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Suggestion on Refinancing/Rental

By Liberty   Follow   Tue, 11 Dec 2012, 9:34am   1,113 views   22 comments
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Folks – Need your suggestions on Refinancing/Rental.

A year ago took a 30 yr FHA mortgage 400k@3.75%. This month I’m coming out of two mini loans which allow me to add extra payment ($800/monthly). Also I believe to have 40k – 50k equity on my home based on comparable. So I have to do something to get rid of MPI $400/monthly, but I’m really confused to make a decision on the following choices.

1)Refinance to 15 yr mortgage with approx today’s rate 2.5%
2)Refinance to 30 yr mortgage with approx today’s rate 3.1% and make an extra payment towards capital.
3)Leave everything AS IS and buy a rental property(Greed).
4)Or any other choice you recommend.

Financial Background: Technically running check to check. But do have 4 months back up if I go after IRA.

Any suggestion would be appreciated. Thanks!

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1. SFace Follow Befriend (2) 61 threads 1,303 comments Premium

   1   9:41am Tue 11 Dec 2012   Share   Quote   Permalink   Like (2)   Dislike   Protected   without further information it is hard to tell. it does seem like you want to pay the loan off as fast as possible as you are eager to put that $800 into repayment. If possible and qualfied, and if you have secure, growing income pick option #1. If your income is not secure or growing, I will pay more for option #2. You don't have money to buy a rental property, option #3. by the time you are ready and available to you, the game is long gone. #4, I am not familiar with PMI, but isn't the rate based on tiering? If so, there's probably some room to cut PMI if the house value went up. The PMI is the waste of money. Interest rate in your situation is probably misleading. What is the APR?

2. Liberty Follow Befriend 1 threads 7 comments

   2   11:00am Tue 11 Dec 2012   Share   Quote   Permalink   Like   Dislike   Thanks SFace! SFace says without further information it is hard to tell. I can provide if I missed any. it does seem like you want to pay the loan off as fast as possible as you are eager to put that $800 into repayment. Not very eager, but I don’t know other investment so thought of saving in interest in long term. You don't have money to buy a rental property. I had the same feeling, but thought of giving it a shot.

3. E-man Follow Befriend (31) 34 threads 2,545 comments San Jose, CA Premium

   3   11:05am Tue 11 Dec 2012   Share   Quote   Permalink   Like   Dislike   Protected   I second what SFace said. However, I recommend you go with Option #2 since you're check to check and don't have much reserve. I would go with no points no costs. Rate will be a little higher, but so what. Save your money for other things. Since you have about 10%-12% equity now, your PMI will likely drop to $300/month. Use the extra $800-$900/month to pay down your principal. Try to get it to 78% LTV ASAP so you can save an additional $300/month on PMI. Once you get there, you'd have $1,100-$1,200/month of extra income. Get that done first before thinking about investing. Time flies. You'd get there in no time. Good luck on your refinance.

4. SFace Follow Befriend (2) 61 threads 1,303 comments Premium

   4   11:15am Tue 11 Dec 2012   Share   Quote   Permalink   Like (1)   Dislike   Protected   E-man says Try to get it to 78% LTV ASAP so you can save an additional $300/month on PMI. Once you get there, you'd have $1,100-$1,200/month of extra income. A little bit more of Obama stimulus would do wonders for your situation. Low interest rate and higher market leads to faster exit of PMI. That's a huge stimulus. But yes, I concur with E-Man, here is how I would priortize. 1) Get out of PMI ASAP. That is flusing money down the toilet and you can't be serious about saving money until you stop flushing it away. 2) Build a 25K reserve. That's when you stop paying interest on credit cards and other subprime type things, ever. 3) Get finance in order permanently. (lowest fixed cost of living possible) 4) Once those are taken care of, invest. It doesn't hurt to invest a little or do a mock portfolio now as experience means more than result now. You try things out in your 20's. You may lose, but so what, it may be 10K., learn from your mistakes in your 30's, make money in your 40' and 50's with two/three decades of experience and preserve your capital/fixed income thereafter in four/five decades of experience and several million dollar in capital.

5. Liberty Follow Befriend 1 threads 7 comments

   5   11:44am Tue 11 Dec 2012   Share   Quote   Permalink   Like   Dislike   Thanks E-man & SFace. I completely agree with your points. I have kid who will be in collage in 10 yrs. What’s your thought about saving on 529 vs paying off mortgage? Which one will be better? Or Do I have to balance it?

6. epitaph Follow Befriend (3) 5 threads 172 comments

   6   12:01pm Tue 11 Dec 2012   Share   Quote   Permalink   Like   Dislike   Do what E-man said, but I'd put that extra $800/mo in a fund for a year or so before trying to work down that principal, so you have a safety net without having to destroy your IRA.

7. YesYNot Follow Befriend (2) 15 threads 429 comments Reston, VA

   7   12:01pm Tue 11 Dec 2012   Share   Quote   Permalink   Like   Dislike   pay retirement accounts, then mortgage, then kids college.

8. SFace Follow Befriend (2) 61 threads 1,303 comments Premium

   8   12:02pm Tue 11 Dec 2012   Share   Quote   Permalink   Like (1)   Dislike   Protected   Liberty says I have kid who will be in collage in 10 yrs. What’s your thought about saving on 529 vs paying off mortgage? Which one will be better? Or Do I have to balance it? You'll need to get rid of PMI first so payoff the mortgage first. 529 is not that important in the overall scheme of things. You have too little money to have any value. In any case, you should look into college funding/grants for low income, low assets. Sometimes it's better to not have bank accounts and 529 as that is basically subtracted from state grants. Put it into a 401K or house as those assets are not counted.

9. E-man Follow Befriend (31) 34 threads 2,545 comments San Jose, CA Premium

   9   1:25pm Tue 11 Dec 2012   Share   Quote   Permalink   Like   Dislike   Protected   Liberty, I agree with SFace. Forget about the 529 plan. Get rid of that PMI first. Say you have to pay down another $40k to get rid of your $300/month of PMI or $3,600/year. That's a 9% return on your money. Where are you going to get that kind of return? To put things in perspective, the bank is loaning you money at 3.25% while paying you 0.25% for your savings. Here is a chance to get 9% return on your money. That's where your effort you should be. Bye bye PMI ASAP. :)

10. Liberty Follow Befriend 1 threads 7 comments

    10   2:30pm Tue 11 Dec 2012   Share   Quote   Permalink   Like   Dislike   Amazing! What a unified thoughts. Definitely, getting rid of PMI/MPI is my next goal. Thanks for making it clear. Again, Thank You all for your valuable suggestions.

11. swebb Follow Befriend (3) 29 threads 490 comments Denver, CO

    11   5:00pm Tue 11 Dec 2012   Share   Quote   Permalink   Like   Dislike   I tend to agree with getting rid of the PMI ASAP, but if I recall FHA makes you carry it for 5 years minimum. I'm not sure about that, but I thought it was so. Edit: I'm not sure what happens if you sell before 5 years, but paying down before 5 years wouldn't remove the PMI.

12. SFace Follow Befriend (2) 61 threads 1,303 comments Premium

    12   8:34pm Tue 11 Dec 2012   Share   Quote   Permalink   Like (3)   Dislike   Protected   The idea is to carry a 80% ltv ratio and refi to conventional. One good year in the housing market will get you there. That's why rising housing prices stimulate the economy. Lower interest rate and rising appraisal is a lethal combination. One more year like 2012 and foreclosure will disappear.

13. B.A.C.A.H. Follow Befriend (6) 5 threads 2,359 comments

    13   9:25pm Tue 11 Dec 2012   Share   Quote   Permalink   Like   Dislike   Liberty says I believe to have 40k – 50k equity on my home .....I have to do something to get rid of MPI $400/monthly....running check to check.....have 4 months back up if I go after IRA...other choice you recommend ...getting rid of PMI/MPI is my next goal. ...I have kid who will be in collage in 10 yrs... "Other choice": Sell the house, put 6 months living expense into FDIC insured account, the rest into IRAs. If you sell the house and get the cash before April 15th, you can put $5000 into 2012 IRA and $5500 into 2013. Double if you have a spouse with income. Now then, with six months' living expense set aside, and more in your retirement account, any ADDITIONAL savings you can set aside can go towards a downpayment on a different house for some time in the future.

14. Liberty Follow Befriend 1 threads 7 comments

    14   7:05am Wed 12 Dec 2012   Share   Quote   Permalink   Like   Dislike   B.A.C.A.H. says Sell the house, put 6 months living expense into FDIC insured account, the rest into IRAs. Different perspective but never occurred to me. May be it’s not a smart thing to do in this context. B.A.C.A.H. says Now then, with six months' living expense set aside That’s a lot of money in Savings Account. Definitely, that’s not my life style. I better invest in something than having it idle.

15. Liberty Follow Befriend 1 threads 7 comments

    15   7:11am Wed 12 Dec 2012   Share   Quote   Permalink   Like   Dislike   SFace says The idea is to carry a 80% ltv ratio and refi to conventional. I concur.

16. FortWayne Follow Befriend (13) 102 threads 3,763 comments

    16   11:19am Wed 12 Dec 2012   Share   Quote   Permalink   Like   Dislike   Do a 30y refi, it's the safest option you have. Others carry too much risk.

17. Liberty Follow Befriend 1 threads 7 comments

    17   12:55pm Wed 12 Dec 2012   Share   Quote   Permalink   Like   Dislike   FortWayne says Do a 30y refi, it's the safest option you have. Others carry too much risk. Agree. I have a question, suppose if I make an extra payment towards capital for a while, then for some reason if I happen to miss one monthly payment. Do they adjust the missed monthly payment with extra capital?

18. SFace Follow Befriend (2) 61 threads 1,303 comments Premium

    18   1:04pm Wed 12 Dec 2012   Share   Quote   Permalink   Like   Dislike   Protected   no

19. uomo_senza_nome Follow Befriend (13) 787 threads 1,542 comments

    19   1:06pm Wed 12 Dec 2012   Share   Quote   Permalink   Like   Dislike   Liberty says Do they adjust the missed monthly payment with extra capital? I don't think so. One other thing is that you have to clearly specify that the extra payment you make is towards principal repayment, otherwise some lenders can just keep it in escrow. This way, they get more interest.

20. Liberty Follow Befriend 1 threads 7 comments

    20   1:20pm Wed 12 Dec 2012   Share   Quote   Permalink   Like   Dislike   SFace says no Thanks. Good to know in advance. uomo_senza_nome says you have to clearly specify that the extra payment you make is towards principal repayment. Thanks, valid point. Cannot afford that mistake.

21. B.A.C.A.H. Follow Befriend (6) 5 threads 2,359 comments

    21   9:06pm Wed 12 Dec 2012   Share   Quote   Permalink   Like   Dislike   Liberty says B.A.C.A.H. says Sell the house, put 6 months living expense into FDIC insured account... Liberty says That’s a lot of money in Savings Account. yes it is. If you are considering using it for "savings for growth". Absolutely I agree with you on that and don't even do it myself. That's why I did not use the words "Savings Account". You did. I said 6 months living expense into FDIC insured account. Six months living expense is **NOT** a lot of money to set aside for a rainy day. Living pay check to pay check is one paycheck away from a disaster, or maybe in your case, four months away (does that include the extra taxes that will be paid?) if you blow your (very small) IRA. So many things can happen to make you blow through six months savings even if you DON'T lose your job. Like, car repairs, getting injured by a drunk driver who is also broke (it can happen, it happened to a roommate of mine), etc.

22. uomo_senza_nome Follow Befriend (13) 787 threads 1,542 comments

    22   2:35am Thu 13 Dec 2012   Share   Quote   Permalink   Like   Dislike   swebb says Edit: I'm not sure what happens if you sell before 5 years, but paying down before 5 years wouldn't remove the PMI. I think if he refis from FHA to conventional, you can get rid of that mandatory 5 yr monthly MIP.