| UPSIDE DOWN IN HOUSE WITH ARM - WHAT SHOULD I DO? |
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Fritz1967
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| UPSIDE DOWN IN HOUSE WITH ARM - WHAT SHOULD I DO? |
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I'm 43 years old and married. My annual income is $175,000. I have 2 kids 8 and 10 years old that I would like to be able to put through college. Here is my situation:
I currently own a house worth $380,000. I have a first mortgage of $436k that is at a fixed 4.5% rate but will adjust to an ARM at the 1 year CMT + 2.75% in March 2012 (currently this would be 3%).
I also have a 2nd mortgage for $67k that is an ARM currently at 3%.
I don't have problems making the payments currently and have negative equity of about $(123)k.
I also have cash available of $145k that I could put down on the house and refinance with a 95% mortgage at a rate in the range of 4.75% + 1/8th points. PMI would likely be 200-300 per month but the payment and PMI would still be about $400 less than what I'm currently paying.
My question is should I put the money down on the house and refi or do something else with the cash?
A few additional pieces of info:
1) I have $24k of credit card debt at 10%.
2) I have about $265k in IRA's and 401K.
3) I'm putting about 15k/year into retirement accounts.
I think I should go ahead with the refinance then start paying down the credit cards as fast as possible while maintaining my retirement contributions and then save for college, but I would love to get some input from others on what I should do.
Thanks!
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Sat Jul 02, 2011 4:30 pm |
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coaster
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I'd suggest liquidating that CC debt first, then make your decision on the rest. 10% is low for a CC account and they can reset that any time, and probably will.
Also keep in mind that the money that goes to PMI is money out the window. It doesn't finance the loan and it doesn't buy equity.
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Sat Jul 02, 2011 5:19 pm |
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oldguy
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I don't see the advantage of locking $145k into the house - if the $145k is invested somewhere at 10%/yr, you would be losing that $1200/m of income while only reducing the house payment by $400/m.
I would clear up the CC debt, no need to pay 10% to borrow capital.
But I would worry about the low investment accounts, $265k. Your family wealth will reside here in your far-future. And there is only about 17 yrs left, after age 60 you must shift from wealth-building to wealth-preservation to protect yourself from market fluctuations.
Your current trajectory - $265k = $15k/yr will be $2,200,000 if you use 11%/yr products for the whole 17 yrs. If you use 8%/yr products it will be $1,450,000.
And if you use the 17 yrs to grow the remainder of the $145k ($120k) at 11%, that's $700,000. That is where I would put the emphasis - it's more important to protect the wealth-building than it is to pay down a house.
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Sat Jul 02, 2011 6:33 pm |
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birdtrax
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Pay off the Credit Card debt #1
Dont lock up cash in your house, I would refinance (4.5%) or downsize as this house is going to be an anchor for a long time.
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Mon Jul 04, 2011 6:27 pm |
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Fritz1967
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Unfortunately, I can't refinance the house without locking more money into it to get a minimum Loan to value on it.
I also can downsize because I have negative equity and can't sell the house.
I should also note that this is in the Bay area and it's a pretty small house as it is.
It seems to me that the only options for the house are to lock more money into it in order to get a fixed rate or gamble on what the adjustable rates will do (only 3% right now) and what long-term rates will do over the next 10 years while the real estate market recovers. My inclination is to lock in a rate so I don't have to worry about fluctuation.
I understand the PMI, but I'm hoping that within the following two years of the refi I will be able to save enough money to put down on the loan and get rid of it. I'm also looking at the option of a piggyback mortgage.
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Mon Jul 04, 2011 7:50 pm |
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birdtrax
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I dont have a crystal ball but I dont see interest rates jumping especially if the govt decides to increase what they can spend a year.
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Mon Jul 04, 2011 9:35 pm |
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oldguy
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quote:
I understand the PMI, but I'm hoping that within the following two years of the refi I will be able to save enough money to put down on the loan and get rid of it.
Not so good. First you have to come up with $143,000 to cover your $123,000 negative equity, plus $20,000 for the 5% DP to get you to the 95% postion. And after 2 years you want to add another 15%, $60,000, to clear the PMI. By locking $200,000 more into house equity, you are giving up the $20,000/yr return on money.
If you want to build wealth, you retain the use of the $200,000, invest it at 11%/yr for 20 yrs, and take the $1,600,000.
Your plan to protect against a potential rate increase comes with a horrendous lost opportunity cost. BTW, I never use ARMs for my rental houses & home. I borrow against my houses to raise investment capital so I confine my risk to the investment side and I avoid risk on the lending side. That said, I wouldn't prepay your ARMs at the cost that you are facing, I would stand the risk. There will come a day when the market will give you that $200,000, no need to buy it. When that happens, the house can be refi'd w/o PMI, you will be on the way to earning the $1.6M - and even if rates are 8% or 10%, you'll still be way ahead. (There were double-digit loans in the Jimmy Carter era - but we still made money on rentals.)
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Mon Jul 04, 2011 10:10 pm |
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Fritz1967
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I think you're right Old Guy. The more I think about it the more I'm leaning toward keeping the mortgage I've got and investing the money in something else. I'm thinking a long-term hold rental property with a fixed rate mortgage might make sense given where the market and interest rates are right now.
I'm not sure what else to invest in right now that would have a better potential long-term return. I think I'll try to find a good financial consultant as well.
The decision would be a lot less complicated if I hadn't gotten the 7:1 ARM in the first place. We moved here on a company transfer and thought for sure we'd be gone in 5 years, but now it looks like we're here for the long term.
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Tue Jul 05, 2011 12:32 am |
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oldguy
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quote:
The decision would be a lot less complicated if I hadn't gotten the 7:1 ARM in the first place.
True - but you couldn't have known. I had the fun of the jimmy carter years, I've seen 17% mortgages - so I've been able to resist the enticing ARM offers over the yrs - but I probably wouldn't have if not for that life's lesson.
As for longterm potential, the SP500 Index Fund with a no-load company is hard to beat - low costs, it grows tax deferred, when you sell some you pay only the 15% cap gains tax on the profit. The multi-millionaires of the past generation purchased that index incrementally, never sold, simply accumulated steadily for 30 yrs. They were quietly known as the millionaire-next-door. (The book by that same name is in most every public library - that Big Brick Building where no one ever goes, LOL.)
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Tue Jul 05, 2011 3:06 am |
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Offshore-Wealth.com
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| MORTGAGE REFINANCING Is NOT ALWAYS BEST OPTION |
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quote:
Originally posted by Fritz1967
I think you're right Old Guy. The more I think about it the more I'm leaning toward keeping the mortgage I've got and investing the money in something else. I'm thinking a long-term hold rental property with a fixed rate mortgage might make sense given where the market and interest rates are right now.
I'm not sure what else to invest in right now that would have a better potential long-term return. I think I'll try to find a good financial consultant as well.
The decision would be a lot less complicated if I hadn't gotten the 7:1 ARM in the first place. We moved here on a company transfer and thought for sure we'd be gone in 5 years, but now it looks like we're here for the long term.
Agreed,
I would stay where you are, it is not worth refinancing given the fact your current rate when adjusted is about as low as it gets. PMI is throwing money away, and putting down enough to cover your reverse equity is also throwing money down the drain for housing prices may fall even further in this collapsing economy. As to plans and employment, as you have learned, there is no certainty left in the employment arena, you never know day to day if you even will have a job, so better to have your reserve fund available in case of emergency. But I would also agree with paying down the credit card, 10% although low rate for credit card in this economy is still as waste of money given you would be hard pressed to get 10% anywhere else, so by eliminating this interest, you are actually earning 10% on that $24K by not losing it, so this is what I would do.
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Thu Jul 07, 2011 1:27 pm |
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