Refinance?

omgladypirate · November 2013

I'm wondering what other people think. I've owned my home going on 4 years now and estimate that I have about $100,000 in equity. I have an FHA loan and only put 3.5 percent down. I plan to stay for another 5-8 years and would like to refinance to pay off credit card debts, my car, make improvements on the house and remove pmi. I am thinking of going back to school and not having a car payment would help me tremendously. What do you think?

hoffse · November 2013

I wouldn't do it. You might be lowering the interest rate on your credit card debt, but you're still paying interest on it... only now it's secured by your house instead of being unsecured debt. It also means your car is being secured by your house... which makes no sense because cars aren't nearly as valuable and have a much shorter repayment period than homes do. Generally speaking, you want assets to be secured by loans that are an equivalent value to the asset... which means if you suddenly can't make a payment since you have rolled your credit cards and car debt into your home loan, you don't lose the car when you can't meet your obligations - you lose your house. See why this is not a good idea?

If you want to refi anyway, you need to do the math. The closing costs plus the higher interest rate (since conventional loans typically have a higher rate than FHA loans) might not save you money if you're only going to be there 5-8 more years. Or it might. You would need to get quotes to see.

I'm confused as to why the PMI hasn't dropped off on its own - The PMI-sticking-to-FHA-loans-for-the-life-of-the-loan thing is pretty new (I think just from this past June), so if you're at 20% equity the PMI should have rolled off anyway. Or am I missing something because it's early in the morning?

Also... if you have $100K in equity, then being in a position where you are still paying PMI means you own more than a $500K house. Is it possible you have just paid $100K in mortgage payments? Because if so, you are still paying primarily the interest. Mortgages are amortized so you pay the interest first and start making real inroads into the principal about half-way through the loan. So either you're confused about how much equity you have or you own a crazy expensive house if $100K doesn't equal at least 20% of the equity needed for PMI to roll off.

If it were me I would call the bank and see if you are closing in on 20% equity. If you are, then PMI ought to roll off on its own, no refinancing needed. If you aren't, you might want to think about what a refi will cost you. It's likely to be at least several thousand dollars. Personally, I think a better use of that money would be to put it toward your credit card debt and then later your car payment.

Disclaimer: I haven't had my coffee yet this morning. So those who are more awake than me might see something I've missed.

Sisugal · November 2013

If you are talking about a cash out refinance - pulling out equity to pay off car, credit cards etc - DON"T DO IT!
You only want to refinance YOUR CURRENT BALANCE at a lower interest rate when that rate is at least 1% lower than current rate.

Stop using credit cards (use only if you can pay in full each month)
If you need to get those debts paid off - cut back on your budget lines (eating out, clothes, entertainment, vacation, - basically all non essential spending)
Get a second PT job and apply that to your debt
Sell items you no longer need or use and apply to your debt
Bonuses, gift money and tax refunds - apply to debt

Sisugal · November 2013

How much is the car worth now and how much is owed? IF you are not underwater - I would suggest selling the car and buying an inexpensive, fuel efficient,, used vehicle -putting as much down as possible.

MommyLiberty5013 · November 2013

What would going back to school do for you? Would it be to complete a degree? Bachelor's? Masters? Or would it be to change fields? Or a "just because I don't like stuff and school seems like a good option right now" feeling?

The reason I'm asking is because the cost of college is $$$ and sadly most/many jobs these days don't pay anywhere near enough to pay off SL debt and other debts like mortgages and still leave room to save and have a life.

Unless this educational experience will open many, many doors for you and will basically explode your income potential compared to what you earn now, I probably wouldn't do it. If the degree will only give you a few thousands dollars per year in pay bumps, but costs you $20-$30k before interest this is a financial loss situation.

I also realize that there are other reasons to get a degree beyond pay increases or income potential - self esteem, self-respect, achieving a goal, to name a few things. These are all valid reasons too.

But at the end of the day, what is most important to you? That's a question only you can answer.

dragonstarjk · November 2013

My H and I did this to pay off a car loan several years ago, and I would count it as my biggest money regret to this day. The math made sense at the time and sure, it was nice to not have that additional payment, but the additional amount it added to the mortgage payment was not worth it.

Whenever I looked at our mortgage balance I would think to myself, imagine how much lower this would be if we hadn't added 15K to it. Grr.....

We have since refinanced a second time, when rates were MUCH lower, so the way the math worked out it was like we got a do-over. Our balance is right where it would have been at this time at the higher rate--but that means it negated the effect of paying that lower rate we got with our first refinance.

I really still can't believe we made this decision, but we've now vowed to NEVER borrow against our home equity. Lesson learned!

omgladypirate · November 2013

Thanks to everyone for their responses. I am definitely rethinking this all. I do feel going back to school is the right thing for me, as I am a nurse with a 2 year degree and would like my bachelors. I make good money and am not struggling to pay my bills I just can't help but wonder what it would be like to be credit card and car debt free.

Question- If I do not refinance can I still call the bank and have the PMI removed if my house appraises for much higher than I paid? The 100k equity estimation is what homes in my neighborhood are selling for vs how much I owe

Thanks again everyone!

hoffse · November 2013

omgladypirate said:

Thanks to everyone for their responses. I am definitely rethinking this all. I do feel going back to school is the right thing for me, as I am a nurse with a 2 year degree and would like my bachelors. I make good money and am not struggling to pay my bills I just can't help but wonder what it would be like to be credit card and car debt free. Question- If I do not refinance can I still call the bank and have the PMI removed if my house appraises for much higher than I paid? The 100k equity estimation is what homes in my neighborhood are selling for vs how much I owe Thanks again everyone!

I can't promise what your bank will say, but some banks will let you do this. If your house has dramatically risen in value, then that's "free equity." But you need to call your bank and find out their policies on this. I would bet they require appraisals done by certain people or through certain procedures, etc. to make sure that your house really has increased in value.... and I don't believe they HAVE to accept a new appraisal. So you should call and find out.

Sisugal · November 2013

read your loan documents as there should be a provision concerning the PMI. Some loans require a specified period of payments before PMI can be removed, regardless of the increase in value. Others only require a specified amount of equity etc.
If you cannot find it on your loan papers, call your mortgage lender.

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