Trying to decide on mortgage refi vs cash-out refi

[hightower]

I've posted about this before, but I wanted to get others opinions on this before deciding.

I want to refinance our mortgage to a lower rate, 15 year loan.  I have the option to take cash out and use it to consolidate some debt (see below).

Current Debt:

Mortgage: 30 yr fixed $291k at 4% on a ~$450k-500k house

Student Loans: $94K at 2.625%

Personal Loan from In-laws (used to renovate the house): $49K at 2.5% for 30 yrs, but we've told them we want to pay them back asap.

No other debt

 

Refinance offer from lender:

3.125% 15 years fixed for a straight refinance (no cash out) (new term would be 291k at 3.125% for 15 years)

or

3.25% 15 years fixed for cash-out refinance (new term would be 340k at 3.25% for 15 years)

 

Plan for the cash out would be to pay off the family loan as a lump sum as soon as we close.

Pros: This would allow me to pay off the rest of my student loans quicker.  By the end of the year I'd have all of my student loans paid off and be debt free except the mortgage.
Cons: Higher rate, higher monthly payment, higher mortgage balance.

If I don't do a cash out:

Pros: Lower interest rate, lower mortgage payments and balance

Cons: It will take me most of the year to pay off the family loan and I'll likely still have 60k or so of student loans at years end.

The bolded statements are what I'm really most concerned with.  I'm anxious to get rid of my student loans asap and to simplify our debt (nothing but the mortgage).  What would you wise folks do in this situation?  I've been really back and forth on this.

[StarTrekDoc]

It looks like a cash flow of ~80k per year.

What's the hurry to relieve debt?  Aside from the Family loan, which I agree to retire first despite the generous 30yr terms, why the rush?

Have you funded priority everything else already?

--Insurance, EF, tax sheltered options, 529s would come first in my mind before attacking well structured debt.

If yes, on all those above -- it's really up to you on what makes you sleep better at night.

Moving around smallish pieces between the debts and consolidation--and the closing fees alone will never be recovered vs just paying off the debts straight up over next 1.5 years and attack the mortgage with additional payments if you wish to achieve Free+clear status.....with cashflow amounts, 5years everything is wiped out no matter what you do.

[hightower]

Yeah, I guess there is no rush other than my lack of patience.  I talked to the in-laws and they said they are fine with waiting until the end of the year, they are in no hurry either.  I guess we'll just go with the no-cash out offer.  Like you said, if I can just be patient, a year or so and we'll have the student loans and family loan gone anyway.  Don't know if I'll pay down the mortgage much faster, but we'll see how we feel once we get there.

And to answer your questions, yes insurance and EF are in place.  We have our accounts set up to automatically fully fund our 401ks, HSA, and Backdoor Roths. No kids (yet) so no 529.  I'm excited to be done with loan pay off so I can start contributing to a taxable account.

[Hatton]

I have been following your situation since you first posted about it.  I would do the refi with no cash out.  The cash-out seems like adding more debt and fees.  You are making huge progress just be patient.

[Zaphod]

I dont see anything wrong with it really, but dont see the pressing need. Rates are a wash after taxes, but you're really worried about 1 y vs. like a 1.5-2y...its basically the same.

[Donnie]

Agree with others. No need to cash out refi here. It could be better not to refi at all depending on closing costs, how aggressively you plan to pay off the mortgage, and your tax situation. Sitting on a plane so can’t run the numbers myself, but you should check the numbers yourself before making a decision.

[hightower]

Donnie wrote:

Agree with others. No need to cash out refi here. It could be better not to refi at all depending on closing costs, how aggressively you plan to pay off the mortgage, and your tax situation. Sitting on a plane so can’t run the numbers myself, but you should check the numbers yourself before making a decision.

Click to expand...

So, if my calculations are correct comparing refinance now vs keeping our current mortgage and paying extra (an equivalent amount each month to what the new 15 year payments would be).  It would be cheaper to go with the refinance even with the closing costs.

Refinance (our monthly payments would go up by $600): Total interest plus closing costs paid over the life of the loan would be $78500 and loan paid off in 15 years

Keep Current and pay $600/month extra: Total interest paid over the life of the loan (ignoring what we've already paid) would be $106,000 and loan paid off in a little over 16 years.

This assumes we keep the house until it's paid off, which is a big question mark.  I don't see us moving anytime in the next 3-5 years at least (we're hoping to start a family in this house).  To re-coup the closing costs in terms of interest saved, would take approximately 22 months (we'd be paying $200/month less in interest).

For us, there is no tax advantage to keeping a mortgage at all, unless we significantly increased the size of the mortgage.  We'll be taking the standard deductions from now on thanks to the loss of full SALT deductibility.