abolish my mortgage insurance, and thats all.

Hopefully soon I can throw a few g’s at it, and start slashing away at that principle a little more.


#8

[quote]carbiduis wrote:
Good feedback

When I looked into accelerated payments (or whatever its called), the amount that it would shift my normal payments towards the principle and away from the interest was too miniscule. I think when I looked at throwing $1000 in a lump sum, my principle only went up by like $10/mo, so to me it doesn’t seem worth it until i can comfortably throw a larger amount at it, maybe $3k, or $5k.

Aso I can’t imagine how refinancing the house at a larger value would hurt me, besides the closing costs (forgot about that). I wouldn’t be doing it to (irresponsibly) pull cash out, I would be doing it to leverage the increased value of the home to abolish my mortgage insurance, and thats all.

Hopefully soon I can throw a few g’s at it, and start slashing away at that principle a little more.[/quote]
Compounded interest is the most powerful force in the world, or so said Albert Einstein. Even if a lump sum payment only increases the portion of your payment that is equity by $10 a month, that’s $120 a year. Plus, the $120 extra that goes to equity will further increase the portion of your payment that goes to principle each month. If you don’t need the cash, pay now and start reaping the benefits of compounded interest today.

The only proviso to this is that you should keep some cash in the bank for an emergency (car repairs). But waiting to have a large chunk of change before making a lump sum payment doesn’t make sense. Pay a little extra every month and time will be on your side.


#9

My brother did just that with virtually the same numbers. By rounding up to a thousand his mortgage was recalculated each year to keep the length of time the same. Each year as the monthly went down the amount he put toward the principal went up. Essentially turns the compound interest formula on it’s head.
Edit~ I was about to start doing the same until my old car crapped out completely last week.


#10

[quote]Silyak wrote:

[quote]carbiduis wrote:
Good feedback

When I looked into accelerated payments (or whatever its called), the amount that it would shift my normal payments towards the principle and away from the interest was too miniscule. I think when I looked at throwing $1000 in a lump sum, my principle only went up by like $10/mo, so to me it doesn’t seem worth it until i can comfortably throw a larger amount at it, maybe $3k, or $5k.

Aso I can’t imagine how refinancing the house at a larger value would hurt me, besides the closing costs (forgot about that). I wouldn’t be doing it to (irresponsibly) pull cash out, I would be doing it to leverage the increased value of the home to abolish my mortgage insurance, and thats all.

Hopefully soon I can throw a few g’s at it, and start slashing away at that principle a little more.[/quote]
Compounded interest is the most powerful force in the world, or so said Albert Einstein. Even if a lump sum payment only increases the portion of your payment that is equity by $10 a month, that’s $120 a year. Plus, the $120 extra that goes to equity will further increase the portion of your payment that goes to principle each month. If you don’t need the cash, pay now and start reaping the benefits of compounded interest today.

The only proviso to this is that you should keep some cash in the bank for an emergency (car repairs). But waiting to have a large chunk of change before making a lump sum payment doesn’t make sense. Pay a little extra every month and time will be on your side. [/quote]

What I am having trouble with is the whole rule of “Have 6-8mo of salary saved up” vs. “eliminate all debt asap” which is more important? I am sure to have money for my furnace going out and car repairs at a minimum.

And in my eyes, it makes sense to save up a decent chunk of money for safety before spending it on my mortgage. I see more value in hanging on to the $3k-$5k for safety before dropping it on the house and saving $10/mo on my principle.

Of course, dropping a decent amount like that sure is going to change that curve on the old P*e^rt Graph all of a sudden, that would be cool to see the Principle jump in just one month.


#11

[quote]carbiduis wrote:

What I am having trouble with is the whole rule of “Have 6-8mo of salary saved up” vs. “eliminate all debt asap” which is more important? I am sure to have money for my furnace going out and car repairs at a minimum.

And in my eyes, it makes sense to save up a decent chunk of money for safety before spending it on my mortgage. I see more value in hanging on to the $3k-$5k for safety before dropping it on the house and saving $10/mo on my principle.

Of course, dropping a decent amount like that sure is going to change that curve on the old P*e^rt Graph all of a sudden, that would be cool to see the Principle jump in just one month.[/quote]

I’d save up a $1000-$1500 emergency fund, then start paying down debts. I really encourage you to go to the library and get a copy of Dave Ramsey’s Total Money Makeover, read it, and follow his principles. It really can transform your financial life. When I followed it to a T, I started feeling like I had money coming out of my ass.


#12

[quote]carbiduis wrote:
I’d like to get rid of my mortgage insurance, I was talking to a co-worker the other day, and he was floating the idea of me refinancing my home in order to lower my payments.

Purchase Date: March 2013
Purchase Price: $130k
% Down: 3.5% (FHA)
Interest Rate: 3.375%
Current monthly Payment: $963 (was $915 for previous year)

My payment went up recently due to escrow. I currently owe about $121k on the house. I would like to get rid of mortgage insurance. AFAIK I need to own 20% in order to get rid of the mortgage insurance. So my coworker was suggesting that if I refinance on the homes new value of (let’s assume) $155K, my owner ship would then be ($155K-$121K) $34K which would be ~21.9%. I do know that if I were to refinance, I would have a new interest rate (what ever it happens to be the day of the REFI, if < 4% then I think that would be acceptable).

Should I look into refinancing?
If so who do I talk to (mortgage broker, my current mortgage holder/bank)?
Is this just stupid and I should stay where I’m at?

I would consider throwing money at the house with the way things are, but to me that doesn’t make sense UNLESS I have enough money to get me to the 20% which I currently do not have.

If I were to get rid of my mortgage insurance, it would reduce my payments by $120/mo.

I would be staying in the house for a minimum of 2 more years.[/quote]

You’re basically betting the price of an appraisal on whether your house gained 5k in equity in two years. I wouldn’t take that bet. Housing regulations are a mess thanks to Dodd Frank and the housing market is pretty flat at best these days. Get a part time job, dedicate the money to paying down the principal and prosper.


#13

It saves up a lot more quickly over time when it isn’t leaving as fast. It realy depends on your mindset and strategy for the long term. An emergency fund is always good too, then on to the next.


#14

[quote]JR249 wrote:

[quote]carbiduis wrote:

What I am having trouble with is the whole rule of “Have 6-8mo of salary saved up” vs. “eliminate all debt asap” which is more important? I am sure to have money for my furnace going out and car repairs at a minimum.

And in my eyes, it makes sense to save up a decent chunk of money for safety before spending it on my mortgage. I see more value in hanging on to the $3k-$5k for safety before dropping it on the house and saving $10/mo on my principle.

Of course, dropping a decent amount like that sure is going to change that curve on the old P*e^rt Graph all of a sudden, that would be cool to see the Principle jump in just one month.[/quote]

I’d save up a $1000-$1500 emergency fund, then start paying down debts. I really encourage you to go to the library and get a copy of Dave Ramsey’s Total Money Makeover, read it, and follow his principles. It really can transform your financial life. When I followed it to a T, I started feeling like I had money coming out of my ass.[/quote]

Two things:

  1. If you are a homeowner, I would not suggest only having a 1-1.5K emergency fund.

  2. To the OP, you can always just go to a bank and ask for an estimate of closing costs and refinancing terms in general. I think it sounds like a poor idea given your interest rate, but it couldn’t hurt.


#15

[quote]JR249 wrote:

[quote]carbiduis wrote:

What I am having trouble with is the whole rule of “Have 6-8mo of salary saved up” vs. “eliminate all debt asap” which is more important? I am sure to have money for my furnace going out and car repairs at a minimum.

And in my eyes, it makes sense to save up a decent chunk of money for safety before spending it on my mortgage. I see more value in hanging on to the $3k-$5k for safety before dropping it on the house and saving $10/mo on my principle.

Of course, dropping a decent amount like that sure is going to change that curve on the old P*e^rt Graph all of a sudden, that would be cool to see the Principle jump in just one month.[/quote]

I’d save up a $1000-$1500 emergency fund, then start paying down debts. I really encourage you to go to the library and get a copy of Dave Ramsey’s Total Money Makeover, read it, and follow his principles. It really can transform your financial life. When I followed it to a T, I started feeling like I had money coming out of my ass.[/quote]
If I remember right, Dave Ramsey recommends the following order:

  1. Get emergency fund ($1-1.5k)
  2. Pay off debt other than mortgage.
  3. Increase emergency fund to be at least 3 months living expenses (maybe as high as 6).
  4. Pay off mortgage more rapidly.
  5. Increase retirement investments. (can be concurrent with step 4)
  6. Enjoy life by paying for nice things without debt and giving back.

#16

[quote]Silyak wrote:

[quote]JR249 wrote:

[quote]carbiduis wrote:

What I am having trouble with is the whole rule of “Have 6-8mo of salary saved up” vs. “eliminate all debt asap” which is more important? I am sure to have money for my furnace going out and car repairs at a minimum.

And in my eyes, it makes sense to save up a decent chunk of money for safety before spending it on my mortgage. I see more value in hanging on to the $3k-$5k for safety before dropping it on the house and saving $10/mo on my principle.

Of course, dropping a decent amount like that sure is going to change that curve on the old P*e^rt Graph all of a sudden, that would be cool to see the Principle jump in just one month.[/quote]

I’d save up a $1000-$1500 emergency fund, then start paying down debts. I really encourage you to go to the library and get a copy of Dave Ramsey’s Total Money Makeover, read it, and follow his principles. It really can transform your financial life. When I followed it to a T, I started feeling like I had money coming out of my ass.[/quote]
If I remember right, Dave Ramsey recommends the following order:

  1. Get emergency fund ($1-1.5k)
  2. Pay off debt other than mortgage.
  3. Increase emergency fund to be at least 3 months living expenses (maybe as high as 6).
  4. Pay off mortgage more rapidly.
  5. Increase retirement investments. (can be concurrent with step 4)
  6. Enjoy life by paying for nice things without debt and giving back. [/quote]

Im essentially at #3. The problem is ive been stuck here since February when i paid off the last $3k of my car. Im finding it hard to get that 3-6mo saved up.

Maybe i need more discipline (im sure a lot of us do)…but does it make sense to put off accelerated mortgage payments for a year* while i save up my 3-6mo of wages?


#17

[quote]carbiduis wrote:

Im essentially at #3. The problem is ive been stuck here since February when i paid off the last $3k of my car. Im finding it hard to get that 3-6mo saved up.

Maybe i need more discipline (im sure a lot of us do)…but does it make sense to put off accelerated mortgage payments for a year* while i save up my 3-6mo of wages?
[/quote]

The first thing to do, right now, is create a budget and stick to it. Eliminate absolutely every single unnecessary expense. Stop eating out, or limit it to a few times/month. There’s no need to go out drinking, or spend money on unnecessary travel. If you really want to get there, you may need to tighten the reins even further, which means “living like no one else now so you can live like no one else later.” When I did this, it was like having no life and being a homebody more than I was used to, but it paid off. I even got rid of the extended cable package and disconnected the home phone line. I wasn’t up to my eyeballs in debt, I simply wanted to discipline myself to save more, so I did budget money for one meal/week (dining out) and up to $15/week on a bar tab as recreation expenses, but that was all. I was no longer dropping $50+ on a night at the bar, or spending $150/week eating out. I reduced my cell phone plan to a simple “pay as you go” network, etc.

It’s your call on the emergency fund debacle. As someone else posted, it’s a trade off between paying down the mortgage, or taking a risk, as a homeowner, by having too small of an emergency fund. If the furnace goes out or some other $2,000+ emergency comes up, you’ll be stuck having to borrow money again to cover it. There’s certainly nothing wrong with adding a few thousand to the emergency fund, then hammering away at the mortgage thereafter if you want to be safe, but I’d make sure every bit of financial fat is trimmed from my monthly financial expenditures first.


#18

[quote]JR249 wrote:

[quote]carbiduis wrote:

Im essentially at #3. The problem is ive been stuck here since February when i paid off the last $3k of my car. Im finding it hard to get that 3-6mo saved up.

Maybe i need more discipline (im sure a lot of us do)…but does it make sense to put off accelerated mortgage payments for a year* while i save up my 3-6mo of wages?
[/quote]

The first thing to do, right now, is create a budget and stick to it. Eliminate absolutely every single unnecessary expense. Stop eating out, or limit it to a few times/month. There’s no need to go out drinking, or spend money on unnecessary travel. If you really want to get there, you may need to tighten the reins even further, which means “living like no one else now so you can live like no one else later.” When I did this, it was like having no life and being a homebody more than I was used to, but it paid off. I even got rid of the extended cable package and disconnected the home phone line. I wasn’t up to my eyeballs in debt, I simply wanted to discipline myself to save more, so I did budget money for one meal/week (dining out) and up to $15/week on a bar tab as recreation expenses, but that was all. I was no longer dropping $50+ on a night at the bar, or spending $150/week eating out. I reduced my cell phone plan to a simple “pay as you go” network, etc.

It’s your call on the emergency fund debacle. As someone else posted, it’s a trade off between paying down the mortgage, or taking a risk, as a homeowner, by having too small of an emergency fund. If the furnace goes out or some other $2,000+ emergency comes up, you’ll be stuck having to borrow money again to cover it. There’s certainly nothing wrong with adding a few thousand to the emergency fund, then hammering away at the mortgage thereafter if you want to be safe, but I’d make sure every bit of financial fat is trimmed from my monthly financial expenditures first.
[/quote]

I tend to live fairly frugally, I believe. Everyday I bring a lunch to work, My GF cooks our lunches and I pay for 2/3 of the cost. It’s a wiin-win, she eats $2 lunches, and I eat $4 lunches with plenty of protein in them. I don’t go out to drink, I spend maybe $30/mo on booze at home, and we only eat out once or twice a mo.

Where I fall off is buying tools and materials so that I can do jobs/repairs/stuff at home, that and I am slowly working on adding a bathroom. I always justify these costs. I recently spent about $800 on my cars body, which I also justify as needed. If I need to fix it, I should buy it right? Maybe I just need to deduct those costs from the amount I spend on frivolous shit, instead of throwing it on top.

I figure, most months I can save about $500-$1000.

I think I may throw $1300 at the house before the end of the year, that will take it down 1%, and I will still have money for a good furnace/installation, plus a small left-over cushion.


#19

I wouldn’t count on your house appreciating by $20k in 2-3 years.


#20

[quote]usmccds423 wrote:
I wouldn’t count on your house appreciating by $20k in 2-3 years. [/quote]

Is that considering the improvements that I’ve made to it?