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Author: CurtisElliott Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 127815  
Subject: Re: When to Refinance Date: 9/25/2005 5:31 PM
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Hey, Mew.

Just a few thought to mull, mew. (couldn't resist)

Anyway, here's where I am. I recently refinanced, in March 2005, to an interest only loan in order to pay off one HELOC and use the extra money by not paying principal, to pay off my credit card debt and thinking within the next few years we would be selling the house. The appraisal was 60K over what I eventually found out later was the value of my home so now I'm living in a home that has only about 9K equity (per two realtors) and if I sold today and got the realtor's price and paid 6% and loan fees, I would have to bring a check for about $3K to the closing.

So...you're really talking about giving away 12k (9k equity + 3k costs) 3k (or 12k) should certainly be factored into the equation. That would almost definately set you back even further. Plus you'll be paying the interest on that balance depending on where you borrowed the money. (I'm assuming you don't have it lying around in savings)


I'm over the fact that I should have examined the appraisal better. I would never have allowed myself to take out all the equity in my home but I have to take the blame myself for blindly trusting the overdone appraisal though I did manage to roll my HE into the house and paid off a bunch of smaller credit card balances.

Let's be sure not to repeat the same mistakes by letting emotions rule the day.

Now I'm trying to figure out the best way to get back on track, pay off the CC debt and have some equity again. The house is a "starter home" 750 SF worth now about $200K so it's not like I have a mansion or anything where I can scale down to something smaller.

Transaction costs of selling and buying and moving would be murderous to an already tight budget.

I have mulled over and over if it would make sense to sell this house and rent for awhile. Or sell the house and buy something even smaller and cheaper, though this would really make live not fun and with no money to put down, and the costs associated with selling and buying again, that option seems silly.

As previously mentioned, is the cost differential between renting vs. buying significant enough to pull you ahead in this lifetime? How quickly would you recoup the transaction costs with monies saved by renting? Are you factoring in rental increases?

I did the rent vs. buy calculator but I don't know enough about all those things they ask, the inflation, the anticipated home value, I can't get all these things accurate to get a good idea. All in all, it just seems that staying in the house is the cheapest option. BUT, a lot of the equity I was planning on would come for an appreciation in the market and the way people are talking about real estate is scaring me.

The biggest consideration that I would factor in here is: How long am I planning on staying in this house? If you are staying in the area or region for the long haul, than real estate "bubble" concerns become basically moot. If, however you are planning on leaving the area by or about 2008 when the interest only feature is due to adjust, than selling is a viable alternative if you feel you wouldn't be able to handle the increased mortgage payments. HOWEVER, you would need to consider that if you are aggressively paying down high interest debt, than those funds can be used to pay a higher monthly mortgage. More calculations are needed here.


But now, what about the loan I have? My terms are; 5.25% interest until 2008 when I would need to sell or refinance. Should I hold this loan all the way until it ends in May 2008 or try to refinance before that to lock in an interest rate?

Refinancing is expensive. Try another calculator to get real life figures. It again depends much on your time horizons. How long do you anticipate staying in the house. It usually takes several years before you breakeven and begin recouping the savings from incremental refinancings.

Ideally, what we would like to do is pay off the credit cards quickly and then get a 15 year mortgage to try to get more equity in the home so that if we stay in this house, we will actually see a day when we can own it, or if we sell, we have equity.

This sounds like the best approach yet. You will be thousands of $$ ahead of the game by staying put and aggressively paying down debt. You will utimately have greater financial freedom and flexibility with much less stress and worry about the micro/macro cycles pulling at you now.


Any ideas what is best? Stay put and pay off the credit cards and refinance (or sell) in 3 years? Or sell now and rent or sell now and buy?

SEE ABOVE. Although I can't, nor can anyone else for that matter, address the 3 year question. It's just impossible to know what anything will look like then. Certainly, by paying off credit cards your personal financial picture will most assuredly look more attractive than it does today.

Food for thought,

Curtis
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