Author Topic: New Mustachian Refi Dilemma - Cashout to pay down student loans?  (Read 3268 times)

EigenStache

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New Mustachian Refi Dilemma - Cashout to pay down student loans?
« on: December 23, 2015, 03:05:28 PM »
Hello All,

New mustachian here (although I've actually been sporting a real-life handlebar for the better part of 3 years at this point). I'm trying to take some good steps towards FI, but the Mrs. and I have a boatload of student loans that have been cramping our style for a while.

I've got a 15 year mortgage at 3.75% interest and recently got a rate locked in for a cash-out refi at 3.375%. Saves a bit of interest, but thanks to appreciation of home values in the area it gets us out of paying PMI for another 14 months @ $75/month.

Current P&I: $1265
Current Principal: $147k
Current Rate: 3.75%
PMI payment: $75/month

New P&I: $1230
New Principal: $161k
New Rate: 3.375%
PMI payment: 0

My initial plan as shown above was to take $8500 out to pay off high-interest credit card debt. (This down from $12k accumulated during an ill-advised stint as a teacher... I have since doubled my salary as an engineer but it has been a while in getting paid off.) The numbers work out favorably and I've already taken several small steps to reduce spending besides... lower internet bill, cheaper car, switched from Sprint to Ting, LED lightbulbs, etc.

So, first question is: I think doing a cash-out refi like this is the right way to go here, but do you all agree? I'm confident that we aren't just transferring debt to start charging on the cards again, and the math is clearly in favor of mortgage debt to CC debt. The hit for the closing costs/appraisal is annoying, but saving the PMI, CC interest, and lower interest rate on the mortgage itself more than makes up for it.

So, assuming that checks out, my second question is:
The home value was 170k when we purchased but is now appraising at >$220k. So while I'm planning on a refi to $161k for the new principal, I could finance $176k without having to pay PMI. This would be nice because...

We still have $75k in student loans. The worst of these are my wife's, $29k at an interest rate of 6.75%. Based purely on the math, I come out way ahead by refinancing the maximum possible amount at 3.375% to pay off that 6.75% loan. It feels vaguely wrong though to be cranking up the debt on the house.

On the other hand, the hit I'm taking on closing fees isn't going to go up or down based on how much I cash out. So if there's $2k fixed costs for the refi, I would be getting a better ROI by taking out the maximum to deal with high interest debt.

Hopefully this is enough information to go on - I can include other financial details but I'm not confused about what to do overall: pay off these credit cards and student loans ASAP. The question is whether transferring student loan debt to mortgage debt is worth it, or if I should just keep that mortgage as low as possible and pay off the loans the old fashioned way.

Thanks in advance!

therethere

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Re: New Mustachian Refi Dilemma - Cashout to pay down student loans?
« Reply #1 on: December 23, 2015, 03:29:24 PM »
How long do you plan to keep the house?

EigenStache

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Re: New Mustachian Refi Dilemma - Cashout to pay down student loans?
« Reply #2 on: December 23, 2015, 03:33:53 PM »
I see us staying here indefinitely, unless there's a job change or something that led us elsewhere. Even then, I've strongly considered keeping it and renting it out since it's a townhome and therefore all the exterior maintenance aspects of home ownership are already taken care of by the HOA.

AlwaysLearningToSave

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Re: New Mustachian Refi Dilemma - Cashout to pay down student loans?
« Reply #3 on: December 23, 2015, 03:39:24 PM »
If you haven't already, you should explore the possibility of refinancing your student loans to get a lower interest rate.  If you can refinance to a lower interest rate on the student loans, this could make the gain from the cash out look less appealing.  Even with a lower interest rate on the student loans, I would not be surprised if some forum members find the cash out to be a worthwhile move.  I express no opinion either way on the cash out.

Another Reader

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Re: New Mustachian Refi Dilemma - Cashout to pay down student loans?
« Reply #4 on: December 23, 2015, 03:44:10 PM »
Taking out long term, secured debt to pay off a short-term, unsecured debt is not something I would do.  That's especially true since you doubled your salary since you ran up the debt.  In your shoes, I would cut expenses and get the credit cards paid off with cash-flow.  Maybe try a balance transfer to a 0 percent interest card to help with the interest expense. 

At 6.75 percent and not dischargeable in bankruptcy, the student loans might be worth rolling into the mortgage.  For me, it would depend on the remaining term and how fast you could kill them with cash flow after the credit cards.

However, before I put them on the house, I would try to refinance them at a lower rate through SoFi, or one of the other student loan refi lenders.  A shorter term and not secured by the real estate would be my first choice.

AlwaysLearningToSave

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Re: New Mustachian Refi Dilemma - Cashout to pay down student loans?
« Reply #5 on: December 23, 2015, 03:45:30 PM »
Maybe try a balance transfer to a 0 percent interest card to help with the interest expense. 

+1.

EigenStache

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Re: New Mustachian Refi Dilemma - Cashout to pay down student loans?
« Reply #6 on: December 23, 2015, 04:10:39 PM »
So, I took a quick look at Sofi a while back and the rates didn't look that advantageous. That was just with a quick pre-qual though... it could be that the situation has changed and I should look more closely. I'll check into that soon - the item of biggest concern is that $29k at 6.75%, because the remaining $46k is at a 5.32% rate (weighted average across all loans), and so the refi is less compelling there.

On the credit card debt, I expect we could pay it off in 2016, but the alternative would be for that money to go towards student loans - based purely on the interest rates, the mortgage debt . One of those cards is a Discover card on an intro 15 month no-interest deal but the interest will be coming due in a few months, and another is a Chase Slate card that was in a zero-interest period but that has lapsed so I'm now paying interest again. I know there are other zero-interest cards out there, but all of them that I've seen have a 3% balance transfer fee so I've been hesitant to go that way.

Anyhow... if I treat this debt paydown as an investment at 6.75%, and take out the maximum possible on the cashout, the numbers show a better position by $10k after 10 years. This is a rough take that doesn't account for higher credit card interest rates and the cost of the refi, but overall the numbers seem to work out.

Another Reader

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Re: New Mustachian Refi Dilemma - Cashout to pay down student loans?
« Reply #7 on: December 23, 2015, 04:33:57 PM »
How about providing your income and expense information in the form of a case study?  My gut reaction is some expense cutting would go a long way to getting rid of the debt,especially the consumer debt.  Although you would reduce your interest expense some, to me you are really kicking the can down the road with your plan.

EigenStache

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Re: New Mustachian Refi Dilemma - Cashout to pay down student loans?
« Reply #8 on: December 23, 2015, 09:30:45 PM »
Ok, here's the goods according to the case study template -

Life Situation: Engineer living in Colorado, married with two young kids (3 and 1). 15 minute commute (I plan to start biking in the summer to save on this) and we live in a wonderful neighborhood with an obscenely good Walk Score. We can walk to the library, park, pool, grocery store, thrift store, etc during the summer. This is almost a disadvantage at times because there's a really good coffee shop and great mexican food half a block away.

Gross Salary/Wages: Gross salary for myself is $65k. My wife is mainly a stay at home mom but makes $12k annually with a photography business on weekends.

Pre-tax deductions: My current employer matches 15% of my salary into a SEP-IRA. No employee contribution required. I put $30 from each paycheck into a 529 college savings plan (not much, but starting it got me some bonus starter funds). I've got life, dental, and medical insurance that also comes out pre-tax.

Net income: After all is said and done, I've got biweekly paychecks of $1900 (26 checks/year) with another $1000 a month from photography (on average, it is much higher in the peak season and lower in the slow times). So call it $5k a month.

Current expenses:
 Auto Insurance - $150 (Based on the former leased vehicle. I expect this will come down some with the cheaper 2010 car)
 Life Insurance - $17 (Brings some comfort of mind. Also, my mother-in-law is my insurance agent... it's hard to turn her down)
 Auto Payment - $166
 Gas - $100 (biking will help, but much of it is because my wife travels to clients for photography)
 Internet - $40 (negotiated down from $70 thanks to MMM - good internet is needed for photo business)
 Cell phones - $60 (My projection. Just switched to Ting, was on Sprint previously at $140!)
 Electric - $70
 Gas - $50 (on average. $17 in summer, $100 January-March)
 HOA - $211
 Ballet - $50. My daughter does this once a week. Probably can't afford it, but I'm having a hard time letting this one go.
 Mortgage - $1365 (1174.46 P&I, $75 PMI, $120 T&I)
Now, the embarrassing part... based on Mint, here's our spending for the last year...
 Health and Fitness - $100 (Mostly doctor visits and prescriptions - wife and kids are sick frequently)
 Pets - $100
 Food and Dining - $1000
 Shopping - $500

I recognize that this is a big part of the problem - so recommendations are appreciated here, but I'm already totally on board that eating out, shopping, and grocery spending all need to be slashed.

Assets:
 SEP-IRA - I just got vested last year, so only about $5k is in right now, with 85% in Schwab S&P index, and then 10% in Schwab Index Bonds fund and 5% in an international fund. I'm thinking when the disbursement comes through this year (it is one lump sum in February each year) I'm going to move it all over into the S&P index. That should bring the total to ~$15k.
 Savings - $1000 kept for emergencies in a credit union savings account
 2006 Pontiac Vibe, paid off.
 $500 total in kids 529 college accounts
 Townhome, purchased for $170k, appraising now at $220k.

Liabilities:
 2010 Mazda5, $166 month payment with $9000 owed. Turning in a leased vehicle next month and this is the replacement.
 Mortgage, payment listed above, $147k owed at 3.75% on a 15-year term.
 Wife student loans - $29k @ 6.75%, $200/month
 My student loans - $47k @ 5.23% (weighted average of several smaller loans) at $450/month
 Credit Card 1 - $1800 @ 18%
 Credit Card 2 - $2500 @ 22%
 Credit Card 3 - $4000 @ 0% (balance transfer, 3 months of no interest remaining)

Specific Question(s):
So I'm midway through the process of a cash-out refinance (move down to 3.375% interest rate, end PMI, consolidate debt) and I'm really wondering what the best course is with that. Cashing out the maximum (up to 80% of appraised home value) and putting it straight to credit cards and then high interest student loans seems to be the best angle based on the spreadsheet numbers, but there might be lots of things that I'm not considering.

Overall I'm trending in the right direction over the past few years. Net worth was -$86k in Dec 2013, -$70k in Dec 2014, and will probably turn positive any day now thanks in no small part to the recent real estate market. But I'm tired of these goddamn loans and I want to stop throwing money down the interest hole every month. I'm frugal by nature but my wife is the opposite and so I have to try to bring her on board - she is willing but it will be a challenge for her because she's lived for 30 years seeing spending as happiness. I've developed some bad habits of my own as well.

The last 3 years really beat us to hell thanks to a very poor job decision ($28k teaching job with a 45 minute commute) and the expenses/downtime of 2 kids being born, but I'm not complaining - just acknowledging that we stacked things against ourselves and so now we're paying for some poor life choices. I'm seeing the MMM light though and I think we're positioned now to make a lot of headway finally, I'm just trying to optimize the choices.

AlwaysLearningToSave

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Re: New Mustachian Refi Dilemma - Cashout to pay down student loans?
« Reply #9 on: December 24, 2015, 05:30:35 AM »
I'll be the first to administer a face punch for the spendypants behavior... Dining out, shopping, credit card debt, etc. But the fact you are here shows me you understand that already. So, now that is over with, on to some other things:

Do you really need two cars if you live in a neighborhood with an awesome walk score? Sure your wife needs the car on weekends for her business, but do you need a second car? Maybe keep this in mind for later in your transition to an MMM lifestyle, depending upon how off putting it would be to your wife. She definitely needs to be on board for that decision.

Stop the contributions to the 529 plan. People generally overemphasize college savings. The best thing you can do for your kids' financial futures is to take care of your own finances. That means save for your retirement first. Your kids can borrow money to pay for college someday. You cannot borrow money to fund your retirement. Ideally, by the time your kids need to pay for college, you will have no mortgage, no consumer debt, significant assets, and, if you are still working, significant income. You can use current income to help with college when the time comes. Plus, the tax advantages of a 529 plan are not that great compared to retirement savings vehicles like 401(k)s and IRAs.

I'm not convinced that the cash out refinance is the best bet for your credit card debt. Surely there are credit card offers out there for 0% introductory periods. Keep doing balance transfers and make sure you never pay interest on those debts. Then focus on getting rid of that debt first. That is the worst form of consumer debt.

I could be convinced that the cash out refi is a good idea for the higher interest student loans. But I'm not sure about the closing costs versus savings. If you did not cash out you would still pay 75 per month for pmi for at least 14 months, so you are spending an additional $1000+ to get the lower interest rate. How long will it take to break even? It might help us to see your math...

Those are a few thoughts to get you started...

Another Reader

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Re: New Mustachian Refi Dilemma - Cashout to pay down student loans?
« Reply #10 on: December 24, 2015, 06:26:07 AM »
So you want to take money out of the house to pay for all that good coffee and Mexican food you already consumed?

In your shoes, the first thing I would do is sit down with the wife and figure out what a minimum reasonable budget is that you both can accept and follow.  I would stop all eating out, including coffee, until the debt is paid off.  Shopping?  My guess is that you can cut that at least $400 for now.  The kid clothes can come from hand me downs and thrift stores.   You and your wife probably don't need any new clothes.  Furniture and similar purchases can be postponed until you are free of consumer debt.  The 529 plan does not make sense when you have usuriously high interest credit cards and those student loans puling you down.  Your "hair on fire" goal should be to throw every available penny at the credit cards and then the student loans. 

Your wife is grossing $12k.  Consider devoting all of her net income to her student loans, once the ridiculous credit card debt is gone.  That can be her contribution to cleaning up the mess you have created for yourselves.  My guess is that your credit scores are not as good as they could be because of your debt levels.  That may be affecting the student loan refinance rates you have been offered.  What's the interest rate on the Mazda?

I agree that you need life insurance, but how much do you have between work and what your MIL sold you?  Are the polices term life or whole life?  Whole life policies are a waste of money, no matter who sold it to you.  Inexpensive level term is what you should consider.

Not sure what area of engineering you are in, but your salary seems low.  The retirement your company offers is ok, except for the vesting.  Any chance you could find a new job or at least get a raise or promotion at your current company?

Once you have a plan in place and a demonstrated commitment to following the plan, then you can make a reasonable decision about the re-fi.  Maybe it makes sense to cash out for the remaining 6.75 percent student loans.  It does not make sense if you cannot commit to living within your means, including saving and investing.  You will be back at the re-fi well in a couple of years if you can't do that.

AlwaysLearningToSave

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Re: New Mustachian Refi Dilemma - Cashout to pay down student loans?
« Reply #11 on: December 24, 2015, 07:19:03 AM »
Once you have a plan in place and a demonstrated commitment to following the plan, then you can make a reasonable decision about the re-fi.  Maybe it makes sense to cash out for the remaining 6.75 percent student loans.  It does not make sense if you cannot commit to living within your means, including saving and investing.  You will be back at the re-fi well in a couple of years if you can't do that.

+1.

Doing a refi will be penny wise but dollar foolish if you can't get your wife on board. Focus on lifestyle change first.

It is possible to get a spendypants spouse on board but it may take work. Getting her to have a sense of urgency about need to pay off debts and reign in spending is the hardest part. Sharing selected MMM blog posts can be a good tool. Then you will need to lead by example, track every penny earned and spent, and show her that the MMM formula works. If she feels you are just depriving her, that won't work. But if you can get her to see the goal, see the plan, and see the plan start to work, there is a good chance she will come around.

My wife was never very speedypants but she enjoyed eating out, didn't see a financial goal, didn't know precisely how much we spent on what, and didn't understand the fine points of tax planning and investing. It took time to bring her around. She doubted me during the first several months of our transition because it felt like deprivation and the changes we were making were not yet paying off. But over time she saw how well it worked and is now an MMM advocate and trusts me to lead our family's finances. Point is, it is possible to get her on board and doing so is far more important than 3% interest savings.

EigenStache

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Re: New Mustachian Refi Dilemma - Cashout to pay down student loans?
« Reply #12 on: December 24, 2015, 10:18:55 AM »
So, some more details: car loan is at lower interest than the mortgage. 3.15%. That said, considering that I have to have full coverage while there's principal owed there's an additional incentive to have it paid off.

My credit score is decent - high 700's. I expect getting the card balances paid down and closing the more recent accounts will bump it over 800.

The life insurance is term insurance.

So the advice on spending is duly noted - I've made a number of changes (phone, internet) and am in the process of getting the Mrs involved. I'm thinking stringent meal planning and doing the grocery shopping myself is the only way... And getting costs down to $400 a month from $1000 would have a massive impact. I also want to go cold turkey on shopping, as much as possible... If that could free up $1000 a month the debt would start melting away pretty quickly.

My biggest reluctance for going to one car is the wife's business. She regularly has jobs that take her an hour's drive away. Maybe that portion of the expenses could be brought under the business account for some tax advantages? I'm not saying it's out of the questions  to sell one, we've survived with one car before, but it was before having kids and so there would be some logistics to work out.

Thanks for all the input so far - lots of things I hadn't considered before. Sounds like overall attitude towards the refi is lukewarm? And that student loans would be better to consolidate than credit cards?

Another Reader

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Re: New Mustachian Refi Dilemma - Cashout to pay down student loans?
« Reply #13 on: December 24, 2015, 11:30:43 AM »
I would re-fi to cut the mortgage interest and eliminate PMI.  If the remaining term on the student loans is in the same range, I might roll the highest interest rate ones in, if and only if I had the spending down and everyone was on the same page.  Otherwise, "beans and rice" are going to accomplish the debt repayment objective.