Where to refinance, and does it make sense for me

[frugalnacho]

My mortgage is paid off, but we still have a $46k lien on the property from county home buyer's incentive program.  The lien is at 0% and we don't have to pay it back until we sell the house, or refinance.  The house is probably valued around $220k.

I don't like the idea of giving up the interest free $46k loan, but with low enough rates, and high enough cash out value, it will make financial sense to pay it off and do a cash out refi.

I applied at the credit union I use and just got the rates they can offer me.

Closing costs $1,256 approximately
30 year = 2.875%, no points
15 year = 2.5%, $94 in points

75% LTV ratio gives me $165k, less my $46k lien, and less the closing costs gives me ~$118k cash to invest.

What rates is everyone else qualifying for?  And where else should I be checking for the best rate?  I could google around, but I'd rather focus on the best sources if anyone has had good luck with some place.

Should I keep my 0% $46k mortgage (with no payments due as long as we continue to live in the house as our primary residence) and just invest as I have been?  Or should I cash out refinance and take a $165k mortgage and drop $118k into the market?

[IsThisAGoodUsername]

You're speculating that you can earn more in the market than the interest rate on the to-be acquired mortgage refi.

You're already winning by investing in the market (expected ROI of more than 0%) while holding onto a 0% loan. I suggest continue living there mortgage free and just invest whatever money you can.

And if it's an emotional issue where you don't like having the lien, you can always make payments on it over time, right? Maybe split future extra money 50/50 or 75/25 or whatever between new investments and paying down the lien.

[achvfi]

We closed last month for 2.875% cash out refi for 75% LTV and invested the proceeds.
Just Keep the 0% loan as long as you can.

[frugalnacho]

You're speculating that you can earn more in the market than the interest rate on the to-be acquired mortgage refi.

You're already winning by investing in the market (expected ROI of more than 0%) while holding onto a 0% loan. I suggest continue living there mortgage free and just invest whatever money you can.

Yes I am, I have confidence that my investments will beat 4% over the long term, which is kind of implicit in following the 4% rule.  Doing a cash out refinance with rates as low as they are is an absolute no brainer if you plan to stay in the property for awhile.  Throwing the 0% mortgage in changes the math a bit, and I certainly wouldn't do a cash out where I only ended up with $10k, but at some point it will be enough to justify ditching the 0% mortgage.  I am always for taking a gamble when I think the odds are in my favor.

[Telecaster]

We closed last month for 2.875% cash out refi for 75% LTV and invested the proceeds.
Just Keep the 0% loan as long as you can.

Do you mind sharing where you got the loan? 

[achvfi]

We closed last month for 2.875% cash out refi for 75% LTV and invested the proceeds.
Just Keep the 0% loan as long as you can.

Do you mind sharing where you got the loan?

Mutual of Omaha mortgage is the lender.

[yachi]

Make sure your numbers are for a cash-out refinance, not a lower-my-rate-only refinance.  It seems to make a difference.

From my perspective that interest-free, no-payment lien messes up the refinance plan:
On the 30-year mortgage:
$165,000 X 2.875% = $4,744 interest cost
$118,000 x 4% = $4,720 market gain

On the 15-year mortgage:
$165,000 X 2.875% = $4,125 interest cost
$118,000 x 4% = $4,720 market gain

[frugalnacho]

Make sure your numbers are for a cash-out refinance, not a lower-my-rate-only refinance.  It seems to make a difference.

From my perspective that interest-free, no-payment lien messes up the refinance plan:
On the 30-year mortgage:
$165,000 X 2.875% = $4,744 interest cost
$118,000 x 4% = $4,720 market gain

On the 15-year mortgage:
$165,000 X 2.875% = $4,125 interest cost
$118,000 x 4% = $4,720 market gain

Yes I actually spoke to a person at the CU by phone and explained the situation since it's kind of a weird one.  She said the 0% mortgage would be counted as a lien and paid off from the proceeds of the cashout finance.

Every time I've attempted to apply to any place online for a mortgage I always get the bait and switch.  They advertise one rate, then when I go through the process of filling everything out I get to the end and I'm either offered a different rate, or nothing at all...but not until after they take my email and phone number, and I unsurprisingly get bombarded for months afterwards.  I tried the top rate given to me by bankrate today and it was the same deal, no offers for me after I filled everything out.  Which is shocking because how do I not qualify?  I should be the most ideal candidate possible.  I'd rather take a targeted approach and apply directly to places that other mustachians have already had success with rather than dealing with the bait and switch of advertised low rates.

Your math seems correct (you mistyped 2.875 instead of 2.5 for 15 year, but did math correct anyway).  I don't know which way the market is going...but I am expecting 4%+ average long term.

[MudPuppy]

We closed this past Monday with 2.6% 30 year fixed, no points.

[frugalnacho]

We closed this past Monday with 2.6% 30 year fixed, no points.

Which lender?

[MudPuppy]

We actually used the same mortgage company we did when we first bought. It’s a local family business with great people so we were happy to choose them again, even if we might have saved an extra tenth of a percent elsewhere. Took 14 days from inquiry to close. Last time our mortgage went to suntrust, so we’ll see where it ends up this time!

[frugalnacho]

I checked around and can't beat the rate given by my CU.  I can lock in the 2.875% rate with no points today.   Not sure how quickly I have to act, but they are going to be closed until Monday after they leave the office today.

I made a mistake adding up closing costs.  It will be approximately $2,250.

If they value the house at $220k it would be:

$165k (75% LTV)
-$46k lien
-$2.25k closing cost

=$116.75k cash

If they value the house at $200k it would be:

$150k (75% LTV)
-$46k lien
-$2.25k closing cost

=$101.75k cash

[Fuzz]

I dunno. The missing variable is what your other asset picture is. Are you capable of saving/investing each month? What's your marginal tax bracket? Are you planning to invest in bonds or dividend stocks and paying ordinary income taxes on the gains? Growth stocks and only pay gains when you sell? How much money is $116K relative to your other assets? Can you itemize and deduct the mortgage interest, or do you take a standard deduction?

Yeah, rates are low, and that's great. But the market is also high on a P/E basis. You can find examples of periods where the market goes sideways for a decade.

I always like the "do nothing" advice. Do nothing, continue to invest. Keep it simple. In 10 years, you may find out that mathematically you would have made more money with a refi. Or you may not.

Since you don't have a mortgage on the property, it would certainly cash flow as a rental (unless that triggers a requirement to repay the lien?). Is being a landlord interesting?

My gut is skip the refi and enjoy mortgage payment free living Then use that low cost living to continue to invest. But you do you.

[Fuzz]

Also since you're borrowing against your house, you'd want something super safe--which means lots of bonds. 30 year T-Bills at 1.6%. Maybe you get a vanguard bond fund at 4%. So let's say you do that. You're making approximately 1% on the spread (4% yield minus 3% mortgage), which is subject to tax. So if you make $1160/year on the spread and pay 300 of that in taxes, you have taken a boatload of risk for $800/year, which is like 40 hours of driving uber. Idk. All that is hand-waving math, but with bond yields so low, I don't see how you do this without taking a lot of risk.

[AMandM]

Have you run the numbers on investing the mortgage payments vs. paying the mortgage and investing the lump sum? They don't look good to me.
For a $685 monthly investment over 30 years, assuming steady 6% growth, I calculate you end up with $692k.
Paying that $685 to the mortgage company so that you can instead make a one-time investment of $117k, at 6% for 30 years, produces $672k.

Your $165k mortgage would give you $117k/102k to invest, so you're essentially betting that the investment returns on $117k (or $102k) will exceed the interest on $165k.

[frugalnacho]

I'm not sure why I'd need a safe investment.  The whole point is to invest and beat the mortgage interest rate. I am highly employable and have good income.  Even if I lost that income I have over $100k in taxable investments that could be used to live on and make mortgage payments.  After a refinance I'd have close to $250k in taxable investments.  I don't need to ensure that my strategy is played perfectly safe; I am ok with taking on some risk, and if the market completely shits out for the next 10 years and I end up losing money by doing this...well thems the breaks I guess. That's the risk I am assuming in order to get those market returns on another $117k.   

I also likely won't complete a 30 year mortgage.  We will almost certainly FIRE and move long before then. 

I'm not sure it's a fair comparison that the $117k has to completely beat the $165k mortgage.  I eventually owe on that $46k lien whether I remortgage now or not, so as long as the $117k investment comes within $46k of the total mortgage debt I will have come out at least even.  And if I only get $102k the mortgage will only be $150k.  I am essentially converting the $46k from 0% to 2.875% in order to take out an additional $117k @ 2.875%.

[AMandM]

I'm not sure it's a fair comparison that the $117k has to completely beat the $165k mortgage.  I eventually owe on that $46k lien whether I remortgage now or not, so as long as the $117k investment comes within $46k of the total mortgage debt I will have come out at least even.  And if I only get $102k the mortgage will only be $150k.  I am essentially converting the $46k from 0% to 2.875% in order to take out an additional $117k @ 2.875%.

Ah, I misunderstood, sorry, Somehow I thought that the $46k lien got forgiven in time. If you have to pay it back, that makes the refi more attractive. In my example, you'd be ahead $26k at the end of 30 years.

[Fuzz]

I'm not sure why I'd need a safe investment.  The whole point is to invest and beat the mortgage interest rate..

Agreed. How did I miss that? There are 2X and 3X leveraged ETFs. So if you wanted, you could borrow 100K at ~2.875% and then dump 100K in a 2x leveraged ETF. Why stop at 100% invested in equities? You could be 200% invested! Since the only reason to do this is to make money on the spread between your loan and your investment returns, why not swing for the fences? If you're guaranteed a 7% historical return (which only makes you a measly 4K/year above the mortgage rate), then you're guaranteed a 14% return with 2x leverage. Those people who are buying your mortgage for their own investment are fools! How the eff do they own a bank? They are so dumb. They aren't even getting 3%.

[bacchi]

Those people who are buying your mortgage for their own investment are fools! How the eff do they own a bank? They are so dumb. They aren't even getting 3%.

The loan is sold to the government. The bank only services it.

[Telecaster]

I'm not sure why I'd need a safe investment.  The whole point is to invest and beat the mortgage interest rate..

Agreed. How did I miss that? There are 2X and 3X leveraged ETFs. So if you wanted, you could borrow 100K at ~2.875% and then dump 100K in a 2x leveraged ETF. Why stop at 100% invested in equities? You could be 200% invested! Since the only reason to do this is to make money on the spread between your loan and your investment returns, why not swing for the fences? If you're guaranteed a 7% historical return (which only makes you a measly 4K/year above the mortgage rate), then you're guaranteed a 14% return with 2x leverage. Those people who are buying your mortgage for their own investment are fools! How the eff do they own a bank? They are so dumb. They aren't even getting 3%.

Sorry to interrupt a good rant, but you should compare apples-to-apples.  That 7% historical return the real return after the average historical inflation rate of 3.5%.  Since the mortgage rate is below the historical inflation rate...this does not seem particularly risky to me.

Sure, the future will be different than the past, no quibble there.  But the bar for success is pretty low and even if the market did nothing for ten or however many years he's still have equity in the house when it is time to sell.   I wouldn't necessarily council someone to do this, but the OP seems to understand the risks and rewards pretty well.