$100,000 paid off on house…but decision time
This past payment has marked a momentous occasion, if you happen to like multiples of 10, which I do. We’ve officially paid off over $100,000 on our home. Based on some calculations, we’re 5 years ahead of schedule for paying off our home!
As some background for you, we bought our home in DC for about $400,000 back in 2004. We had a combination of a 5/1 interest-only loan (80%) and 15 year balloon (20%), which meant a lower payment, but 100% financing and a big risk to the bank and us if either of us lost our job. We also had over $115,000 in debt outside of the home back then too.
As of today, we’ve paid off all our debt (the last one being my student loan in Nov 2009), have a good 5 figures in cash savings, 6 figures in retirement (but nowhere near what we’ll really need), and our 2nd mortgage paid off and a small chunk of our primary mortgage paid down. Overall, we’re closing in fast on a half-million dollar net worth, counting home equity (but that’s always a hedgy calculation). Life has been good for us financially.
But it’s decision time. We thought this house would be good for 5 years; basically a starter home. We’ve been in it for over 7. We’ve gotten to be good friends with our neighbors, we like the local area and are learning to love it more. But we have to ask…
– Should we stay or
– Should we go?
(yes, that was from a song)
There’s a lot that we have to consider and I won’t list everything here, but lets consider the financials:
– We might break even on the sale of the house, minus realtor fees
– We need to consider WHY we would move (bigger, newer, smaller, etc. house…new jobs…change of life?).
– Should we refinance? Should we go short-term (another variable mortgage like a 5/5) or longer-term (15, 20 or 30 years)?
That last question has a lot of impact because it implies how long we stay here, when can I close some credit cards (cause it’ll hit our credit scores) and, maybe if the wife lets me and I can find the right one, when I can replace my truck (another hit on credit scores and our piggy bank).
Ok, so let’s assume we stay. We have to decide on:
- Stay with our current mortgage: We have a variable rate (5/1), interest-only mortgage (for only 3 more years) that has saved us tons of money since the rate went to variable in 2009 (it’s under 3% right now). BUT, the 6-month LIBOR rate, which is our prime rate, has been going up recently. It went from .40 to .80, but now it’s at .70, so I don’t know what to think. We have a couple more months until the next reset though…
- Another variable rate mortgage: We’ve been lucky with our current mortgage, but Pentagon Federal Credit Union is advertising a 5/5 loan (not interest-only) in the low 3% range AND they pay your closing costs. That’s the biggest reason I’m looking at that loan option. You can spend thousands in closing costs, not counting the escrow that you get back.
- 30 year mortgage:Ok, here’s where we decide on staying in our home for a while. If we’re paying closing costs and committing to a higher mortgage payment, then we need to stick around for a few years for that payback period on the costs.
- 15 year mortgage: Same as the 30-year (gotta stay in the house, etc.), but with a lower rate and higher payment (because it’s shorter-term).
Ok, so what do we do? I know you all can’t help with our decision of whether to stay in the home or not, but what have your experiences been on refinancing, including something like the PenFed 5/5 loan with no closing costs? Keep in mind we have A-rating credit scores (I’ve checked).
If you have good credit and a good income you can get better rates than Pentagon on fixed rather than ARM. I have a PFCU 5/5 loan on our starter home (now a rental), but when we went to refinance our current home we went elsewhere (AIM mortgage, to be specific, but there are probably others). I got a 15 yr fixed 2.875 rather than the 3.125 the 5/5 was at. Rates will be low for a while, but they will go up. There is a reason they offer to pay your closing costs, and its not the good of their hearts…
Clever Dude says
@Kat, good point on the reasoning for no closing costs. I just didn’t know what people with good credit were actually seeing out there. If I can get a 15 year mortgage for .25-.5 less, then it would pay back the closing costs much more quickly and we wouldn’t need to worry about any variable rates.
I would refinance into a 15 yr. Rates are going to go up, and with a mortgage as large as yours, I wouldn’t take the risk. If you can go into a 15 yr fixed @ 3%, that owuld be great.
Tough to say exactly what you should do, but a couple ideas I’d throw out:
– To give you flexibility, you could refinance into a 30-year mortgage, but resolve to make payments as if it’s a 15-year mortgage. I like this because if something really goes haywire–like an unexpected layoff–you have the option of making only the required mortgage payment, which will be a lot less than if you signed up for a 15-yr mortgage to begin with. Yeah, your rate will be a bit more, but if you truly make payments as if it were a 15-yr mortgage, at the increment in today’s 30-yr vs. 15-yr rates, you’re not talking a huge cash difference. With the difference, you’re buying flexibility.
– Maybe there are improvements you can make to your house so you’ll be content to stay there long enough to make refinancing pay off. Sounds like the externalities–neighborhood, etc.–are all good, so make the house more to your liking and all is well!
I recently (Nov) refinanced to a 3.5% 15 year from a 6.25 30 year with closing cost included. That way if I changed my mind(found an offer I couln’t refuse) and wanted to sell. I didn’t have to wait for a ‘closing cost payback’. And if I didn’t find the deal of the century, I could withstand a sudden climb in the rates. Also. If rates go down further I can refi again without waiting. It looks like since my refi rates have gone down .25. If I can get .50 or more, I’d probably refi again.
Refi and stay put. It sounds like you have made some AWESOME progress killing debt and I would encourage you to keep that going. Since you are in a high-rent district, a move would likely mean a more expensive home. You say you like the neighbors and the area -so stick with a good thing for a while longer.
As for the refi, I do not understand why anyone would take a variable mortgage of any kind these days. Rates are as low as you will likely ever see again in your lifetime! Lock it in!! If you can swing it, do the 15 year. If you can’t, do the 30 year and endevor to pay it as a 15 or as soon as possible. I prefer to just do the 15 year if you can since the vast majority of people who intend to make extra payments never do.
I refinanced about 3 months ago at 3.0%15 yr fixed zero points. If you have good credit, you can easily get 3% money today.
I’ve personnally never liked the term “starter home”. Sounds like it came with training wheels or something. Instead assess whether or not it still meets your needs or if you actually need a different type/size/location of house. Chances are, in 30-40 years you’ll be downsizing to exactly the same sort of house. Move on if you need to, but keep in mind you’ll be spending the next few decades paying off successively larger mortgages, filling big houses up more with furniture and paying maintenance costs and higher utilities and taxes. At the end then what, you downsize the house and get rid of most of the stuff you acquired. Instead maybe consider staying put and retiring a decade or two earlier…
Just my perspective as I dream of getting out of my 3500sqft home and into to something tiny and retiring in 5-7 years (I’m 48). I’d rather spend my time travelling, painting, taking another degree or anything really than looking at another 17yrs of work to build the extra funds needed to support this albatross in retirement. Even with a paid off mortgage our property taxes and utilities are $12k/yr in today’s dollars. Our recent roof replacement was $18k, in the next 5 yrs the windows will need doing. When we built 20 years ago we spent $22k on them – I hate to think what they’ll cost now.
I think back fondly to our first home, a little townhouse we bought for $67k in 1984. While this place has been lovely, most days I wish we’d just stayed put and invested or travelled with the rest instead of living like frugal zombies intent on paying off the giant mortgage.
My wife and I go house shopping about every six months, and then decide we like the idea of being debt free more than stainless and granite. Who knows what we’ll decide next time though…
I would say look around where you live now and see what rents are. Chances are they are pretty high compared to your mortgage. If so get a 30 yr fixed at like 3.8% if it will cash flow every month and rent out your starter home after you move into your new home. This will do amazing things for your cash flow and taxes which will bee reflected in your net worth.
Clever Dude says
Thanks all for the comments and suggestions. Just to be clear, I did mention that if we were to move to a new home, we wouldn’t be looking at a new home in our area. It just doesn’t make sense to us, but I didn’t explain all the reasons why (we have more room than we need now, the cost of a new home and loss on the sale of our current home, etc.).
If we were to move, it would be for a new job in a different state or even different country (doubtful, but never know). We’re looking at whether we want to commit the thousands to closing costs when we’re currently just paying under 3%. We just don’t know where the market will go. We might wait till the next reset in a few months and decide then.