$100k - Refinance or Invest? Need Lower Payments!

[cowpoke mcstink]

Greetings!

My Wife and I purchased our home last year for $300k @ 6.5%. Our PITI is almost $2400/month. At this point, my wife and I would both have to work full time to get by, and we decided that it would be nice to have the option of her staying at home when we have children in a year or two.

So fast forward 10 months, I am working as a contractor in Iraq. Our plan is to simply refinance our existing mortgage down to $200k this coming June. Running the numbers on the mortgage calculators shows that would save us about $760 per month. It isn't the $1000 reduction we were hoping for, but it would put quitting her job in the realm of possibilities at least.

I'm not really finance savvy and my wife is very risk averse, so I wanted to run my scenario by you folks and gather any insights you may have.

Are we being foolish dumping $100k into our mortgage to save $760 a month ($9120 a year)?

Would it be a better idea to invest the money and use the interest to supplement our income?

I'm guessing if we could average a 13% return on the $100,000 we could increase (after taxes) our income proportionately to the savings we would have realized in a refinance, and in the end we would still have $100k. Is a low-risk 13% return even realistic?

Thanks for taking the time to read my novel. I feel guilty because you all are going to look over and see "Posts: 1" next to my name. Hopefully it won't turn you off too much!

Thanks,

Cowpoke McStink

[cschin4]

What is the $100K? Is this savings? Did you put any money down when you initially bought your house?

[sweeps]

Is a low-risk 13% return even realistic?

This is the biggest flaw in your plan. No, it's not reasonable to even expect an 8% return with low risk.

Are you getting a lower interest rate by refinancing? Or are you just refinancing (and putting extra money in) to lower your monthly payment. Dumping $100K into your mortgage can be risky because you've lost that liquidity in case a problem comes up.

[m3racer]

Is a low-risk 13% return even realistic?


Cowpoke McStink

In a simple word...no.

[cschin4]

At this point, my wife and I would both have to work full time to get by,


Can I ask you a couple of questions? Please don't take offense I am just trying to get some info.
First, if you knew that you would both have to work FT to get by and that you had planned to have children down the road, why then did you purchase such an expensive house? I often wonder why people do this and then find themselves in a difficult financial position.
However, if you have $100K banked then you are not in a bad financial position. Is your mortgage 30 yr fixed?

[Ima saver]

Right now the market is down, you can barely get 4% on a c.d., so 13% return is pretty far fetched.

[jIM_Ohio]

Greetings!

My Wife and I purchased our home last year for $300k @ 6.5%. Our PITI is almost $2400/month. At this point, my wife and I would both have to work full time to get by, and we decided that it would be nice to have the option of her staying at home when we have children in a year or two.

So fast forward 10 months, I am working as a contractor in Iraq. Our plan is to simply refinance our existing mortgage down to $200k this coming June. Running the numbers on the mortgage calculators shows that would save us about $760 per month. It isn't the $1000 reduction we were hoping for, but it would put quitting her job in the realm of possibilities at least.

I'm not really finance savvy and my wife is very risk averse, so I wanted to run my scenario by you folks and gather any insights you may have.

Are we being foolish dumping $100k into our mortgage to save $760 a month ($9120 a year)?

Would it be a better idea to invest the money and use the interest to supplement our income?

I'm guessing if we could average a 13% return on the $100,000 we could increase (after taxes) our income proportionately to the savings we would have realized in a refinance, and in the end we would still have $100k. Is a low-risk 13% return even realistic?

Thanks for taking the time to read my novel. I feel guilty because you all are going to look over and see "Posts: 1" next to my name. Hopefully it won't turn you off too much!

Thanks,

Cowpoke McStink

Some basic questions
1) how much is house worth?
2) when did you buy house?
3) how many years have you been paying down the 300k (is this the current balance or what you owed when you took out the mortgage).
4) have you looked at refinancing to a lower rate? 6.5% is expensive. I was looking today and found rates of 5.375% for 30 year fixed.

Here is what I would do:

1) do a basic budget analysis. Look for ways to save money and improve cash flow outside of mortgage. Others on this board are really good at this if you post your monthly income and monthly expenses.

2) Get this 100k invested in a money market fund. You are in Iraq- is this money going to get taxed? The money market fund should pay you between 4 -4.5% per year ($4500).

3) Verify you have a long term retirement plan. Smartmoney magazine has an article in this month's issue about investing a windfall. Do some reading.

4) Create a financial plan. Include short term, mid term and long term goals. If I read post right, you do not have kids yet (but are planning to). I would not be looking to reduce mortgage payment (by paying it down) until one spouse needed to stop working for certain.

5) how much mortgage interest did you pay last year, and do you itemize your income taxes? Did you take the mortgage interest as a deduction?

6) what is your tax bracket (10, 15, 25% or other)? This combined with answer to 5 might be lowering your interest rate.

7) what is your credit score? wife's credit score?

Please make sure to address the above 7 issues for better advice and help create a plan which should then solve your specific question (your question is not as simple as it appears). Some comments (which will come up), but are not actually solutions:

1) It is generally better to invest money and not pay off a mortgage, unless the mortgage interest rate is above 7-8%. Most conservative investors can get an 8% return after taxes. Especially if mortgage interest is being deducted from income taxes.

2) Refinancing alone might solve your problem.

3) if you do pay down loan, consider refinancing, and using some of 100k to pay points which will lower the interest rate.

4) you could create a graph where the 100k grows and the current 300k mortgage shrinks using an ammortization schedule and simple spreadsheet. More than likely you can grow the 100k to 200k in about 9 years, and then the 300k mortgage might shrink to 200k in about 9-15 years. At this point it might make sense to pay off and drastically improve cash flow. If you just paid the 100k to principal now, I think you might be mis using a use asset not available to most people.

5) If I had to invest for an 8% return over a 15 year period, an 80-20 mix of stocks and bonds would probably be picked. 40% large cap, 20% small/mid cap and 20% foreign stocks in established markets (Europe and Asia). 20% into US domestic intermediate term bonds. As time where I wanted the money approached, I would sell the equities and purchase more bonds.

[maat55]

I would sell the house, buy one you can afford on a 20 year note or less with putting 20% down out of the 100k, then set aside about 10k for an EF. The rest I would invest in roths and other MF investments.

This will give you peace of mind for raising a family and be the best use and investment of your money.

[Scanner]

To me, it sounds like this house was 100% financed and in that case, there is probably PMI on the mortgage.

I would put down enough to at least have 20% down on your house - invest the difference. This gets the PMI off the mortgage.

So. . .in this case. . .you have a 300K house. . .put down 60K. . .invest 40K.

BTW, I disagree with getting a new house. . .that means about $15,000 in real estate commissions to turnover to another house. Stick with what you got and make it a home.

[maat55]

Who say's you have to pay commissions. I've never paid a penny in commissions.

[Snave]

I would sell the house, buy one you can afford on a 20 year note or less with putting 20% down out of the 100k, then set aside about 10k for an EF. The rest I would invest in roths and other MF investments.

This will give you peace of mind for raising a family and be the best use and investment of your money.

This is actually a question for maat55. Is there anytime you would get a 30 year mortgage? I have seen you on multiple occassions go with a shorter term route. I was just wondering b/c we have one (a 30 year) and I was wondering what possible scenario you would do a 30. Just curious. Thanks.

[Scanner]

In this real estate economy, the average person is going to need a real estate agent to sell their house.

[maat55]

If the payments on the last 10 years were 1 dollar. Just kiddin. 20 years is a compromise from 15, 30 you spend the first ten years paying rent. It's just a bad investment.

[cowpoke mcstink]

Responses

You all were kind enough to respond, so I will do my best to return the favor...

Starting from the top:

What is the $100K? Is this savings? Did you put any money down when you initially bought your house?

The $100k is earned income expected from my current job. As of the last pay check I have about $50k earning 5% in my FNBO bank account right now. I purchased the house with a VA loan, no money down April, 2007

Are you getting a lower interest rate by refinancing?

I would expect to lower my interest rate. Hopefully to 5.5%

If you knew that you would both have to work FT to get by and that you had planned to have children down the road, why then did you purchase such an expensive house?

When we bought the house we did so knowing I would go to Iraq to make it more manageable. I live in California and things are expensive.

1) how much is house worth?

With the market down-turn I would expect that the house is now worth less than I paid one year ago. Probably by 10 or 15k.

3) how many years have you been paying down the 300k (is this the current balance or what you owed when you took out the mortgage).

Just one year. I don't have the statements in front of me, but I think our balance is still 297k or so.

4) have you looked at refinancing to a lower rate? 6.5% is expensive. I was looking today and found rates of 5.375% for 30 year fixed.

According to my calculations, simply refinancing the existing balance from the current 6.5% to 5.5% would save me $193 a month. We have yet to see what we would qualify for this time around.

5) how much mortgage interest did you pay last year, and do you itemize your income taxes? Did you take the mortgage interest as a deduction?

We paid approx. $14,500 in interest in 2007. We do itemize and take the interest as a deduction.

6) what is your tax bracket (10, 15, 25% or other)?

I couldn't tell you off the top of my head, but I my wife and I's combined income last year after taking the foreign earned income exclusion was around $105k.

7) what is your credit score? wife's credit score?

A year ago, before we bought the house my FICO was 810 and my wifes was 790.

1) It is generally better to invest money and not pay off a mortgage, unless the mortgage interest rate is above 7-8%. Most conservative investors can get an 8% return after taxes. Especially if mortgage interest is being deducted from income taxes.

I understand this concept and agree with it totally. My problem is, I'm looking at the monthly cash flow, not the total cost over the lifetime of the loan. I know that's not the smart thing, but that's the reality of the situation. I'm trying to find out if there is a way I could pull $700 to $800 cash from an investment monthly, and still end up better off than just dumping the whole thing into the mortgage now.

I would put down enough to at least have 20% down on your house - invest the difference. This gets the PMI off the mortgage.

I'm not paying PMI now because it is a VA loan. To get a better interest rate, I would have to dump the VA, so I will still want to put at least the minimum % down to avoid the PMI.

Well, I think that's about it.. No, I will not sell the house to buy one I can afford.

Thanks,

Cowpoke McStink

[cschin4]

I you are planning to stay where you are and can dump $100K on the mortgage and refinace. Then, I say go ahead and do that.