Cash-out Refi:Face Punch for Being Tempted?

[Making Cents]

Everyone in this forum gives really helpful sensible advice. I've never done a refi before so thanks in advance for anyone who takes the time to offer an opinion.

Ok, so I'm thinking of taking advantage of the recent slight dip in mortgage rates to refinance--something that we have planned to do this fall for a while now. The decision to refinance seems like a no-brainer, right?, because my monthly payment would remain constant but I would cut my interest rate by over 2% and pay the house off 4 years earlier, but I'm wondering if I should take the opportunity for cash out for a (necessary! see below) renovation at a higher rate, but obviously much lower than any other loan for a remodel.

Current Loan Info
Interest rate: 5.00%
Term: 30 yr fixed
House purchased for $179,900, loan amount of $143,920 (20% down)
Home value: 9/13 appraised at $185k. I estimate it will appraise for at least $230k now (market values have skyrocketed in my neighborhood)
Current balance: $137,841
Monthly payment (mortgage/interest only): $773 but I currently pay an additional $170 to principal with no penalty (scheduled to pay off the house in 19 years timed to coincide with retirement)


Refi Info if I don't cash out:
Interest rate: 2.875%
Term: 15 year fixed
Monthly payment: $944 (1$ more than I currently pay comfortably)
Appraisal paid by lender credit. No origination fee. $1318 title fee.


Refi with $30k cash out:
Interest rate: 3.75%
Term: 20 year fixed
Monthly payment:$995
Lender credit of $3k to cover appraisal and title fees + escrow. Assuming my appraisal estimate is not way off, we would still have a loan to value ratio of about 73% (I don't want to go near 80%).


Why I'm Tempted:

The second story (which has our guest room) is inaccessible to most people (super steep and narrow, very uneven dangerous stairs) and so it is all but unusable. When we bought this house, we did it with the intention of replacing the stairs, which entails wall removal and relocating them because currently the run of the stairs won't fit in its current location if we bring it to code. We'd also like to add a second bathroom up there. All of what we plan should increase the home resale value enough that we gain most of what we put in back, and it will substantially increase our comfort and happiness (my aging parents can visit!).If we don't do the renovation through a loan of some sort, it will take me about 6 years to save enough to pay the cost outright because we are prioritizing tax-advantaged retirement savings.


Face punches, anyone? Am I thinking about this all wrong?

[frugaliknowit]

Do you have firm estimates to do the work?  If not, what makes you think $30K will cover it?

Have you considered buying a different house that better suits your needs instead of doing what sounds like some pretty serious rennovation?

What percentage of income will your housing costs be with the larger loan amount?

[Making Cents]

Do you have firm estimates to do the work?  If not, what makes you think $30K will cover it?

Have you considered buying a different house that better suits your needs instead of doing what sounds like some pretty serious rennovation?

What percentage of income will your housing costs be with the larger loan amount?

No, I don't have firm estimates. I don't expect $30k to cover it, but I'm not going to be able to get figures before we make the decision of how to refinance and don't want to miss the opportunity for a low cost loan. I would actually take the cash out amount and invest it, adding another 15K or so in additional summer salary over the next 2 years. Whatever work we have done, my husband and I will contribute some labor to the project (e.g. installing toilet/tub, tiling, etc.)

I have thought about changing houses, but decided it doesn't make sense. We will be staying in this city for our jobs, and any house we would buy would be well over $300k if we even could buy (demand exceeds supply pretty dramatically here and houses that don't require additional work almost always sell within 24 hours if they even go on market). We bought the least expensive house in an up-and-coming neighborhood (where recent sales on our street have been $300k-$500k). Other neighborhoods we would consider are much more expensive.

The larger loan amount would be less than 14% of our annual hh income (counting mortgage, interest, prop taxes, and insurance as housing costs).

[Gone Fishing]

If you really want to cash out, do the no-cash out refi, then get an equity line.  The higher interest rate on the cash out option results in an effective rate of around 7.75% on the extra $30k.

[Making Cents]

If you really want to cash out, do the no-cash out refi, then get an equity line.  The higher interest rate on the cash out option results in an effective rate of around 7.75% on the extra $30k.

Thanks. Seems obvious now, but I hadn't thought of crunching the numbers that way. That makes perfect sense.

[Bob W]

My numbers are similar.   At some point I plan on selling and buying a house with the equity of around 90K valued at around 90K.   

Don't know if that works for your area?   Most MMM readers are over housed at a very large margin.  Since if you essentially don't use the upper it is of little value.   If it is a guest set up run the numbers on that.   How much is having and extra guest room costing you.

In most cases it is much higher than it would cost to house your guests for the number of nights they would use it per year. 

So yeah,  consider doing the not on the radar unthinkable and selling and buying a house of 100 K in value.   Those numbers work nicely in our hood but maybe not in yours?

A paid off (financed at 2.7% of course, investing the cash at 8%) house is a very cool thing.   

[Fishindude]

So you want to go into debt for five additional years and pay a bunch more for something you've been getting along fine without?
Plus, your pretty sure this additional mount won't cover it, and it will take a couple years to actually get the project completed assuming you do a bunch of the work yourself.

FACE PUNCH !
Sounds like a good likelihood you could squander the money away on other things and never get the remodeling fully completed.
I'd recommend doing the re-fi, no cash out to get a much shorter pay-off at the same amount you've been paying.
Do the remodeling work in phases, pay as you go.

[Making Cents]

consider doing the not on the radar unthinkable and selling and buying a house of 100 K in value.   Those numbers work nicely in our hood but maybe not in yours?

Unfortunately not an option here. Our house is (not counting upper story) is a 2 bed/1 bath in a wonderful quiet safe neighborhood. Any house here priced at 100k is not only a 2/1 but needs serious work (e.g. new foundation and more or total tear-down) and would almost certainly be in a neighborhood with lots of vacancies and a high homicide rate. Nothing under at least $250k for a 2/1 would not need as much work as our house.

[Making Cents]

So you want to go into debt for five additional years and pay a bunch more for something you've been getting along fine without?
Plus, your pretty sure this additional mount won't cover it, and it will take a couple years to actually get the project completed as summing you do a bunch of the work yourself.

FACE PUNCH !
Sound like a good likelihood you could squander the money away on other things and never get the remodeling fully completed.
I'd recommend doing the re-fi, no cash out to get a much shorter pay-off at the same amount you've been paying.
Do the remodeling work in phases, pay as you go.

Thanks. Agreed! I'm going for the 15-year fixed at a great rate with a sigh of relief at successfully resisting temptation.

We definitely wouldn't have squandered the cash out, but you are right that since we don't really have a clue so far exactly what we are doing with it, it's not a good idea.

Now that I understand that with the lower 15 year fixed rate, I could afford a HELOC on part of the reno in the worst case scenario that still would be cheaper overall than the cash-out refi, I see the light!

[john c]

When your parents visit, can you or your kids sleep upstairs, and have your parents sleep on the main floor?

[Making Cents]

When your parents visit, can you or your kids sleep upstairs, and have your parents sleep on the main floor?

Yes, this is what we've done before, but I don't think it'll fly longterm. It took a while to convince them it was ok and they end up feeling like they've put us out.

I really don't mind the stairs but even our less adventurous middle aged friends are daunted by them and I've almost fallen down them many times (even though i know the tricky spots) so I worry someone will be hurt. The bottom line for me is that it is important to me to be able to welcome guests into our home and feel that they are comfortable. I don't spend any money to speak of on clothes or trinkets, but the remodel is something I think is absolutely worth the money since we intend to stay in this house until retirement. Now the only trick is to figure out how to save for it and reduce its cost so that we can afford it while sticking to our plan of FIRE in 15 years or less.

In an update, I turned in all the paperwork for the 15% FRM last night. I'm really excited and crossing my fingers for a quick close without any hiccups. I knew I could improve on our rate, but didn't expect to get below 3% and it's looking like our total PITI payment may even be reduced by thirty bucks! (Reduced over what we were voluntarily paying of course, not from the required payment.)

Still a newb at this refi thing... If anyone has any tips on best times of the month to close, the whole "skipped payment" thing, etc.... I'm all ears.

Thanks for everybody's comments. You all helped me to make the decision I knew was the right one but couldn't put my finger on why.

[Papa bear]

DIY the remodel.  A lot of what you need done is labor cost.


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[Gone Fishing]

After you get your rate down to 2.875%, do not prepay any more principal.  Use cash to fund investments.