Author Topic: Mortgage question  (Read 5460 times)

Jen

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Mortgage question
« on: March 25, 2013, 11:25:06 AM »
Hi,

I'd appreciate some advice/suggestions/face-punching on my situation:

My husband and I have decided to get serious about our mortgage by refinancing to a lower interest rate.  Our mortgage balance is currently $313,000.  Through extra payments, we are paying down $5,000 in principal each month.  Our interest rate is higher than we'd like (5.625) but because there was a short sale on our street about 10 months ago for $250,000, we cannot refinance until either (1) a house in the neighborhood sells for considerably higher or (2) we pay down the balance.  (We are not eligible for HARP because we refinanced in 2010 under HARP.)  I think we can pay off about $60,000 in principal over the next year, which would get us down to refinancing territory.  Is it worth suspending retirement contributions to accelerate this process?  Is there something else I should consider other than simple aggressive payments? 

Other relevant facts: we are 33 and 35 years old.  My income is about $120,000 per year, and my husband is recently self-employed, but we anticipate income of around $100,000 in 2013.  I currently save the maximum amount in my 401k, and my husband also plans to contribute to his retirement account (yet to be set up).  We anticipate going to one income in the next year or so as we'd like to have a baby. 

I'd appreciate any insights and am happy to provide more information if it would be helpful.  I am a fairly new MMM reader and until a few months ago thought we were doing great with a 25% savings rate.  We've improved drastically since then but are still learning. 

AJ

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Re: Mortgage question
« Reply #1 on: March 25, 2013, 11:41:08 AM »
What do you anticipate your income will be in retirement? I ask because your contributions to your 401k are saving you loads in taxes right now. If you anticipate living on less in retirement (and, therefore, paying a lower rate at that time), it might not be worth it to miss out on those tax savings now in favor of a bit of mortgage interest.

And remember, in the large scheme of things 5.6% isn't a bad rate. Certainly rates are lower now, but there are major opportunity costs associated with accelerating your mortgage payoff to the exclusion of all other investing. That doesn't make it a bad idea (especially since it sounds like you are underwater) but it would be a good idea to run the numbers on how much that will save you vs. how much you will be giving up in potential returns from other sources.

Jen

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Re: Mortgage question
« Reply #2 on: March 25, 2013, 11:48:30 AM »
I really have no idea on the retirement income question, but I hesitate to give up on the tax-advantaged retirement savings.  You are right that 5.6% isn't terrible from a historical perspective, but in looking for ways to improve our monthly budget, our mortgage payment stands out as being high.  My thought is that it would be great to take advantage of an incredibly low interest rate on the mortgage if we can accelerate the payments for a year - especially if that can be done while still continuing to invest in the market via retirement contributions.  Then, at that point, we'd likely refinance to a 15 year mortgage and use extra money for investing rather than mortgage pre-payment.  Just curious to hear perspectives from the MMM crowd; appreciate hearing your thoughts. 

Another Reader

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Re: Mortgage question
« Reply #3 on: March 25, 2013, 11:53:35 AM »
Did a lender tell you that you cannot get the property to appraise because of that short sale?  A 10 month old sale is not a valid comparable for appraisal purposes.  Many markets have gone up since then and one old short sale does not make a market.  Call some lenders and see what they say. 

I would not suspend retirement contributions.  You have an opportunity to max out those tax deferred accounts now before you go to a one income situation.  In your shoes, that's what I would do.

Jen

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Re: Mortgage question
« Reply #4 on: March 25, 2013, 11:56:50 AM »
Yes, a lender said that because the short sale was on our street, it would be the best comparable.  I wonder if it is worth approaching a few other lenders to see if I get different answers.  It seems like it is a bit subjective....

Thanks.

Another Reader

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Re: Mortgage question
« Reply #5 on: March 25, 2013, 12:16:14 PM »
Appraisals cannot use sales that are that old.  The appraiser will have to use comparables from nearby neighborhoods.  What is the house really worth?  Do you have an idea from Zillow or Trulia?  Have you seen any listings in the area?  Visited any open houses?

Call a few lenders and get a feel for what is possible. You may be pleasantly surprised.  Also, you will want to get the refi done before you drop to one income.  It will be much easier to qualify, although your husband's business income may be weighted less because the business is new.

Jen

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Re: Mortgage question
« Reply #6 on: March 25, 2013, 12:23:09 PM »
Do you think it is worth paying for a formal appraisal? 

Another Reader

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Re: Mortgage question
« Reply #7 on: March 25, 2013, 12:35:10 PM »
No.  You can get the information for free.  Call the agent that you used to buy the house.  Usually they will help you with comps, because they want to retain the connection next time you buy or sell.  Or call the agent that leaves the calendars and notepads at your door, because this is their "farm" area, and they want to build a similar relationship.  Some lenders have an automated valuation model and the loan officer will give you an idea if the refi is feasible over the phone.  Check Zillow, Trulia, and I think Realtor.com now for estimates, but do not rely on them as any more than a rough idea.  Their models may use that old short sale. 

If you are in a neighborhood that has appreciated, there will be sales in surrounding areas that show the rate of appreciation.  You did not say where you live, but lots of markets around the country are up substantially.  Yours may be one of them.

If the refi is feasible, you will pay for an appraisal through the lender.  You can't use an appraisal you procure yourself for the loan.

Jen

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Re: Mortgage question
« Reply #8 on: March 25, 2013, 12:39:53 PM »
Thanks, great idea.  I'll reach out to the agent we used to purchase.  The area has not appreciated since we bought the house, but I don't think the short sale is representative of what value we could get now if we sold. 

Hamster

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Re: Mortgage question
« Reply #9 on: March 25, 2013, 12:48:06 PM »
I typed basically the same things as Another Reader who postedas I was typing.

I second the idea of contacting an agent you've already worked with to ask for a comp. It's just a few minutes' work. Just be honest with them that you are looking for an idea of the value to refinance, and don't lead them into thinking you may want to sell.

I'd also talk to a few lenders before dismissing the idea. One comp does not constitute an appraisal. Also, short sales generally sell for less than the same house being sold without the extra time and hassle of having to deal with the lender's bank. It seems strange that the lender dismissed the idea outright. Do they currently hold your mortgage? Might they not want you to refinance for a lower rate? or know that their rates aren't competitive, so are worried that if you do refinance, they'll lose your account?

What is the house really worth?  Do you have an idea from Zillow or Trulia?

Be careful paying much (or any?) attention to values on Zillow. Unless there have been no modifications to your home, and you expect it's value to trend exactly the same as other homes in your area, Zillow is notoriously off the mark.

Jen

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Re: Mortgage question
« Reply #10 on: March 25, 2013, 01:07:02 PM »
Trulia says the house value is $294,000 and Realtor.com says $304,000.  Seems like the next step is to follow up with our real estate agent.  It would be great if we were closer to the goal than I thought; while I'm enjoying watching the balance drop, it would be more enjoyable to have a lower interest rate. 

Another Reader

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Re: Mortgage question
« Reply #11 on: March 25, 2013, 01:18:45 PM »
That's why you need the comparable sales, the ones the appraiser will use in the appraisal for the lender.

The proprietary consumer-oriented AVM's are often 10 to 30 percent off.  Zillow tends to be the lowest and Realtor.com the highest.  Time to start "dialing for dollars".

clutchy

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Re: Mortgage question
« Reply #12 on: March 25, 2013, 01:33:02 PM »
with that type of income I'd probably be investing at the same time.

You'll be in a high tax bracket and that interest can help you reduce your tax liability.  5.6% is high but it's not horrific.  Rates should stay reasonably low for the next 2 years or so says helicopter Ben ~4% would be my guess.

I don't think I'd defer your investing at this point though.  You make great money so invest some of it.

A440

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Re: Mortgage question
« Reply #13 on: March 25, 2013, 04:05:10 PM »
Would definitely look into getting an official appraisal, maybe your house will do better than you think.  I would hope one bad house in the neighborhood wouldn't totally mess up everyone's property value.  If it does, maybe look into getting your property taxes reduced!

Also, I thought I would never say this, but have you thought about a 401k loan?  You would want to check on the interest rates that you would be paying (although you are paying them to yourself) and do a few calculations to see if it would be worth it.  Just a back of the envelope calculation would be that 2% of 300,000 is 6k.  So if you can reduce your interest by 2%, which seems fairly likely, you could save $6000 in a year (minus closing costs and etc.).  You would also want to make sure that you can continue to make contributions while you have a loan.  That way you won't lose your tax-advantaged space.  It could be worth it, but you would want to run your own numbers and make sure it makes sense for you. 


Jen

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Re: Mortgage question
« Reply #14 on: July 30, 2013, 01:09:40 PM »
UPDATE: When mortgage interest rates started to rise, we got an official appraisal on the house, which came back at $325.  We accelerated our payments even more and paid the balance down to $260 (thereby achieving an 80% loan to value ratio) and refinanced into a 15 year mortgage at 3.625%.  Our payments are actually going down by over $500/month.  We managed to do all of this without suspending any retirement contributions. 

Thanks for all of the advice and comments.  This site is such an inspiration - I never would have imagined we could have done this a year ago, but it actually wasn't that difficult. 

Dee 72013

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Re: Mortgage question
« Reply #15 on: July 30, 2013, 04:38:33 PM »
UPDATE: When mortgage interest rates started to rise, we got an official appraisal on the house, which came back at $325.  We accelerated our payments even more and paid the balance down to $260 (thereby achieving an 80% loan to value ratio) and refinanced into a 15 year mortgage at 3.625%.  Our payments are actually going down by over $500/month.  We managed to do all of this without suspending any retirement contributions. 

Thanks for all of the advice and comments.  This site is such an inspiration - I never would have imagined we could have done this a year ago, but it actually wasn't that difficult.

Congratulations! We also just refinanced our home from a 30 yr. note down to a 15. Isn't it a great feeling?
I'm determined to pay it off in 10yrs. or sooner. Keep up the great work!!

FrugalZony

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Re: Mortgage question
« Reply #16 on: July 30, 2013, 04:58:30 PM »
UPDATE: When mortgage interest rates started to rise, we got an official appraisal on the house, which came back at $325.  We accelerated our payments even more and paid the balance down to $260 (thereby achieving an 80% loan to value ratio) and refinanced into a 15 year mortgage at 3.625%.  Our payments are actually going down by over $500/month.  We managed to do all of this without suspending any retirement contributions. 

Thanks for all of the advice and comments.  This site is such an inspiration - I never would have imagined we could have done this a year ago, but it actually wasn't that difficult.
Great job!!! Glad that worked out for you!!
Plus you get to invest all that extra cash flow from the mortage now!