Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
I bought a condo over 3.5 years ago. Purchase price was $245K @ 4.65%, 30yr fixed. The interest rate and 20% down was higher than desired, but that was what was needed at the time to secure special financing for it, since there was on-going litigation that was about to wrap up. I looked into the issues under litigation and they were things that could be remedied by the settlement and the area and condition of the condos/buildings was pretty good. The litigation ended in a settlement and the HOA ordered the fixes which were completed about a year or so after purchase.
The property peaked at about $345K ($100K appreciation since date of purchase) during the 2nd half of 2018 and in 2019 has been seeing a bit of a decline. Current Zillow, Trulia values show it at around $322K ($80K appreciation since date of purchase, not counting my 20% deposit).
Current rate for 30 year fixed is about 3.78% (not quite a whole percentage point lower than my current rate), 15 year fixed is at 3.16%.
My question is: When does it make sense to do a cash out refinance and when doesn't it? How about in my particular scenario? Since my condo is out of litigation and there are no rental restrictions or owner/rental occupied ratios in the HOA rules, I think that opens up my financing options considerably compared to when I bought it while under litigation.
I like the condo, it's in one of the more desirable cities in my county. My mortgage (principal and interest), it is just under $900/mo. With insurance and property taxes, my total monthly payment becomes $1290-ish. Finally, with my HOA dues at $166, I'm at $1456 a month total. The going market rate in my area for a comparable 2-bdrm, 2-ba., 1-car garage apartment with about the same square footage is $1800 to as high as mid-$2000's or so. I could probably rent it out for $1700-1800 if I wanted to at some point. It's close to a major employer (walking distance), also walking distance to a local shopping plaza, so it's very convenient.
I was considering selling the condo when it peaked at around $345K, and could have pocketed $100K plus got my 20% down back (about $48K additional). But then I'd either have to buy another house or rent an expensive apartment (if I wish to remain in the same area). I was reluctant to buy a new house because I'd be looking at around $500K or more, which would be about a $400K mortgage. I believe I'd be paying a premium at or near peak, and interest rates were also creeping up to the 4.x% range. Considering the added expense and my desire to retire in 10 years rather than work a additional 7 years on top of that, and desire to pay off any mortgage by the time I retire, that would require double payments. So, it was hard to justify buying an new house to have the luxury of more space that is a "nice to have" even though I can get by alright with my current 2bd/2ba condo. There's also the upkeep considerations of owning a house (more time and money) vs a condo.
Which brings me to considering the viability of a cash out refinance instead. I would get to take out my equity, keep the condo and continue living in it rather than rent it out. Monthly payments would go up somewhat, but maybe the increase in monthly payment wouldn't be so much since I'd be getting into a somewhat lower interest rate? I could then continue to make double payments on the condo (something I likely wouldn't be able to easily do without becoming house poor if I were to sell the condo and buy a new house, taking on a $400K mortgage). As for the cash out proceeds, I could invest that wisely (hopefully) towards my retirement or maybe some solid low-risk opportunities with potential gains to justify pursuing them.
I'd appreciate some input on the pros and cons of a cash out refinance and whether it would make sense in my scenario.
I've never liked the idea of a cash-out refinancing- ESPECIALLY if the cash isn't used to improve the house. (And most improvements, of course, don't increase the market value by as much as they cost.)
A "low-risk" investment (high-grade bonds or CDs) won't yield a rate of return higher than the mortgage interest rate. If you want more yield you take on risk, and then the value of your investments can decrease. I won't pretend to know when the top or the bottom of a market has been reached, but I'd be uneasy about throwing a large lump sum of cash in right now.
I'd be tempted to do the refinance for the balance due (no cash out) and continuing to make the same payment you did on the old mortgage to pay it off faster, if you get another 30-year. (For a 15-year your payment will go up.)
half of it is the numbers, and half of it is predicting the future based upon past performance.
have you gone so far to talk to a lender to see what you could actually get the rate at for a 15 and a 30? Have they calculated the payment for you on a no cash-out for each, and with a cash-out? that's part 1 - the numbers.
predicting the future - have you had your same job/promoted same company since before 2008? ie, just how stable is your income & its source? will it be 10+ years before you retire, or before you sell the condo?
Last I checked - and the market's been on a helluva 5+ year run since then - there's never been a 10 year period when the stock market didn't provide a healthy return. And healthier than the 3-4% you're going to borrow the money at now.
half of it is the numbers, and half of it is predicting the future based upon past performance.
have you gone so far to talk to a lender to see what you could actually get the rate at for a 15 and a 30? Have they calculated the payment for you on a no cash-out for each, and with a cash-out? that's part 1 - the numbers.
predicting the future - have you had your same job/promoted same company since before 2008? ie, just how stable is your income & its source? will it be 10+ years before you retire, or before you sell the condo?
Last I checked - and the market's been on a helluva 5+ year run since then - there's never been a 10 year period when the stock market didn't provide a healthy return. And healthier than the 3-4% you're going to borrow the money at now.
So you're going to take a risk for a possible 2-3% return?
That doesn't make sense.
OP could invest the money in an index fund, have the stock market take a 20% correction, and then he's underwater on a loan. All for what? The possibility of squeezing out a little interest at the end of a bull run?
OP: Unless you're a Wall Street insider, taking a loan out to fund your retirement makes absolute zero sense. There are no low-risk, sensible investments that will pay you more than the interest rate of a mortgage loan, because if there were, banks would be putting their money there instead of loaning money for mortgages.
If your goal is to pay off your mortgage by the time you retire, it doesn't seem to make any sense to pull cash out through a refinance--which will only increase the amount that you'll owe on your mortgage. If you have investment plans which will yield considerably more than the mortgage interest rate, it may be something to consider but it still seems to be counter to your mortgage payoff goal (and much more risky).
Refinancing to simply reduce your interest rate, however, may make sense. That way, more of your mortgage payments will be applied against the principal.
So you're going to take a risk for a possible 2-3% return?
That doesn't make sense.
OP could invest the money in an index fund, have the stock market take a 20% correction, and then he's underwater on a loan. All for what? The possibility of squeezing out a little interest at the end of a bull run?
OP: Unless you're a Wall Street insider, taking a loan out to fund your retirement makes absolute zero sense. There are no low-risk, sensible investments that will pay you more than the interest rate of a mortgage loan, because if there were, banks would be putting their money there instead of loaning money for mortgages.
.
I'm not sure what you mean by a "possible 2-3% return". most 15 year horizons, it's returned > 7%, or 3+% more than a current 15 yr mortgage. But yes, it's a risk. Every dollar you put in the stock market is a risk. The question was when to do it. Income certainty = repayment certainty; long horizon = positive net return
Banks and institutional investors DIVERSIFY their portfolios. And I believe banks are required to lend money as part of their government relationship (charter, capital requirements, favorable legislation, etc)
I'm not sure what you mean by a "possible 2-3% return". most 15 year horizons, it's returned > 7%, or 3+% more than a current 15 yr mortgage. But yes, it's a risk. Every dollar you put in the stock market is a risk. The question was when to do it. Income certainty = repayment certainty; long horizon = positive net return
Banks and institutional investors DIVERSIFY their portfolios. And I believe banks are required to lend money as part of their government relationship (charter, capital requirements, favorable legislation, etc)
I'm pretty sure that they were referring to the possible 2-3% return that they might receive which would be above the mortgage interest rate. A return less than the mortgage rate would definitely be a losing proposition.
I am a huge advocate that all decisions for refinancing are individual decisions based on individual circumstances. There was one point seriously missing from the OP's scenario --> what the plans were for the cash. I have had cash outs that have resulted in over $1000 cashflow improvement in month expenses for a recently single parent left holding all of the ex's debt. Or get the cashout to be ready to jump on the next property without requiring sale and settlement first. So many individual, good reasons.
FWIW, your payments would likely be remarkably close with today's lower rates. But, to cash out just because what sounds like the OP misses their cash? I don't get that.
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.
Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
