Help with Refinance

Here is my situation: I have a condo that I bought for $166k and is probably worth about $130k now (average of many online estimators). Still owe $146k on it. Suck. I also have a terrible interest rate on the 30 year mortgage (7%).

So, it is time to fix this crap situation. I would like to refinance to get a lower rate and hopefully lower payments. I have excellent credit (780 average) and steady income. Unfortunately my loan is owned by the VHDA, not Freddy or Fannie and not FHA, so I am unable to take advantage of HARP or other programs. No one will touch a loan in my situation.

The only solution I can come up with is to take a loan from my retirement account, use it to pay down the mortgage below 95% of the home value, and then refinance that amount (taking out enough extra on the retirement loan to cover the initiation fees). I am looking to make this a 30 year fixed rate mortgage.

I am currently being quoted around 4.125% with PMI or 4.5% with lender paid insurance, both from Sebonic (Cardinal). The main difference is that I have a higher monthly fee for several years with the PMI until I get 20% equity and then it gets lower as the PMI goes away, or I take a midlevel payment that stays the same the whole way through with the lender paid.

My questions: What good lender or brokers should I be taking a look at? Who has had good experiences with one? Anyone have bad experiences with Sebonic? Can anyone think of any other options I have not considered? What pitfalls should I be careful of? If I get an appraisal done myself ahead of time will the lenders take that or will they request another appraisal? How do I go about finding a company to do title?

I understand no one is giving me authoritative financial advice, this is a request for opinions, experience, and ideas. I am a bit overwhelmed by the whole process and could use anything people can give me.

TLDR: Upside down in my mortgage and want to refinance, looking for help.

So you’re considering a loan from your retirement account for around $22k plus closing costs/fees to get down to 95%. Then you would refi approximately $124k on a 30-year fixed rate mortgage at the 4.xxx rate you mention.

Have you considered (or would it even be possible) to borrow $46k from your retirement account? Then your new mortage would only need to be $104k, or 80% of value, and you could avoid paying PMI altogether? Just a thought…

You definitely need to get out of that ridiculous 7% mortgage you currently have. I compared a 7% vs. 4.5% mortgage for $150k and 30-years- Over 30 years, you would pay $86k more at 7% than at 4.5%! ($209k vs. $123k).

If you borrow 95% of the value, you could also pay extra toward the principal to get under the 80% threshold much sooner. You could lose the PMI several years sooner by paying $100 or $125 extra per month. Again, just tossing out ideas…

I’m not familiar with Sebonic, but I would suggest checking mortgage rates for your area on Bankrate.com. I use Bankrate to compare auto and home loan rates before I borrow. I’ve never had any problems using any of the banks quoted on Bankrate.

Good luck!

Before you do this, make sure you check all the variables with your company’s retirement plan.
First, make sure that your job is secure.
Second, make sure that if you lose your job, you can continue to leave the retirement money there and continue to make the payments and do not have to take a distribution/roll over your funds. If they require you to move your money, you will have to treat the loan as a distribution, meaning you will have to pay income tax on the money (plus a 10% penalty if you are under 59 1/2).
Third, make sure you want to stay in this home long-term to make sure that you save money in the long run.

Psychobunny mentioned some really good things to consider about your retirement plan. You want to make sure that you don’t end up getting hit for taxes plus penalties or you lose your tax rate plus that percentage which would be disastrous.

Also, I see where Beelzebubba mentions the amount you would save comparing your current interest rate to your new one over 30 years. I don’t know the answer and I’m getting over being sick so I’m brain dead right now, but shouldn’t you also look at what you’re losing by withdrawing that money from your retirement? What is the time value of that money that you’re taking out between now and whenever you get it paid back? In other words, don’t get so hung up on the mortgage savings that you neglect to look at the retirement deficit that you’ll be looking at by putting that money on your mortgage.

Instead of taking anything from your retirement and being in a hurry to fix the situation, what would be the difference if you just went aggressively at paying your mortgage down to the point where it could be refinanced? Sure, it doesn’t get it done now, but you also don’t risk losing out on retirement gains or potential huge losses if you lose your job. You’d only be losing whatever changes occur between now and when you pay it down far enough, however long that takes for you. If you look at it and say that will take forever, then you have to realize that it will also take you forever to pay back your retirement loan which sets you up for losses over the years in gains and a possible job change which really crushes you.

You make a very valid point about comparing the impact on retirement earnings vs. the savings from refinancing!

In some situations, I know you can borrow money using your retirement/401k/investment account as collateral. But the actual retirement funds are not impacted and continue to perform. But if the loan is actually taking funds out of the retirement account and reducing potential growth of the account, then I would definitely think twice and compare all options to determine which is best for your long term financial health.

You should also consider having your condo appraised before you borrow against your retirement. You think it will be approximately $130k, but what if it actually is closer to $140k and you need $10k less??? OR what if it’s less than $130k and you need more than you’re currently planning??? I’ll keep my fingers crossed that the former will be true, not the latter! :smiley:

nm

Don’t do it.

The money in your retirement account (I’m assuming it’s a 401k?) is tax deferred. You didn’t pay taxes on it when you put it in, but will pay taxes on it when you eventually retire and start withdrawing the money. But if you take a loan, you pay back the loan with after tax money. So you’ll pay tax on it when you earn it and pay it back, and then you’ll be taxed again when you start withdrawing it in retirement.

Also, most 401k loans need to be paid back within 5 years, and you probably have to start paying it back right away.

A 30 year loan with a starting balance of $166K at 7% (what you have now) has a monthly principal and interest payment of $1104.40.

A 30 year loan with a starting balance of $123.5K (95% of $130K) at 4.5% (what you want to get) has a monthly principal and interest payment of $625.76. Sounds pretty sweet, huh?

But wait, consider the payment you will have to make on the retirement account loan. You’ll need to borrow $22,500 to pay down the mortgage (and I’m not considering the additional amount you want to take out for closing costs). That loan needs to be paid back in 5 years and assuming it has a 4.5% rate, the payment on that is $419.47
So your payments will be $625.76 + $419.47 = $1,045.23.

Of course, what we don’t know is what amount per month you are currently contributing to the retirement account. But after five years of paying $419.47 per month back to retirement, your retirement is right back where it is today. Yes, at the five year mark, then you get the benefit of the lower mortgage payment of $625.76. But also consider that in 5 years, your current 7% loan balance will be down to about $130K anyway, and there are other factors that could make it possible to refinance sooner than that – you could scrape together some modest amount of cash to pay it down a bit, or the housing market may improve and the condo could regain some value. And if you do that, then your retirement fund will have grown since you didn’t take the loan.

So you’ll save all of $59 bucks per month for the first five years, be at risk of a 10% penalty and taxes on the retirement loan if you can’t pay it off, and lose out on growth on your retirement fund.
Run the numbers yourself, but if the current payment of $1104.40 isn’t killing you, suck it up for a few more years and try to find other sources of funds other than retirement to pay down the current balance.

(reposted as I made a pretty obvious error in my first post)

Thank you guys for all the input I will try to answer all your questions.

Bingo

Yes, I have been thinking about it. That would be right near the limit of what I could take out, though, so depending on what the appraisal comes back as, it might not even be possible. I need to help out some family members financially for a while, so they payments between the higher monthly from a 15 year and the retirement loan might be too much. All really depends on appraisal.

Preach on! When I bought it interest rates were high and credit score was fairly low. Now the reverse is true.

This is major determining factor for if I get lender paid or borrower paid PMI. With lender paid I have a lower payment at first, but it stays that way over the life of the loan. With borrower paid I eat the PMI and have a higher payment until I get below 80%, then a lower payment for the rest of it. If I think I can pay down to 80% fairly quickly, I will go with borrower, otherwise lender.

Yes, I have gotten some great options from bankrate, thanks.

Thanks!

Yes, the job is very secure (federal government and I have had it for 10 years). If I do lose it, the penalties you describe would happen unless I pay back the whole thing at once. I do not consider myself in any danger of that though. With the change in interest rate, I would save money by doing this very quickly, but I still plan on staying in my place for the foreseeable future.

Excellent point. The interest rate on the loan is based on the annual rate of the retirement fund, so assuming no huge changes in return the fund should end up about where it would have been if I had not taken the loan. The extra money I am paying myself in interest (rather than earning) is only at about 2.1% right now, so a five year max of losing that much on a relatively small amount seems worth saving about 3% on a much larger amount for up to 30 years.

The job change part is a risk, but with this I am basically committing myself to this job for 5 years. I really like the job, so am OK with that. It will be quite a few years before I get the loan below 80%. The only thing that will make that occur in a reasonable time frame is if the value jumps, but the market around here is showing no sign of it and that would probably accompany increased interest rates. In fact, I expect rates to go up before values do. You do bring up a good point though. I need to run numbers for several potentials and see how they leave me.

Amen. The mortgage loan officers made the same suggestion and I wholeheartedly agree. In fact, I do not need to commit to a specific term (15 year/30 year) until that comes back and it will affect the decision. If I come back at or near the current load amount, it might be worth it to make this an 80% loan.

This is something to consider. 5 years, 2.12%. The tax/after tax situation is factually as you say, but I am not sure if the end result is as poor as you say. For example, if you consider that the rates on the retirement loan stay about the same, the actual value will be just where it should be at the end of this. Since the money is going to things that would be paid with after-tax funds, and after-tax funds go to pay it back, I am not seeing how it is double penalized. In comparisons with a loan taken out from another source this seems better, but I admit I am not sure I am fully wrapping my mind around it. I need to look closer. You are correct that the monthly payments are similar for the first 5 years, and then they drop to a much smaller amount. So, no big gain or loss for the first 5 years, but then huge gains.

That is one of the biggest questions I guess. How the two compare. I think that they biggest determining factor will be what happens to interest rates. They certainly aren’t going to be lower though.

I am going to run a comparison on this now. This is a very interesting point.

OK, from my estimation for what the situation will be like in 5 years:

Baseline (7% mortgage, starts at 144k)
Owe 129k, 7%, 1,050/month, 18 years left, paid a total of $63,100

20.5k retirement loan, refinance to 4.5%, lender paid PMI (95% loan)
Owe $113k, 4.5%, $630/month, 25 years left, paid $62k

20.5k retirement loan, refinance to 4.125%, borrower paid PMI (95% loan)
Owe $112k, 4.125%, $660/month, 25 years left, paid $62k, after 3 years goes to $600/month

40k retirement loan, refinance to 4.125%, no PMI (80% loan)
Owe $94k, 4.125%, 500/month, 25 years left, paid 73k

This assumes returns on the retirement account stay the same. If they jump up to about 10%, I estimate that the account will be around 5k shorter than it would have been without a 40k loan.

[When I said retirement account on the last line I meant retirement interest rate.]

Thank you for your help. It has really been good for clarifying my thoughts. It definitely looks like the retirement loan is the way to go. I will be 17k better off in 5 years, and it only gets better from there as I can up my mortgage payment to what I am use to paying for mortgage and retirement loan together (which is about what I am paying for mortgage right now) and pay the thing off very quickly.

The different PMI options do not seem to make a huge difference, and the 80% might be nice if I can suck up a bit of pain in the next 5 years. We will see based on the actual appraisal. Again, if anyone has any bits of advice I would appreciate it.

How old are you?

Since you are a fed employee we are talking TSP, correct? If so, then you need to consider the rate of return you are getting. You shouldn’t be happy with a 2.12% return, when you have the investment opportunities of the C, S, and I funds.

39, and yes. I have had my ass beaten pretty badly by the I fund, so a couple years ago I moved to L. Less maintenance for someone like myself who is not looking at the rates weekly.

Though that is about the lowest the L has been for quite some time.

Can you get 2 loans instead of one on your condo? Get a first for 80% of the appraised value, then get a second for the remaining value? Do you have any other assets you can use as collateral for the 2nd?

This will prevent you from having to pay PMI, which is a complete loss to you.

J.

The only thing I could think of would be cars. Both are paid of, but only worth a fraction of what the second loan would be for. That just leaves personal loans and those rates (based on a quick look) seem to start at around 10%.

So slight hijack here:

If you get a 30 year mortgage, are you locked-in at the same rate for the term of your mortgage?

I live in Canada and when I bought my house a little over 6 years ago I got a 30 year mortgage of ~$290,000.

But the rate I got (3.99%) was only good for a 5 year term, so at year 5 I needed to “re-new” my mortgage at a new rate. My new rate was prime minus .65%, so with prime being 3.0%, my new interest rate is 2.35%. It’s a floating rate that I can lock in at any time.

Is this typical in the US?

MtM

A “fixed rate” mortgage in the US is indeed fixed for the entire term of the mortgage. We also have “adjustable rate” mortgages (ARM) of which a 5-year fixed term is common.