What should I do with my house and mortgage?
March 22, 2014 7:01 AM   Subscribe

I have never refinanced my house, but am weighing that vs. investing my money elsewhere. Please advise.

Basic facts. I live in a town frequently listed as one of the best US Small Towns. As real estate prices spiked in 2005, I bought a ranch house for $220,000. All I could afford at the time was an interest-only loan. My mortgage has been $1400 a month.

Since then, I've gotten a divorce and am now paying that amount by myself each month - essentially renting the place from myself. I have redone the kitchen, French doors, etc, and feel like I need to have some actual equity in this house though. The house is currently valued about $5000 less than I bought it for, which is an improvement, but still.

I am confident that the market will slowly improve and I'm considering a move to the city anyway and just renting my place out.

What would you do here? Refinance the house and start making small deposits toward principal each month? Or just hang onto the house and invest money elsewhere? FWIW, I am 40 and make about $60,000/year. Thanks!
posted by deern the headlice to Home & Garden (12 answers total) 1 user marked this as a favorite
Have you only been paying the interest? What's your interest rate? It might be hard to refi if your house value has gone down and yiu haven't paid off the principal at all.

Without knowing much more I'd say you should start paying off the principal immediately. So basically overpay every month. I would advise using a mortgage calculator to see what your monthly payments would be if it were a 30 year fixed, and try to match those every month. Interest only loans typically have a better interest rate than 30 year fixed, so if you have the discipline to overpay every month they can be a good deal. Stop paying for improv ents to the house, and put that money into mortgage payments instead. At 40, you're currently looking at paying the mortgage (and not retiring) til you're 70 if you start overpaying now, so get overpaying!
posted by Joh at 7:29 AM on March 22, 2014 [1 favorite]

The one thing I for sure wouldn't want to do is rent out the house. A few months of struggling to find a tenant, or getting a tenant who doesn't take proper care of things leading to added repairs, or even just the higher property tax rate you pay as a landlord compared to an owner-occupier (you'd need to check if this applies in your area), might quickly add up to more than the $5000 loss you're trying to avoid.

A refinance is worth looking into, but calculate the break-even point, where the savings from the lower payment over however many months begins to outweigh the cost of the refinance. If the break-even point is after you think you might move to the city, I wouldn't refinance.

Can you make extra payments toward principal on your current loan without a penalty? If so, I'd start making small extra payments now, so that you won't be underwater and will be able to afford a realtor's commission by the time you want to move. That way, you'll be able to sell without it being a sudden blow to the wallet.
posted by Bentobox Humperdinck at 7:58 AM on March 22, 2014 [1 favorite]

When do you have to start paying back the principal? What is your interest rate?
posted by metasarah at 8:19 AM on March 22, 2014 [1 favorite]

Response by poster: Oops, interest rate is 6%
posted by deern the headlice at 8:25 AM on March 22, 2014

You're unlikely to get a guaranteed 6% tax free return anywhere else. Paying off the principle on the mortgage on the other hand gets you exactly that. Paying off the mortgage to the point where you can refinance to a significantly lower rate gets you an even bigger payoff.
posted by pharm at 9:24 AM on March 22, 2014 [5 favorites]

Interest only loans generally require you to start paying back principal after a set number of years. How does that work for you?

If the interest you're paying on the mortgage is larger than average post-tax investment yield, you should be paying it down as fast as you can. (I would argue that it's worth doing even if investments would pay slightly more because there is zero risk.)

If I understand your situation right, I'm a bit worried. You owe the same amount on this house as you did when you bought it ten years ago? Do you have other significant investments elsewhere? If you refinanced, what would your interest rate and monthly payments (including principal) be?
posted by metasarah at 11:07 AM on March 22, 2014

Refinance it, and don't get an interest-only loan. They put you in a worse situation than renting, because you're not building equity yet you're on the hook for all repairs, loss in value, etc. Get out of this trap as soon as you can.

Pharm is right -- this is a great return rate. Refi, then pay off.
posted by Capri at 11:16 AM on March 22, 2014

6%, interest only loan? I'd be doing everything I could to get into a real mortgage (i.e. 30 year fixed, you should be able to significantly reduce your rate). 60K/year, you should be able to get that. Start asking your friends and neighbors about mortgage brokers.
posted by humboldt32 at 11:19 AM on March 22, 2014

Imagine that you don't actually own this house - if the opportunity arose today to buy this house for 220k inc costs, would you still buy it?
posted by molloy at 11:40 AM on March 22, 2014

Sell it, take the loss, move on.

You will sleep SO much better at night.
posted by Ruthless Bunny at 4:24 PM on March 22, 2014

Taking a quick look at bankrate.com, 30 year mortgages seem to be in the 4.0-4.5% range. If your mortgage is $200,000 that would put your monthly payment around $1000 - a significant savings from your current $1400 a month at 6%.

If you could refinance your existing mortgage at current rates with no points or fees, it would be absolutely the right thing to do, if you plan on still being in the house just six months from now. However, you will probably have to pay some fees, maybe some points and may need to payoff a small amount to get the mortgage amount down to 80%. Add of these up and compare the monthly savings. How long are you absolutely sure you will stay in the house? Do you break-even in that amount of time. Personally, if it takes more than 12-24 months to break even, I would hesitate because a better deal may come along or might not stay as long as planned.

If it doesn't make sense to refinance, I would start putting some money towards equity just because a guaranteed 6% return is a really good deal (assuming that you already have enough rainy day money and some liquid assets somewhere else).
posted by metahawk at 4:45 PM on March 22, 2014

Do you have the savings for an additional down-payment? If the house is worth less than when you bought it and you've been on an interest-only loan, banks may not be willing to refinance without you putting more money down.

Over the next couple of years, it's quite likely that interest rates will go up as they've been abnormally low since the financial crisis. That means that if you're going to refinance, sooner is better than later though this is on the time horizon of years.
posted by bsdfish at 8:47 AM on March 23, 2014

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