<p>Five years ago, when our youngest was entering her freshman year, we refinanced our 15 year mortgage (10 years left) to a 30 year mortgage for all the reasons the op listed. It provided us with 15K/year flexibility. We have 2 kids, 1 year apart. So 3 years of overlap. Just sent the last payment a month ago (woohoo!!). In retrospect, W and I both stayed employed, unfortunately received a modest inheritance, and as such, we didnt NEED the flexibility. But it was definitely worth it in my opinion. You sound like responsible people who have thought this through and will not put yourselves in an overly risky situation.</p>
<p>My vote is for not to refinance. You’ll be mortgage free in three years. Let the kids take our loans, especially for graduate school. If you’re in a position to help them pay of those loans in three years one you’re mortgage free then do that</p>
<p>Just my two cents.</p>
<p>Sent from my DROID BIONIC using CC</p>
<p>i am in a similar situation, except my dh and i both work in IT. our jobs aren’t secure. my suggestion to the OP:</p>
<p>i would NOT refi the 1st mortgage since you are within 4 years of paying it off. Most of your payments now are toward principle reduction. This is a very important factor, i am surprised that no one brought it up. Mortgage payments are front loaded. In the earlier years, most of the payments are towards interest. I would instead get a home equity line of credit. I would borrow the amount whenever needed. Make minimum payments. It doesn’t make sense to borrow a fixed amount as you don’t need to pay all your children’s college expense at once. Once your 1st is paid off in 2016, you can focus on getting the equityline paid off.</p>
<p>OP, it would be worth while for you to use a mortgage calculator (online) to do a side by side comparison of how much interest you will be paying during the life of the loan.</p>
<p>When H retired, he went around his office & asked his buddies when they planned to retire. Many said they had so much college debt from paying for their kids that they likely never could retire. It was sad and sobering for him. Glad he was able to retire but sad for his friends that decisions were made so they will be unable to–many are in their 60s & beyond, some don’t like their jobs much and aren’t sure how much longer the jobs will exist.</p>
<p>Just wondering if less expensive college options might be worth considering as well. D’s CC experience was about $1K/semester, plus books. That got her 3 semesters worth of credits for <$5K. Just a thought.</p>
<p>I think this is a great idea. You can always accelerate the principal payments once your cash flow situation improves (either after they are out of school or in those months when you may have some extra funds.)</p>
<p>Most HELOCs I am aware of are adjustable rate while mortgages tend to be EITHER fixed or adjustable. That is something to keep in mind as well. Whatever you decide, be sure that your new option has no pre-payment penalty. Ours had none, so we repaid MUCH faster than scheduled and were able to happily pay off our mortgage and save LOTS of $$ in interest. This was important for us to do before H retired.</p>
<p>Without taking interest into consideration, they will come out $293,600 ahead if they do NOT refinance their house, pay off the mortgages with current savings and then put the $2900/month they are spending back into savings, on top of the $33,000 they are saving now. Those funds together will cover every year except year 2 and a LITTLE bit of year 1–for a whopping shortage of $400 for the two years combined. (actually with the lower costs in the following years, MORE than cover the costs). The interest you save over the next 3 years will more than cover that $400. Running the numbers I just can’t see how refinancing is a better option.</p>
<p>The figure above is the amount you would saving if you put the $2900/month into your savings minus what is owed currently on your house or more concisely, all of the money you are paying now on your mortgage plus one year of your current savings rate will cover every penny you outlined above. Take the $124K out of savings, pay off your mortgage, put the $2900/month into a savings plan and call it good. You can tap the equity in your house if you REALLY, REALLY, REALLY needed to but I think you will find that you will be just fine.</p>
<p>If I understand this correctly, Cupcake’s $90K college fund will be depleted over the course of the next two years as her oldest is finishing her undergrad, possibly enrolling in grad school, and the middle child will be a college freshman. </p>
<p>As I see it you have a couple options -</p>
<ul>
<li><p>Freshman takes out a student loan and you & DH pay it down once your mortgage payments stop.</p></li>
<li><p>You refinance.</p></li>
</ul>
<p>DH & I just refinanced our house with a 15 year loan. We had about 6 years left, with a low balance and our house is worth at least six times the remaining mortgage. We did it because it was free (initiated by our lender) Our interest rate dropped a point and lowered our payment in half. We will use the extra money to stockpile savings for college.</p>
<p>SteveMA, that was great that you ran those numbers for Cupcake. I totally agree with you. Pay off your mortgage now then put the $2900 back into savings every month. In the long run, you will be saving yourself almost $300K. Refinancing is a short-term solution that will cost you in the long run. Plus, you won’t have that debt hanging over your head.</p>
<p>I thought about the crazy amount of new interest too. You’re pretty much only paying principle now.</p>
<p>Sent from my DROID BIONIC using CC</p>
<p>ah, a nice complicated financial planning “problem” with several reasonable options and responsible people. Love it. </p>
<p>Here’s how I’d plan this one out were I you guys. First off, sounds like you have $90k in savings earning little or no interest, right? I’m not against taking on debt but in your case I’d pay off the 1st mortgage that is at 6% interest with the savings. You can use your HELOC for cash flow/emergency reserves. Now, you have roughly $27k more per year in cash flow due to eliminating the $2,300 mortgage payment. This would be a bit risky due to the HELOC being adjustable and could wind up much higher later on. </p>
<p>However, you have a potential back-up plan in case this happens - you can borrow from your 401K, paying the interest back to yourself! Risky? Not really, because in your case the WORST case is you’d have to have that on your HELOC at a higher interest rate. So… you pay off the mortgage, use the HELOC if more current cash flow is needed (shouldn’t be much with added $2,300/mth); then, IF HELOC rate climbs above, say 5%, then borrow from 401k to pay down HELOC (but keep it open). IF you lose your job and have to pay back 401K, you can take it from the HELOC so no fear of that loan becoming a distribution (if you were not able to pay it back). </p>
<p>I’d maybe try to get the HELOC extended to a bit more $$$ just in case.</p>
<p>We just refinanced our house – had four years left on our primary mortgage and a HELOC used for a portion of college expenses. Similar loan numbers to OP, loan balance (primary plus HELOC) is about 1/4 of market value. Refinanced to 15 years at 2.625% – old rate was 5.875% fixed on the primary and 4.25% adjustable on the HELOC. We have lots of equity since we bought in 1998 at the bottom of the last down market and only used the HELOC for college. The refi dropped our payments by $400/mo. We pulled out a modest amount of cash for urgently needed home repairs that won’t wait til S2 graduates, but otherwise it was pretty much a straight refi.</p>
<p>We have paid for college mostly through current income (we live pretty frugally and save aggressively), but since I am no longer working due to health issues, what I used to contribute to EFC has now been replaced by $$ from the HELOC over the past year.</p>
<p>We will continue with the new mortgage payments until S2 graduates, and allocate the savings from the lower mortgage payment to college on top of what we are already putting aside. Then after graduation, we’ll throw the entire thing at the mortgage and long-term savings. Our mortgage lender does not write for anything less than 15 years – we had wanted to refi for ten years – but there is no prepayment penalty. We ran the numbers and in this scenario, the mortgage will be paid off within 8-9 years, so we wind up with the result we wanted. </p>
<p>It helps a lot that our mortgage has always been a fairly low % of income. We live in an expensive area, but we bought small 15 years ago in anticipation of college expenses. </p>
<p>OP, is your refi an interest only loan? That much difference in pmt seems quite extreme!</p>
<p>Personally, I would not take all my available cash and pay off the mortgages now. G-d forbid you or your spouse lose a job, due to cuts or illness (BTDT). It is far more difficult to borrow when things go south and when you really NEED that loan. We have some liquid funds, but the majority of our savings is through retirement vehicles.</p>
<p>rundmc, the problem with that scenario is that OP would be using debt as an emergency financing vehicle, which would require payments to be made even as she has little/no income to make those payments. </p>
<p>Using a HELOC to manage cash flow from one semester to the next I totally get (we do that – borrow HELOC to pay the bill, then pay HELOC down over the semester).</p>
<p>401(k) loans aren’t instant cash – I was a 401(k) administrator for many years, and it takes time to get loans approved and checks issued. That assumes the 401(k) plan allows loans. Not all of them do. The limit is $50k in any event and unless the loan is for the purchase of a primary residence, it must be repaid within five years. Run $50k @ 4.25% for five years – it ain’t pretty. Lose your job with an outstanding loan – it gets even uglier. The loan balance becomes subject to federal, state & local taxes, plus (if you are under 59.5) a 10% penalty.</p>
<p>I think the interest would be about 30 k.</p>
<p>That’s assuming a 125I loan over thirty years.</p>
<p>Do you know what your closing costs would be for the new loan? And how much interest you’d be paying for the next few years? I’d compare it that way.</p>
<p>Sent from my DROID BIONIC using CC</p>
<p>OP, does your $2900/mo. payment include taxes and insurance?</p>
<p>I ask because my pre-refi numbers (debt, interest rates, time remaining) are similar to yours and our payments were almost 40% lower.</p>
<p>CD makes a good point. Property tax in some places can be a big factor. </p>
<p>“Most of your payments now are toward principle reduction. This is a very important factor, i am surprised that no one brought it up.” - I was going to mention that. We have avoided refinance, despite the tempting low rates. We have 7 years left and like seeing the principal paid down at a faster rate.</p>
<p>Wow, I appreciate all of the comments people have shared. I am certainly considering what everyone has to share.</p>
<p>I think, in attempt to share everything I thought relevant, I perhaps provided some irrelevant info and not enough of what I should have! (This would not come as a surprise to anyone who knows me well!!!)</p>
<p>With our current financial situation (no changes), we will pay off our mortgage in just under 4 years. HELOC (if paid at current rate of $600 per month) would then be paid off 2 years later. If we chose to add our mortgage amount (since it would be paid off in 45 months), we’d pay the HELOC off 5 months later.</p>
<p>If we refinance, but continue our current payments of $2900 per month, we pay off everything in 43 months. That saves us $2900 a month for 3 months (almost 9K), plus the additional 2 years of $600 per month (about 14K)</p>
<p>That’s our plan. The refinance would save us about 23K.</p>
<p>I somehow miscalculated the numbers I need beyond our current 33K per year. It’s actually about 148K, spread out over the next 7 years. </p>
<p>We have college savings. If we pay off mortgage in the above mentioned time frame, that amount can also go to college expenses, which would cover the difference.</p>
<p>Does the above make more sense?</p>
<p>Cupcake50–do you have enough in savings to pay for the rest of this year in college and pay off the mortgage? I think you think you have to have all of your funds ready to go the first day of school. Most schools do allow you to pay monthly. I personally would suggest doing that vs paying a big lump sum either way.</p>
<p>To make things more confusing, I wonder how it would all work out if you got a Pentagon Federal home equity loan for 5 years. They have a 5 year home equity loan, for a rate of 1.99%, if you apply online. I think the only closing cost you pay would be the appraisal, if one is even required. Then with that loan, you pay off the mortgage and the current HELOC. Seems you could pay the whole shebang off in 5 years, at far lower payments, or you could pay it all off early.</p>
<p>I love PenFed, they are a great credit union, they have given us so much money for so cheap! They have a 5/5 HELOC, where you only pay the appraisal if one is required. The starting rate is 3.75%, but it stays that way for 5 years. Then, if it adjusts, it adjusts for a 5 year time period. And then the very best deal they have, is they will give you an auto loan for 5 years for 1.49%. So you say, hey, I don’t need a car loan. But…on a paid off car, they will send you a check. They sent us one for 14K and for 17K, on two paid off cars. How do you beat 1.49% for 5 years?</p>
<p>Well, actually you can beat that, Slate has a credit card that they will give for up to 25K, no annual fee, 15 months at 0% and no balance transfer fee. You can get one, and your husband too. But I guess it is all a matter of restraint, and it sounds like you have plenty. I just need a certain amount of money borrowed (we bought a bunch of short sale condos) and I hate paying interest, so we shuffle everything around like crazy to pay the lowest amount of interest. It wouldn’t be for everyone, but your situation sounds pretty great to me!</p>
<p>Just to clear up what Countingdown said regarding the problem with my pay-off, use HELOC scenario… I don’t think you get what I suggested. They have $90 doing NOTHING as far as I can tell, and a $90k loan at 6% ($5,400 interest annual PAID). All they’d be doing is using the cash to pay off a 6% loan and then only taking on debt if NEEDED. They already have the debt, so you can’t say they’re “funding emergency with debt” any more than if they used the current cash for an emergency and still had the $90k mortgage debt. It would just be “as needed” my way and also cheaper while the HELOC rate is below 6% (quite some time if the Fed gets their way). </p>
<p>As for 401K’s not being “instant cash”, they wouldn’t need and instant cash so it makes no dif. They’d only tap the 401K if NEEDED due to HELOC interest rate getting too high. They aren’t ever forced to touch the 401k. </p>
<p>Having $90k in “savings” with today’s near-0% interest rate is a foolish thing to do when you have a 6% mortgage and also a 3% HELOC you can access. Paying off the mortgage is an instant 6% return for the 4 years and they very likely would never need to add to their HELOC due to the cash flow increase.</p>