Author Topic: Am I nuts to refi with cash in?  (Read 7349 times)

CB

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Am I nuts to refi with cash in?
« on: October 04, 2012, 01:07:03 PM »
Current mortgage balance: $165k@4.5%
House purchase price: $219k three and a half years ago. 

Values in our area have fallen since purchase, so I'd ballpark that our house is worth $200-210k.  However, our next door neighbor has a similar house (in terms of quality of construction, materials, finish, etc.-- theirs is about 2900sft vs. our 2400sft) and just refi'd with an appraisal at $295k (roughly $100/sft).  On the other hand, the smaller house on our other side recently sold for about $80/sft.--it was not in great interior condition and sold before the realtor's sign went up in the yard.

PenFed's 5/5 ARM is currently 2.75% and they pay all closing costs (about $3k).  The catch is that they require 70% LTV in our state, so I may be looking at putting cash in to get the refi done (unless we get an extremely generous appraisal like our neighbor).  We have enough in cash (about $40k in savings acct.) and it will cut our interest payments by about $300/month.  With the lender covering closing costs it seems to be a no-brainer. 

One complicating factor is that I had planned to survive on savings the rest of the year as I've already earned more than I did last year and wanted to put most of the rest of my income into maxing out my 457 plan.  So there's $17k of income that will be "missing" for the next three months.  I think we're okay, as our $40k cushion - $15k living expenses (we can pretty easily live on $4k/month so $17k is extremely generous) still leaves $25k to put toward paying down the mortgage to facilitate the refi.  However, this could potentially leave us with zero cash cushion, albeit only temporarily as my first paycheck in January will go back to normal.

The obvious risk is a drop in housing value, but we already face that regardless of the refi.  We will probably be relocating within the next two years, but as I mentioned above with zero closing costs this should pay for itself quickly.  One objection I can come up with is that if I don't have enough cash on hand before April 15, we won't be able to max out our Roth contributions for 2012 (I had earmarked some of our savings for that).  I suppose another worry is that the appraisal comes in so low that we need to put more than $25k or so in, leaving me holding the bag for pre-closing expenses: I'm on the hook for the app fee ($65) and appraisal (~$300?) if we back out once the application process is started.

Any comments you fine folks have would be great, this forum is awesome for getting lots of good perspectives.

Thanks!

« Last Edit: October 04, 2012, 01:10:04 PM by CB »

AJ

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Re: Am I nuts to refi with cash in?
« Reply #1 on: October 04, 2012, 01:30:12 PM »
Tough call. Would it be worth doing the refi if it meant you weren't able to max out your 457?

IME, you should base your estimates off the most conservative guess of what your home will appraise for. I've had a half dozen appraisals in the last few years, and seen others from my friends, and not a single one came back as high as we thought it should. Sounds like your friend was very lucky, as appraisers in this market are very conservative.

But even if it comes back on the low end ($80/sf x 2400sf = $192k low estimate), it looks like you would still be able to refi, you just couldn't do both that and max the 457.

velocistar237

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Re: Am I nuts to refi with cash in?
« Reply #2 on: October 04, 2012, 02:39:38 PM »
Would another loan work better? 30-year rates are at 3.25%, and for those kinds of rates, 75% LTV is enough. Why the ARM?

CB

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Re: Am I nuts to refi with cash in?
« Reply #3 on: October 04, 2012, 02:55:27 PM »
Would another loan work better? 30-year rates are at 3.25%, and for those kinds of rates, 75% LTV is enough. Why the ARM?

I'd prefer the ARM because PenFed pays all of the closing costs so the refi pays for itself immediately.  At a 3.25% rate it will take about 15 months for $3k in closing costs to make the refi pay for itself (edit: pay for itself in terms of interest saved vs. current loan).  If we only end up staying here another year it won't be worth it; I suppose we could always consider renting it out for a year or two after we leave...
« Last Edit: October 04, 2012, 03:18:52 PM by CB »

CB

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Re: Am I nuts to refi with cash in?
« Reply #4 on: October 04, 2012, 02:55:58 PM »
AJ,

I've already allocated the $17k to the 457 (i.e., sent off paperwork for salary deduction) so I'm not sure if I can undo it quickly/easily.  In addition to our cash cushion we do have $2.5k in a taxable investment account as well as another $4k or so in our "travel fund" that I could dip into if push came to shove.  We'd get a nice improvement in cash flow with the refi, so I'm not worried about rebuilding our cushion quickly, it would probably just be December/early January that we'd be on thinnish ice.  According to Mint we're living on ~$2.7k/month if I ignore all the set-asides (e.g., stuff like $60/month for car insurance that doesn't actually come due until February) so we might be okay for Oct-Dec on <$9k total; in fact nothing extra is coming out of my first October paycheck so it's really only about 2.5 months of near-zero cash flow.

Maybe what I need to decide is whether it's worth the gamble of eating the $400 or so in getting the ball rolling on the refi if it turns out we don't feel comfortable with the cash-in amount.  I might also be able to refile the 457 paperwork to commit less, but I really like the 457 as I can do anything with it once I leave my current job.

Thanks for the input, I need to think more on this...
« Last Edit: October 04, 2012, 03:22:03 PM by CB »

Another Reader

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Re: Am I nuts to refi with cash in?
« Reply #5 on: October 04, 2012, 04:25:59 PM »
You should be able to find a no-cost 15 year at around 3 percent with a 75 percent loan to value ratio.

There's an even more obvious risk with a 5 year ARM.  Rates may go up dramatically and you may not move within 5 years.  With a relatively small difference between the ARM and the 15 year fixed, in your position I would take less risk and go for the fixed rate.  Even more so if I was thinking about renting the house out later.

CB

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Re: Am I nuts to refi with cash in?
« Reply #6 on: October 04, 2012, 07:43:44 PM »
A 15-year no-cost refi sounds great, but I'm not finding much in that rate range.  I'm in Florida so there are significant taxes and title insurance fees associated with a new mortgage; while there are lenders offering negative points, I'd need something with -2 points or so to end up with a true no-cost.  I've found some in the 3.5% range for -1 points but nothing like 3% with -2 points.  I mostly have cruised the bankrate.com offerings as many of the lenders shown there provide detailed GFE's as well as some negative point offerings.  I may just not be looking carefully enough so I'd appreciate suggestions on finding a wider variety of rates.

We'd actually prefer *not* to rent out the house if we move and would probably only consider that if the local market were to get worse than it is now.  Like I said, I'd love a fixed rate but I'm either uninformed or unlucky in tracking down something appealing.

ShavinItForLater

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Re: Am I nuts to refi with cash in?
« Reply #7 on: October 06, 2012, 08:25:33 AM »
Unless you know with a fair degree of certainty that you will be moving in less than 5 years, I would not choose a 5 yr. ARM at this rather extreme point in mortgage rate history.  I would look at that 5 yr. ARM offer as if they were saying "FUCK, interest rates are going to SKYROCKET from this artificially low level that only exists due to massive government intervention which can't go on forever--I certainly don't want to take that risk, how about YOU taking it on for a 0.5% break on your rate today?"

Have you seen what interest rates were in the late 70s/early 80s.  Take that as your worst case scenario.  Ready to sign?  I think people taking ARMs today are suckers unless they know 100% that they will move or pay off the loan before the rate adjusts.

I've done refis a bunch of times, mostly through the bankrate.com listings, and I've never had a problem finding a no-cost refi with more than maybe a 0.25 to 0.5% jump in the rate.  It let me not worry about breakeven periods but also let me refi again whenever rates dropped. 

I just did a refi about 6 months ago, and I'm thinking of doing another one now.  Always fixed 30 year--I have strongly considered a 15 yr. but my mortgage is unfortunately large and I didn't want the risk of having that larger minimum payment when my kids are starting college in about 5 years.  I might even be willing to pay closing costs this time for the ultra low rate since it's not likely they can drop much further, but my dilemma is I never know how long I'll be in this house, we often talk of moving but have no definite plans, so it's always just a big unknown--I figure .25-.5% interest rate penalty is a good enough hedge against that unknown risk.

Separate from that, I know Florida values are hit hard and it might take a while for the recovery there, more than other areas, but it will recover.  Bottom line, I'd go with fixed in your shoes, unless you just haven't told us that there is a definite plan to move in the next 5 years.

CB

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Re: Am I nuts to refi with cash in?
« Reply #8 on: October 07, 2012, 09:01:38 AM »
Unless you know with a fair degree of certainty that you will be moving in less than 5 years, I would not choose a 5 yr. ARM at this rather extreme point in mortgage rate history.  I would look at that 5 yr. ARM offer as if they were saying "FUCK, interest rates are going to SKYROCKET from this artificially low level that only exists due to massive government intervention which can't go on forever--I certainly don't want to take that risk, how about YOU taking it on for a 0.5% break on your rate today?"

Have you seen what interest rates were in the late 70s/early 80s.  Take that as your worst case scenario.  Ready to sign?  I think people taking ARMs today are suckers unless they know 100% that they will move or pay off the loan before the rate adjusts.

It's a 5/5 ARM (not a 5/1) with 2% cap per 5-year period and a 5% lifetime cap.  So the true worst case scenario for the next 15 years is 2.75->4.75 five years from now, then 4.75->6.75 ten years from now.  The rate is capped at 7.75%.  So while it is certainly likely the rate would rise, there's no way we'd be stuck with a Volcker-era rate.  If rates rise we do have the wherewithal to accelerate repayment, augmented by the cash flow increase from the lower post-refi payment.

Right now I would put our probability of moving within the next year at about 50%, within the next two years about 80%.  However, in about a year I'll know with much more certainty whether or not we'll be staying here longer-term.  One solution is to go with the no-cost ARM for now and re-evaluate in a year or so; I can always refi to a 15-year a year (or less) down the road once I know I'll have no problem recouping the closing costs.  Given the open-ended nature of QE3 I don't harbor great fears about 15-year rates heading upwards before I have a chance to refi, but of course anything can happen.

I agree with your general perspective but I think we fall close to your two exceptions in terms of probability of moving and ability to pay off loan more quickly.
« Last Edit: October 07, 2012, 09:08:01 AM by CB »

Blindsquirrel

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Re: Am I nuts to refi with cash in?
« Reply #9 on: October 07, 2012, 06:12:59 PM »
 Not sure if they are in your area but Union Savings/ Guardian have a deal of total cost to Refi of $250. They are in Oh, Ky and In I know. Recent 30 year rate is 3.625.

madage

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Re: Am I nuts to refi with cash in?
« Reply #10 on: October 08, 2012, 10:32:21 AM »
CB-

FWIW, I have a 5/5 ARM from Penfed and I'm thrilled with it. I believe your analysis of this loan is spot-on. I'm willing to accept the very low rate with no closing costs for a small amount of rate uncertainty. The fact the rate can only increase 2% at a time, and only once every five years makes it much easier to stomach for me. I've refinanced twice this year and couldn't find a comparable rate on a no closing cost fixed-rate loan of any duration. Oh, and your $300 estimate for the appraisal is exactly what showed on my HUD.

As to your specific situation, I'd probably take the plunge because I love watching my mortgage principal shrink and your cash on hand is manageable. One of the big reasons I went for the ARM was so I could reduce the principal even faster than with my previous 4.375% 30-yr fixed mortgage.

Quick240

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Re: Am I nuts to refi with cash in?
« Reply #11 on: October 08, 2012, 11:10:36 AM »
FWIW, I have a 5/5 ARM from Penfed and I'm thrilled with it.

A little off topic here, but how long did it take you to close?  I just started a refi with them about 10 days ago (to the same 5/5 ARM you have), but I recently read some horror stories online about PenFed's timeliness to close.  It's a 90 day lock, so hopefully that's long enough, but those reviews got me a little worried.

CB

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Re: Am I nuts to refi with cash in?
« Reply #12 on: October 08, 2012, 12:18:58 PM »
...couldn't find a comparable rate on a no closing cost fixed-rate loan of any duration...

That's what I'm finding, too.  Fixed rate would be great but they're just not out there with truly zero closing costs. 

I'd also second the request for anecdotal info on time-to-closing; I think the PenFed literature says an approximate 45 days for a refi, but if we go with it I really want to close ASAP.

Able was I ERE

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Re: Am I nuts to refi with cash in?
« Reply #13 on: October 08, 2012, 01:46:30 PM »
A little off topic here, but how long did it take you to close?  I just started a refi with them about 10 days ago (to the same 5/5 ARM you have), but I recently read some horror stories online about PenFed's timeliness to close.  It's a 90 day lock, so hopefully that's long enough, but those reviews got me a little worried.

In my anecdotal experience, the closing processor will extend the lock if there are delays that could prevent closing in 90 days.  My 5/5 ARM refi closed within 90 days, but only just.   Part of that was due to complicated paperwork, including an in-person appraisal, re-titling the house and subordinating a HELOC.  For my subsequent refi to the 5-year equity loan, it took about two weeks from start to finish.

Able was I ERE

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Re: Am I nuts to refi with cash in?
« Reply #14 on: October 08, 2012, 01:57:43 PM »
However, this could potentially leave us with zero cash cushion, albeit only temporarily as my first paycheck in January will go back to normal.
....
One objection I can come up with is that if I don't have enough cash on hand before April 15, we won't be able to max out our Roth contributions for 2012 (I had earmarked some of our savings for that). 

Can you take out a HELOC as Springy Debt instead of a Cash Cushion?  Might give you piece of mind and source of ready cash if you run short in April.   You can't make up IRA contributions, so it can sometimes make sense to borrow temporarily in order to max out your contribution for the year.

Edit: Since you're contributing to a Roth IRA---in an true emergency, you can withdraw your contributions.  Are you sure need a cash cushion? 
« Last Edit: October 10, 2012, 07:46:53 PM by Able was I ERE »

madage

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Re: Am I nuts to refi with cash in?
« Reply #15 on: October 09, 2012, 02:57:19 PM »
A little off topic here, but how long did it take you to close?  I just started a refi with them about 10 days ago (to the same 5/5 ARM you have), but I recently read some horror stories online about PenFed's timeliness to close.  It's a 90 day lock, so hopefully that's long enough, but those reviews got me a little worried.

Time from application to closing was about 50 days. Penfed is not as motivated to close quickly as the brokers are (previous broker refi was completed in just over 30 days).

burly

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Re: Am I nuts to refi with cash in?
« Reply #16 on: October 16, 2012, 06:39:43 PM »
I work for a major US Bank and we have home equity installment loans, like most banks... The closing costs are around $200 bucks. Honestly, mortgages should only be used for purchases, once you have at least 15% equity, do a home equity. Have you used a payment estimator to see what the true differences in pmt or total finance charges are?  Anyways, I know for us a 350-417k HEIL is 3.29% for 18yr...


follicular

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Re: Am I nuts to refi with cash in?
« Reply #17 on: October 17, 2012, 07:21:37 PM »
I too just started the penfed 5/5 arm application after considering several other options. this was the cheapest and 'safest' for an arm that I had seen. I have been somewhat annoyed at the overbearing requirements those penfed folks are placing on me even tho' I owe less than half of the appraised value of the house. Nonetheless, they estimate a closing date which will be about 6 weeks after the process started.
You have to realize tho' that the amortization period is 30 years--therefore, you are paying off very little of your house principal each month (about 40% of your monthly payment goes to principal; my current 10 year fixed rate mortgage is allotting  70% of monthly payment to  principal pay-down every month).
My goal in refinancing this way was to be able to either: a) accelerate payoff of my entire mortgage principal about 5 months sooner than if I had retained my current mortgage or b) reduce my monthly mortgage payment and apply the difference between the 2 mortgage monthly payments to either retirement accounts or debt pay down. I am not sure which option makes more sense and I will probably play around trying to find the happy medium.

CB

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Re: Am I nuts to refi with cash in?
« Reply #18 on: October 18, 2012, 08:04:56 AM »
I went ahead and started the 5/5 ARM with PenFed; no idea on a closing date yet.  We had a very good September and looking to have a good October in terms of savings so I'm pretty confident we'll have sufficient cash to pay down principal, be able to "survive" through Nov-Dec with a diminished paycheck, and still get our 2012 Roths fully funded before April 2013.

Thanks all for the advice.

TomTX

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Re: Am I nuts to refi with cash in?
« Reply #19 on: October 18, 2012, 07:20:18 PM »
Unless you know with a fair degree of certainty that you will be moving in less than 5 years, I would not choose a 5 yr. ARM at this rather extreme point in mortgage rate history.  I would look at that 5 yr. ARM offer as if they were saying "FUCK, interest rates are going to SKYROCKET from this artificially low level that only exists due to massive government intervention which can't go on forever--I certainly don't want to take that risk, how about YOU taking it on for a 0.5% break on your rate today?"
e than other areas, but it will recover.  Bottom line, I'd go with fixed in your shoes, unless you just haven't told us that there is a definite plan to move in the next 5 years.

Bah, they can pay off the entire house in 5 years.

If they really want to.
« Last Edit: October 18, 2012, 07:22:30 PM by TomTX »