Author Topic: Case Study: To refinance or not to refinance to help pay off school debt  (Read 2306 times)

lampstache

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At the end of 2015 I refinanced a 30 year (4.125%) mortgage to a 15 year (3.625%) thinking I wanted my monthly mortgage payment to do more work for me in terms of paying down my mortgage faster. I purchased the house in January 2015. The house appraised for 190k in December 2015 and I think it would be the same to be conservative.

My thoughts have shifted about having a 15 year mortgage because my fiance (getting married in August) will be finishing nursing school in December and will have $67,000 in school debt. I'm trying to understand if it would end up being wiser financially to refinance to a 30 year mortgage and use that additional monthly money we would not be spending on a 15 year and put that (approximately $415) towards the school loans vs paying down the mortgage faster with a 15 year loan. Below are the details on my current mortgage, potential new mortgage, and school loan totals with interest rates:

Current Mortgage:
Remaining balance $165,010
15 year (14 years, 4 months remaining)
3.625%
Total monthly payment with PMI: $1584

If I refinance:
New balance $170,000
30 year
3.5%
Approximate monthly payment with PMI: $1160

School Loans:
3.13%    $15,460.03
3.40%    $15,278.00
3.86%    $9,993.00
4.29%    $15,595.00
4.66%    $10,887.00
Total            $67,213.03

We don't plan on moving anywhere in the next 3-5 years as far as we know if that's helpful. After all of our recurring bills and variable expenses (childcare, blow money, kids activities, etc) every month we have about $300 left over to do what we want with (save, invest, pay off debt, etc). The additional money would leave us with about $715 per month. We'd love to pay off the house by the time our youngest (3 years old) finishes high school if at all possible. We know that we can make extra payments to the house after paying off the school loans too if we go back to a 30 year mortgage.

So what do you think, should we do it? Or, is it better to stay the course? Let me know if there's any additional info I should add. Thanks!
« Last Edit: July 07, 2016, 03:48:10 PM by lampstache »

Miss Piggy

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Curious to see what others here say, but this seems like a "six one way, half a dozen the other" kind of situation.

Some other thread within the past few weeks talked about a government program for paying off college debt if you work in a hospital or other not-for-profit for 10 years. I don't know anything about it, but it would be worth looking into.

tonysemail

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I feel that getting rid of PMI would take higher priority for me.
how much of that monthly payment is PMI?

yes, given this scenario, i would refinance to 30 years at lower rate.

lampstache

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I feel that getting rid of PMI would take higher priority for me.
how much of that monthly payment is PMI?

yes, given this scenario, i would refinance to 30 years at lower rate.

Today we pay $55 per month in PMI and it will go away in about 2.5 years if we keep the current mortgage.

If we refinanced PMI would be raised to around $64 per month due to our loan to value ratio going down. I don't know when it would go away, but I can confidently say it would be more than 2.5 years. This scenario gives me pause because I would like to get rid of PMI, but it would take much longer to do so.

lampstache

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Curious to see what others here say, but this seems like a "six one way, half a dozen the other" kind of situation.

Some other thread within the past few weeks talked about a government program for paying off college debt if you work in a hospital or other not-for-profit for 10 years. I don't know anything about it, but it would be worth looking into.

I agree with the "six one way, half a dozen the other" saying when I look at the numbers.

We're aware of the different loan forgiveness plans out there if you work for the gov't, work in a high need (rural) area of the country, or VA hospital repayment assistance. However, she has no desire to work in the VA or the local government hospital that would allow for this. She's pretty locked in on working in peds or labor and delivery. She works as a nursing assistant at a children's hospital right now and more than likely can very easily transition into a nursing role there when she's done with school.

We've talked about the benefits of working the locations that could offer either loan forgiveness or big repayment plans, but I'm agreement with her that she should pursue what she's most interested in and will enjoy on a regular basis.

notactiveanymore

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Just a question to clarify...

In the refinance to a 30 year mortgage situation, your mortgage goes up by $5000. Is that a cash-out refinance, or are you rolling closing costs into the new mortgage?

If it's closing costs, aren't you essentially borrowing an extra $5000 at 3.5 to help you pay off 67000 at 3.817 ( weighted average). Doesn't make a ton of sense to me. I do understand the argument that your lower payment on the mortgage will help you pay down the loans faster, but the interest rates are really pretty negligible.

I'm also a little concerned that you've only owned this house for 1.5 years and you would now be paying closing costs on it for a third time with very little advantage in the interest rate. So no, I wouldn't borrow an extra $5000 just to lower my payment on a 165k loan with a 3.5 interest rate to help me pay off a 67k loan with a 3.8 interest rate.

It's early so I don't want to run any more numbers, but I don't think you come out ahead.

lampstache

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Just a question to clarify...

In the refinance to a 30 year mortgage situation, your mortgage goes up by $5000. Is that a cash-out refinance, or are you rolling closing costs into the new mortgage?

If it's closing costs, aren't you essentially borrowing an extra $5000 at 3.5 to help you pay off 67000 at 3.817 ( weighted average). Doesn't make a ton of sense to me. I do understand the argument that your lower payment on the mortgage will help you pay down the loans faster, but the interest rates are really pretty negligible.

I'm also a little concerned that you've only owned this house for 1.5 years and you would now be paying closing costs on it for a third time with very little advantage in the interest rate. So no, I wouldn't borrow an extra $5000 just to lower my payment on a 165k loan with a 3.5 interest rate to help me pay off a 67k loan with a 3.8 interest rate.

It's early so I don't want to run any more numbers, but I don't think you come out ahead.

Yes, the idea would be to roll closing costs ($3000) and new escrow ($1800) into the new loan.

After thinking about it further the last few days the gain would be very minimal overall to add $5k to my mortgage and make PMI payoff that much harder to reach.

Once my fiance is a nurse, we'll still be able to max our 401k's and accomplish the other financial goals we're setting out to complete while still having a 15 year mortgage and paying of her student loans if we stay the course.

wintertell

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Yes, the idea would be to roll closing costs ($3000) and new escrow ($1800) into the new loan.

After thinking about it further the last few days the gain would be very minimal overall to add $5k to my mortgage and make PMI payoff that much harder to reach.

Once my fiance is a nurse, we'll still be able to max our 401k's and accomplish the other financial goals we're setting out to complete while still having a 15 year mortgage and paying of her student loans if we stay the course.

I agree. It seems the solution to this is extra income, not refinancing the house again. Just keep what you have in terms of the mortgage. Then, when it comes to extra money, either through increased income or those unexpected windfalls (from cutting bills or refunds or true windfalls), those can accelerate your other financial goals.

Me personally, I'd put an amount that your are comfortable with in your 401Ks and then use extra cash flow to pay down those student loans to increase cash flow. Then, once the student loans are down I'd start maxing the 401Ks. (My personal inclination is to prioritize debt payoff over maxing retirement savings because it gives you more options throughout your working career).

Also, do you have a 3-6 month emergency fund? That's step 1 before anything - mortgage prepay, student loan payoff or retirement savings.