Refinance or invest?

[MMMuser]

I (38m) landed a much better paying job a year ago and my wife (40f) and I should have about $50k saved by the end of the year and would like to solicit advice on what may be the best option for us. A little bit about me:

    Currently making about $120k. Wife works P/T making about $10k.
    We have renters that bring us $700/month.
    Only about $26k in 40k. Contributing 3% currently but will be upping that to 6% (company match).
    Planning on opening Roth IRA's for the both of us in the next few months.
    2.5 years out of bankruptcy.
    Current credit about 700.

Currently have a home 4 years into a 30 year FHA loan at 4.75% via streamline refi last year. Home is valued at about $360k, my loan amount is currently $291k, so I should be able to get rid of my PMI ($263) in about a year. Monthly mortgage is $2150

    Something we have been thinking about is putting the $50k down on a 15 year conventional refi (talked to mortgage company and I qualify) which would get our mortgage payments down, allow us to pay off the home quicker, and save on interest paid. Even thought of borrowing $20k from parents do be able to put more money down on a refi due to the currently low rates (2.75-3%). We would be able to pay them back with interest in under a year. One major reason for this route is because job security is never a definite. One day, I could very well lose my job and end up finding a job that pays less. Paying off the home as soon as we can is something we've considered. If we are aggressive, we may be able to do this within the next 10 years. Even if we do eventually move from here, we would like to keep this home to provide us rental income.

    After talking to a real estate agent relative, they were against the idea of a 15 year refi and recommended staying in a 30 year loan saying that the tax implications would benefit us in the long term. Maybe I'm not understanding this properly but my thought is that the money I'd save on interest would be far more than what I would save on tax deductions or other tax reasons. They also suggested possibly buying a cheaper property with this $50k, such as a condo, and renting it out. I'm not sure I'd be able to afford both homes (upkeep, no renter, etc) though.

    Taking this $50k and investing is also an option. I'm a total financial dummy and will need a lot of guidance if I decide to go this route.

I've lived as a financial dummy and know I am late to the game. The goal is to be to be able to move to a better home within the next 5-10 years, be able to help our parents out when they're retired, and plan for financial stability when we are retirement age. I've learned a ton from here and would love to hear, good or bad, what you guys may have to say about my situation.

Thanks in advance.

[Another Reader]

In your shoes, at your ages, I would really focus on retirement.  Fund $10k this year in Roths, $10k next year.  That's $20k of the $50k, right there.  I would also up my 401k savings as much as I could afford.

My recollection is you need to be three years out of bankruptcy to get a new mortgage.  I'm surprised your mortgage company quoted these rates with the bankruptcy.  Did they consider the bankruptcy in their calculations?  Talk to a couple of good loan brokers and see what all your options are.   With a recent bankruptcy, your rates may be much higher if you can even get a loan.  I like the 30 year loan idea because I would be paying a slightly higher rate for the added flexibility and the opportunity to divert money to investing in the near term.  At a lower salary after a job loss, I could more easily afford my payments.  If things go well, I can pay the loan off faster.

Unless you really like being a landlord, I would pass on the condo.  Too risky for me in your situation anyway.  If you max out your 401(k), that will increase your tax deduction.  If I were worried about my job, I would maintain strong cash reserves. 

You have already accomplished a lot to go from bankruptcy to $50k in savings in 2.5 years.

[MMMuser]

A good opportunity fell onto my lap a year ago and with my wife's determination, we were able to save the $50k in that time.

As for the refi, I've talked to several brokers but have mainly been working directly with the bank (BOA) and my mortgage person (same person who did my streamline refi from an FHA 5/1 ARM to FHA 30 year fixed last year). My refi last year was at a slightly higher rate due to the bankruptcy, but I received closing costs credits and didn't encounter any other problems from it. I've become a Platinum Member with BOA after moving all of my accounts over and rolling over all of my previous 401k accounts into an IRA with ML (now BOA) and now qualify for better rates, closing cost credits, free accounts, etc.

I will certainly consider your suggestion of funding Roth IRA's with $10k this year and $10k next year and contributing more than the company match to my 401k.

Thank you for your reply.

[Another Reader]

The streamline refinance is a special case, but Bof A retail mortgage generally has some of the highest rates and fees around.  They were ridiculous compared with the broker quotes and my current servicer, Wells Fargo, when I locked my conventional refi rate in September.  I'm always suspicious of offers tied to moving all my accounts to one bank anyway.  It's kind of like getting a promotion to a job with a new title and the same money.  Having $50,000 or $100,000 at a bank doesn't really do much for the bank.  Bring 'em a million or two, that will get their attention.  Often you can do much better by shopping the various accounts and services around.

It would be interesting to hear what the ML people suggested for the rollover IRA's.

[MMMuser]

I did shop around a little and with my credit, the lowest a broker could give on a 15 year was 3.00% plus closing costs and some added some unknown "fee". BOA is able to match that, give me another 1/4 point, plus closing cost credits. I'll still look into shopping around with other lenders.

[Another Reader]

I'm on my way to BofA to deposit some checks.  I'm going to ask about the various account levels while I'm there.  Maybe you hit a winner others can benefit from!

[MMMuser]

I told them straight up from the beginning that, having been loyal to Chevy Chase Bank for almost 20 years without much benefits, I no longer have any sense of loyalty to any eatabliment. I'm happy to switch out as fast as I switched in.

It would be fantastic if I could do something that others can benefit from. Good luck!

[markstache]

Currently have a home 4 years into a 30 year FHA loan at 4.75% via streamline refi last year. Home is valued at about $360k, my loan amount is currently $291k, so I should be able to get rid of my PMI ($263) in about a year. Monthly mortgage is $2150

While not to the heart of your question, you should be aware that you may not be able to stop making PMI payments next year even if you reach 78% LTV. When I was researching a similar question, I learned that FHA loans require 60 months of PMI payments for a 30 year mortgage, and a refi (even streamlined) resets that clock. As always, check the fine print on your mortgage, but something to be aware of. If you do refi and want to get out from under PMI a conventional mortgage with at least 20% equity is probably the way to go.

If you are worried about job security, the safest thing would be to keep the lowest monthly payment mortgage and make early payments. If you were to pay the same monthly principal payment as a 15 year mortgage, you'd end up paying about the same amount in interest over the course of the loan, but you'd always have the option of falling back to the lesser payment if times get tight. The advantage of a 15 year mortgage would be a lower interest rate. You'll have to decide if the trade off in security is worth it to you.

You can run the numbers yourself: http://www.bankrate.com/calculators/mortgages/amortization-calculator.aspx

[MMMuser]

I was under the impression that my PMI restarted with my streamline refi last year. It wasn't until I went to talk to my BOA mortgage person about a 15 year refi when she looked over everything and told me that the streamline refi didn't restart the PMI. Basically, a new 30 year loan term was started last year but the 3 years of PMI that I've been paying was rolled into. She confirmed that I would qualify to get rid of my PMI at my original 5 year mark (July 2013). If it was anything but a streamline refi, the PMI would have restarted. This was not something I was expecting so it was a pleasant surprise.

My job security isn't very high on my list of worries. However, as with any job, that could change in an instant and I'd like to have an what-if plan.