Author Topic: Refi from 15y back to 30y?  (Read 5918 times)

James!

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Refi from 15y back to 30y?
« on: April 14, 2015, 10:39:36 AM »
Hi All,

So, before discovering this board I thought I was brilliant for switching to a 15y mortgage when I refinanced ~1.5 years ago.

So I currently have a home with the following:

Approx value: ~$550k (side bar, before I'm accosted for having "too much house" this is actually a modest house, plus our handbuilt ADU that is rented out)
Mortgage: $340k @ 3.875%, 13.5 years remaining
Monthly PITI: ~$3017
Property Taxes: ~$3k/yr

I know now that being on a 15y vs. a 30y with current rates isn't the optimum move. On the other hand, the mindset of being mortgage free a.s.a.p. was, and frankly still is, enticing.


Why am I considering going back to a 30y?

1) We just had our first child, and are considering having my wife be a SAHM for the next 5-7 years.
2) I am quitting my job and starting a business this year. While I anticipate my earnings to be higher eventually, I accept that there will be a transition period with unknown income and unknown duration.

So for those reasons, a reduction in monthly expense would ease the transitions.

On the other hand:

1) Closing Costs
2) While there is a theoretical gain to being on a 30y vs. a 15y, that is only if I actually take all the difference in expense and invest it. I'd love to say I will always do that, but it's hard to say that with certainty, especially with so many financial variables in the near future.

Further confusion:

I plan on opening a HELOC a.s.a.p. to act as a buffer when I start the business, perhaps this weekend. Does that affect this discussion at all? If I have a HELOC open, and then later re-fi, does that affect the HELOC?

What I'd love to do is get the HELOC now, wait and see how the transition goes and see if I can still comfortably swing the 15y, and if not re-fi at that point. There are two problems with that plan.

1) I will have quit my job so I won't have the income history. Would I even qualify to re-fi at that point?
2) Interest rates may be higher?


Anyway, I hope that's enough info. I appreciate all your thoughts.

Cheers,
James

velocistar237

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Re: Refi from 15y back to 30y?
« Reply #1 on: April 14, 2015, 10:57:28 AM »
We went from 30 to 15 and back to 30. To us, the flexibility is worth the price. In our case, the interest rates were still falling, so we benefited from that, too.

I don't know how a HELOC works. Would refinancing just cancel the HELOC, and then you would have to start a new one?

Refinancing while your income is easier to account for would make the whole process easier. What exactly would you learn from waiting for the transition? If you can make income projections, you might could already answer your questions.

Blonde Lawyer

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Re: Refi from 15y back to 30y?
« Reply #2 on: April 14, 2015, 11:02:29 AM »
This doesn't answer your question but having your wife become a SAHM the same year you quit to start your own business sounds dangerous to me.  I'd make one of those changes first, make sure that your expectations = reality before making the other change.  Maybe wife stays home for a year and you make sure you can both survive on what you expect your lower income to be.  When you see it is sustainable, then you quit.  Or, she keeps working while you start your business.  If it makes enough, then she quits.  If your business doesn't make it or you find your expected budget plus kid is way off, at least one of you still has your job.

James!

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Re: Refi from 15y back to 30y?
« Reply #3 on: April 14, 2015, 11:47:18 AM »
I need to look in to the options available for a refi in terms of rates and costs, but I'm really hoping to get some insight into the questions regarding the HELOC, and qualifying for a refi after I've quit.

Also wondering if anyone has any predictions on expectations for interest rates for the next year. I know it's pure speculation, but perhaps someone has more of an understanding than I do. That wouldn't be hard!

Anyone?

ysette9

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Re: Refi from 15y back to 30y?
« Reply #4 on: April 14, 2015, 11:48:53 AM »
Since you are contemplating multiple risky moves in the near future, what about building up a cash reserve that you can use to tap into should your income dip for a while? That would give you the buffer to continue making the 15-year payments while your income ramps up (or your wife goes back to work, or whatever other solution you put in place). That would avoid the cost and hassle of a refi.

James!

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Re: Refi from 15y back to 30y?
« Reply #5 on: April 14, 2015, 11:50:51 AM »
Since you are contemplating multiple risky moves in the near future, what about building up a cash reserve that you can use to tap into should your income dip for a while? That would give you the buffer to continue making the 15-year payments while your income ramps up (or your wife goes back to work, or whatever other solution you put in place). That would avoid the cost and hassle of a refi.

Yeah I didn't mention that but I anticipate having $20-25k cash (invested, but in taxable acct) by the time I quit. I also have secondary passive income. So there are multiple safety nets in place.


frugaliknowit

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Re: Refi from 15y back to 30y?
« Reply #6 on: April 14, 2015, 11:54:14 AM »
What would happen if your business made no profit and never got off the ground?

Would you have enough income to sustain without bleeding with a new child and a SAHM?

Don't mean to be a downer.  Otherwise, start the business part time.
Once you do quit your job, plan on not being able to qualify for a refi.

Jack

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Re: Refi from 15y back to 30y?
« Reply #7 on: April 14, 2015, 11:56:16 AM »
If the point of going to a 30-year mortgage is that it's mathematically optimal to invest the difference, why not skip the HELOC entirely, refi immediately with cash-out to get back up to 80% loan-to-value, invest the lump sum, and then draw from your brokerage account instead of the HELOC?

I think a cash-out refi might have a slightly higher interest rate than a regular one (but perhaps not a higher rate than a regular refi + a HELOC with a non-zero balance), but that's the only real downside I can think of right now.

GoldenStache

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Re: Refi from 15y back to 30y?
« Reply #8 on: April 14, 2015, 12:04:09 PM »
+1 Jack

If you get a HELOC it will be at a higher rate than your 30yr.  I seriously doubt that you will be able to refi once you quit your job, most require 2-3 years of income history at the same job.

Refi and cash out and keep the cash as a safety.. Good luck.

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Re: Refi from 15y back to 30y?
« Reply #9 on: April 14, 2015, 12:14:47 PM »
Since you are contemplating multiple risky moves in the near future, what about building up a cash reserve that you can use to tap into should your income dip for a while? That would give you the buffer to continue making the 15-year payments while your income ramps up (or your wife goes back to work, or whatever other solution you put in place). That would avoid the cost and hassle of a refi.

Yeah I didn't mention that but I anticipate having $20-25k cash (invested, but in taxable acct) by the time I quit. I also have secondary passive income. So there are multiple safety nets in place.

Not sure what type of business you are thinking about opening, but I would have at least 24-36 months of  expenses on hand NOT including what you think you may need to put into the business. 

bacchi

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Re: Refi from 15y back to 30y?
« Reply #10 on: April 14, 2015, 12:36:07 PM »
I'm doing what Jack suggested, except only up to the $100k deductible limit (and 50% LTV).

A cash-out will have a higher rate.

You almost certainly wouldn't be able to get a re-fi without 24 months of continuous W2 or self-employment income. The income has to be from the same source -- either W2 or SE but not mixed (in other words, 12 months of W2 and 12 months of SE income won't cut it). The Freddie/Fannie guidelines are for 12-24 months but lenders are very strict about it.

James!

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Re: Refi from 15y back to 30y?
« Reply #11 on: April 14, 2015, 12:58:07 PM »
Since you are contemplating multiple risky moves in the near future, what about building up a cash reserve that you can use to tap into should your income dip for a while? That would give you the buffer to continue making the 15-year payments while your income ramps up (or your wife goes back to work, or whatever other solution you put in place). That would avoid the cost and hassle of a refi.

Yeah I didn't mention that but I anticipate having $20-25k cash (invested, but in taxable acct) by the time I quit. I also have secondary passive income. So there are multiple safety nets in place.

Not sure what type of business you are thinking about opening, but I would have at least 24-36 months of  expenses on hand NOT including what you think you may need to put into the business.

The business is engineering consulting. So fortunately the "expenses" are extremely low. I have essentially no operating costs, except computers and software up front, and we'll be working from my home for the first few projects. All costs beyond design services (prototypes, simulated surgery labs, etc., ) are passed through to the customer.

+1 Jack

If you get a HELOC it will be at a higher rate than your 30yr.  I seriously doubt that you will be able to refi once you quit your job, most require 2-3 years of income history at the same job.

Refi and cash out and keep the cash as a safety.. Good luck.

At today's rates, that isn't quite true, but the HELOC is variable so over the long run that is probably correct.



So the takeaway is that if I'm going to get a HELOC or refi, I need to do it now.

I'm leaning towards getting the HELOC, and leaving the mortgage as is for now. If I need a buffer beyond my cash savings during the transition I'll dip in to the HELOC. If things work well, then I'll be fine. If the business crashes, I'll get another job.


begood

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Re: Refi from 15y back to 30y?
« Reply #12 on: April 14, 2015, 12:59:33 PM »
Maybe I am too conservative, but I wouldn't put my emergency fund in a taxable account - too much volatility, especially for something that is supposed to provide some comfort buffer in the event of a downturn of any kind.

zolotiyeruki

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Re: Refi from 15y back to 30y?
« Reply #13 on: April 14, 2015, 01:17:31 PM »
This doesn't answer your question but having your wife become a SAHM the same year you quit to start your own business sounds dangerous to me.  I'd make one of those changes first, make sure that your expectations = reality before making the other change.  Maybe wife stays home for a year and you make sure you can both survive on what you expect your lower income to be.  When you see it is sustainable, then you quit.  Or, she keeps working while you start your business.  If it makes enough, then she quits.  If your business doesn't make it or you find your expected budget plus kid is way off, at least one of you still has your job.
I'd agree with this.  Take one life-smashing step at a time :)

Blonde Lawyer

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Re: Refi from 15y back to 30y?
« Reply #14 on: April 14, 2015, 02:32:05 PM »
RE: working from home.  Do you think you will be able to work at home with a young child and your wife at home at the same time? Will it be quiet enough to take conference calls? Will you want to just hang out with them when they are doing something fun? I can't imagine working from home with a full house.

James!

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Re: Refi from 15y back to 30y?
« Reply #15 on: April 14, 2015, 02:53:32 PM »
RE: working from home.  Do you think you will be able to work at home with a young child and your wife at home at the same time? Will it be quiet enough to take conference calls? Will you want to just hang out with them when they are doing something fun? I can't imagine working from home with a full house.

It's not an ideal long term scenario, but I think we are disciplined enough to make it work. I'll be on a separate floor. I anticipate within a year moving to proper office space, but I don't want to deal with that up front when it's not necessary.


partgypsy

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Re: Refi from 15y back to 30y?
« Reply #16 on: April 14, 2015, 06:15:01 PM »
i agree with others a lot of life changes at same time. even you delaying a year to transition to self employed will help smooth things. plus you should be eligible for fmla while employed.
if you refinance with a different bank which gives you the most options fro getting the best rate you will need to close out old loan and heloc. so no cant keep heloc with new mortgage. I'd look into whether existing lender willing to lower interest rate for a point or low fee, and keep existing heloc. Personally id be loath to switch back because you keep starting the clock over again and paying the most interest and you would only tap heloc if needed. But only you know your comfort zone.

Bob W

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Re: Refi from 15y back to 30y?
« Reply #17 on: April 17, 2015, 09:57:25 AM »
Seems like you could refi to 30 and take 100K out of that transaction.   100K would pay your mortgage for 3.5 years.   At the end of 3 years you can sell you home for a net profit of $180K.   You can then buy a reasonably priced house for $180K.   

Or you could just buy the $180K house now and finance it at 30 years.   You would invest the profit from your home sale at an average return of 9% and essentially be mortgage free. 

I realize homes are expensive in some areas but I'm sure you can find a right sized home for 180K somewhere nearby?   You are essentially living beyond your means (borrowing money for lifestyle inflation)  if you don't have investments equal to the debt on your home.   If that is the case,  right sizing is the answer.  If you do have the investments to equal your debt, then just go for the 30 year refi and take 100K out to ease the transition time. 

James!

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Re: Refi from 15y back to 30y?
« Reply #18 on: April 17, 2015, 10:09:37 AM »
Seems like you could refi to 30 and take 100K out of that transaction.   100K would pay your mortgage for 3.5 years.   At the end of 3 years you can sell you home for a net profit of $180K.   You can then buy a reasonably priced house for $180K.   

Or you could just buy the $180K house now and finance it at 30 years.   You would invest the profit from your home sale at an average return of 9% and essentially be mortgage free. 

I realize homes are expensive in some areas but I'm sure you can find a right sized home for 180K somewhere nearby?   You are essentially living beyond your means (borrowing money for lifestyle inflation)  if you don't have investments equal to the debt on your home.   If that is the case,  right sizing is the answer.  If you do have the investments to equal your debt, then just go for the 30 year refi and take 100K out to ease the transition time.

Hi Bob,

This particular house(s) is a bit different. If you see the link in my signature, that's the 2nd house on the property. My wife and I along with her parents designed and built this house by hand. Not only are we personally connected to it, we already have Airbnb rental scheduled for the summer at over 4k per month, and that's just for the little house. So... I will not be selling this property ever. Or least until we build our next house from scratch together, which I'm sure will be at least 5 years out.

My wife and I have continued to discuss this, and I think I've made peace with my work situation enough to just stay here and actively pursue developing the consulting business in my spare time, so the transition will be much more dependable. With that I'll be staying long enough to hit 100% vest in my 401k as well as significantly increasing our savings over the remainder of 2015.

I do appreciate all the advice, and I spoke to my local credit union. I'll be applying for the HELOC this weekend. The rate is prime + 0%, and other than $150 closing costs there are no other fees at all. No prepayment, minimum balance, transaction fees, inactivity, etc. So this is a no-brainer, and I'll have at least 100k available if I ever need it.

Cheers,
James