Mortgage refinance 7 months after buying my 1st home.

This post boils down to
Interest saving is guaranteed and tax-free gain, especially sweet when
1. it comes @ no cost/fees
2. it frees up additional cash flow
3. it allows you to build equity faster
 4. The above can be accomplished with a mortgage refi done correctly
Background:
I purchased my first home a couple days before med school graduation, using doctor’s loan. The home needed some major repairs, including a brand new roof and AC. It has its original 1970’s kitchen and bathrooms. But it is still our home sweet home.
Who helped:
With the generous help of my sister and Nana, we were able to refinance our house to a lower interest rate. I paid my sister back her 2.5k with my next 2 paychecks, and Nana gifted her 4k  towards my partner’s credit card debt 🙂
Short term and long term impact of my mortgage refi:
Before I signed my no-cost refinanced ARM (adjustable rate mortgage), I ran the numbers to make sure that I will not lose my savings during the fixed mortgage rate portion of the loan when the rate adjusts to a possible maximum of 8.375%. My goal was to switch from a fixed rate mortgage to a adjustable rate mortgage to save on interest that’s guaranteed during the fixed rate portion of the ARM. But I needed to make sure that when the rate does adjust and likely to a much higher rate than rate now, and possibly to the maximum rate of 8.375%, that I’m fully prepared for the higher payment and to pay off the mortgage much more aggressively to avoid the high interest down the road.
After running the numbers, I was prepared for the worst case scenario. Ie, when my rate adjust and it can adjust to as high as 8.375%, I can technically pay off the ENTIRE house in 4 months on a then projected (conservative) income.
I happily signed the mortgage refinancing documents and started enjoying paying a smaller monthly mortgage payment, AND building equity faster. The 1% less in interest reduced my mortgage payment by $160, while increasing my principle payment by $40.
This is a perfect illustration how interest is the bane of existence for debtors.
Results:
By reducing my mortgage interest by only 1%, I increased my cash flow by $160, which I can re-allocate to higher interest debt (student loan at 6.8%) and pay that off faster, leading to guaranteed tax free return in the form of interest saved. AND, I accelerate the process of becoming a real owner of the house.
Update:
I wrote this post back in January, and thanks to this financial move, I indeed paid off my student loan completely shortly there after. Now my highest interest debt is my mortgage and I have been channeling my cash flow towards maxing out 23.5k of ROTH space available to me. So far, on tract to do so for 2015.
Hindsight 20/20:
In retrospect I wish I was more educated about mortgage and started with ARM instead of a fixed mortgage from the get go when I purchase the home. It would have saved me quite a bit on interest, given mortgage payment is heavily front-loaded with interest during the initial years of the term. But I’m also grateful for quickly we were able to refinance to an ARM, and what I learned along the way.
  • Did you choose ARM or fixed rate mortgage when purchasing a home?
  • What are the pros and cons of your mortgage choice?
  • Did you ever refinance your home? Was it a good financial move for you?
  • How much closing costs did you pay the bank with your fixed rate mortgage or ARM?
Comment below!

Numbers speak louder than desires…

image courtesy of lovethispic.com
image courtesy of lovethispic.com
We recently faced the dilemma of whether to purchase another home so that my parents can live in one of them and we another. We COULD afford a 2nd home mortgage/expenses, but I suspected it was NOT a numerically sound choice.
Since John places a high premium on quality of life, living space, privacy, and our daughter having pool in the backyard, I decided to crunch some numbers to see how much these “desires and wants” will cost us: if we were to purchase a second home NOW instead of putting the same amount money in post tax and pre-tax retirement savings (mainly in stocks.)
time is more valuable than moeny
Time value of $ combined with opportunity costs, consider both.
The following table compares 3 scenarios:
  1. The first row represents the seller’s current terms after backing down from initially asking 365k, 6% interest rate on owner carry back loan.
  2. The 2nd row represents my best and final offer, purchasing @ 285k for 285k value.
  3. The 3rd row represents purchasing @ 285k for 325k value.

 

terms/ value cash into  2nd home for 24 mos 24 month expenses + 40k down payment equity gained in 24 months net gain in 24 months if buying net gain in 24 months if invested in stocks @ 8% return instead difference
between investing in stocks over buying 2nd home
price 340k, 40k down, 4.5% -60051.6 -100051.6 $49,901.82 -50149.78 16648.58624 66798.36624
price & value 285k, 40k down, 3% -48360.48 -88360.48 50385 -37975.48 14703.18387 52678.66387
325k value, bought @ 285k, 40k down, 3% -48360.48 -88360.48 90,385.81 2025.33 14703.18387 12677.85387
3rd row is BEST case scenario
285k purchase price (with presumed 325k value)
40k down
3% interest
2 year refi
as is condition
AND if indeed our first home is rented out for 12k/mo for 24 mos= 28.8k
we can possibly come out ahead buying vs. investing this money.
But if we don’t count rental income at all from our first home, yet still pay for utilities/housing expenses of 1st home, and 2nd home is worth exactly what we bought it for (285k for 285k value), we will be missing 53k if we buy this home instead of invest in stocks (long term.)
Where to put my $
This is the impact of putting $100 Today into various priorities (it’s worth 2k in a matched 401k in 30 years; worth 1k in Roth IRA, worth $720 if paid fed student loans, worth $370 if paid lower interest rate refinanced student loans, $0 if purchased clothes.) Without running the # on this specific scenario, I know that buying this house would get me a return somewhere between paying down fed vs. buying clothes after adjustment for maintenance costs/ property taxes/insurance, etc. & inflation. Not to mention the potential headache of being a landlord.
This does not EVEN account for additional factors:
  1. Maxing out ROTH space NOW is much cheaper than when my income quadruples or quintuples in 5 years.
  2. Time value of money and compounding interest. 8-10% long term growth in stock vs. 1-2% appreciation in houses.
  3. Major repairs or even small maintenance costs associated with a 3000 sq foot home plus a lap swimming pool.
  4. Last but not least, the seller is convinced that their home is worth 345k when my realtor estimated no more than 325-330k. The highest price I’m willing to pay is 285k.

 

The numbers are simply too convincing for me to want to purchase another home, or at least THIS particular home.

 

  • Have you ever been faced the dilemma of purchase and indulge vs. save and invest?
  • Which did you choose, how did you justify your choice?
  • Did you have any smart ways of getting more growth out of real estate other than stumbling on an amazing deal (ie. purchasing WELL below the value of the home)?
  • Any success story to share when you came out ahead buying homes rather than investing?

 

Comment below!

What to do with 80k?

What would you do with 80k cash flow over 2 years?

Pay down/off student loan?

Buy your first home?

Buy a second home?

Pay off credit cards?

Max out ROTH space?

Max out pre-tax retirement savings?

Buy term life insurance?

Buy disability insurance?

Pay off car loans?

We are deciding whether to buy a home for my parents (in addition to our current home) or save for retirement/kid’s college.
Please share if you have great ideas on how to make the most with this cash flow.
We want to know what we are missing (ie. the opportunity costs) for purchasing a 2nd home.

Thank you!

DWM Q&A

[Pre-med candidate about to start med school wrote]

Hi, DWM.
I have been reading your strategies and things you posted on your blog, which I find very informative.

I start medical school this year and I am trying to follow your strategy. I am actually in a very fortunate situation, where I got full-tuition scholarship to an US MD school and I will just have to cover for living expenses, which I will use credit cards to save off of my interest. And I have a few questions that I hope you could help provide some insights based on your experience.

  1. I will have about $7k in cash and about $4k debt (9k total credit limit) on my 0% APR card before school starts. And my question is, how did you pay for rent or tuition with credit cards? Don’t you need cash to pay for rent or tuition? Don’t you have to do cash advance, which has higher interest rate? I do know that credit card companies sometimes send out empty checks, where you can use to pay for anything, but I think those are cash advances, no?

  2. Currently, I cannot find a way to pay my rent with credit card unless I get cash advance, so I am trying to keep my cash just for rent and spending everything else on my credit card.

  3. If I do find a way to pay rent with credit cards, do you think it’s wiser to put $5.5k out of $7k into Roth?

  4. I also need to buy a car and my parents will actually help me with $3.5k. I am trying to buy a used car that’s worth about $7-8k. Is there any best way out there to finance my car payment? I am thinking of getting a car from an owner directly through craigslist, which often require cash transaction. And I am not sure if there is any best way out there with cheaper auto loan than current 6.8% med school loan.

Thank you very much and any insight is appreciated! Hope you had a great Memorial weekend.

congrats! you are off to a great start. it’s awesome to get full tuition scholarship, you must be an outstanding candidate.

answers to your questions,

  1. use balance transfer checks. (start with chase slate, the only card i know of that charges 0% transaction fee and 0% interest for 15 months) so this means you get to write yourself a check for the amount of your credit limit and pay anything you want and borrow this money for free for 15 months… that’s what i did to pay part of my student loans last year when i first got out of med school. but double check the guidelines now, make sure it has not changed… then in 15 months, you can balance transfer this amount to another credit card (at this point, you will likely pay 3% of transaction fee on 0% interest rate for 12-18 months, which equates to 2-3% effective interest annually) still beats student loans. any amount of the slate card that you can’t pay off with another balance transfer/ cash/ side job, you can then request student loan to pay off. key is minimize and delay requesting student loan. student loan as last resort.

  • pay rent with credit card by writing yourself a balance transfer check with chase slate. when i did it to get the 0% fee 0% interest balance transfer, you needed to write and deposit/use the check within 90 days of account opening. make sure you always pay attention to the fine lines before you sign. make sure you know exactly how much each transaction with credit card companies cost you, and how soon you need to pay off the balance to avoid the ultimately exorbitant interest cc companies charge you to make a profit. consider the 0% or 2-3% effective interest rate a bait/teaser that cc companies use to charge you 12-30% after the teaser period is up (usually 6 months -21 months).

  • yes, if i could do it over again, i would definitely MAX out ROTH every year I have income greater than ROTH limit. which was every year of med school for me because i was working lots and lots of work study hours. I highly recommend outstanding med school candidates like yourself to hold a side job during medical school, preferably a work study position. work at the library and get paid while you study.

    • 4. try to buy car from a family member, so you know what to expect in terms of maintenance cost, etc. i would go for buying a 3-4k car rather than twice that. then again, i’m very cheap, cuz i had to save my money to support my kid and to pay 50k tuition each year…

    Lastly, I’m really happy for you. you are in a position to be graduating from medical school with a POSITIVE rather than negative net worth with the combination of full tuition scholarship, some parental help, delaying student loan interest, being frugal and smart with your money, a work study job, and last but not least, taking advantage of the time value of money.

    Keep me posted on how you do.

    Timing Credit Trough’s

    Dear Readers, I have a confession to make.

    I recently got my personal record low credit score of 717 (based on experian credit bureau, my transunion credit score is still 740, but down from 800; haven’t checked my equafax credit score.)

    My score lowered for the following reasons,

    1. I took on my partner’s credit card debts willingly to optimize his credit score so he can refi his car loan to a lower rate.
    2. I am helping my father with his expenses (just received a 6k tax bill… and medical expenses).
    3. I am aggressively funneling my limited cash towards retirement savings, while charging daily expenses on my credit cards.
    4. I am taking full advantage of new card offers that give me fantastic cash back deals. (eg. 10% cash back @ nordstrom rack when i bought my dad shoes in addition to the $100 dollar cash back with the first $1000 spent in first 90 days of opening the account.)

    Consequently, my credit score took hits for

    1. increasing debt/total credit limit ratio.
    2. number of recent hard credit inquiries from credit card applications.
    3. number of cards with revolving balances.

    However, the good news is

    1. I can pay down my credit card debt by 10k pretty quickly and bring my score back up to the 740+ range.
    2. credit inquires fall off of credit report in 2 years, as my old inquiries in 2013 fall off, total # of inquires on my report will decrease and my score will increase.
    3. I can just make minimum payment +1 dollar to my current credit cards with balances (all @ 0% interest), and time will buy my credit score back. With just 6 months of TIMELY payment to all my accounts including mortgage (i’ve never had a late payment per my credit history), my score would be back up to 747.
    4. I’m still happy that my most expensive debt is currently my mortgage @ 3.375% rather than student loan @ 7%.
    5. I’m still convinced that I’d rather max out 23.5k of retirement savings this year and throughout pre-attending years than to pay down my 0% credit card debt.
    6. this a bit of rationalization,  a lower credit score will slow me down somewhat… or i would be buying a 2nd house NOW… (that’s another post to discuss my plan to purchase a 2nd house.) waiting to buy a 2nd home in 6 months-2 years would be a wiser thing to do than to take on extra liability NOW.

     

    So the most important point is neither how comfortable I am with a lower credit score nor how I will boost it back up again.

     

    The most important point is learning how to TIME your credit troughs. 

     You want your credit peaks to be right before you make large item purchases such as a house, a car, or a yacht (which I will never buy) so that you can qualify for the best rates and terms, saving you money for the long term and in great magnitude.

    Car loan and mortgage companies treat 740+ consumers with the best rates and terms. So if you are saving money on higher interest debts by utilizing credit cards and/or enjoying cash back from charging your cards, be sure you slow down and trend your credit score back up either with TIME and/or MONEY to prepare for the ultimate credit check that will determine the rates and terms of your new debt (ie. mortgage, car loan, medical practice loan, etc.)

    This takes a little planning, but it is entirely doable. Talk to a loan officer 6 months-1 year before you want to buy a house/a medical practice/medical equipment/car and use your time/cash during that next 6-12 mos to boost your credit score to its highest.

    Next post, I will discuss what I have learned from buying my first home, refinancing it and then attempting to purchase a 2nd house. IE how to reach your credit PEAKS before big ticket purchases.

     

     

    • In your experience, what boosts your credit score?
    • what hurts your credit score?
    • how do you time your credit score troughs and peaks?
    • since a credit score of 740+ is the same for getting the best mortgage/ car loan rate, would you be willing to carry some 0% credit card debt and forego your 780 credit score?
    • how do you use credit cards to your advantage? save you interest on student loans? cash back? free admission to museums? maximize your retirement savings?

    Comment below!