Author Topic: Starting cashout refinance, what would you do?  (Read 10842 times)

PathtoFIRE

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Starting cashout refinance, what would you do?
« on: April 02, 2015, 07:58:58 AM »
Forward:  Ok, I've been mostly a lurker for the past 2 years, and haven't revealed a whole lot of financial info, in part out of embarrassment given the group of badasses you guys are, but I really want to get a diverse set of opinions on this next step we are about to take, which means opening up. So I will say up front that yes, I am fully aware that our house is beyond fancypants, and while that's a separate issue, the family and I have not gotten to a place yet where we are ready to give it up. Ok, without further ado.

We are pursuing a cashout refinance in order to 1) free up some equity and 2) reduce our interest rate a little. When I pitched the idea to DW and she accepted, the plan was to pay off both of our med school loans with the cash. I'll admit up front, I'm still 90% sure this is what we are going to do no matter what, but I want this to be a fully informed decision, and so I ask you all what you would do, and is there any angle I haven't considered. Obviously the other option is to throw the money into our stock/bond index portfolio. We are not interested in real estate investment at this time.

Here are the facts that I believe are relevant:
Income                - ~350k
Student loans     - (120k) (combined) @ 3.25%, 0.82k monthly payment
Mortgage            - (663k) @ 4.25%, 3.4k monthly payment
NO CC debt/auto loans
Home value         - 1030k (appraisal is pending, lower may sink this whole thing)
Cash/emergency - 35k
Retirement funds - 540k
529s                    - 65k
Net worth            - 887k (~800k after realtor fees/closing costs if the house was liquidated)
Marginal tax        - 33% solidly

The refinance is for 772.5k @ 3.5%, 30y 10/1 ARM, cashout of ~105k, with a monthly payment just slightly higher than our current mortgage payment. The cashout will probably be a little higher and the mortgage and student loan balances a little lower once we reach actual closing in May, and then the plan is to use the cashout + cash to pay off both student loans.

From a loan standpoint, it makes sense. While we are rolling the student loans @3.25% into a 3.5% mortgage, we cannot deduct the SL interest, and with our 33% tax bracket, the effective interest rate on the new mortgage is 2.345%. Also, this cash flows better, as the required minimum payment after the refi and SL payoff is equal to the current mortgage payment only, and if we turnaround and continue paying the 820/mo on top of the mortgage, the monthly debt paydown is greater.

Of course, a large part of me sees that 100k+ coming, and thinks it would be incredible to increase our retirement accounts by 20% in one fell swoop. For a little perspective though, between our 401k/TSP+matches, my deferred comp, and monthly automatic deposits to aftertax Vanguard account, we plan to save 130k this year, plus additional 529 contributions and debt paydown. However, the student loan debt just feels different to us, and we really want to get rid of it quickly. In addition, if our house appraises at what we think it will, that's an 18% since we bought it in 2012, and I would rather put that money to better use, either paying off the student loans or investing. If I could, I think I would take out even more, accept a higher monthly mortgage payment, and do both, but these numbers are right at a LTV of 75%.

I'd really appreciate your thoughts or observations, thanks!
« Last Edit: April 02, 2015, 08:51:26 AM by PathtoFIRE »

YTProphet

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Re: Starting cashout refinance, what would you do?
« Reply #1 on: April 02, 2015, 08:32:35 AM »
I think it's a great idea to pull money out of the house and pay off the student loans. If the sh*t ever hit the fan, student loans are non-dischargeable whereas a bank will just take the house and probably wouldn't come after you for a deficiency judgment (if there was one, which seems unlikely) AND I'm pretty sure creditors can't get access to 401k/IRA accounts.
 
What's your household income?

PathtoFIRE

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Re: Starting cashout refinance, what would you do?
« Reply #2 on: April 02, 2015, 08:52:01 AM »

boarder42

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Re: Starting cashout refinance, what would you do?
« Reply #3 on: April 02, 2015, 08:53:47 AM »
i think those student loans are at low enough rates you should still do the cash out REFI to a 30 year no ARM.  and invest that money ... if shit hits the fan you have the cash to pay off the loans.  a 3.25% interest rate is essentially inflation.  so you're getting nothing out of your money.

PathtoFIRE

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Re: Starting cashout refinance, what would you do?
« Reply #4 on: April 02, 2015, 09:42:03 AM »
Thanks YTProphet and boarder42 for your replies.

so you're getting nothing out of your money.

I understand and agree fully with what you are saying. While 1000k is not my FIRE number, it's my first goal, and I would feel much more comfortable in life and at work if I reached 1000k in investments. If this cashout brought me up to that number, I'd jump at the chance, but since it doesn't.... So why am I seriously considering using the money instead to pay off student loans? It's not logical, but I just really want to be rid of those things as well as the required 10k/year in payments. Looking at some rough numbers (7% real return, 150k annual savings), the extra 120k of investments now will get me to 1000k in 19 months rather than 27 months, a 30% decrease in time! I also have to admit, while I am a strict indexer and really believe we can't know what the markets will do in the next few years, a part of me says "well if only the markets had pulled back 10% in the last few months, then maybe I would feel better about investing the cashout". It pains me to admit it, but putting those kinds of thought + the desire to be rid of the student loans forever + my DW's preference to pay off the SL is tilting me towards that. Basically, I'm trying to fight my initial urge publicly here, and maybe I'll move myself and then DW towards the logical thing once the refi actually closes :)

boarder42

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Re: Starting cashout refinance, what would you do?
« Reply #5 on: April 02, 2015, 09:46:25 AM »
logic is better than emotions.

Numbers Man

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Re: Starting cashout refinance, what would you do?
« Reply #6 on: April 02, 2015, 09:48:32 AM »
If I were in your shoes, I would cash out to wipe out the student loan. It would just add a relative pittance to your mortgage payment. You have plenty of assets and an impressive net worth at your age considering you're barely out of residency.

jmusic

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Re: Starting cashout refinance, what would you do?
« Reply #7 on: April 02, 2015, 10:12:29 AM »
Thanks YTProphet and boarder42 for your replies.

so you're getting nothing out of your money.

I understand and agree fully with what you are saying. While 1000k is not my FIRE number, it's my first goal, and I would feel much more comfortable in life and at work if I reached 1000k in investments. If this cashout brought me up to that number, I'd jump at the chance, but since it doesn't.... So why am I seriously considering using the money instead to pay off student loans? It's not logical, but I just really want to be rid of those things as well as the required 10k/year in payments. Looking at some rough numbers (7% real return, 150k annual savings), the extra 120k of investments now will get me to 1000k in 19 months rather than 27 months, a 30% decrease in time! I also have to admit, while I am a strict indexer and really believe we can't know what the markets will do in the next few years, a part of me says "well if only the markets had pulled back 10% in the last few months, then maybe I would feel better about investing the cashout". It pains me to admit it, but putting those kinds of thought + the desire to be rid of the student loans forever + my DW's preference to pay off the SL is tilting me towards that. Basically, I'm trying to fight my initial urge publicly here, and maybe I'll move myself and then DW towards the logical thing once the refi actually closes :)

I actually disagree with the folks that advocate cashing out to invest in the markets as that exposes them to VERY high risk.  If the stock market tanks, the real estate market won't be far behind, so not only will they lose borrowed money in the market, they'll be underwater/stuck in a house barring extreme actions (foreclosure/short sale). 

In your shoes I absolutely agree with paying off the student loans because of this:
If the sh*t ever hit the fan, student loans are non-dischargeable whereas a bank will just take the house and probably wouldn't come after you for a deficiency judgment (if there was one, which seems unlikely) AND I'm pretty sure creditors can't get access to 401k/IRA accounts.

Dicey

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Re: Starting cashout refinance, what would you do?
« Reply #8 on: April 02, 2015, 10:14:33 AM »
IIRC, there are limits to the amount of cash that you can pull from your house and still deduct the interest. I'm thinking it's 100k, but I'm not a CPA. I don't even play one on TV. Perhaps CheddarStacker or one of the other highly qualified folks who grace these halls will chime in with a better explanation. Since they're all kind of busy right now, I'd give them a couple of days...

One thing to note is that your SL's are variable and your mortgage will be fixed. Doing this now lets you lock in a favorable rate and gives you a longer horizon for payoff, plus the flexibility of paying it off early if you chose to. Depending on the answer about deductibility, I'd do it. If you can only deduct up to 100k, I'd take that, pay down the loan and then throw all my extra cash (after investments) at the remaining 20k. Same thing if the numbers are a little off post-appraisal, consider bringing cash to closing. If it's not a ton of money, it might be worth it in the long run.

Given your income, you could pay the SL off fairly quickly either way. Also, don't listen to the people who suggest you sell and downsize. By the time you get done paying the commissions and related costs you will have spent half of what you owe on SL's. And I'm guessing the process would eat up a chunk of time that you just don't have right now. Please keep us posted and best of luck to you.

Killerbrandt

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Re: Starting cashout refinance, what would you do?
« Reply #9 on: April 02, 2015, 10:23:31 AM »
With 350k income, why cant you just knock out the student loans in one year? Also, that house is crazy!! but if that is your main source of entertainment and you both are home bodies, then I can completely understand! :) . However, A refinance is still a great idea to get the lower rates and even maybe drop it to a 15 yr fixed loan with a lower rate (some at 2.8) might keep the payments the same and you will be able to pay off the house much faster.

boarder42

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Re: Starting cashout refinance, what would you do?
« Reply #10 on: April 02, 2015, 10:30:53 AM »
Thanks YTProphet and boarder42 for your replies.

so you're getting nothing out of your money.

I understand and agree fully with what you are saying. While 1000k is not my FIRE number, it's my first goal, and I would feel much more comfortable in life and at work if I reached 1000k in investments. If this cashout brought me up to that number, I'd jump at the chance, but since it doesn't.... So why am I seriously considering using the money instead to pay off student loans? It's not logical, but I just really want to be rid of those things as well as the required 10k/year in payments. Looking at some rough numbers (7% real return, 150k annual savings), the extra 120k of investments now will get me to 1000k in 19 months rather than 27 months, a 30% decrease in time! I also have to admit, while I am a strict indexer and really believe we can't know what the markets will do in the next few years, a part of me says "well if only the markets had pulled back 10% in the last few months, then maybe I would feel better about investing the cashout". It pains me to admit it, but putting those kinds of thought + the desire to be rid of the student loans forever + my DW's preference to pay off the SL is tilting me towards that. Basically, I'm trying to fight my initial urge publicly here, and maybe I'll move myself and then DW towards the logical thing once the refi actually closes :)

I actually disagree with the folks that advocate cashing out to invest in the markets as that exposes them to VERY high risk.  If the stock market tanks, the real estate market won't be far behind, so not only will they lose borrowed money in the market, they'll be underwater/stuck in a house barring extreme actions (foreclosure/short sale). 

In your shoes I absolutely agree with paying off the student loans because of this:
If the sh*t ever hit the fan, student loans are non-dischargeable whereas a bank will just take the house and probably wouldn't come after you for a deficiency judgment (if there was one, which seems unlikely) AND I'm pretty sure creditors can't get access to 401k/IRA accounts.

if shit hits the fan and he has a paid off house and the  market tanks his house still loses all that value.  he is more able to adjust for market swings the more there is invested in the market.

frugaliknowit

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Re: Starting cashout refinance, what would you do?
« Reply #11 on: April 02, 2015, 11:45:23 AM »
By doing a cash out, you are increasing your risk.  For that reason, I would not do a 10/1.  I would do fixed rate.  Don't assume you will know when rates are going to rise and that you will be able to cut your risk.  What happens if you stay in your house beyond 10 years and rates go to the moon?

If you are doing a cash-out, I would apply to student debt, not invest it (too risky).

boarder42

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Re: Starting cashout refinance, what would you do?
« Reply #12 on: April 02, 2015, 12:00:32 PM »
By doing a cash out, you are increasing your risk.  For that reason, I would not do a 10/1.  I would do fixed rate.  Don't assume you will know when rates are going to rise and that you will be able to cut your risk.  What happens if you stay in your house beyond 10 years and rates go to the moon?

If you are doing a cash-out, I would apply to student debt, not invest it (too risky).

I would like to understand how risk is being increased by cashing out to a lower rate ... assuming he does 30 year fixed vs the 10/1 he states.  The risk involved with not investing your money is higher than the risk of a 30 year inflation hedge at today's rates. 

See: http://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/

Not only is it great to carry a mortgage to reach FIRE faster its better in ER to have a mortgage as it lowers your overall Risk.  By being an inflation hedge and increasing your likelihood of success.

frugaliknowit

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Re: Starting cashout refinance, what would you do?
« Reply #13 on: April 02, 2015, 02:47:54 PM »
1.  Doing a "cash out" refinance as opposed to simply refinancing the balance is riskier because of the increased borrowing amount (greater uncertainty than otherwise).
2.  In this case, doing a cash out to eliminate SL debt (dollar for dollar) at a FIXED lower interest rate does not increase risk because higher interest rate debt is being replaced by lower interest rate debt.
3.  Doing a cash out at a variable rate (even if assuming it will be paid off before the rate is reset) and paying of SL debt dollar for dollar is riskier than just leaving the student loans be.  The reason is there is an additional unknown:  what the interest rate will be in 10 years.
4.  Doing a cash out and investing some or all proceeds is riskier than paying off the SL balances because the outcome is less certain than paying of the SL balances.  The risk of doing this with a variable rate is higher than with a fixed rate mortgage.

Just because a certain outcome is "more/most likely", does not mean there is no risk or that there is not increased risk.  I hope that clears things up.

bacchi

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Re: Starting cashout refinance, what would you do?
« Reply #14 on: April 02, 2015, 04:26:58 PM »
1) Student loans are dischargable in bankruptcy. It's not as easy as listing SLs alongside the other loans but they can be discharged.

2) Yes, $100k is the maximum deduction amount.

boarder42

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Re: Starting cashout refinance, what would you do?
« Reply #15 on: April 02, 2015, 05:05:31 PM »
His student loans are at a lower rate than the refi would be. And your definition of risk is 100% emotional.

PathtoFIRE

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Re: Starting cashout refinance, what would you do?
« Reply #16 on: April 06, 2015, 09:09:49 AM »
Diane C:  Thanks for the heads up, I'm right at that 100k limit, so yes, a couple thousand of my refi will not qualify for the interest deduction. I need to research what improvements to the house qualify, I actually hadn't planned on doing anything major to the house soon, but there is one issue with the roof that's more cosmetic and I've been putting off, maybe it wouldn't be a bad idea to use some of the cashout for that, and get the entire loan balance to qualify under the IRS rules. Also, our student loan debt was consolidated right out of school, and is 30y fixed rates.

Killerbrandt:  I know, from a distance, it seems like it would be so easy to wipeout. However, taxes (all in, including property, OASDI/Med, etc., but no state income tax!) are about 95k, the mortgage+insurance is about 45k, then there are the real expenses. We've done a pretty good job of whittling things down over the past 2 years, but extinguishing the SL debt over the course of one year would mean deferring any non-401k/TSP retirement savings for that one year, and while the debt pains me (and DW even more), it's not enough to forgo increasing our market exposure early in life. I didn't mention, but we are 35 and 33, and really want to pull the trigger by 40.

jmusic,boarder42,YTProphet:  I've considered all of the aspects you three have mentioned regarding risk, but there is enough uncertainty that it's hard to say which is riskier. I've generally assumed the SL is non-dischargeable, now I know that that's not 100% the case, but looking at our financial situation, it may be hard to convince a judge, which is probably what it would come down to. That is one of the main reasons I really want to get rid of the SL debt. Boarder42, I'm with you, I see many advantages to carrying the mortgage into retirement, and will try to do so.

frugaliknowit:  Thanks for the itemizing. I feel like our move falls under your #2. Yes, I know we are talking about a 10/1 ARM, but 10 years is a working lifetime around these parts :)  Our plan is definitely to do something before the 10 years are up. Either move/downsize, or refinance again (I'm of the belief that low interest rates are here for a long time to come).

bacchi:  I still think it is easier and financially better to be in a situation of walking away from an underwater home rather than having to use bankruptcy to discharge debts. I admit, I'm not really planning on ever doing either, and haven't done much research, and do not probably understand these concepts as well as I should.

boarder42:  technically the SLs are being refinanced from a lower to a higher rate, but aftertax the rate is lower, and I still plan on paying significant taxes in the next 5-10 years.

Killerbrandt

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Re: Starting cashout refinance, what would you do?
« Reply #17 on: April 06, 2015, 10:23:25 AM »
Hmmmm, But even after you subtract 95k of taxes and 45k of house payments you are left with 210k a year! that is a good chunk! I have a TSP account and you can only do about 18k max into them (counting you and your wife, 38K). Then you are still left with 5.5k for other retirement accounts each (11k). What are you spending your left over money on? You could after subtracting all that almost knock out the student loans and party like rock stars! Then after freeing up that cash flow from the student loans, you could shove it all into taxable accounts. In addition, then after the student loans are gone, you could refinance the house loan to the current value at a lower rate, you could knock that out before 40! By then you will have so much saved in your taxable accounts to retire and wait for the 59.5 rule to kick in for the rest. (Hint* TSP allows you to withdraw as long as the government approves that you are retired).   Hope this makes sense! :)

forummm

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Re: Starting cashout refinance, what would you do?
« Reply #18 on: April 06, 2015, 10:55:06 AM »
Generally a cashout refi is more expensive--both in the interest rate and in loan fees--than a refi for the current balance (because the loan amount is larger and its a riskier loan for the lender). Make sure to compare the total costs of your cashout loan to a non-cashout alternative. Even just a 0.25% interest rate hike on an $800k loan can add $40k in interest costs.

forummm

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Re: Starting cashout refinance, what would you do?
« Reply #19 on: April 06, 2015, 10:59:42 AM »
$87k in realtor fees and closing costs coming out of my pocket to sell a house would give me so much pain....

Of course, your incomes are much higher, and that's also more than I paid for my house. But that's an insane transaction cost.

Killerbrandt

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Re: Starting cashout refinance, what would you do?
« Reply #20 on: April 06, 2015, 12:46:29 PM »
Generally a cashout refi is more expensive--both in the interest rate and in loan fees--than a refi for the current balance (because the loan amount is larger and its a riskier loan for the lender). Make sure to compare the total costs of your cashout loan to a non-cashout alternative. Even just a 0.25% interest rate hike on an $800k loan can add $40k in interest costs.

Exactly!! +1+1

MDM

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Re: Starting cashout refinance, what would you do?
« Reply #21 on: April 06, 2015, 01:53:51 PM »
Do the phrases "Alternative Minimum Tax" and "Refinanced Mortgage Interest May Not All Be Deductible" ring a bell?  The AMT restrictions may be worse for you than the $100K limit already mentioned.

E.g., see http://www.irs.gov/instructions/i6251/ch02.html#d0e183, http://hindsmancpa.com/refinanced-mortgage-interest-may-not-all-be-deductible-2/, or similar....

PathtoFIRE

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Re: Starting cashout refinance, what would you do?
« Reply #22 on: April 06, 2015, 01:54:59 PM »
Not to make things too complicated, but the 120k in SL are evenly split between DW and I. So I could pay off one loan, and invest the balance too.

Forummm:  The fees are pretty low, about $4500 all told, and that's mostly title fees. The impetus for all of this is the pain it causes me to see my home value increase, which doesn't feel as real as building wealth in the stock/bond markets. I know that's the opposite of what a lot of people say, but I really wanted to shift some of that home equity into the markets, and the refi to a lower rate is just a bonus. Also, the expectation is that this mortgage will be temporary, and we will either pay the whole thing off once we get closer to our FIRE number in about 5 years, or refi to a 30y fixed mortgage to take into FIRE.

Forummm:  I know what you mean, we paid very little in fees to buy the house, it's the selling that's painful. Naturally I've contemplated selling by owner in the future to save 30-40k. I put a Make Me Move price a year ago, and my wife called me later in the day asking why someone had called her asking about us selling the house. They had used the address to find our info on the school directory, and her number was listed. That was for 1.3MM. I really doubt anyone would pay that much for our house, but still it made me think it might not be so hard to save the 3% on the listing agent..

PathtoFIRE

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Re: Starting cashout refinance, what would you do?
« Reply #23 on: April 06, 2015, 02:51:44 PM »
Do the phrases "Alternative Minimum Tax" and "Refinanced Mortgage Interest May Not All Be Deductible" ring a bell?  The AMT restrictions may be worse for you than the $100K limit already mentioned.

E.g., see http://www.irs.gov/instructions/i6251/ch02.html#d0e183, http://hindsmancpa.com/refinanced-mortgage-interest-may-not-all-be-deductible-2/, or similar....

That's a good point, I believe I had originally factored that into my numbers, and then forgot in the ensuing discussion. So my calculations show the acquisition debt will be 85.66% of the mortgage. I'm set to pay about 28k in interest this year on the current loan, the new will come out to about 27k starting out, or around 23k of acquisition debt. So I will be claiming about 5k less versus leaving my mortgage the same, and with the 33% tax bracket that's a loss of ~1.7k in tax reduction, or around 130-140/mo. I'm not sure if I should be using the 33% or the AMT rates, but that's in the ballpark. That's weighted against the approximately 800/mo I free up in required loan payments. Obviously the numbers get worse the further in time we go, but that's true for the original mortgage as well. Is this what you are referring to, or is there an additional angle to AMT and this proposed refi that I'm not seeing?

MDM

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Re: Starting cashout refinance, what would you do?
« Reply #24 on: April 06, 2015, 03:28:41 PM »
Is this what you are referring to?
Yes, that's it exactly.  Forewarned is forearmed, so it appears you are well grounded in making your decision.

clifp

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Re: Starting cashout refinance, what would you do?
« Reply #25 on: April 06, 2015, 03:41:57 PM »
I think it is a well thought out plan and makes sense.  Eventhough the interest rate is low for the student loans strictly from a risk perspective I think I'd go ahead and pay them off. However, if you want to take some of the money and max out tax deferred saving for this year that is probably optimal.

The biggest issue I have is what happens at the end of 10 years. Now if you 90% sure you will find a new house by then I won't worry about. However, 10 years is long time and I'd say the odds are very very high that interest rates will be higher, in fact I'd bet much higher 2 or 3%. Is there a cap on the ARM adjustment and what would the payment look like then?

Cassie

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Re: Starting cashout refinance, what would you do?
« Reply #26 on: April 06, 2015, 03:49:49 PM »
I think your plan is good. I would get a fixed rate instead of the ARM.

YTProphet

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Re: Starting cashout refinance, what would you do?
« Reply #27 on: April 07, 2015, 06:27:01 AM »
1) Student loans are dischargable in bankruptcy. It's not as easy as listing SLs alongside the other loans but they can be discharged.

2) Yes, $100k is the maximum deduction amount.

Technically, yes, student loans are dischargeable in bankruptcy. However, under existing legal precedent, you basically have to be starving and homeless (not being sarcastic). So, no, they're not really dischargeable.
« Last Edit: April 07, 2015, 06:38:46 AM by YTProphet »

forummm

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Re: Starting cashout refinance, what would you do?
« Reply #28 on: April 07, 2015, 07:08:20 AM »
Forummm:  The fees are pretty low, about $4500 all told, and that's mostly title fees. The impetus for all of this is the pain it causes me to see my home value increase, which doesn't feel as real as building wealth in the stock/bond markets. I know that's the opposite of what a lot of people say, but I really wanted to shift some of that home equity into the markets, and the refi to a lower rate is just a bonus. Also, the expectation is that this mortgage will be temporary, and we will either pay the whole thing off once we get closer to our FIRE number in about 5 years, or refi to a 30y fixed mortgage to take into FIRE.

I think you're looking at this the wrong way. If your house value goes up, that's not pain, that's gain! Honestly, I don't expect the stock market to perform better than about 4% in real terms over the next 10 years. Prices are too high. And if you're going to do anything other than 100% stocks, then your expected return will be less than the interest rate of your new loan. So you're taking on extra risk and interest expense to invest in something that has a low expected return. I don't think there's enough margin here for this to make sense. If you want to refinance to lower your interest rate, it's possible that it would make sense. But you'll have to stay in your house and keep that mortgage long long enough for the lower interest/higher taxes to end up totaling less than the closing costs of the new new mortgage.

Forummm:  I know what you mean, we paid very little in fees to buy the house, it's the selling that's painful. Naturally I've contemplated selling by owner in the future to save 30-40k. I put a Make Me Move price a year ago, and my wife called me later in the day asking why someone had called her asking about us selling the house. They had used the address to find our info on the school directory, and her number was listed. That was for 1.3MM. I really doubt anyone would pay that much for our house, but still it made me think it might not be so hard to save the 3% on the listing agent..

If you can actually sell it for $1.3M (or close to it) without realtor fees, then why don't you just do that, buy a more-reasonably-priced-but-still-crazy-expensive house (like $500k), and then invest all the extra money? Dallas isn't that expensive of a market. You can find something really nice for less than half a million bucks.

In sum, you have really high incomes, but you are spending a lot more money than you need to be. That's your choice. But if you really want to accumulate wealth, the easiest thing to do is to start spending less. You have a lot of room to do that. You could probably cut $100k per year in spending and still have great lives. That would be guaranteed money you could invest instead of borrowing money to invest at a cost that likely exceeds the returns. You could just keep doing what you're doing and keep saving $130k/year--that's still pretty great. But if you're looking to improve things, your fancypants lifestyle is what should get attention.

forummm

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Re: Starting cashout refinance, what would you do?
« Reply #29 on: April 07, 2015, 07:10:17 AM »
Hmmmm, But even after you subtract 95k of taxes and 45k of house payments you are left with 210k a year! that is a good chunk!

And even that 95k of taxes and 45k of house payments can decrease by getting a still nice, but less crazy expensive house. This is a lot of money that you could keep by just cutting spending.

forummm

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Re: Starting cashout refinance, what would you do?
« Reply #30 on: April 07, 2015, 07:14:26 AM »
Looking at some rough numbers (7% real return, 150k annual savings), the extra 120k of investments now will get me to 1000k in 19 months rather than 27 months, a 30% decrease in time!
Money in your house vs money in your investment account is still money you have. Shifting it from one place to the other does not increase your net worth, or your time to FIRE.

And 7% real return in the stock market is a pipe dream right now, unless the economy just takes off like crazy. Given the soft economies globally, this isn't likely for another 5-10 years, or if there's a substantial decline in the market.

PathtoFIRE

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Re: Starting cashout refinance, what would you do?
« Reply #31 on: April 07, 2015, 07:15:39 AM »
Is there a cap on the ARM adjustment and what would the payment look like then?

Yes, the cap 8.5%, with a payment of around 5.5k versus 3.5k initial.

I think your plan is good. I would get a fixed rate instead of the ARM.

I fully understand fixed versus ARM, which is why I opted for the 10/1 over the 7/1. For the short and medium (10year) term, the numbers for the ARM were superior to that for the fixed. Long term, it probably won't matter, but it's easily conceivable that I will be kicking myself for not locking down what may be historically low rates. However, I'm fairly certain that we will be making some kind of major change within the next 10 years, I just don't know whether it will be giving up this monster of a house and being more practical, or just paying the house off. What I'm more worried about is deciding to use the money for SL elimination, and then kicking myself hard when backtesting will probably show what my 'stache could have been if I'd just invested it.

1) Student loans are dischargable in bankruptcy. It's not as easy as listing SLs alongside the other loans but they can be discharged.

2) Yes, $100k is the maximum deduction amount.

However, under existing legal precedent, you basically have to be starving and homeless (not being sarcastic).

If the judges were drawn from the Yahoo finance commenters, and we FIRE'd MMM-style, then the impression may very well be that of starving deprived people, but I agree, the riskiest assumption out of all that we've discussed in this thread would be assuming that SL debt could be discharged.

waltworks

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Re: Starting cashout refinance, what would you do?
« Reply #32 on: April 07, 2015, 07:34:03 AM »
At your income, why bother? Just kill the SLs with cash in the next, say, 6 months.

I mean, you're FI *right now* on paper if you aren't too spendy of an individual and you're willing to move somewhere else or rent a place. You won the game, time to decide when you want to quit playing. Mucking around with refinancing low interest loans to pay other low interest loans is a waste of your time. Go do something fun.

-W

Killerbrandt

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Re: Starting cashout refinance, what would you do?
« Reply #33 on: April 07, 2015, 08:12:32 AM »
At your income, why bother? Just kill the SLs with cash in the next, say, 6 months.

I mean, you're FI *right now* on paper if you aren't too spendy of an individual and you're willing to move somewhere else or rent a place. You won the game, time to decide when you want to quit playing. Mucking around with refinancing low interest loans to pay other low interest loans is a waste of your time. Go do something fun.

-W

+1

PathtoFIRE

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Re: Starting cashout refinance, what would you do?
« Reply #34 on: April 10, 2015, 10:01:07 AM »
Ok, the appraisal came back at $1,244,000. That is way way above the $1,030,000 I was shooting for and over 40% increase from our purchase price 3 years ago, and frankly is a little unbelievable. My house has good "numbers" (similar lot size and square feet, age is not significantly older), but it is definitely not fashionable in outward appearance or inside layout and detail compared to the comparables, so I have my doubts it could fetch that on the open market, while I think that's an entirely reasonable and maybe even low number for some of the neighbors'. With that said, I've posted a Make Me Move price on Zillow out of curiosity.

With that said, this opens up some new considerations. With the old numbers, we were able to cash out just under the amount we owe on student loans, $120k. Now, the LTV on the old numbers with the new appraisal is 62% versus the original 75%, which may result in some savings on the interest rate, they are going to get back to me. But what if we borrowed to the full 75% LTV? That would be a cashout in the neighborhood of $265k! Part of me says wow, we could pay off the loans and invest nearly $150k lump sum now, and assuming the interest rate would hold, our monthly payment would only be about $200 more than our current mortgage+SL payments. I think this line of thinking scares me, and DW will no doubt bright me back to earth, but I just started wondering out loud, and thought I'd see what reaction I got from you guys about this.

Numbers Man

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Re: Starting cashout refinance, what would you do?
« Reply #35 on: April 10, 2015, 10:04:54 AM »
Just pay off the student loans. Keep the rest of the dough as equity in your home. This way you maintain a diversified mix of assets instead of sinking everything into the stock market.

ShoulderThingThatGoesUp

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Re: Starting cashout refinance, what would you do?
« Reply #36 on: April 10, 2015, 10:10:16 AM »
Shit man, that's a lot of house in Dallas, unless you're in the Park Cities. If you are then I get that, sort of.

PathtoFIRE

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Re: Starting cashout refinance, what would you do?
« Reply #37 on: April 10, 2015, 10:51:50 AM »
Park Cities

Yes, except neither of us are really Parkies in any real sense. I mean we really like the neighborhood, but...heh, well I admit it would be nice to live here and be retired as well, but I think deep down I would jump at the chance to trade this for early retirement.

ShoulderThingThatGoesUp

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Re: Starting cashout refinance, what would you do?
« Reply #38 on: April 10, 2015, 12:05:33 PM »
Park Cities

Yes, except neither of us are really Parkies in any real sense. I mean we really like the neighborhood, but...heh, well I admit it would be nice to live here and be retired as well, but I think deep down I would jump at the chance to trade this for early retirement.

I went to HPHS, I can't complain about the school district. We weren't country club types either. As I said, you can afford it, I get it.

boarder42

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Re: Starting cashout refinance, what would you do?
« Reply #39 on: April 10, 2015, 12:36:20 PM »
why are you paying off loans. at a lower interest rate than what your new mortgage will be.  this makes no sense.  if you arent going to invest the difference this cash out REFI makes 0 sense.

waffle

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Re: Starting cashout refinance, what would you do?
« Reply #40 on: April 10, 2015, 02:00:29 PM »
why are you paying off loans. at a lower interest rate than what your new mortgage will be.  this makes no sense.  if you arent going to invest the difference this cash out REFI makes 0 sense.

+1 on that. The whole time I was reading this thread I kept thinking what is the point of paying off student loans that have lower interest rates? I'd refinance the house to whatever the lowest rate you can get is (probably a 10 or 15 year fixed) and just pay that off while making the normal payments to student loans.

forummm

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Re: Starting cashout refinance, what would you do?
« Reply #41 on: April 11, 2015, 10:00:20 AM »
Ok, the appraisal came back at $1,244,000. That is way way above the $1,030,000 I was shooting for and over 40% increase from our purchase price 3 years ago, and frankly is a little unbelievable. My house has good "numbers" (similar lot size and square feet, age is not significantly older), but it is definitely not fashionable in outward appearance or inside layout and detail compared to the comparables, so I have my doubts it could fetch that on the open market, while I think that's an entirely reasonable and maybe even low number for some of the neighbors'. With that said, I've posted a Make Me Move price on Zillow out of curiosity.

With that said, this opens up some new considerations. With the old numbers, we were able to cash out just under the amount we owe on student loans, $120k. Now, the LTV on the old numbers with the new appraisal is 62% versus the original 75%, which may result in some savings on the interest rate, they are going to get back to me. But what if we borrowed to the full 75% LTV? That would be a cashout in the neighborhood of $265k! Part of me says wow, we could pay off the loans and invest nearly $150k lump sum now, and assuming the interest rate would hold, our monthly payment would only be about $200 more than our current mortgage+SL payments. I think this line of thinking scares me, and DW will no doubt bright me back to earth, but I just started wondering out loud, and thought I'd see what reaction I got from you guys about this.

Increasing your leverage to invest in an overpriced market is a risky proposition. And the extra mortgage interest will not be deductible. The smartest thing you could do is sell your house, take the cash and buy a new house with no mortgage. With no mortgage, and lower  property taxes, you could increase your savings a ton. You could pay off your SL in a year. And with the lower cost of living, you've dramatically decreased your time to retirement. Try selling it without a realtor to save the fees.

Or continue with this quixotic plan because you are struggling to find some way to keep your fancypants lifestyle and retire in your 30's. It's your life. If this luxury is worth many more years of you working, then keep on burning the cash. But your current decisions are in conflict.

boarder42

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Re: Starting cashout refinance, what would you do?
« Reply #42 on: April 13, 2015, 12:53:54 AM »
Forummm where is your crystal ball that let's you know this market is overpriced?  I want one.

waltworks

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Re: Starting cashout refinance, what would you do?
« Reply #43 on: April 13, 2015, 12:45:58 PM »
Sell house, move somewhere much cheaper, you're done. Or like we all said earlier, just pay off the SLs with your regular old salary. Or just pay them off as slowly as possible, since they're cheap as shit.

Jesus. *Or* do a bunch of idiotic paperwork to leverage equity in your crazy expensive house to pay off what is, for you, a negligible amount of low interest debt. Sounds like a great use of your time.

I am starting to wonder if OP is trolling here. I mean, nobody who makes that kind of scratch would ask this kind of dumb question, right?

-W

forummm

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Re: Starting cashout refinance, what would you do?
« Reply #44 on: April 13, 2015, 07:05:30 PM »
Forummm where is your crystal ball that let's you know this market is overpriced?  I want one.

Basic stats. CAPE has only been higher one time (before dotcom crash). PE is 50%+ above average.   TMC/GDP is near an all-time high (only higher before dotcom crash). These measures project about 2% real CAGR over 10 years.