OT: Mortgage Question

[jmc11201]

I know we have one of these every few weeks, but I'll throw my situation out there.

I bought my house 4 years ago using a 10/1 ARM at a rate of 2.625% that remains fixed through 2022. My goal/hope is to have the house paid off at the end of the adjustable rate period and my mortgage balance is now about 55% of the original, while the loan to value of the house is a bit north of 30%. If I stay on the current pace of repayment, paying off the mortgage in 2022 is very likely. For all those who are thinking 'why pay off a mortgage at such a low rate', I know I shouldn't (economically speaking), but my goal is really to have no mortgage and improve my cash flow as much as possible.

We are very likely to need the roof replaced within 2-3 years. What I am debating are the following options:

1. Whether to refinance the mortgage at a higher balance than my current balance with another 10YR ARM at maybe 3.5% or so, take cash out to do the roof, lower my mortgage payments (new mortgage, despite being at a higher rate would probably be 70% of the original mortgage balance), and improve my tax deductions. The downside being higher interest rate and extending the repayment by maybe a year or two (I'm not that close to retirement where another year or two matters). Essentially pay for the roof with a new mortgage.

2. Home equity loan. Borrow for the roof at a higher rate, keep the existing mortgage at the low rate and the earlier repayment date. Nearer-term cash flow hit.

3. Wait a year or two and put money aside for the roof and pay for it when needed. Maintain existing mortgage as-is.

Neither option will materially change my financial outlook and all are doable...just trying to figure out which direction to go. I'm slightly inclined, if I can get decent rates, to go with Option 1, but figured I'd see what Scarlet Nation thinks.

 

[patk89]

I know we have one of these every few weeks, but I'll throw my situation out there.

I bought my house 4 years ago using a 10/1 ARM at a rate of 2.625% that remains fixed through 2022. My goal/hope is to have the house paid off at the end of the adjustable rate period and my mortgage balance is now about 55% of the original, while the loan to value of the house is a bit north of 30%. If I stay on the current pace of repayment, paying off the mortgage in 2022 is very likely. For all those who are thinking 'why pay off a mortgage at such a low rate', I know I shouldn't (economically speaking), but my goal is really to have no mortgage and improve my cash flow as much as possible.

We are very likely to need the roof replaced within 2-3 years. What I am debating are the following options:

1. Whether to refinance the mortgage at a higher balance than my current balance with another 10YR ARM at maybe 3.5% or so, take cash out to do the roof, lower my mortgage payments (new mortgage, despite being at a higher rate would probably be 70% of the original mortgage balance), and improve my tax deductions. The downside being higher interest rate and extending the repayment by maybe a year or two (I'm not that close to retirement where another year or two matters). Essentially pay for the roof with a new mortgage.

2. Home equity loan. Borrow for the roof at a higher rate, keep the existing mortgage at the low rate and the earlier repayment date. Nearer-term cash flow hit.

3. Wait a year or two and put money aside for the roof and pay for it when needed. Maintain existing mortgage as-is.

Neither option will materially change my financial outlook and all are doable...just trying to figure out which direction to go. I'm slightly inclined, if I can get decent rates, to go with Option 1, but figured I'd see what Scarlet Nation thinks.

First off, great job buying a house that you could easily afford based on the amount you put down and the speed with which you are paying the mortgage off. Also, great rate on that 10/1.

I see rates for a 10/1 ARM being well below 3.5% right now (credit union) so don't think you will see much of an increase should you refinance. There are obviously fees that you will pay to refinance that are not insignificant.

Other considerations. Are you piling all of your free cash flow into repaying mortgage when you should be building a cash reserve for things like the roof? Or god forbid, a job loss or health issue? Can you invest the funds that you are prepaying the loan at a higher return? Your mortgage cost post-tax is extremely low. I am very conservative financially and realize the objective of being debt free by a certain age is attractive but these low rates make we struggle with that goal.

 

[WhiteBus]

Having spent 30 years in the mortgage industry I could provide some helpful info but it's best to talk with someone currently in the industry. Now, if you have a craft/import beer question I'm your man!

Talk with this guy. He supports this board. And from what I hear, he is great at what he does.

 

[jmc11201]

First off, great job buying a house that you could easily afford based on the amount you put down and the speed with which you are paying the mortgage off. Also, great rate on that 10/1.

I see rates for a 10/1 ARM being well below 3.5% right now (credit union) so don't think you will see much of an increase should you refinance. There are obviously fees that you will pay to refinance that are not insignificant.

Other considerations. Are you piling all of your free cash flow into repaying mortgage when you should be building a cash reserve for things like the roof? Or god forbid, a job loss or health issue? Can you invest the funds that you are prepaying the loan at a higher return? Your mortgage cost post-tax is extremely low. I am very conservative financially and realize the objective of being debt free by a certain age is attractive but these low rates make we struggle with that goal.

Got the mortgage as part of a job relocation...so my company paid down the rate a bit...but the timing was still pretty advantageous.

Are you piling all of your free cash flow into repaying mortgage when you should be building a cash reserve for things like the roof?
No. I tend to move most of my excess cash into a brokerage account...so we have access to it. The mortgage pay down utilizes a decent amount of free cash flow, but with my wife and I both working, we are able to do both. If it was an emergency, we could get the cash together without much problem, but I'd prefer to leave it alone.

Can you invest the funds that you are prepaying the loan at a higher return? Your mortgage cost post-tax is extremely low.
Maybe...my view has always been that paying down the mortgage is a guaranteed return. My stock picking tends to be awful (I'm a behavioral finance experts dream)....so putting the money into stocks could be a much better, or worse, use of cash. I prefer to make sure some cash is generating a guaranteed return by paying off the mortgage. I know I could buy treasuries or munis and earn a spread...but a spread of 1% on $50 or $100k isn't going to change my life...so I prefer simplicity.

I am very conservative financially and realize the objective of being debt free by a certain age is attractive but these low rates make we struggle with that goal.
Exactly.

 

[gmay8]

What is your estimate cost to replace the roof? The only reason I ask if the house I'm buying will probably need a new roof within 5 years, and I'm curious as to the going price for a new roof...
The easiest thing to do in my opinion would be just pay for the roof out of pocket with some excess cash (assuming the roof is $10-15k) or go for a home equity loan, at very low rates, and borrow and pay the roof that way, and pay it back over time.

 

[jmc11201]

What is your estimate cost to replace the roof? The only reason I ask if the house I'm buying will probably need a new roof within 5 years, and I'm curious as to the going price for a new roof...
The easiest thing to do in my opinion would be just pay for the roof out of pocket with some excess cash (assuming the roof is $10-15k) or go for a home equity loan, at very low rates, and borrow and pay the roof that way, and pay it back over time.

It's a cedar shake roof...haven't gotten the estimate back yet, but cedar is, unfortunately, more expensive. I would think an asphalt roof is probably in the ballpark you estimate...obviously depending on house size, materials, it could be less or more.

The other option I'm considering is simply refinancing to my current mortgage balance, reduce my mortgage payment by $500-$600 per month, and use that and get the new roof next year.

 

[KingKore]

I used Greg Ginn a few years back. I live in Chicago suburbs. Greg and his group was great did a refi and saved close to 750 a month. Highly recommend Ginn.

 

[RBS05]

I would start diverting some of your excess CF into an account dedicated for the roof expense, instead of continuing your current pace of paydown on the mortgage. Even if you only put aside half of what you currently are, it will start adding up, you'll still be ahead of schedule on your repayment, and you can still get a home equity loan down the road to make up the difference. I don't think rates would be very different by then where you need to lock it in now, but even so, you'll have so much equity built up that you could consider a refinance over a HE if you're more inclined.

I'm not sure I follow the benefit to refinancing now. Would you do the roof immediately instead of waiting until it actually needs replacing? Otherwise what would you do with that cash you're taking out?

 

[jmc11201]

I would start diverting some of your excess CF into an account dedicated for the roof expense, instead of continuing your current pace of paydown on the mortgage. Even if you only put aside half of what you currently are, it will start adding up, you'll still be ahead of schedule on your repayment, and you can still get a home equity loan down the road to make up the difference. I don't think rates would be very different by then where you need to lock it in now, but even so, you'll have so much equity built up that you could consider a refinance over a HE if you're more inclined.

I'm not sure I follow the benefit to refinancing now. Would you do the roof immediately instead of waiting until it actually needs replacing? Otherwise what would you do with that cash you're taking out?

Thanks for the suggestion.

Good question...might just do the roof now instead of waiting until next year (assuming the price doesn't totally horrify me), which is why I would consider a refinance now.

 

[patk89]

My house has a terra cotta roof. When I investigated prior to our purchase, I learned that they are designed to last 100 years. Problem is our house was built in 1926 so 100 years is 2026 which is only 10 years away. Given a reasonable variance to the mean of 100 years, I worry that I could be hit with a big expense. Roof is holding up fine right now but I will have it looked at and hopefully maintained every few years.

 

[Crazed_RU]

Unless there is rate advantage I'm not sure why you would refinance the primary. I personally would use a combo of cash on hand and the HELOC. Based on how you have described yourself you'll end up minimizing your interest expense by payin down the HELOC fast.

 

[NewJerseyHawk]

the 10-1 ARM rate you have is very attractive, so as much as you would save on cash flow, if you do refinance and incur the standard closing costs that are a part of every mortgage (appraisal, title, etc.), I would take a close look at the entire house and figure out whether there are any other upgrades you can add to the equation, while not cutting down on the savings you would have.

As an example, perhaps all of your bathrooms are fine, recently upgraded and look great, but perhaps they can use an overhaul.....I don't know the layout of the yard, perhaps you can use an upgraded deck that can improve the use of the home.

I would not refinance strictly for the roof, it's not a large enough of an expense to justify the cost.....If you can get by with a Home Equity then you can perhaps take a larger home equity loan for something other than just the roof.....perhaps 40K to 50K and use whatever is necessary for the roof. This way you only pay on the amount of money used and have the other available for emergency or other projects/upgrades.

I can set up the refinance or a Home Equity Loan (either a variable rate tied to Prime rate or Prime minus 1/4 % as an example) and a last resort is a fixed rate home equity loan.....a fixed rate home equity likely carries a higher rate than you can capture on a refinance, but it also comes with practically no closing costs.

I would only refinance the first mortgage, if you truly want to fix the payment and don't want the future risk of interest rates eventually rising, if and when the economy starts to really click again. If you can find other projects or upgrades that would make sense, then we should talk and see what we can do to perhaps give you another 10-1 ARM...it won't be as attractive as the rate you have now, but close enough that it would probably make sense.

gginn@myinvestorsbank.com.....or text or call me anytime.....I am likely headed over to the RAC for "lunch" or to see the press conference for the new Hoops coach Pikiell, but would be glad to chat anytime....and thanks for those referrals that are behind the scenes here on ScarletNation and beyond as well. This is a great fanbase and have made friends I would have never gotten if not for mortgages and helping others here and beyond.

 

[jmc11201]

Having spent 30 years in the mortgage industry I could provide some helpful info but it's best to talk with someone currently in the industry. Now, if you have a craft/import beer question I'm your man!

Talk with this guy. He supports this board. And from what I hear, he is great at what he does.

Just exchanged a few emails with him.

The rumors are true...great guy and very helpful!

 

[Metropolitans3]

I'm with the OP being very conservative and paying off the mortgage early. I know many financial professionals would advise against it because the money can make more elsewhere, but it can also lose. I'd rather take guaranteed returns at a lower rate vs putting money into the market while I have a large debt. I dont think I should be risking my savings that way.

I'd take option 3. Plan ahead. Don't let it go until you have actual damage and additional expenses to fix it, but start saving for it now. Why lose money on paying interest when you can avoid it?

 

[KingHigh]

Having spent 30 years in the mortgage industry I could provide some helpful info but it's best to talk with someone currently in the industry. Now, if you have a craft/import beer question I'm your man!

Talk with this guy. He supports this board. And from what I hear, he is great at what he does.

This is accurate. I've worked with him. Very efficient job.

 

[BigLou]

Personally I would go with #2 or #3. I too think paying down mortgage debt is a good thing since most people would not save the money if they stretched out their mortgage by paying less monthly.
Also, increasing mortgage debt to get a higher mortgage interest tax deduction is not a great move. You are always better off with less of an expense even of your tax bill goes up since the after tax cost of mortgage interest is still about 72 cents on the dollar.

 

[jmc11201]

Personally I would go with #2 or #3. I too think paying down mortgage debt is a good thing since most people would not save the money if they stretched out their mortgage by paying less monthly.
Also, increasing mortgage debt to get a higher mortgage interest tax deduction is not a great move. You are always better off with less of an expense even of your tax bill goes up since the after tax cost of mortgage interest is still about 72 cents on the dollar.

Looks like Option 2 or 3 makes the most sense. I can't justify the fees for a new mortgage, and the rate for a cash-out refinance is higher than a regular refinance...so just not worth it.

A home equity loan might work if the rate is attractive enough, otherwise I'll just wait it out a year.