House refi - Take out extra for savings? - Tilted Forum Project Discussion Community

intecel · 04-03-2006, 02:52 PM

I'm refinancing my house to pay off my 30k in credit / equity line debt in a couple weeks. I've been told by a few people that I should pull out an extra 15k to put into investments like a CD. I can easily afford the mortgage payment if I do this, but would it be worth it?

The interest rate on my morgage will be 6.12%, and I think the current rate for CDs are around 5%.

Can anyone explain why this is, or is not a good idea?

SirLance · 04-03-2006, 04:46 PM

You can't earn enough to pay the interest.

One caution, you cannot borrow your way out of debt. It may not be a good idea to replace unsecured debt with secured debt.

ngdawg · 04-03-2006, 06:12 PM

Even if you can afford it, why lose money? It'd only work if the cd paid more than the mortgage rate I should think.
If you're doing just so you can have something to fall back on should times get a little difficult and it won't make a difference in your month outlay, then yea, go ahead, but as an investment? nah....you'd be better off putting it into a diversified portfolio with both high-risk and 'safe' stock investing, but it has to sit a while to show a difference-a few years. I also wouldn't do 15 grand-if it's a cushion you're looking at, figure your outlay for 3 months and take that.

NoSoup · 04-03-2006, 08:38 PM

I'm going to go against the grain here...

The deciding factor in your case, though, should be whether or not that rate is fixed or variable. If it is fixed, I'd take a look at all the different options available to you, but if it is variable, it is unlikely that you will be able to earn more in interest less taxes due than you would just owing the lesser amount.

There is someone that I know quite well that had his house paid off a couple of years ago, but took a mortgage out on it for 80% of it's value when mortgage rates were absolute rock bottom.

Although it took quite some time for rates to get up there - at the time he did it savings and cd rates were dismal - he has a mortgage for just over $400,000.00 borrowed at a rate of 4.625% for a 30 year fixed loan. Even now, he is not earning much of a profit, if any. However, He's probably sitting on nearly half a million in cash, and as CD rates continue to increase, eventually it will pay off considerably.

To be honest, chances are you won't be able to turn a profit at this point, but keep in mind that noone knows how quickly the market will change.

It's a gamble, but depending on what you are considering investing in, and the time frame you are looking to keep it there, you it may pay off in the end.

Ah, and also - if you are earning 7% on a CD and paying 6.12% on a mortgage, you aren't necessarily making any money. You need to consider tax benefits as well. You'll likely be paying income taxes, possibly capital gains tax, on any profit that you make with that money. Additionally, you'll likely be able to deduct a portion of the interest you pay on your primary residence each year. Depending on your tax bracket and situation, the actual rate at which you will begin to profit could vary substantially.

I'd check with a local tax consultant and explain your situation to him...

intecel · 04-03-2006, 09:42 PM

Thanks for the replies, especially the very detailed reply from NoSoup. I have been debating on this as I wait on them to ask what my final numbers are to take out.

The rate will be a fixed 6.12.

I bought this house back 23 months ago for 140k with 0 down at 5.5%. I racked up my credit card debt quickly to 30k by purchasing new furniture and doing improvements on the house (and a trip to Vegas that didn't help) and my payments for all my credit is around $550 a month.

I found out that the value of my home was now over 200k, so I decided to go through the steps of a refi. The appraiser appraised my home at 235k. Not a bad investment for 23 months

Even thought it's a higher interest rate, my payment is only going up $120 to take out the extra 30k and I won't have to pay PMI or the $500+ a month on credit minimum payments...

Now I'll have a way to start saving anyways, so I may just keep that money in the house and save it the old fashioned way.

The_Jazz · 04-04-2006, 04:37 AM

You should keep the money in the house. Real estate is the safest investment there is, although I wouldn't necessarily take the appraiser's estimate as gospel. You might find it hard to sell a house for 68% more than you paid 24 months ago. Any real estate agent paying attention is going to know that and try to push down your selling price with that information. And that's the best way to recoup your money. Paying 6.12% on money earning 5% is a good way to lose money. The equity that you have in your home is your savings at this point. Don't worry about CD's and the like at this point - there's plenty of time for that later.

ratbastid · 04-04-2006, 04:48 AM

Quote:

Originally Posted by The_Jazz

You should keep the money in the house. Real estate is the safest investment there is...

I'm not so sure about that. There's evidence of bubble-pricing in real estate in most metropolitan areas these days. One sign of that is the 70% appreciation of this property over 23 months! I mean, that's great, but... c'mon. That can't keep up indefinitely.

Once the bubble passes, the market won't bear prices like that anymore. Now might be a good time to get your money out of real estate and into something more guaranteed to keep its value.

intecel · 04-04-2006, 06:29 AM

Quote:

Originally Posted by The_Jazz

You might find it hard to sell a house for 68% more than you paid 24 months ago.

Actually, the house 2 doors down from me is the same floorplan and lot size and they sold 5 months ago at $246k.

The prices around here are skyrocketing, and there are really no homes under 200k for sale except for old, rundown homes. Last time I checked, there were 2 decent homes around 200k for sale but they already had a sale pending.

The_Jazz · 04-04-2006, 06:59 AM

Quote:

Originally Posted by ratbastid

I'm not so sure about that. There's evidence of bubble-pricing in real estate in most metropolitan areas these days. One sign of that is the 70% appreciation of this property over 23 months! I mean, that's great, but... c'mon. That can't keep up indefinitely.

Once the bubble passes, the market won't bear prices like that anymore. Now might be a good time to get your money out of real estate and into something more guaranteed to keep its value.

The "bubble" means price growth. If the bursting of the bubble means that prices actually go down, then we're all in a shitload of trouble. If the bubble bursts, then price growth should decelerate, not start to decline. I agree that 70% over 23 months is an insane growth rate, but unless the housing market seriously crashes (i.e. people start abandoning an area like Detroit in the late 60's/early 70's) there shouldn't be a decline. Growth of 8% annually would be reasonable and easily realized even in a non-bubble market.

Quote:

Originally Posted by intecel

Actually, the house 2 doors down from me is the same floorplan and lot size and they sold 5 months ago at $246k.

The prices around here are skyrocketing, and there are really no homes under 200k for sale except for old, rundown homes. Last time I checked, there were 2 decent homes around 200k for sale but they already had a sale pending.

As tempting as it is to fall into this trap, I'd be cautious about it in the extreme. Given the growth curve that you're on, the sale down the street tells me that your home is most likely not the best maintained over the long run on the block. When you sell real estate, you can't count on the demographics holding true on every transaction. If you're willing to wait for the right buyer, you can get your ask price, but if I were a buyer in your real estate market and I saw your house for sale and did my research, I would problably offer close to your ask, have the place inspected by someone I trust and then use the results to drive you down. That's working from the assumption that I would be thinking of it as an investment and not listening to my wife about how in love she is with the house. It would be a gamble on my part, but given what you've posted (which I could pretty easily track down with or without the help of my realtor), it's a fairly safe bet that there's at least a couple of systems that need updating or aren't up to code.

None of this is to say that you can't go out and find someone to pay $250k+ tomorrow for your house. If it's a motivated buyer and you create a sense of urgency by having another interested buyer to bid against, you could exceed your expectations. You just need to be wary of counting on demographics since there are folks that can turn them against you just as easily.

Regardless, congratulations on the savvy real estate move! Be careful about protecting that investment, though.

DDDDave · 04-04-2006, 07:06 AM

As you can see from the varied responses, there is no 'correct' answer to your question. Almost every financial decision depends on your personal situation, and even your personality. Are you comfortable borrowing money? Some people are very debt adverse. 'Don't owe anybody anything' , 'Pay it off as soon as you can'. Others realize the power of leverage and are comfortable using it. All you can really do is analyze your entire situation and make the best decision for you.

As for the numbers, in the 28% tax bracket, your true cost of borrowing is probably closer to 5% when figuring the write-off for interest and RE taxes. While your mortgage rate is fixed, short term rates are going up and will continue to rise. How far is anybody's guess. If in 5 years CD rates are 7% (very possible), you will be thinking 'I should have borrowed more at the time'. A HELOC is not really an option as it carries a variable rate and defeats the purpose of trying to leverage your borrowing.

Are you able to have a savings account with 30K in it and let it sit there without spending it. That is an important question. It takes discipline. Some people always have it the back of their minds 'No matter what I ring up on my cards, I can always refi and pay it off.' As has been said 'You can't borrow your way out of debt'.

What is your income situation? Two good stable jobs? You never know what might happen. All the pundits say have 6 months savings in a liquid account just in case. Health insurance? Good, not so good, or none? Maybe have a little more set aside if 'not so good'. Kids? College expenses? If so, borrow the money now while its cheap. Maybe half what you think you'll need. If you lose your job or are injured and can't work, it will be much more difficult to borrow the money you may need. .....Only you know the answers to these questions, and only you can prioritize them correctly for your personality and lifestyle.

As for RE prices and such, that is a whole other story. As long as you live in your house and can afford to make the payments, who cares what prices do? It makes for great headlines, but the only ones affected are people who have to sell. It sounds like you have a good bit of equity in the house and even if prices stay flat or decline for a couple of years, so what?

Good luck.

intecel · 04-04-2006, 10:03 AM

Great info guys....

My house is in about the same shape as the person 2 doors down. I'm pretty sure their value was a little higher because of their patio that they added on, and that they're on a corner lot.

My home is kept up very nice. I live in a golf club community with a lake across the street and a fairway view to the side i look 3 homes down. I'm actually in the process of landscaping my yard with new plants, which should be done within the next couple weeks.

I like the info about doing what I feel is right... I'm usually pretty bad with money (hence the 30k in credit debt), which is why taking out the extra money wouldn't be the greatest idea, but if I were to stick it in an investment that cannot be touched for a year or 2, that would probably work the best for me.

Once the refi goes through, I will only have the house and car payment (5k left) to pay off. I have no children, no wife (but a girlfriend who supports herself), and I make over 45k a year in a very stable position.

I've only got another day to decide on this.. but all your input has definitely helped... thanks!

ngdawg · 04-04-2006, 10:34 AM

Quote:

Originally Posted by intecel

Great info guys....

My house is in about the same shape as the person 2 doors down. I'm pretty sure their value was a little higher because of their patio that they added on, and that they're on a corner lot.

My home is kept up very nice. I live in a golf club community with a lake across the street and a fairway view to the side i look 3 homes down. I'm actually in the process of landscaping my yard with new plants, which should be done within the next couple weeks.

I like the info about doing what I feel is right... I'm usually pretty bad with money (hence the 30k in credit debt), which is why taking out the extra money wouldn't be the greatest idea, but if I were to stick it in an investment that cannot be touched for a year or 2, that would probably work the best for me.

Once the refi goes through, I will only have the house and car payment (5k left) to pay off. I have no children, no wife (but a girlfriend who supports herself), and I make over 45k a year in a very stable position.

I've only got another day to decide on this.. but all your input has definitely helped... thanks!

It's interesting that you note you make $45k a year. Many mortgage companies(and real estate offices) at first glance multiply your annual gross income by 3 to gauge how much you may be able to afford in mortgage payments, then take 1% of that as an estimated monthly affordable payment. Thus, your affordable monthly payment would hover around $1350.
For a single guy, I guess it's doable; I know for our family, ours IS that much and isn't very doable at all and we have a second mortgage of about $400 a month (our gross annual is approx $60k)
Our house here also went through the roof as far as it's appraisal and I have a feeling it was inflated. In two years, the market value went from $200k to over $295k, yet the houses on this street that have actually sold haven't sold for $200k yet. So, I'd be cautious about appraisal vs selling price.
Why not take that car payment and toss it in there? You're throwing a car payment to something that's deflationary in value, and the interest isn't tax deductable. But mortgage interest is, so you save some there as well.

intecel · 04-04-2006, 02:25 PM

I'd do that, but the interest on my car is at 0.9%.

With the refi + 30k, my payment will go from 1100 to around 1250. My pay post tax is 3000 a month, so I usually have enough money to live.

ngdawg · 04-04-2006, 04:55 PM

If you owe $5k on your car, you should check book value and see if you owe more or less than it's actually worth. If what you owe is less(ex, car is worth 15k), than it doesn't make any difference. However, if you owe 5 grand on a car worth less than 5 grand, then the payments might be better off being absorbed into a mortgage. Five thousand over 30 years adds very little, you own the car free and clear and that much more is in your pocket each month.
Car payments are one of our biggest wastes of monthly income-granted, you're paying for a big ticket, longterm ownership(in most cases), but depreciation on all but the most desirable and/or expensive cars many times outruns the balances owed.

intecel · 04-04-2006, 04:58 PM

Ahh, nah.. My honda is still worth around 10k. It's a 2003 civic lx. I doubt I'll be keeping it around much longer anyways.. I've been needing a pickup truck for way too long now, that I will be selling the honda to pick the truck up.

NoSoup · 04-05-2006, 10:26 PM

I'd caution to to investigate a second mortgage rather than increasing the interest rate on your current loan, since it is so low.

You'll likely be paying a higher interest rate on the second mortgage, but if it'll save you money in the long run, I'd leave the first mortgage alone.

To figure out what it will cost you, use a loan amortization calculator and make sure that you're going to be paying less interest total with the situation that you go with. In my experience, it is very, very likely that it will be better for you just to take out a second mortgage. As I stated before, the rate might be higher, but the term of the loan will likely be shorter, and keeping the majority of the debt at a lower interest rate will likely be an advantage.

If you have already closed, don't fret - you have up to three business days to "recind" - basically, back out. You may have to pay some costs, depending on the bank or broker that you used, but hopefully they'll be able to utilize most of the things (like the appraisal) when they do the second mortgage...

Good luck!

intecel · 04-06-2006, 07:32 AM

I haven't closed yet... I did some rate comparisons online and I will be paying a lot more monthly for a 2nd mortgage that I would with a full house refi. For some reason they want to charge me 9+ % for a 2nd morgage of 30k. I currently have an equity line open that I've taken 20k out of. My interest rate started at 8.5 and it's up around 10% now...

I've done my homework a bit on this and I definitely think the refi is the way to go for me. I've also decided to just leave the additional money in the house since I'll probably be selling in a couple years anyways. I can invest whatever I don't put into my next home at that time.

nazia · 04-11-2006, 02:06 PM

its always good to pay off your own house, so never let it go

04-03-2006, 02:52 PM	#1 (permalink)
intecel Psycho	House refi - Take out extra for savings? I'm refinancing my house to pay off my 30k in credit / equity line debt in a couple weeks. I've been told by a few people that I should pull out an extra 15k to put into investments like a CD. I can easily afford the mortgage payment if I do this, but would it be worth it? The interest rate on my morgage will be 6.12%, and I think the current rate for CDs are around 5%. Can anyone explain why this is, or is not a good idea?

04-03-2006, 04:46 PM	#2 (permalink)
SirLance Junkie Location: In the middle of the desert.	You can't earn enough to pay the interest. One caution, you cannot borrow your way out of debt. It may not be a good idea to replace unsecured debt with secured debt. __________________ DEMOCRACY is where your vote counts, FEUDALISM is where your count votes.

04-03-2006, 06:12 PM	#3 (permalink)
ngdawg peekaboo Location: on the back, bitch	Even if you can afford it, why lose money? It'd only work if the cd paid more than the mortgage rate I should think. If you're doing just so you can have something to fall back on should times get a little difficult and it won't make a difference in your month outlay, then yea, go ahead, but as an investment? nah....you'd be better off putting it into a diversified portfolio with both high-risk and 'safe' stock investing, but it has to sit a while to show a difference-a few years. I also wouldn't do 15 grand-if it's a cushion you're looking at, figure your outlay for 3 months and take that. __________________ Don't blame me. I didn't vote for either of'em.

04-03-2006, 08:38 PM	#4 (permalink)
NoSoup Non-Rookie Location: Green Bay, WI	I'm going to go against the grain here... The deciding factor in your case, though, should be whether or not that rate is fixed or variable. If it is fixed, I'd take a look at all the different options available to you, but if it is variable, it is unlikely that you will be able to earn more in interest less taxes due than you would just owing the lesser amount. There is someone that I know quite well that had his house paid off a couple of years ago, but took a mortgage out on it for 80% of it's value when mortgage rates were absolute rock bottom. Although it took quite some time for rates to get up there - at the time he did it savings and cd rates were dismal - he has a mortgage for just over $400,000.00 borrowed at a rate of 4.625% for a 30 year fixed loan. Even now, he is not earning much of a profit, if any. However, He's probably sitting on nearly half a million in cash, and as CD rates continue to increase, eventually it will pay off considerably. To be honest, chances are you won't be able to turn a profit at this point, but keep in mind that noone knows how quickly the market will change. It's a gamble, but depending on what you are considering investing in, and the time frame you are looking to keep it there, you it may pay off in the end. Ah, and also - if you are earning 7% on a CD and paying 6.12% on a mortgage, you aren't necessarily making any money. You need to consider tax benefits as well. You'll likely be paying income taxes, possibly capital gains tax, on any profit that you make with that money. Additionally, you'll likely be able to deduct a portion of the interest you pay on your primary residence each year. Depending on your tax bracket and situation, the actual rate at which you will begin to profit could vary substantially. I'd check with a local tax consultant and explain your situation to him... __________________ I have an aura of reliability and good judgement. Just in case you were wondering...

04-04-2006, 04:37 AM	#6 (permalink)
The_Jazz Asshole Administrator Location: Chicago	You should keep the money in the house. Real estate is the safest investment there is, although I wouldn't necessarily take the appraiser's estimate as gospel. You might find it hard to sell a house for 68% more than you paid 24 months ago. Any real estate agent paying attention is going to know that and try to push down your selling price with that information. And that's the best way to recoup your money. Paying 6.12% on money earning 5% is a good way to lose money. The equity that you have in your home is your savings at this point. Don't worry about CD's and the like at this point - there's plenty of time for that later. __________________ "They that can give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety." - B. Franklin "There ought to be limits to freedom." - George W. Bush "We have met the enemy and he is us." - Pogo

04-03-2006, 09:42 PM	#5 (permalink)
intecel Psycho	Thanks for the replies, especially the very detailed reply from NoSoup. I have been debating on this as I wait on them to ask what my final numbers are to take out. The rate will be a fixed 6.12. I bought this house back 23 months ago for 140k with 0 down at 5.5%. I racked up my credit card debt quickly to 30k by purchasing new furniture and doing improvements on the house (and a trip to Vegas that didn't help) and my payments for all my credit is around $550 a month. I found out that the value of my home was now over 200k, so I decided to go through the steps of a refi. The appraiser appraised my home at 235k. Not a bad investment for 23 months Even thought it's a higher interest rate, my payment is only going up $120 to take out the extra 30k and I won't have to pay PMI or the $500+ a month on credit minimum payments... Now I'll have a way to start saving anyways, so I may just keep that money in the house and save it the old fashioned way.

04-04-2006, 07:06 AM	#10 (permalink)
DDDDave Addict Location: Sarasota	As you can see from the varied responses, there is no 'correct' answer to your question. Almost every financial decision depends on your personal situation, and even your personality. Are you comfortable borrowing money? Some people are very debt adverse. 'Don't owe anybody anything' , 'Pay it off as soon as you can'. Others realize the power of leverage and are comfortable using it. All you can really do is analyze your entire situation and make the best decision for you. As for the numbers, in the 28% tax bracket, your true cost of borrowing is probably closer to 5% when figuring the write-off for interest and RE taxes. While your mortgage rate is fixed, short term rates are going up and will continue to rise. How far is anybody's guess. If in 5 years CD rates are 7% (very possible), you will be thinking 'I should have borrowed more at the time'. A HELOC is not really an option as it carries a variable rate and defeats the purpose of trying to leverage your borrowing. Are you able to have a savings account with 30K in it and let it sit there without spending it. That is an important question. It takes discipline. Some people always have it the back of their minds 'No matter what I ring up on my cards, I can always refi and pay it off.' As has been said 'You can't borrow your way out of debt'. What is your income situation? Two good stable jobs? You never know what might happen. All the pundits say have 6 months savings in a liquid account just in case. Health insurance? Good, not so good, or none? Maybe have a little more set aside if 'not so good'. Kids? College expenses? If so, borrow the money now while its cheap. Maybe half what you think you'll need. If you lose your job or are injured and can't work, it will be much more difficult to borrow the money you may need. .....Only you know the answers to these questions, and only you can prioritize them correctly for your personality and lifestyle. As for RE prices and such, that is a whole other story. As long as you live in your house and can afford to make the payments, who cares what prices do? It makes for great headlines, but the only ones affected are people who have to sell. It sounds like you have a good bit of equity in the house and even if prices stay flat or decline for a couple of years, so what? Good luck. __________________ I am just a simple man trying to make my way in the universe... "Go confidently in the direction of your dreams. Live the life you have imagined." - Thoreau "Nothing great was ever accomplished without enthusiasm" - Emerson

04-04-2006, 10:03 AM	#11 (permalink)
intecel Psycho	Great info guys.... My house is in about the same shape as the person 2 doors down. I'm pretty sure their value was a little higher because of their patio that they added on, and that they're on a corner lot. My home is kept up very nice. I live in a golf club community with a lake across the street and a fairway view to the side i look 3 homes down. I'm actually in the process of landscaping my yard with new plants, which should be done within the next couple weeks. I like the info about doing what I feel is right... I'm usually pretty bad with money (hence the 30k in credit debt), which is why taking out the extra money wouldn't be the greatest idea, but if I were to stick it in an investment that cannot be touched for a year or 2, that would probably work the best for me. Once the refi goes through, I will only have the house and car payment (5k left) to pay off. I have no children, no wife (but a girlfriend who supports herself), and I make over 45k a year in a very stable position. I've only got another day to decide on this.. but all your input has definitely helped... thanks!

04-04-2006, 02:25 PM	#13 (permalink)
intecel Psycho	I'd do that, but the interest on my car is at 0.9%. With the refi + 30k, my payment will go from 1100 to around 1250. My pay post tax is 3000 a month, so I usually have enough money to live.

04-04-2006, 04:55 PM	#14 (permalink)
ngdawg peekaboo Location: on the back, bitch	If you owe $5k on your car, you should check book value and see if you owe more or less than it's actually worth. If what you owe is less(ex, car is worth 15k), than it doesn't make any difference. However, if you owe 5 grand on a car worth less than 5 grand, then the payments might be better off being absorbed into a mortgage. Five thousand over 30 years adds very little, you own the car free and clear and that much more is in your pocket each month. Car payments are one of our biggest wastes of monthly income-granted, you're paying for a big ticket, longterm ownership(in most cases), but depreciation on all but the most desirable and/or expensive cars many times outruns the balances owed. __________________ Don't blame me. I didn't vote for either of'em.

04-04-2006, 04:58 PM	#15 (permalink)
intecel Psycho	Ahh, nah.. My honda is still worth around 10k. It's a 2003 civic lx. I doubt I'll be keeping it around much longer anyways.. I've been needing a pickup truck for way too long now, that I will be selling the honda to pick the truck up.

04-05-2006, 10:26 PM	#16 (permalink)
NoSoup Non-Rookie Location: Green Bay, WI	I'd caution to to investigate a second mortgage rather than increasing the interest rate on your current loan, since it is so low. You'll likely be paying a higher interest rate on the second mortgage, but if it'll save you money in the long run, I'd leave the first mortgage alone. To figure out what it will cost you, use a loan amortization calculator and make sure that you're going to be paying less interest total with the situation that you go with. In my experience, it is very, very likely that it will be better for you just to take out a second mortgage. As I stated before, the rate might be higher, but the term of the loan will likely be shorter, and keeping the majority of the debt at a lower interest rate will likely be an advantage. If you have already closed, don't fret - you have up to three business days to "recind" - basically, back out. You may have to pay some costs, depending on the bank or broker that you used, but hopefully they'll be able to utilize most of the things (like the appraisal) when they do the second mortgage... Good luck! __________________ I have an aura of reliability and good judgement. Just in case you were wondering...

04-06-2006, 07:32 AM	#17 (permalink)
intecel Psycho	I haven't closed yet... I did some rate comparisons online and I will be paying a lot more monthly for a 2nd mortgage that I would with a full house refi. For some reason they want to charge me 9+ % for a 2nd morgage of 30k. I currently have an equity line open that I've taken 20k out of. My interest rate started at 8.5 and it's up around 10% now... I've done my homework a bit on this and I definitely think the refi is the way to go for me. I've also decided to just leave the additional money in the house since I'll probably be selling in a couple years anyways. I can invest whatever I don't put into my next home at that time.

04-11-2006, 02:06 PM	#18 (permalink)
nazia Banned	its always good to pay off your own house, so never let it go