Lazy Man and Money

Should I Refinance?

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Quick Housekeeping Note

If you’ve enjoyed reading Lazy Man and Money this year, or any of the previous 14 years, please nominate me for a Plutus Award. I’ve never won, but I was nominated for a Lifetime Achievement Award several years ago.

I’m not sure what category is the best fit, because I certainly do family, financial literacy for children, real estate, investing, underserved communities (mostly through my MLM content), side hustle, and traditional retirement. I just don’t specialize on any one particular area.

If you want some kind of reason why you should nominate me here’s a brief 14 year history of this blog. I may have been one of the first FIRE blogs… and probably the longest-running one. What’s missing from that article is all the years that I fought the MLM/pyramid scheme industry. I like to think that my 12 million page views have maybe impacted a billion dollars in people’s financial lives. (I don’t know if it’s true, but it sounds like it could be, right?)

I’ve kind of wondered what it would be like to walk across the stage to receive a Plutus Award. I kind of feel like this could be my year… simply because there will be no stage to walk across.

Now let’s get back to the original question

Should I Refinance?

Should we refinance?There are a lot of questions that people have asked during COVID-19. One of the ones that may have been overlooked, for obvious reasons, is that there are historically low-interest rates for mortgages. That leads to the question, “Should we (or you) refinance?”

Before I get into our situation, mortgage rates are around 2.74% for a 15-year fixed (our preferred option) or 3.17% for a 30-year fixed according to Bankrate. I’d like to think that most people would be better off refinancing, but a variety of circumstances may make it not work for you. For example:

  • You might not have the best credit to get these best rates.
  • From what I’ve read, banks aren’t very eager to refinance during these uncertain times
  • You might already have a great rate. After all, mortgage rates have been low for a while.

If you have a rate that’s .50% or .75% above those rates that I mentioned above, it might be smart to do an internet search for a mortgage calculator. That will give you an idea if it’s even worth moving forward. If so, it may be time to call some banks. I prefer local banks for mortgages because they know they stand a good chance of getting your other business.

Side note: I completely understand if you are busy managing work and kids during this time. If someone had even suggested that I do anything more a couple of months ago, I would have bit off their head. Things have settleed down with school being out. Hopefully, like me, you have a little more time to move forward with projects and financial things like these.

Our Refinance Situation

We refinanced our home in 2012. It was a particularly great time to refinance. We hit the interest low getting a 2.75% rate on a 15-year mortgage.

You might be thinking… “Umm… that’s today’s rate.”

Yep. On the surface, it wouldn’t make a lot of sense to refinance to the same rate. However, we’ve been living close to paycheck-to-paycheck for a while with 3 investment properties (that don’t make money until their mortgages are paid off), kids’ private school, saving for retirement, and our general costs of living.

This creates a lot of stress. It’s not end-of-the-world stress, but I feel like I worry about money more than I should.

Refinancing would allow us to lengthen the payments over a longer term. On one hand, we’re more than halfway through our 15-year mortgage and only have 7 more years left. On the other hand, refinancing it over another 15-years would lower our payments of $1,061 according to one mortgage interest calculator.

While it’s tempting to have an extra thousand dollars a month, it would mean that we wouldn’t be mortgage-free until 2035. By that time, we’ll all be vacationing on the moon, right? (I’m joking.)

The calculator also said that we’d pay $13,161 more in interest. Yikes, that’s an expensive decision.

In this case, it’s just what the guidelines say… it doesn’t make sense for us to refinance. I was fairly sure that was going to be the case, but it can’t hurt to kick the tires every now and again when the opportunity arises. This is certainly one of those opportunities for many people with mortgages.

Is it Time to Refinance your Mortgage?

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We are in the process of refinancing our mortgage – again.  We bought our first home in 2005.  Due mostly to the expense and uncertainly of kids, we took out a thirty year mortgage.  In 2014, we moved to a different, larger house with a different, larger mortgage.  My mom’s estate was recently settled, and we decided to pay down the principal refi the 30 year mortgage (which has 27 years remaining) into a fifteen year mortgage at roughly the same cost (about $15/month more).

[Editor’s Note: I wanted to emphasize that again… he reduced 27 years of paying a mortgage to 15 years!]

While the optimal choice for us would have been to start with a 15 year mortgage, this really wasn’t feasible at the time.  We wanted to be able to fund retirement plans, 529 plans for the kids, pay for day care (a big cost, especially before the kids reached school age), have a sufficient emergency fund, and have the flexibility to deal with other costs that popped up along the way.

Mortgage Refinance Calculator

One thing we did do over the years is refinance.  In the nine years that we owned the first home, we refinanced it twice.  In each case, the break-even point was between eighteen and twenty-two months.  After each refi, we continued to pay the amount of the original mortgage, but with additional money going to principal (shortening the length of the loan).  A key part of understanding the break-even is understanding what portion of closing costs are actual incremental costs and which are not.

Pre-paying the escrow is money that you pay to ensure that there is a enough money in your escrow account to pay for homeowner’s insurance and property taxes.  Why is this not an additional cost?  Because you’re spending money up front to fund the escrow on the new mortgage, but you’ll be getting a check for the amount that is in the escrow account for your old mortgage (this may take a month or two, depending on your state and your lender).  Regardless of whether you kept the old mortgage or refinanced, you would have had to had sufficient funds in the escrow account to cover the taxes and insurance when they are due.  Once the escrow on the old mortgage is refunded, it’s a wash.

You’ll also have some pre-paid interest.  This accounts for the interest in the partial month between your closing date and the first of the month.  If you close on the 30th, this cost will be minimal.  If you close on the second, it would be almost an entire month’s worth of interest.  But this is interest you would have paid regardless if you refinanced or not.  It’s important to note, though, that if you close on the 2nd, you’re skipping an entire month’s worth of principal payments, pushing your payoff date nearly a month past what it would be if you had closed on the 30th.

What remains are the actual incremental costs to refinance.  In my specific case, these come to around $1500.  To illustrate the break-even calculation, let’s assuming you are saving 3/4 of a percent and have a mortgage balance of $150,000.

  • The monthly interest savings would be (180,00/12)*0.0075 = $112.50
  • Here’s the tricky part.  While mortgage interest is tax deductible, the closing costs generally aren’t.  Let’s assume your combined federal and state income tax rate is 25% (note: you’ll want to use your marginal rates, rather than your effective rates, since you’re calculating an incremental effect).  This means the actual cash savings from the reduced interest is ($112.50 * 0.75) = $84.375.
  • $1500 / 84.375 = 17.77 months

While this is a reasonably accurate quick calculation, it will be slightly off, because you’re saving slightly less in interest every month.  You’ll save $112.50 ($84.375 after adjusting for impact of taxes), in month one, but you’ll save a dollar or two less in each additional months.  So to be safe, just round-up and add another month to the break-even length, bringing the break-even to 19 months.

Some other notes about mortgages and refinancing:

  • Some people have a rule to not refi within X years of taking out the mortgage or doing a previous refi.  This is not a good determiner of whether the time is right to do a refi.  If you close on a mortgage today and rates drop a full point tomorrow, you absolutely should refi.  You can’t change the fact that you had bad luck in the past – but you can change your future rate.  The key thing to look at is how many months it will take to break even on the refi costs.
  • When buying a house, some people will approach the lender and ask what amount they can be pre-approved for.  My advice is instead to settle on a price point and get pre-approved for that amount, plus a small cushion.  If you ask the lender to set the amount, odds are good that it will be higher than the price point you would have chosen, and you may end up purchasing a more expensive house than you really need.
  • A lender will often allow – or even encourage – you to roll the closing costs into the mortgage amount.  If you have the ability to pay these amounts up front, it can save you quite a bit of money in interest.  We’ve never rolled the closing costs into a mortgage or refi.
  • Shop around.  You may be able to find slight differences in rates between lenders.
  • Watch for coupons.  We routinely get coupons in the mail for $100 off closing costs.  When we knew the a refi would be imminent, I made sure to save one of the coupons.  In comparison to the mortgage, $100 is a very small amount – but it’s still $100.

One More Refinance

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I have a friend who I think refinances his home every two weeks. I exaggerate, but just a little. I didn’t know how he does it without paying a ton of bank fees and appraisals and stuff like that. I know he avoids a lot of the fees by using a mutual lawyer friend for the closing.

I’ve been watching mortgage interest rates like a hawk lately. They were starting to tick upwards last month and rumors of interest rates going modestly higher were in high gear. I had started to think that I missed out on getting the best possible rate. However, I noticed that rates went back down an 1/8th of a point a couple of days ago. My forecasting tool at Bankrate didn’t seem to indicate things were going to continue any lower, so I locked in a refinance with the bank.

I’m slowly starting to catch up to my friend in the refinance game. Having completed a double HARP refinance less than six months ago, this refinance of our third property will complete our dealings with the mortgage underwriters for some time – I hope.

What did I gain by this refinance? We bought this property only a couple of years, when the rates were still quite cheap. In fact, that was one of the motivating factors behind the purchase. So unlike the HARP refinances where I was bringing a 6% interest rate to 3.5%, this is smaller deal. We’ll go from a 15-year fixed at 3.75% to a 15-year at 2.75%. (Somewhere my mother is reading that 2.75% interest rate and thinking back to the 80’s when rates could be 12%.)

What does that mean in terms of dollars and cents? We’ll go from a monthly principal and interest payment of $2327.12 to $1995.15. Simple math says that we’ll paying around $332/mo. less than before. That’s not bad for a few hours of work, right? Well, it’s not quite as good as it appears at first glance. Right now, we are a couple of years into the 15-year fixed mortgage that we have now… we have around 13 years of payments left. With the refinance we’ll take that balance and spread it back over the 15 years again. That’s a good chunk of the $332/mo. savings. However, the lower rate itself is responsible for a $130/mo. savings.

So in the end, we’ll get a little more financial flexibility in paying less each month, and we’ll save what amounts to a typical cable, phone, and internet bill these days.

What You Can Learn from the 4 Events in 2012 That Changed my Financial Life

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I’m rarely one to follow the pack. So when everyone publishes a review of 2012 in the first week or January, I say, “Let’s make em wait until February.” Also, rather than just give an update of what I did financially in 2012, I’m going to dig a little deeper and get a little Fat Alberty on you delivering a lesson or two.

1. Having a Baby

One of the biggest events of a person’s life is when they give life another. This past year I got to experience that. And while it is fun to joke that Little Man is a nice little tax deduction, he’s a whole lot more than that. Having looked at the the cost to raise a child in the United States it looks like this USDA calculator estimates our costs to raise Little Man will be $28,500 a year.

We are only a little more than four months into Little Man’s life. I feel safe in saying that we are going to come in far under that… at least for the first year. Here’s a breakdown:

  • Housing – The USDA estimate is that it will cost us another $10,600 in housing. I don’t think our housing costs have gone up that much, but it’s hard to say since that’s related to the #2 event (our move).
  • Food – The USDA estimate is $2,450. I think we are under that, but it is hard to calculate because right now he’s on breastmilk. That indirectly leads to his mom eating more food.
  • Transportation – There’s an estimated $3,125 in transportation costs. We bought a new car due to our move to Boston, and part of that was because I felt I needed a safer car for Little Man. On the other hand, my 12 year old car probably need replacing soon anyway.
  • Clothing – Due to the generousity of friends and family, especially my own mother’s gift of amazing bargain hunting, we shouldn’t have to buy clothes for the next five years. The USDA budgets $1438 and I think we’ll avoid much of this expense.
  • Health Care – One of the best benefits the military has going is its health care. I think we’ll save a vast majority of the $1113 that the USDA has allocated. The exception is out of pocket things like baby Tylenol and the like.
  • Child Care and Education – The USDA estimates $7,538 and this is where my blogging career really pays off. I can be that child care provider. I had estimated day care for Little Man to be around $15,000 a year. Since that’s after-tax money, it’s almost like adding $20,000 in salary. However, as it turns out we might be able to get almost full-time coverage for $6,000 at a military base. We’ll see if that comes to pass.

I think the lesson here is that raising a child can be done on a budget. It certainly helps to plan ahead (be a blogger), have a great support system (thanks Mom!), and get a good breaks (military benefits rock). Oh and if you are going to be a new parent soon, here’s some of my favorite baby gear.

2. Moving Across the Country

This year we moved back to Boston, which has always been where my heart is.

One thing I can say about Silicon Valley. Having lived there, I understand how a foreigner would come to United States thinking that the “streets are paved in gold.” Silicon Valley is a lot like that too. There’s a ton of money due to all the successful technology companies such as Google and Apple. I don’t know if it is the money or great schools like Stanford, but there are a ton of very smart people there.

Not only is it a land of opportunity, but the three feet of snow that we are getting right now in Boston reminds me how wonderful the weather is in San Francisco.

As wonderful as that is there were two major downsides for us: 1) Our friends and family are in Boston 2) The price of housing is 3 times more than what we can get in the Boston area. That’s literally a million dollar difference.

It’s not like Boston is a horrible place either. With Harvard and MIT, there are some smart people here too. I’ll probably always wonder what life would have been have been like, not just for me, but for Little Man, if we stayed in San Francisco.

What’s the lesson here? It’s probably nothing new, but geography does play a huge role in personal finance.

3. Refinancing Two Mortgages

Lost in the birth of baby and the move back to Boston is the financial move that flew under the radar. I was able to use the government’s HARP program to refinance two mortgages. With the drop in value of real estate over the last 8 years, these properties no longer had 20% equity and we were paying on average 6% interest on them. We were able to keep the payments close to the same and change 22 year mortgages to a 15 year one. The reason we were able to do that? The interest rate of 3.5% on a 15 year lowers the payments to what we were paying on the 30-year at 6%.

It was extremely difficult, especially because I’m a self-employed blogger. I might as well be a third-class citizen to mortgage underwriters. The hours on the phone and email really paid off…

The result of eliminating 7 years of mortgage payments on two properties is tremendous. Some rough math tells me it will save us $225,000 in mortgage payments.

The lesson here is to take advantage of these low interest rates if you can.

4. Buying a New Car

In any other year, buying a car would trump the money moves. After buying a house, it is usually the biggest purchase someone makes. One month in, I still have no regrets on buying my Subaru Forrester.

Wait, maybe I do.

The last lesson is that before you buy a new car, look at what is coming down the pike in the near future. It’s something that I think about whenever buying technology, but I somehow forgot about it with buying a car. I think it was because I was going in with the intention of buying a slightly used car and saving on depreciation. However, they made the new car a lot better deal because they had dealer incentives and 0% financing for 63 months.

It wasn’t until a few days later, I found out that they are coming out with a 2014 Forester in a couple of months that is going to get 5 miles more per gallon. As it turns out waiting wasn’t a good fit for us because we need to snow-worthy cars in New England, but doing some rough math, the money that I saved with the 0% financing is about what I was likely to save on gas through the life of the car.

I might still come out ahead if Subaru bumps up the price of the 2014 Forester as many expect they will.

Putting it All Together

Most years, I don’t make too many big financial moves. Obviously some of them like taking a new job or having a baby are common life milestones. Other things such as taking advantage of historically low interest rates (particularly for mortgages and cars) fits in the category of making the most of opportunity presented.

Now it’s time to take a year to settle down.

What’s Better than a Double Rainbow? A Double HARP!

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Remember this guy who sounded like he made sweet love with a vision of a double rainbow?

If it sounded like that guy was heaven, you should have heard me when I got the news that I’d be getting a double harp. It was angelic.

It wasn’t the angel’s kind of harp, but the Home Affordable Refinance Program kind of HARP.

That kind of HARP was created by the Feds to help those who are underwater or close to it, refinance with today’s rates. For people like my wife who bought in 2003 or me who bought in 2005, this program represents a great opportunity. Due to the drop in housing prices, many of us have no equity and 6% interest rates. This is a double whammy. With no equity, lenders wouldn’t consider refinancing under today’s low rates. The person buying now can get a similar condo to the one I bought in 2005 for about 30%, at a 30-year fixed interest rate of 3.5%.

We put down 20% and could make the payments, but being responsible worked against us when we tried to take advantage of refinancing under the recent low interest rates. Mortgage lenders only wanted to reduce rates on people who were behind on payments. It lead me to write “Lower the Interest Rate on Your Mortgage Without Refinancing?” more than three years ago.

This past December I thought I had it all figured out, I was going to use a HARP to Save Money with a HARP-Refinance on an Investment Property. It would bring down from a 5.875% rate to a 5.04% rate. At the time, it looked like it was going to save me $250 a month, which is huge. Then I realized there was there was something that they left out. It should have been obvious, but I would be taking a 30-year mortgage that I’m already 7 years into and reset it to 30-years again. While the rate is cheaper and there would be still some savings, most of the savings came from spreading the mortgage over a longer period. I tried to pursue a 15-year mortgage, but at the time HARP mortgages would only allow you to refinance to a lower monthly payment (the point was to save people money). With the refinance costs on top of that, I decided that wasn’t right for me and pushed the mound of paperwork into the trash.

A few weeks ago, I noticed that interest rates had continued to drop even further. This time I called up USAA, which is my bank of choice, and ask them about my options for refinancing. It never hurts to ask, right? It turns out that their underwriters don’t do condominiums that are investment properties, but they have a partnership with Wells Fargo to cover that exact scenario. I met all the requirements for the newest version of HARP (they seem to be pushing out updated legislation every 6-9 months lately), and that allowed me to get into a 15-year mortgage at 3.5%… amazing for an investment property at nearly 100% Loan to Value (LTV). The monthly payments would be almost exactly what I am paying now. This may not seem like a bit deal, but I’ll cut 8 years off of paying a mortgage.

Next up, I asked about my wife’s mortgage. She was told previous that because her loan wasn’t serviced by Fannie Mae or Freddie Mac, she wouldn’t qualify for a HARP. However, I figured that once again, it wouldn’t hurt to ask. Also, since she didn’t buy at the exact top of the market she was close to 80% LTV allowing for a traditional refinance. It turns out that whatever information she was given before wasn’t correct or no longer applicable. Her property qualifies as well. She only has 21 years of mortgage payments, but she’ll save a little money each month in addition to eliminating 6 years of mortgage payments.

It seems like a lot of people could benefit if they knew about the HARP program. Maybe it is just me, but I’ve found that very few organizations are actively publicizing it.

Take a minute and imagine what your life might be like if you had your next 96 payments of your mortgage covered… now double that. Certainly beats the pants off of a double rainbow! The only downside is that it is A LOT of paperwork. They are also saying that I might need to get additional flood insurance reminiscent of the time I almost got tricked into buying flood insurance I didn’t need.

Three years ago when I wanted to refinance the rates were at 4.875%. In December I almost refinanced at 5.04%. It seems like good things come to those who wait.