Home Loan Refinancing
I have many internal struggles when it comes to making decisions with money. As you may have seen recently with deciding if I should pay off my last personal loan, help pay off our rental mortgage, increase my investment in my 401K, or hoard cash and swim through the gold coins like Scrooge McDuck. I ran numbers this way and that just too eventually go with the choice that meant more to me emotionally and helped my family more than it really would help me. So it was not a surprise that when I read Reaching Our Balance post on Potentially Refinancing My Mortgage it brought up a topic that I have been talking myself in and out of over the last year, refinancing our home.
We purchased our home about 3 years back with a 30 year mortgage at a 3.875% interest rate. Based on our down payment and the number of things we planned to fix in the property, the decision was made to get a 203K FHA loan, which essentially is taking the loan that you would normally get for fixing up your home and putting that into your regular mortgage loan amount. If your home loan is for 100K and the renovations needed are 20K, your loan balance on your total mortgage is 120K. The 203K loan process gives you a more structured plan and walks you through many of the steps, especially the money to renovate your home and work with the contractor. I’m happy to report our first home together and our first intentional investment property that we would be landlords and property managers has been a success so far.
The type of loan we received was an FHA; we did not put down the full 20% so we were required to have PMI (Primary Mortgage Insurance) payments each month, which is a definite drawback. Our particular loan requires 5 years of PMI insurance payment regardless of the Loan to Value (LTV), otherwise we would have almost been at the 78 or 80 percent LTV that most banks require after our initial renovation, it’s the double edged sword of the FHA and 203K loan specifically.
Over the last year I have run the numbers and for whatever reason I couldn’t pull the trigger on getting rid of my PMI, here’s what has held me up:
- Hassle-Handing over W-2’s, loan docs, and every other item that is required to refinance a mortgage makes my face shrivel up like the bitter beer face guy from those old Keystone Light commercials
- 2-3 years left-It’s such a short period of time before the PMI will go away, although that’s not really a great reason to keep paying PMI at approximately 1.15% of the home value.
- Payment Increasing-Our rate of 3.875% is solid for a 30 year fixed rate and the only direction I am moving is forward with a 15 or 20 year fixed rate and I didn’t feel comfortable with our payment going up especially since I had my student loan balance and outstanding mortgage on our rental property.
Recently I ran the numbers again and really took a look at the 15 year rate and expected payment compared to my current 30 year fixed rate mortgage. The numbers started to make more sense, sure it was an increase in payment, but when you add in the PMI to my current principal and interest payment, the difference is only a couple hundred dollars.
One thing that I couldn’t forget was closing costs, which I also factored in for a break even range of between 9-12 months based on estimates I found using a couple different searches. The more and more I look at a possible refinance with my mortgage, I’m not finding the same down falls and hang ups as I did before that seemed to be holding me up.
The paperwork will always be a part of the scenario, the short time frame seems silly to me now since saving money for 2 years or 2 months either way I would be saving money. Finally the payment increasing is something the adds a small hesitation, but mathematically all this means is that more money will be going towards principal and of course that’s not so bad.
As those of you know who follow the blog knows Even Steven Money has a plan to reach financial independence in May 2020. Part of my early retirement blueprint is to pay off our mortgages and use the rental income as our primary income in early retirement. How would this change the plan?
The plan is to pay off our out of state rental property in December 2016, then shortly after, move on to the Chicago property and make large payments to pay this balance off sooner, this would decrease are overall expenses and increase our income once entirely paid off. The December 2016 date would not change or be affected by a refinance if anything it could be paid off sooner if we refinanced our rental property mortgage into our owner occupied mortgage. The only thing that would change financially from first glance is a larger payment, which would be divided up equally between me and Mrs. Even Steven. Although a rent increase or smaller allocation of an emergency fund for our house could decrease this number as well, but I would not consider this in our calculations in the higher payment.
If anything the December 2016 date could be another addition to our fork in the road(s) as we would need to calculate if keeping the mortgage and significantly increasing our investment contributions would be a wiser investment, something we have discussed recently before this recent refinance topic. Paying off our mortgage in 2030 instead of 2020 could be a discussion to have in the near future, assuming the additional money is all allocated towards other investments rather than living large, driving a new Mercedes and buying Armani suits.
Whatever mortgage you obtain, it’s important to run the numbers and consider what your plans for the future are with any home loan. Our numbers have changed over the last couple years as I’m sure yours have with the housing market, it’s a great time to run those numbers again and see what is out there, as you can see I have. Rates are expected to rise and have been for some time, I’m not an economist but I do agree that rates can’t stay this low forever.
Thank you to the kind folks over at Newcastle Permanent Building Society for sponsoring this post on home loans, which feature rich variable rate home loans from Newcastle Permanent. This post was sponsored here on Even Steven Money, but as with all of my posts found here all thoughts and writings are my own, thanks for reading.