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!