Refinance dilemma

Information missing:-

what will it cost to refi - origination, processing, escrow and title insc costs plus notaries, documention, filing etc etc. How long will the reduced payments take to pay that off (hopefully under 4 years)

if you pay-off the $78K will you have enough of a liquid reserve to cover a totalled car, a job loss etc.

Well, as Avrum suggests, if the $78,000 is all your liquidity, that's an issue. Years ago, I pulled a similar move, and at the same time dropped from 30 yrs to 20. The rate drop and large cash thrown at the mortgage meant I still had a lower payment, and cut 8 years off the mortgage. Since the cash took me below my comfort level, I added a HELOC to the deal, figuring if the emergency Avrum offered had happened before I built the cash back up, I'd not be in deep mud.

For what it's worth, the math works out to a 7.43% return on the $78,000. That's the rate I calculate for the difference in payments between your two choices. If that doesn't make sense, I can reply and spell it out better.

Joe

Taking the 4.875% rate instead of the 5.3% rate saves you almost $150/month in interest, at least at first.

So the question is whether you can afford to part with $78,000.

If you can't, can you get a second mortgage for that portion?

Right now, you're paying about $29,000/year in interest. If you refinance $417,000 at 4.875%, you'd be paying a little more than $20,000 in interest. So you could afford to finance the other $78,000 at a rate that costs you $8,000/year and still be ahead. That works out to 10.25%, more or less.

In other words, if you were to finance $417,000 at 4.875% and take out a second mortgage at 10% for the remaining $78,000, you would be paying the same amount of interest overall as you are now.

You could then decide independently how fast you wanted to pay off the $78,000.

Your first alternative is equivalent to paying it back immediately; the second alternative foregoes the option of paying it back at all.

Here's a third alternative for those above 40-ish (does not apply to younger homeowners): Live in a house you can afford.

In this context, "afford" means that you pay cash for all current expenses, save sufficiently for things like cars, vacations, retirement, emergency reserves, etc., and do it all without resorting to debt.

I am not as dumb as I look and realize that this sounds extreme. The fact that the above sentiment is the minority view explains why we're having such an unpleasant contraction now.

-HW "Skip" Weldon Columbia, SC

In many areas renting is more expensive than owning and there are no "starter homes." Thumper

Skip

Thanks for moderating this list and your patience with us, but I must disagree, Yes, debt to savings ratio for the average American is abysmal, but we certainly wouldn't be in this "unpleasant contraction" (that is almost as good as "enhanced interrogation techniques") w/o Wall St's and Gov's avarice, greed, ignorance, incompetence, arrogance, and dare I say immoral behavior. So-called "free" market, unregulated capitalism, bah! "Invisible hand", more like the raised 3rd finger.

I am well above 40, have a Ph.D, but little interest in financial planning, (this list is about as close as I come to real financial minds). I played my entire life by the above rules and still I am getting royally screwed.

Chip

Chip, the following is not a comment on you but instead a thought on what a PhD or advanced degree means.

Seems like there is some irony in the hand that many PhD'd (or master degreed) quants played in this crash. They strike me as not so smart, all told, because they failed to emphasize the assumptions on which the theory they were trying to apply rested. When the value of anything goes up and up, all socio-economic classes seem to be blind to reality.

Academic degrees do nothing to ensure wisdom. This is something every PhD should have drilled into him or her, reinforced with real life examples.

Agree in part. I only played the Ph.D card to show that I am stubborn, dogged, and smart enough to play the system. I worked my way through all my college and grad school days, with the help of the GI Bill and assistantships. I have met my fair share of pointy head profs that I wouldn't trust to walk my dog. BUT the vast majority I am more than willing to support in any head-to-head "wisdom" competition.

Just because you got the degree doesn't mean you are an above the clouds airhead. Heck, some of my best friends are Ph.D.s.

Chip

My only surprise is that you limited this to those above 40. This sounds like good advice at any age doesn't it? Maybe not realistic for those still in school, but after that...

-Will

william dot trice at ngc dot com

I'm sorry that has happened to you. My husband had no college and worked a blue collar job all his life. I had 1 year of college and worked in technical jobs. Neither of us were particularly well paid, just regular working class people. We are both retired, several years before the normal retirement age. We have a small house, on which there is no mortgage and hasn't been for several years. We have no debt. My husband has a pension, for which he worked hard and to which he had to contribute a portion. We saved/invested. I did not know of Skip's advice above while we were working our way toward retirement, but certainly there is something to it. Some 50 or so years ago, I remember my mother complaining about government spending, saying they were borrowing money that would be paid by her grandchildren. Sound familiar? We've been getting screwed by Washington for a number of years, it's just that no one seemed to care. Now, apparently, people do.

Elizabeth Richardson

It's Ok to disagree - that's what we do here.

Would you mind being more specific about what you mean by "getting royally screwed"?

-HW "Skip" Weldon Columbia, SC

"Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery." -Wilkins Micawber in Charles Dickens' novel David Copperfield (pub 1850)

Dumb? Hardly. I love the above quote, although the sentiment is far older that this. If the advice has been around so long, why can't we embrace it? (Elle and Elizabeth both advocate more education regarding finance in our schools, I'm agreeing that may be the solution. In theory, we should teach this to our children, in reality, most parents don't)

Joe

I didn't teach it. I just did it. The only things I recall saying are perfectly normal, like "we can't afford that" "if you can't pay for it, you can't afford it." (I have a degree in finance, can you tell? :-) Magically, it got transmitted across generations :-) I was actually surprised when I heard, "Do you need it, or do you just want it?"

Not to get too esoteric, but some guy once said, "The harder I work, the luckier I seem to become." It strikes me that a man who works at what he loves gets to do what he loves to do. He loves, and is loved in return.* A man who tries to take advantage of others, ends up on the losing end. Simple. I believe Elle mentioned the word "wisdom" on this thread. There is always something a man does not know. Maybe that's the seed from which wisdom grows? I believe ethics or morals have everything to do with living, of which financial planning is a part. Too bad colleges don't teach more about how to see value in life and in others, as well as in oneself.

*(With apologies for near-plagiarism of Vladimir Nabokov who wrote opening words to his novel "Laughter in the Dark", as follows: "Once upon a time there lived in Berlin, Germany, a man called Albinus. He was rich, respectable, happy; one day he abandoned his wife for the sake of a youthful mistress; he loved, was not loved; and his life ended in disaster."

Good thoughts. One thing about the current financial crisis strikes me as being rather unusual and very beneficial: Large numbers of ordinary American citizens are becoming extremely upset and concerned about the ethics and morality of people in business and finance and are speaking about loudly and condeming abuses in no uncertain terms. Perhaps I am missing something, but the force of the outcry seems to me to be new and different. There have always been criminals, scamsters, and less than honest CEOs, etc in the financial realm, and such animals certainly have played a role in past booms and busts. But I have never seen anytthing like the extent to which the people have spoken out and taken them to task at present, instead of sweeping things under the rug as in those good old days.