Cash out refinance

[lauren170]

Right now we have a quote to refinance our 30 year mortgage with cash out. We refinanced a little over a year ago, so we're not resetting the clock too much.

We'd go from a 3.0% to a 2.99% fixed, keep our monthly payments the same, but get 38k cash out. We'd use this cash to pay down debt that is at higher interest rates (new roof at 6.99%, student loans at 4.625%, and some credit card debt). Paying down this debt also saves us $700 per month.

We do have a lot of equity in our house, conservatively $600k.

We could apply some of the monthly savings to mortgage principal, although we're thinking about spending the next 7 months paying off our car loan which is at a 0.9% interest rate and then building some additional savings. At that point we'd have over $1100 less of monthly expenses to then in turn apply to the mortgage.

I realize that if we didn't apply more to principal eventually, we're paying more on the roof and student loans over the course of the loan, since the roof is a 5 year and the student loans a 10 year and we'd be moving that to 30. 

Why this is attractive is that it doesn't increase our monthly payment at all. Or should we stay the course on the 5 and 10 year loans and not bother with this whole plan?

[waverly]

I think that sounds like a good plan. But wondering if it saves more money to do a 15, 20 or 25 year plan on the house instead of 30? Just throwing out an idea to look into. You could pay off the debt, save money, pay off the house faster and possible pay less than the $700 saved on the other loans, on the mortgage depending on the math.

[lauren170]

Oct 27, 2021 19:25:21 GMT -5 waverly said:

I think that sounds like a good plan. But wondering if it saves more money to do a 15, 20 or 25 year plan on the house instead of 30? Just throwing out an idea to look into. You could pay off the debt, save money, pay off the house faster and possible pay less than the $700 saved on the other loans, on the mortgage depending on the math.

It definitely saves more over the course of the loan, but increases the monthly payment. I did have them run that scenario. I think it comes down to whether we actually diligently apply the monthly savings back to the mortgage long term.

[sadlebred]

I would never take cash out of a mortgage to pay off other debt. You are better using a method like snowballing the debt or finding more income, selling stuff, etc.

[heygrey]

Honest question - are you disciplined enough to use the "saved" money for more debt pay down or savings? If you aren't, set a goal to change your habits and reevaluate in a year if the market is still favourable. I'm generally more aligned with sadlebred, pay off your high interest debt in other ways, don't add to your mortgage.

[atarianna]

How much are your closing costs for the refi? We just finalized a truly no-cost refi, where the fees were 100% covered by our lender but that is very atypical. Normally the fees and prepaid are added to the loan value or charged at closing.

[Susie]

I'd be ok with taking cash out to pay off the roof (basically like a home equity loan anyway), both because it's an improvement and because 6.99% sucks.

I don't love using equity to pay off SLs.  You'd be swapping unsecured debt for debt secured by your house, and that's a bad idea generally.  4.625% is not too bad.  My personal threshold was 5%.  We rushed to pay off all SLs at 5%+, but then put them on cruise control.  If those SLs are federal, I definitely wouldn't use equity to pay them off.  Private is a less clear case for me.

I also don't love using equity to pay off credit cards.  CCs are unsecured debt, so same as the SLs - I don't like it.  

I wouldn't pay off a car loan at 0.9%.  In fact I have one at that rate, with about 12-13 months left, and I'm letting it ride for the term.  There are better things I can do with the cash.

So... I guess I come down on really only being interested in paying off the roof with equity.  How much are you spending in fees to do this refi?  Is it worth it?

[Deleted]

Oct 28, 2021 9:11:49 GMT -5 Susie said:

I'd be ok with taking cash out to pay off the roof (basically like a home equity loan anyway), both because it's an improvement and because 6.99% sucks.

I don't love using equity to pay off SLs.  You'd be swapping unsecured debt for debt secured by your house, and that's a bad idea generally.  4.625% is not too bad.  My personal threshold was 5%.  We rushed to pay off all SLs at 5%+, but then put them on cruise control.  If those SLs are federal, I definitely wouldn't use equity to pay them off.  Private is a less clear case for me.

I also don't love using equity to pay off credit cards.  CCs are unsecured debt, so same as the SLs - I don't like it.  

I wouldn't pay off a car loan at 0.9%.  In fact I have one at that rate, with about 12-13 months left, and I'm letting it ride for the term.  There are better things I can do with the cash.

So... I guess I come down on really only being interested in paying off the roof with equity.  How much are you spending in fees to do this refi?  Is it worth it?

This is what I was thinking just articulated much better than I could. 

[tealblue]

Susie had a good point and the comment above about closing costs.


One suggestion- would a HELOC or a HEL be a better suggestion? Several years ago we opened a HELOC (basically an open line of credit) that we could use for remodeling or whatever. The rate on our was at Prime, so super low. There was no cost to do this if we took out $10k at the time and we could turn around and pay off the $10k a week or two later. Another option is a HEL which is a fixed rate at a fixed period of time. I would consider opening this (or the HELOC) for only the roof costs.

I’m also unsure I would pay off SL’s and unsure if you would be disciplined enough to keep putting $$ back into pay this all down. I would also not pay off the car any earlier. I know you are close and I’m sure that’s a $$$ amount each month but would focus on the higher % debt first.

[flygirl]

I’m not a fan of rolling debt into your homes mortgage, so I definitely wouldn’t do credit cards, cars or student loans. The roof loan is probably ok since it is related to the house but you’re essentially going to be paying a lot more than 6% by amortizing it over your new mortgage period.
The only way I would do this, since you’d be saving $700 a month is to reduce your term from 30 yrs to 20-25 (where you get a couple hundred savings vs $700)

[gt7301b]

I wouldn't want to use the mortgage to pay off debt and the student loans. Specifically addressing the credit card debt it would be good to look at how you could tackle that without the mortgage. If you don't make sure you are tackling the root cause you are likely to end up back in the same position in a few years.

[marie]

I would not refinance short term debt into a 30 year loan long term loan. This is not saving you money. What is the term on the other loans? I imagine it is a LOT less than 30 years. Swapping debt at 6.99% with a 3 year term doesn't save you money at a lower rate with a 30 year term.

[scm1011]

100% agree with Susie. I'd also evaluate how you ended up with credit card debt in the first place. I'm saying this from a non-judgemental place, but if IIRC this isn't the first time you guys have ended up in a position like this (spending beyond your means for whatever reason). I think getting a handle on your budget would be more beneficial for your financial picture than a quick fix like this.

[lauren170]

Thanks everyone - we didn’t do the refinance. The credit card debt is recent due to a pet emergency.

We are going to work on a better snowball plan. My highest monthly payment debt has the lowest interest rate. Highest interest rate has the lowest monthly payment - so trying to figure out the best method.

[niq]

IF (big if) you think you won't go right back into CC debt, doing a cash out refi and paying down CC debt seems good. But I'd pay off and the roof SLs first, since those are longer-term debts.

I would not pay down principal.

[simpsongal]

lauren170, hang in there - if rates drop and you need a broker referral let me know. We've gotten like ~$10K out of most of our refis and they were not cash outs, it just worked out that way. Plus skipping a mortgage payment, and better rates/terms makes it a win-win. Hopefully you find something w/even more favorable terms that happen to yield some extra cash?