Refinance question

[BlueMonday]

Need the hive wisdom.

 

Recently purchased a new home, new mortgage is $1.25M (5/1 ARM, 3.625%). Closing on former home next week, proceeds after paying off its associated loan, closing costs, etc... will be $625k.

 

What should I do with the $625K?

1. Immediately put towards above new loan until I can save up enough to refinance into a 15yr conforming loan. Should take me about 4-6 months. I'm not sure, but I believe the payment will all go towards principal, and resulting interest will be that much reduced. I will still have to make my current mortgage payment (~$5800/mo, which is not a cash flow problem for now), but about $3700 per month will go towards principal vs right now about $2000/mo (I think that's how it will work, are mortgage payments calculated using simple interest?


2. Put the cash in an online savings account earning ~1% interest until I save up enough to refinance into that above 15yr conforming loan.


3. Just go ahead and refinance now into a 15yr jumbo loan. The rates right now are about 3.5% for the jumbo 15yr vs. 3.0% for the conforming 15yr. Those rates may change over the next roughly 4-6 months it will take to save up the cash to get my loan balance to $417k.

 

Thanks!

[StarTrekDoc]

Have to ask -- why didn't you come here 2 months ago before closing?   Would have worked with your bank on contingency loan closing to carry the 2nd home for a short while.   Lenders will do that and work with buyer/sellers to avoid this 2nd closing and refi into new loan issue with double/triple closing costs.

Would have saved on the refi off the ARM which is probably the worst product at this point in time of interest rate hikes coming --- unless your plan is payoff in 5 years.  --- no mention of income/cash flow to mark that measure, which is crucial point in this whole exercise.

Anyways -

1. max mortgage deduction is $1M; so don't carry above that as no tax benefit

2.  This is where the debate will rage forward -- I go against the grain on this forum and Boglehead/FIRE mentality --- depending on your cash flow/savings and retirement horizon coupled with investment risk tolerance -- would refi into 30year fixed product and take all that money deductions and plow into investments.   If you're less risky -- choose less risky investments.   Jumbo 30 yr fixed at 4% wont be around in the future.   Use that cheap money to compound earn for you.

 

[BlueMonday]

StarTrekDoc,

I did look into contingency loans and bridge loans. The costs were actually much higher than what I'm doing. The 5/1 ARM I got was essentially "no closing costs" (I only paid for the appraisal). I used the ARM because it was the cheapest mortgage I could get with the knowledge that I'd refi when I sold my other house.

Interesting thoughts regarding interest rates. You're suggesting that I pay down my mortgage to $1M and refinance that into a 30yr jumbo? We could certainly do that cash flow wise, but - I spent 10 years after finishing residency furiously paying off my student loans, not sure I want to carry so much debt again.

 

 

[Donnie]

ARMs are fine, and I would certainly be inclined to wait to refi until you got closer to 5 years.  You paid for a 5 year fixed rate, you may as well take advantage of it.  I wouldn't pay down the mortgage necessarily just to get the mortgage deduction or to get to a conforming loan.  If you always planned to do this, as StarTrek said, you should have arranged this with the lender ahead of time.

I suggest investing the $625k and letting the ARM ride its normal course.  Rates will come back down during the next recession anyway.  Who knows, you may want to move in 5-7 years like most folks do, and paying multiple closing costs on the same house in that time frame would be a real shame.

[adventure]

 

 

Congrats on the new digs. Hope you love it.

1.A fair amount of this depends on cashflow, risk tolerance and goals (IPS/FIRE/other). What are said goals? Will you be in the house for a while? If you have sufficient cash flow to pay for this, then you can risk the great rate now, for the unknown in 5 years. Is there a max interest cap rate % on the 5/1 arm? 30 year term? Balloon? If you have a balloon, you likely need a different plan. Some online calculators will show the breakdown. Do you have the cashflow for payments on a 15 year fixed?  You didn't want a lot of debt again, but you just have 1.25 of new debt.  How long until retirement?

2. Seems like a bad idea all around.

3.Yes, if you paid the 625 to the 1.25 loan, it'd go against principle (well, you probably have $10.24 cents of accrued interest since your last payment, so 99.999 will be P and not I. You mention cashflow of the payment isn't a problem " for now".. is there more to that? Based on your post, you can take 1.25 and pay 625, then in 4-6 months have a conforming (aka 427?) loan? Did I read that correctly? That's some made cash you have to pay this loan back. If you really have that much cash, make sure retirement is all set, but otherwise think about how long until you could have this paid off, in full? Perhaps that's something to consider.

My other thoughts:

1. Make sure you have taxes sorted out, are you sure they are factored in to the 625k? You may be getting close or past the 500k home sale tax exclusion. Just worth double checking so next April isn't a bummer.

2. 3. Getting to <1M to realize 100% of the interest deduction (and not lose the interest paid on $ over 1M...) is a fine goal. Calculate it out. Might not be conquential, after tax brackets, etc.

3. Mort importantly, forget a conforming loan. Not worth the hassle to chase it. Do you want a different mortgage? Or just feel like you should "b/c ARMs are bad"? Just find a lender who does non-conforming mortgages. There are tons of "professional" (aka, doctor and dentist etc) or just high earner loans. They are non-conforming, don't have all the Frannie/Freddie paperwork, and the lenders usually service the loans themselves. At great rates. I've found several that are better than any conforming loans. Ask around. There are piles of doctor mortgages - many of these are non conforming. For example, Sofi will lend up to 3M. These are non conforming, but have great rates.

4. how long will you be in the house? (short? keep the ARM, long? maybe refi, pending cash flow). Do you have other expenses/retirement sorted out? Do you have an aversion to debt? I think those will help determine the plan.

[blowhard]

The difference in interest between a 15 yr mortgage for $625k at 3.5% vs 3.0% is less than $30k over the lifetime of the loan. You can decide whether that is worth putting an additional 200k towards your mortgage now vs the risk that rates my rise precipitously in the near future.

If cash flow is not a problem, and it doesn't seem to be if you can save up $200k over the next 6 months, then just go ahead and refinance to the jumbo loan.

[StarTrekDoc]

No closing cost arm? Nice. Haven't seen that since the ingDirect days.

You can probably refi with the same lender at reduced costs or find out the title company to use again and have them extend their insurance with rider since the insurance is fresh still

I understand the debt aversion. We are 45, debt free and well on our way to retirement... recent years have shifted from growth to income so have only a 550k mortgage on 30 yr (on 1.2m home)....with a subsequent taxable account that's dedicated to payoff the mortgage at any given moment...that account tracks a lot more conservative investments but stays considerably ahead of payments and we active draw down on the account the past two years to the regular taxable account. Really depends on where you are on the growth like, savings, retirement spectrum.