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Reducing cash to pay down mortgage to conforming limits

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  • Reducing cash to pay down mortgage to conforming limits

    Normally I’d jump the gun on this but Covid is giving me pause. would you do this refi?

    We have wanted to refi our jumbo mortgage to a 15 year for some time, but jumbo rates are not very good right now. Would you significantly reduce your cash reserves to pay down mortgage $70k to a confirming limit? This would reduce our emergency fund from 10 months spending to 4 months and we can get a 15 year at 2.375% instead of our current 3.625%. We can replenish the EF with about one month of expenses per month (or more), so by Christmas our emergency fund should be back to normal again. if we use the Better Amex offer and a lender credit the refi will be no cost.

    The refi will save about $7k in interest per year. We do have money in a taxable account, an hsa and an unused heloc (& sufficient disability insurance, etc) as a back up if ************************ hit the fan. We are a two income household.

    my husband does see some Covid patients in his practice, and has had a pay cut due to volumes decreasing. The new mortgage will still be affordable on a reduced pay and is only about 10% higher than current mortgage payment.

    The way I view it is that the $70k we pay down will generate about $7k in savings so a 10% return due to lower interest, plus another thousand or so in interest savings due to the fact that the mortgage is $70k lower.

  • #2
    Impo, you should do it (with the standard caveat that you are not my client and I am not your advisor).
    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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    • #3
      really depends on how comfortable you and your husband are with a lower EF. With 10 months' of expenses, that's more than average. We keep 3-4. If we actually had 10 months and were in your situation, we'd absolutely do this. We're in a similar situation....8 years into a 30-year mortgage with a fixed 3.3% rate and I wanted to refi to a 15-year or 20-year but can't find a better rate because it's a jumbo. Going to start paying down the mortgage faster in 2021

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      • #4
        Normally we keep a 2-3 month expenses EF but we were already unusually cash heavy earlier this year and then the pandemic hit so we have been hoarding. So doing the refi takes us back to, or even above, where we normally are. It has just felt nice to have a larger cushion during these tumultuous time. And although it has felt nice I’m not sure I want to pay $8k per year for that feeling.

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        • #5
          Originally posted by Budgetmaestra View Post
          Normally I’d jump the gun on this but Covid is giving me pause. would you do this refi?

          We have wanted to refi our jumbo mortgage to a 15 year for some time, but jumbo rates are not very good right now. Would you significantly reduce your cash reserves to pay down mortgage $70k to a confirming limit? This would reduce our emergency fund from 10 months spending to 4 months and we can get a 15 year at 2.375% instead of our current 3.625%. We can replenish the EF with about one month of expenses per month (or more), so by Christmas our emergency fund should be back to normal again. if we use the Better Amex offer and a lender credit the refi will be no cost.

          The refi will save about $7k in interest per year. We do have money in a taxable account, an hsa and an unused heloc (& sufficient disability insurance, etc) as a back up if ************************ hit the fan. We are a two income household.

          my husband does see some Covid patients in his practice, and has had a pay cut due to volumes decreasing. The new mortgage will still be affordable on a reduced pay and is only about 10% higher than current mortgage payment.

          The way I view it is that the $70k we pay down will generate about $7k in savings so a 10% return due to lower interest, plus another thousand or so in interest savings due to the fact that the mortgage is $70k lower.
          what can you refi to at your current LTV?
          what do you get if you choose a 30 year?

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          • #6
            At our current loan amount I’m not finding anything under 3% for a 15 year and with significant fees. As for a 30 year I don’t know what rates would be at current or paid down levels as we intend to pay it down in less than 15 years anyway.

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            • #7
              I would do it. We just refinanced to a 15 yr from a 30 yr. You already have a better EF than 90% of the population and can increase it rapidly over the next few months. In fact by the time the refi goes through you will already have increased your EF by 1-2 months.

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