Am I doing the right thing re: mortgage and another debt?


#1

When we bought our house in 2013, we could only afford an adjustable mortgage. We were in not great shape financially, but thanks to our credit union and a decent credit score, we were able to buy the house.

Over the years that have passed, we’ve really gotten a lot of our finances in order and been able to save quite a bit of money while paying down a lot of debt.

Now the time has come for us to refinance the house to lock into a fixed rate before (I believe) rates go up again. We have two choices: A and B.

Choice A:
Refinance 148,000 (remaining balance on mortgage), 30 yrs @ 4.5% interest.

Choice B:
Refinance 170,000, 30 yrs @ 4.5% interest. Which would put us up into PMI territory.

The reason we might do choice B is that my wife’s father, in his infinite wisdom, got her a loan for college. But he doesn’t trust the government, so he got her a personal, unsecured loan for $38,000 at 8.5% interest. We’ve been paying on that damn thing for 15 years now, and it’s just now down to $19,000. If we went with choice B, we could pay that loan off and that amount would be at 4.5% interest instead of 8%. (the banker was “nice” enough to lower it to 8% a few years ago.)

If we go with choice A, we can have a lower mortgage amount AND get a home equity loan for about $10,000 at 3% interest. Throw in some money we have stashed away and finish paying that personal loan off. That will free up the $400 per month we’ve been sending to pay off her college loan that can now go to the home equity loan and some other debt.

I’m thinking choice A is the way to go. I’d rather have the lower mortgage debt and still pay off the personal loan than get a huge mortgage.

Is that the way to go? What do you think? Is this so obvious I’m making it harder than it needs to be?

Thanks!

P.S. When this is over, I can tell you about the $178,000 in student loans we owe.


#2

A few questions - have you looked into resources to refinance those student loans and the personal loan? I’ve heard that SoFi does a good job with both, and there are links around the web that will give you $100 to $300 for using them.

I personally would not want to trade unsecured debt (personal loan, student loans) for secured debt (mortgage) unless it was an absolute must. Especially since it gets you into PMI territory, you would need to look at how much are you paying toward PMI and count that as a type of “interest” cost to carrying a larger loan. It sounds like you can pay off the personal loan without going to route B, so I would go that way.


#3

I like choice A better, PMI is the worst, it truly feels like throwing money away every month. Most HELOC are interest only for the first 10 years or so, so you can catch up on the initial 10k balance at your own pace and it is likely only around 4% for some time to come.


#4

One thing to think about the student loans is if they are dischargable in bankruptcy or not. All things being equal, I’d rather have mortgage debt that can be discharged if I ever go financially belly up rather than a student loan if it was of a type that was non-dischargable which most aren’t.


#5

Are you intentionally refinancing into a 30 year loan to lower the mortgage payment as opposed to refinancing but sticking with the remaining term of the original mortgage which I’m guessing is 26+ years remaining since you bought in 2013?

How much will PMI cost you and how soon can you eliminate it versus the projected interest savings? Would refinancing more than the remaining balance but just at the threshold for getting charged PMI be a middle ground? So you’re borrowing more to to reduce the 8% interest student loan balance but not enough to get charged PMI. And then focus on paying down what’s left of the student loan balance quickly?


#6

I’d go with Choice A and work like crazy to pay off the 8% loan (or work like crazy to rebuild your cash stash if you use a lot of it to pay the loan off). Yes the interest rate is high, but if you aggressively pay it down, the actual interest cost would be a pretty small amount. Why take 30 years to pay it off when you can hammer it and get it done quickly? Plus the PMI cost would probably be higher than the interest you would be saving!

John


#7

Ok. Lots of good responses here, and I appreciate the input.

We’ve decided to refinance the house with Choice A. Straight refi, but getting us from an adjustable to fixed rate.

We’ve saved up some money, enough to pay off a lot of our personal loan. AND, given that we live in a very hot market right now, our appraisal ought to come back at a high enough point that we’ll be able to get a HELOC at 3% interest. We’ll use that money to finish the other part of the $19,000 personal loan. We can pay that loan off aggressively, because our monthly payment for the personal loan has been $400 a month. We’ll start sending that much to pay off the HELOC, which ought to get rid of it in a couple of years. (It will actually be $450 a month due to some snowballing of debt I’ve been doing.)

When that’s done, we roll that total payment towards student loans.

It’s a long, long, long-term plan, but when you get yourself in as deep a hole as we’re in AND have the income we have as teachers in North Carolina, it has to be.


#8

Long term plans are just fine! I first started much of my planning over 10 years ago, and here I am 10 years later having achieved many of my goals and getting closer to others. The time will pass whether or not you’re working toward a goal- so it’s a good idea to spend it improving your life!


#9

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