Question by Magaroni: Help me understand mortgage refinancing?
We have about $ 30k in equity on our home, and currently have a 30 yr fixed at 6.9%. I’m not sure if refinancing will help or hurt us. My student loans are at 7.22, but I only owe another $ 3500, and my auto is 1.9% and I owe about $ 6500. I thought about paying those off with the cash from the refi – is that a bad idea since the auto loan is at a lower rate? I thought since the mortgage interest is a tax right off and the auto loan isnt…?
If we aren’t sure how long we’ll be in this house, is refi a bad idea?
I’m pretty confused about this – any help would be greatly appreciated.
Answer by P J
Awful idea to risk your home over other debts.
When was the last time you got an appraisal because you MAY find you have NO equity in your home.
What do you think? Answer below!
wrong thought process. use the 30k in equity to buy a second piece of property, which you can use to generate income, so it pays for itself. arrange the purchase in such a way that you get $ 10k back from the seller at close and pay off the two loans.
you have to be insane to seek financial planning advice in a place like this. there are professionals available for this sort of thing and I highly recommend that you invest the time to decide who will do right by you and the money to get answers to your questions.
It is extremely unlikely that you could get any help in these answers that you could rely on.
But you obviously understand math. Why would you even think of taking out a high interest loan to pay off a low interest loan? That’s backwards.
You will not need to refi the 1.9% auto loan.
Money coming back to you from the mortgage interest isnt that extravagant. Especially if you plan to payoff that 1.9% auto loan. Student loans are also tax deductible.
You might want to look at other investments that benefit you like retirement accounts. IRA’s, 401ks, annuities, etc
If you can get a decent rate on a NO COST home equity loan, that might be ok.
Rolling in the car will COST you $ $ as the interst rate will go up BUT your cash flow will improve as the balance is amortized over 30 years not 3-5.
Since your are NOT planning on being there for a long time, rolling int he car is ok. Otherwise NO.
With only $ 30k of equity in the house, you are talking about taking out about 10k. That is a pretty high cash out LTV and will probably carry PMI. To get a rate better than 6.9, you would likely have to pay about $ 3k in costs. So pay $ 3 to get $ 10. Nah. A 30/15 second for no costs might be an ok move depending on how much cash flow improves and if that is a priority. EM me if you like to run the numbers. Patrick.Horgan@lendia.com
If you can trim off at least 1% off the mortgage and are planning to live there long enough to pay off new closing costs, then it would make since to refi.
Since you don’t know how long you’ll be in the house it’s going to be a bad deal for you all around.
Ask yourself if you would finance a car for 30 years? That’s what you’re doing when you payoff the car with money from you mortgage. Also I’ll bet you’ve already paid the interest on the car lone and financed that with the car loan too. That is you paid the interest up front.
I could see adding the student loan to the mortgage, but with the closing cost involved and the fact you don’t know how long you’re going to stay in the house, it’s not a good idea.
Generally I have found student loan to have very small principal payments, see if you could just add a small amount and pay off the principal a little faster.
Hoped it helped
There are several questions here. The first one is “should I refinance?” the answer is yes if you can save money over the life of the loan. You have to make an assumption about how long you’ll be in the house. Let’s say five years. Then the question is “can I save money over five years with a lower interest rate given closing costs of x?” So you create a spreadsheet with the old monthly payment, the new monthly payment, and the closing costs, and you decide whether to refinance. A simple calculation is like “I can save $ 300 a month, for 60 months, that’s $ 18,000, and the closing costs are only $ 3000, so I’ll be better off by $ 15,000. This doesn’t include tax effects: you can instantly write off points paid, but you will slightly decrease your annual mortgage interest deduction. But the cash benefits outweigh the tax benefits.
So it all comes down to what are the closing costs and how much cheaper per month will it be?
The second question here is what to do with the proceeds of a re-finance. If you borrow money at 6 percent, don’t use it to pay off a loan at 1.9 percent. Use it to pay off loans with higher interest rates.
If your mortgage loan is at 6 percent, the after tax rate is probably around 4 percent, depending on tax rate, income, etc.
How much can you earn by parking your money in a CD? 5 percent. Well then pay off all loans with after tax rates over 5 percent, and invest the rest in CDs. Keep all loans that charge less than five percent.
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With refinancing you have to look at several areas. Its not just the lower rate, you have to measure what closing costs will be to see if there is any real value. The idea on consolidation of debt is really only a benefit if you have a reason to lower your monthly payments to keep your debts current. When consolidating your payments will normally drop so it looks like a good idea, but you are stretching the debt out considerably longer so you will end up paying more in the end. If you want to use the equity in the home, get around closing costs of 2,000-3,000 (on average), Then look at a home equity line of credit. Again, using this for consolidation purposes is not a good idea unless you are trying to lower your monthly payments. There are also restrictions on the interest writeoff for tax purposes. My opinion is that with your current 1st mtg rate, and the debts you are talking about….if the payments are comfortable for you….stick with what you have.
Mortgage refinance has become a thriving business over the years. There are various reasons why you should refinance: reduce the interest burden by opting for a mortgage with lower interest rate, eliminate the risk of an adjustable-rate mortgage by taking fixed-rate loan, cash-out refinance where you turn the equity into money or increasing the period and lowering monthly payments.