How can we reduce our mortgage payments if we bought the new house, *then* sold the old house?
January 9, 2012 7:53 PM   Subscribe

This past year, we bought a house. A month or two later my wife sold her house. We'd really hoped we could sell the house first, obviously, but it was a bad market and we were in a rush get the home (my wife's house was in another state). So now we both have a0 large mortgage and a large chunk of cash. We're trying to figure out what to do now.

Our mortgage is $200k, 30 years, at 5%.

Her house ended up selling far below its market value. After the sale we had around $140,000 cash. Around $30,000 or so went towards paying off credit card debts and covering repairs and improvements to the new (old) house. So we have around $110,000 cash left (assuming we don't owe any of it in taxes [see below]).

We'd like to put that cash towards paying off our mortgage. We just had a kid (hence the reason we rushed a bit on the house) and we're trying to get our expenses down so I feel like it'd be better to refinance the mortgage somehow rather than just paying down the original mortgage (since all that will do is shorten the length of the mortgage).

I'm not sure how to go about refinancing the mortgage, especially since most material online seems to focus on refinancing as a way to borrow more money rather than change the total. I'm also leery of contacting a professional mortgage advisor right away since I'm not certain that they will choose the best option for me and might choose something that ends up costing me even more money.

What steps should I take next? What refinance option is best when the goal is reducing the entire loan rather than extending it or just changing the interest rate?

Also, we've been having a hard time figuring out if we owe taxes on the house we sold. We've been getting conflicting answers about this. It was my wife's primary residence for a while but she was away for two years as a student and she rented it out, so it's not clear if it counted as her primary residence when she sold it. One accountant said we would, and another said we wouldn't, need to pay taxes on our income from the sale. Which one is right? That last thing we want is to suddenly owe the government a lot of back taxes.
posted by nosh, daven, shtup to Work & Money (34 answers total) 1 user marked this as a favorite
Depending on taxes... use 100K to pay down mortgage and the rest to pay for fees associated with refinancing for the now 100K. Find a good stable Credit Union in the area, walk in and start asking questions about refinancing.
posted by edgeways at 8:08 PM on January 9, 2012

Depending upon how your mortgage is written you may be able to apply the money directly to reducing the principle of the loan, which in turn would reduce your mortgage payment and the overall amount of interest you'll be paying.

Alternative ideas worth considering now that you've got a child:

Dump a chunk into a 529 college savings plan. 17+ years of compound interest...
posted by roue at 8:10 PM on January 9, 2012 [2 favorites]

Refinancing without taking out cash is easy. I've done it about 5 times over the years. You don't need a mortgage broker, just call a couple of local banks to check the rates on 30 year fixed rate mortgages. You should be able to get something in the neighborhood of 4%.

Put in the extra $100k, pay off the old mortgage, pay closing costs and you're done.
posted by alms at 8:25 PM on January 9, 2012 [3 favorites]

Response by poster: Because we hadn't sold the other house yet, we ended up having to get a FHA mortgage. So I think we are paying PMI.
posted by nosh, daven, shtup at 8:25 PM on January 9, 2012

Response by poster: So I'm looking at around $10k for closing costs? Is there any way to get that reduced?
posted by nosh, daven, shtup at 8:27 PM on January 9, 2012

Best answer: On the other hand MoonOrb the "return" you getting from putting that capital into paying off the principal of the mortgage is 5% *tax free* for 30 years. Good luck getting that kind of guaranteed return on the open market right now.

(Obviously if putting just *some* of the capital into the mortgage lets you refinance to a lower rate & not pay PMI then the balance might change. At 5% + PMI I suspect for most of us the right choice is to pay down the mortgage.)

Also, putting the cash into other investments will not diversify the OP away from their home equity investment. They've already made an investment in home equity, which is balanced by a mortgage debt. What they can do is decide how much mortgage debt they want to carry vs other investments.
posted by pharm at 3:00 AM on January 10, 2012 [1 favorite]

Best answer: The magic words are "cash-in refi." If I were in your shoes, I'd put most of that money into home equity to reduce my monthly obligations (but I don't plan to move anytime in the next several years).

At today's rates, and if it gets rid of FHA mortgage insurance, which you're automatically paying for -- I believe -- 5 years, you'll come out ahead no matter how much cash you put in. Closing costs can be financed into the refi in many cases.
posted by zvs at 6:07 AM on January 10, 2012

IIRC with and FHA loan, you have to pay PMI no matter how much you put down so even paying the principle down until you have 20% equity might not make that go away (but you'd need to talk to a mortgage professional to be certain).

If I were in your shoes, I would refinance and get a non-FHA loan and reduce the principle amount until you get to 20% down/equity. You should get a rate somewhere around 4% with no points.

$10,000 seems high for closing costs. We bought a house last march and paid about $4,000 in fixed closing fees along with a 1% origination fee so I would think that you'd pay $6,000 or less in closing costs. If you want to pay points you would trade increased closing costs for a lower rate and you would want to talk to a mortgage pro and play around with the numbers to figure out what will make the most sense.

Assuming you put 5% down the first time and that the value of your home hasn't changed, another $30,000 ($36,000 with closing costs) would get you to 20% and a principle of $170,000. Your payment would be about $810/month plus taxes and interest so I would guess maybe $1,150 or so all told since you wouldn't be paying PMI.

Put the rest of the money in some combination of short-term, highly liquid and longer term higher yield investments (like an index fund) maybe even put some in a 529 or your IRA.
posted by VTX at 6:09 AM on January 10, 2012

Tax issue with the house depends on the state your sale and your residence is. I can possibly help you better if I knew those two states.

As for refinancing, you can call the bank you presently have the mortgage with and ask them if you can do a no-fee refinance. Tell them you would like to put a substantial amount for down payment. If they can't do a no-fee refinance (where you only have to get a notary to sign the papers with you and you won't need to pay fees,) or they may do an entirely new loan (refinance.) It would be subjected to the same fees as when you first acquired the mortgage for your present home.

Start with your present bank and the representative who helped you since they would try to keep you as a customer before you look for a new bank.
posted by Yellow at 6:14 AM on January 10, 2012 [1 favorite]

The person you want to contact is an Upfront Mortgage Broker. These are mortgage brokers who disclose their fees upfront and so can transparently work with you to help you find the loan that is in your best interests.

If I was in your shoes, I would use the extra cash to refinance to a 15 year mortgage that has a similar or slightly lower payment to what you currently have. (Based on some quick calculations that would mean a loan of about $140,000 at a similar interest rate). Then I would take the extra cash and put some in a 529 for your child, and put some in an emergency fund.
posted by bove at 6:41 AM on January 10, 2012

Response by poster: The two states are Virginia and Pennsylvania. My wife's home was in VA and the new house was in PA. We sold the house as permanent residents of PA.

I just heard from Quicken Loans. They offered a rate of 4% with $2,500 closing costs which would be rolled into the payment. My monthly payment, including insurance and PMI (he said rates would be cheaper if I continued with an FHA loan) would be $754/month. That would be for a ~$90k loan.

Has anyone had experience with them? They sounded good right up to the point when the salesman started getting very pushy. I told him that I needed some time to explore my options and he was like, "What do you need to explore?" and started pressing me to go ahead with the process. He said he needed a $400 "good faith" deposit to start the process. Is that standard practice?
posted by nosh, daven, shtup at 6:47 AM on January 10, 2012

The rates will be better with an FHA loan but you'll be paying PMI. The total cost of the loan will be far lower if you can avoid paying PMI. The deposit is NOT standard practice. I wouldn't talk to them again.
posted by VTX at 6:51 AM on January 10, 2012 [1 favorite]

Response by poster: If I was in your shoes, I would use the extra cash to refinance to a 15 year mortgage that has a similar or slightly lower payment to what you currently have.

The thing is our rate needs to be seriously lower. After taxes, health insurance, and the mortgage, we have less than $1,200/month to cover all other expenses. I guess that should be enough but right now it seems really tight.

The rates will be better with an FHA loan but you'll be paying PMI. The total cost of the loan will be far lower if you can avoid paying PMI. The deposit is NOT standard practice. I wouldn't talk to them again.

Yeah, I was surprised by that and really, really didn't like how hard he was pushing. I know on most people it must work (otherwise why would he do it?) but on me it just made me not want to do business with him at all. After I told him I'd get back in touch he tried to schedule an appointment for him to call me back instead of just letting me call him back when I was ready. At the end I basically told him that I felt like I was being pushed and instead of backing off he tried to tell me that the rate would jump up if I didn't act in the next couple of days. The one thing that occurs to me is that I sound a lot like a woman over the phone and I wonder if he uses that technique on women to "scare" them into making the deposit on the first call.
posted by nosh, daven, shtup at 6:59 AM on January 10, 2012

Best answer: Yeah, that sounds *really* shady nosh. Once you've made a deposit they've got ordinary people on the hook as the "sunk cost fallacy" kicks in & they'll then rack up the charges as high as they think they can push them.

btw a 90k repayment loan for 30 years at $754 / month: I make that a 9% interest rate. I hope that was really for a 15 year loan...
posted by pharm at 7:34 AM on January 10, 2012

ps. Try a local credit union?
posted by pharm at 7:35 AM on January 10, 2012

Response by poster: btw a 90k repayment loan for 30 years at $754 / month: I make that a 9% interest rate. I hope that was really for a 15 year loan...

That included home insurance and property taxes. So closer to $550 I guess if you're only looking at the principal and interest.
posted by nosh, daven, shtup at 7:39 AM on January 10, 2012

Here's my recommendation (I've gone through the mortgage process 5 or 6 times in my life).

First, It's usually a good idea to have an emergency fund. It should be large enough to cover your expenses for at least a couple months but ideally up to 6 months. If you don't have one, then it's probably a good idea to start one from the money you have on hand. This won't be the most efficient use of your money but it is probably the most prudent.

Second, assuming you have left over cash from the emergency fund and don't have any other major expenses in the near term (furnishings, cars, etc), then I would put all of it towards a refinanced mortgage.

For example, let's say you go with a 7 year adjustable rate mortgage. This one from Orange is 4% APR for the first 7 years, and closing costs would probably be around $4,000. Assuming you put $30,000 of your $110,000 in an emergency fund, you'd have ~$75,000 to apply to mortgage. This would result in a $125,000 mortgage and at 4% your monthly payment should be less than $600 a month for the first 7 years. Note, after the 7 years your rate will go up, but if you saved $500 a month, you'd have $42,000 at the end of the 7 years. So you could refinance again, this time with a mortgage of less than $85,000 (by applying the $42,000 to the remaining balance). Even if interest rates triple, a $90k mortgage would still be less than $1200 a month.

The reason I recommend throwing all the extra cash into the house is that mortgage rates are significantly higher than any interest rates for "safe" investments, so you are better off paying off the debt, than trying to save that money (since your debt grows faster than your savings).

Others have recommended the opposite, putting the bare minimum into your mortgage debt to get the payment you want, and then saving the rest. This is a viable option if you either expect to need access to the money within a couple years, or you fully expect saving rates to go up higher then 4% in a couple of years (so you can have savings that grows faster than your mortgage debt).

Good luck.
posted by forforf at 7:50 AM on January 10, 2012

Yes, but it's a more diverse investment portfolio that comes at the expense of a pile of mortgage debt: "Shall I invest 100% of my capital in real estate, or 50% in real estate and 50% in stocks and bonds" is a completely different investment decision to "shall I pay off half the mortgage on the house I live in or invest that capital in stocks and bonds & keep the mortgage?". That's the point.

Obviously the OP would be well advised to keep a liquidity buffer in the form of some cash savings, but the guaranteed tax free return on paying off the mortgage is very hard to beat in the current environment.
posted by pharm at 8:52 AM on January 10, 2012

Response by poster: One issue about the "guaranteed tax free return" gained by paying off debt: to truly realize the value of this return it's essential to actually save/invest this money. In practice, you get this "guaranteed tax free return" in the form of less money you have to pay each month on your mortgage bill. If you spend that money on things that you wouldn't otherwise spend them on, you're somewhat undoing the good you've done by paying down your mortgage.

The problem is, we're already spending some of that money; it's just that it's coming out of the total money we have now sitting dormant in a money market account. I'd much rather get that money out of our accounts altogether, eliminate some of our mortgage debt, reduce our monthly payments, and then focus on getting our spending in line with our income. Right now I think we're spending just a couple hundred more dollars/month than we take in, but that is eating into this cash. I kind of see this refinance as the first step towards being more financially responsible.

For example, right now I'm at 1% in my 401k plan (employer doesn't match funds) and I could probably easily and comfortably move up to 5%. We're not that young (mid 30s) but young enough that I feel like a little extra monthly liquidity is a good thing.

I like the idea of setting up a emergency fund too, although I'm not sure about $30k unless I could put it somewhere that was both safe *and* beat inflation.
posted by nosh, daven, shtup at 11:01 AM on January 10, 2012

I think you should check out recasting. In theory, this allows you to put a large chunk of money down on an existing loan and then they will recalculate your monthly mortgage payment. Then you don't have to do through all of the issues with refinancing such as closing costs and lower home value. You might get a better rate on the refi, but you may end up putting more in if your home value dropped.
posted by kookywon at 11:03 AM on January 10, 2012

...put it somewhere that was both safe *and* beat inflation

What you're looking for there are called TIPS (Treasury Inflation Protected Securities).

For something a little more liquid and easier for you to buy, you could look at a mutual fund based on a range of inflation protected securities or a similar ETF.
posted by VTX at 11:20 AM on January 10, 2012

Response by poster: I think you should check out recasting.

According to the article you linked to, FHA loans aren't eligible. Othewise it sounds perfect.
posted by nosh, daven, shtup at 6:11 PM on January 10, 2012

Response by poster: Self-derail: if I were to set up a 6 month "emergency" fund, is it supposed to be pre-or-post tax income? Federal, local, and state taxes, etc. take up around a quarter of my pre-tax income.
posted by nosh, daven, shtup at 8:23 AM on January 12, 2012

Best answer: When people talk about an "X month emergency fund" they're usually talking about having X months expenses saved up.

IOW enough cash that you can continue your current lifestyle for X months. Conceptually, this is separate from the cash you put aside monthly to cover annual expenses (car insurance etc).

How many months savings you deem appropriate is up to you: it depends on things like how easy it would be to get a new job in your chosen profession.
posted by pharm at 8:37 AM on January 12, 2012

Best answer: (That may not be entirely clear, so I'll try the bit about expenses again) IMO, it's a good idea to allocate a portion of each months income to a (real or notional) savings account to cover annual expenses. The cash accumulated here does *not* form part of the emergency fund, but said fund does need to include an allocation for covering those expenses. That way if you get (say) three big annual bills in the autumn you'll still be OK if you lose your job in September because you'll have saved both the cash to cover those bills & have the savings buffer to cover the rest of your living expenses.

Hope that makes sense!
posted by pharm at 8:42 AM on January 12, 2012

I think you should check out recasting.

Why would you want to recast a loan at 5% when current interest rates are closer to 4%?
posted by alms at 11:33 AM on January 12, 2012

Response by poster: Okay, so had a "duh" moment. I realized I could just use the same mortgage broker who handled the mortgage for our home!

I called her and she said she could do the refinance.

Here are the numbers she gave me:

Loan amount: $130,000
This would be a standard loan, so no more PMI.
(she agreed I should set up an emergency fund, that'd be around $25k or so)
Interest rate: 3.95%
Loan Term: 360 months
Monthly payment (including property taxes and home insurance): $852

Closing costs:
MMI Charges: $770
3rd Party: $465
Attorney/Title: $860
Tax/Fees: $200
Reserves/Escrow: $2400
Interest: $196

So looks like once you discount escrow closing costs are less than $2,300.

Do these numbers sound right? Is there anything here I'm missing?
posted by nosh, daven, shtup at 1:59 PM on January 12, 2012

Best answer: It looks like a good deal to me. Once you start the process but before you're too heavily invested in it to back out, you'll get a "good faith estimate" (GFE) pretty early on that will spell out all of the fees involved so if there is anything she forgot or is hiding for some reason, it will show up there.

For example, I think a 1% origination fee is pretty standard but maybe she able to waive it because it's a refinance and she did the first loan or something. The numbers final amounts you pay at closing will be listed on the HUD-1a and have to be pretty close to what you see on the GFE.

I would guess that you'll have to get a new appraisal (though I don't see that fee listed on there either) and depending on what the value comes back as, you might want to change the loan amount. As I said up-thread, I would put down just enough to get to 80% equity, especially if you plan on staying in the home for more than 10 years.
posted by VTX at 5:52 AM on January 13, 2012

At first glance I'd say this looks great. 3.95% is certainly much better than 5%. If you've worked with this women before and you were happy with her I'd say to go for it again.
posted by alms at 6:21 AM on January 13, 2012

Response by poster: VTX, her numbers included the appraisal fee under 3rd party services.

She entered $0 for the origination fee and I can't imagine that she would tack that on as a surprise.

I'm not sure how I would calculate the equity. Assuming the home value remains mostly unchanged (very likely; it's only been 8 months) that means the value is $210k. The most we'd be able to pay off is in the neighborhood of $100-105k (if we didn't set up an emergency fund). Wouldn't that be closer to around 50% equity?
posted by nosh, daven, shtup at 8:57 AM on January 13, 2012

Thanks everyone. I think we're probably going yo go with the broker and set up an emergency fund as well.

Someone mentioned TIPS above are they liquid enough for an emergency fund? Otherwise by setting up an emergency fund we will lose value from inflation.
posted by Deathalicious at 3:46 PM on January 13, 2012

Best answer: MoonOrb is right, I meant 20% equity. The loan would be for 80% of the value. I would take the extra cash and invest it as well as leaving myself a a cushion of cash (an emergency fund).

In my neck of the woods, appraisals done for a purchase have a tendency to come back at exactly the purchase price. When they do an appraisal for a re-fi, sometimes the value ends up being higher.

Mortgage companies don't really get to have surprises unless they're in your favor. If there is something we're missing, it WILL show up on the GFE. The numbers you posted look really good.

Buying TIPS straight from the treasury would be liquid but it would be kind of a PITA to manage. You'd want to stagger the maturities so that you'll always have something that is going to mature pretty soon. That way, if you need to cash some in, you'll have a pay the bare minimum of penalty (usually a month or two of interest) and probably nothing at all. If I were you, I would buy one of the mutual funds based on TIPS that I linked above. Basically, they do the managing for you. You'll never pay a penalty and someone else (with a staff of professionals) manages the terms for you. The only draw back is that the value of the fund can fluctuate slightly since it is based on the current value of the securities of the fund rather the value at maturity. Short term, it can lose value (especially if the stock market really takes off).

That said, they're pretty stable and are what I would use were I in your shoes.
posted by VTX at 8:21 PM on January 13, 2012

Response by poster: Just got the GFE. Numbers are pretty much the same, except I was able to get 3.875%.

We'll probably just put the rest of the money into a savings or MMA. I took a look at the funds mentioned by VTX and wasn't crazy about the huge drop they took in 2008. Since these funds are supposed to stick around for emergency use I can live with the low percentage if that's the price for low risk.

Thanks everyone!
posted by nosh, daven, shtup at 12:06 PM on January 24, 2012

Response by poster: Origination fee is just $770, or 0.6% which seems pretty good to me.
posted by nosh, daven, shtup at 12:14 PM on January 24, 2012

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