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Refinace Question

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  • Avatar sdbill 
    Participant
    Status: Physician
    Posts: 12
    Joined: 03/30/2018

    Thanks for reading and posting.

    My wife (also an MD) and I recently completed a rebuild.

    We owe $780K on our primary at 3.375%

    We owe (from rebuild) 480K in a variable rate HELOC at 4.5%

    I owe 130K in student debt.

    Our credit is good but reduced bc at least 1 credit agency counts helocs as revolving credit.

    We can refi the primary and heloc at 3.25% (thru deposit incentives) or roll mortgage, heloc, and student debt into a 5/1 arm at 2.75% (without incentives) with the aim of refi a 30 in 6+ months once our credit improves and potentially rates drop.

    Should we take the bird in hand or aim for bigger savings at a risk?

    #242731 Reply
    Avatar sdbill 
    Participant
    Status: Physician
    Posts: 12
    Joined: 03/30/2018

    the 130K of student debt is at 3.75%

    #242748 Reply
    CordMcNally CordMcNally 
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    Status: Physician
    Posts: 2851
    Joined: 01/03/2017

    It’s basically boils down to a math question. Also, how long are you intending on staying in your house and how debt averse are you?

    “But investing isn’t about beating others at their game. It’s about controlling yourself at your own game.”
    ― Benjamin Graham, The Intelligent Investor

    #242760 Reply
    Liked by adventure
    Avatar EntrepreneurMD 
    Participant
    Status: Physician
    Posts: 334
    Joined: 06/10/2019

    Depends what size monthly payment you feel you can comfortably afford.

    The HELOC is great current rate for a HELOC, but is your highest rate (should drop at least another 25 basis points in September). Could you afford to merge your HELOC debt and primary rate into a fixed 15 year mortgage? I see those as low as 2.75% currently even for jumbo. You may even be able to throw in the student loan balance if you have enough home equity. I’m not into long term mortgages personally or staying highly leveraged while throwing money into today’s risky market.

    However, I would not necessarily bother with a refi if you can afford to pay off this debt over the next 4-5 years mainly due to refinance costs and a reset of the amortization schedule, only if you have to keep the debt longer term. Another downside of consolidating to a large loan is if you are able to pay a substantial portion, your monthly payment does not decrease.

    I built a home in 2005, borrowed 7 figures for it and paid it off within 5 years at higher interest rates.

    Built a commercial office in 2017 (also borrowed 7 figures) and plan to pay it off within the next 3 years barring a significant investment opportunity that can change this plan (ie. market crash, real estate crash). I currently have more total debt than you, equivalent to about 19 months of gross household income or 9 months of total business/RE revenues.

    Over the decades, transferred hundreds of thousands to 0% no balance transfer fee cards and paid them off by the end of the intro period to further decrease my effective loan rates. Not everyone thinks that profiting off of someone else’s money this way is worth the extra effort though.

    Make sure to maintain adequate reserves in cash equivalents that keep up with inflation for emergencies, large expenditures and investment opportunities as they arise.

    Wish you well!

    #242761 Reply
    Avatar sdbill 
    Participant
    Status: Physician
    Posts: 12
    Joined: 03/30/2018

    Thank you both for your replies.

    We plan on being in this house until we go to assisted living.

    We are in general medium debt adverse – not so intense as per white coat investor but not as aggressive as some we know.

    Although w dual incomes we can afford the 15 year payments, we prefer the flexibility of the 30.  We hope to use the extra cash flow to save for investment properties and would tolerate longer/larger debt for the right situation for us.

    Our currently monthly payments are:

    3800 for primary

    2500 for heloc (paying a little primary) – we had planned on paying this off in 5 years but w rates now – wanted to capitalize

    1100 for student loan (30 year repayment)

    The 30 year we are considering can be recast as many times as we wanted so we could adjust the payments down by paying more in principal

     

     

    #242767 Reply
    Avatar Budgetmaestra 
    Participant
    Status: Attorney
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    Joined: 04/30/2019

    That is a lot of debt.

    So you had planned to pay off the $480k heloc in five years? That is over $8k per month (not counting interest). If you do the 5/1 ARM can you make the regular monthly payment (which is around maybe $6k per month) plus the $8k heloc payoff? If you can do that I’d do it. When rates adjust your mortgage size will be more manageable.

    Just thinking about paying $14k per month gives me heartburn though.

    #242784 Reply
    Liked by jhwkr542
    Avatar nephron 
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    Status: Physician
    Posts: 227
    Joined: 05/09/2019

    I agree that you guys are carrying too much in debt.   Your monthly payments going to debt are preventing you from accumulating real wealth.   I would recommend calculating the amount that you are spending in interest every year and realize that every dollar spent in interest could have been spent on something which actually added value for your lives.  Irrespective of your income, everyone is going to make a finite amount of income during their lives and you have to realize that it can either go into building your net worth or building the net worth of banks that you owe interest to.   I would not recommend getting an ARM, you may be able to afford your monthly payments right now but should the interest rates increase as one would expect them to or should your income decrease substantially, you guys would be in trouble.  I don’t consider income in medicine guaranteed over a 5-10 year period, too many changes in healthcare on on the horizon.  I would listen to Dave Ramsey and start decreasing your debt load before considering investing in any investment properties.  The volume of your debt would make me want to get rid of some of it before seriously investing for retirement.

    #242791 Reply
    Avatar Tim 
    Participant
    Status: Accountant
    Posts: 3079
    Joined: 09/18/2018

    Insufficient info. Two physicians are two unknown incomes (let alone taxes/retirement savings %’s), a little idea of how much you got socked away, age or at least how long you reasonably plan to keep up the income stream. I can’t speculate on the student debt.

    The point,an incomplete balance sheet and no income statement statement can’t tell how low fixed or variable or which option might suit your future plans.

    If you are saving less than 20% for retirement, you have a debt problem. Given that, pay off the student loan and refi the house at a 15yr fixed if you have a better rate. If you can’t handle that, the math is telling you that you might have a debt problem. Work on that then.

    #242830 Reply
    Avatar hightower 
    Participant
    Status: Physician
    Posts: 1485
    Joined: 12/07/2016

    Agree with Tim, need more info.  If my math is correct, you have nearly 1.4 million in debt, most of which is mortgage debt.  For that level of mortgage debt I would hope you make at least a combined $600-700k/year?

    If you guys make significantly more than this, then the choice of how to refinance it is less important simply because you could afford to pay these balances down quickly if needed.  In that scenario (in which you two are actually making quite a bit more than 600-700k), I would recommend the 5/1 ARM so that you’re paying less interest while your balance is so large, then later you can refinance to a fixed rate after you’ve already made a large dent in that loan.  Meanwhile you should probably be making large payments towards it to get the balance down faster.

    #242839 Reply
    Avatar sdbill 
    Participant
    Status: Physician
    Posts: 12
    Joined: 03/30/2018

    Thank you everyone for your posts. You guys are awesome.

    Our combined incomes are 700-800k. After we max out our 401k and i401k plus backdoor Roths. We are in our early 40s and have about 1.5m in retirement. I know things will change but we are not extravagant (besides our home.)

    I have been moonlighting to supplement bc I am feeling the debt burden that many posts have mentioned.

    It’s interesting. We live in Southern California and perhaps bc of the high cost of living, it seems like people are more debt tolerant – especially for housing.

    It was a life’s dream of mine to have a nice custom home. My dad is a retired contractor. So while I acknowledge it’s not the best financial move, it was good move for us. After rebuild w the debt we still have over 2m in equity.

    Leaning to wards taking the 3.25/30 year fixed and pay it down when we get bonus checks. Recast the loan periodically.

    While taking the 5/1 arm and paying down the debt seems like a really good move. I guess we are more debt tolerant than most. We want the longer term security of the lower payment so we can start investing.

    I really appreciate everyone’s thoughts and thank you people.

    #242852 Reply
    Avatar Tim 
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    Status: Accountant
    Posts: 3079
    Joined: 09/18/2018

    “Leaning to wards taking the 3.25/30 year fixed and pay it down when we get bonus checks. Recast the loan periodically.”
    Purely opinion:
    •Refi 3.25/30 , only the heloc and mortgage. You will lose the tax is you include the student loan.
    •Have a plan to payoff the student loan as fast as possible.
    •Then, you choose mortgage or investment.

    There is a reason for asking the savings rate. Your spending and housing choices may be “reasonable “ but they greatly influence rate of spending needed in retirement. Your housing costs will be high even in 30 years. This isn’t meant to be critical, simply pointing you to the real costs of your choices. It’s just math! You may or may not need to work until 70. Actually, it doesn’t matter whether you spend on housing or expensive vacations. By choice, you are spending more than you would like, which might be fine for you.

    Different numbers, plug in your own.
    https://www.physicianonfire.com/a-tale-of-4-physicians-the-importance-of-lifestyle/

    #242857 Reply
    Avatar EntrepreneurMD 
    Participant
    Status: Physician
    Posts: 334
    Joined: 06/10/2019

    So your total debt burden is just under 2x current annual household income. You are in early 40’s (many potential years of future earnings) with $1.5M in retirement and $2M equity in your house, $700K+ household income. Not extravagant spenders.

    Am I the only one that doesn’t see this as too much debt/risk? Sure you can have a little less debt and be a little less debt tolerant (mainly on the HELOC). But this appears to be very manageable coming from experience of similar debt to income ratio’s. Your debt is generally all good debt as well.

    Monthly payments going to debt repayment do not prevent you from building wealth. Only the origination and interest burden on the debt less associated tax breaks are true monthly expenses on a loan. The principal repayment plus property appreciation comes back to you when you ultimately sell. My big beef with the prospect of maintaining the large house indefinitely are the cost of property taxes and insurance over the decades and the hassles (not necessarily costs) that go with repairs and maintenance as the property ages. While a house is not the best financial investment compared to some other options, it does force us to store equity where it’s not spent on depreciating items and holds sentimental value. The 1% generally have a lower percentage of their net worth in their residence due to better returns elsewhere.

    Our philosophies are a bit different regarding debt repayment, but hey there is no one right way. Also one day, you may not want to trade your time (moonlighting) for income to support continued high debt levels. That’s my main concern with your long horizon on the debt. None of the financial accomplishments matter if time with your family suffers. I committed a decade ago to seek more passive revenue streams so there would be a big shift by the time I hit my older pre-retirement years.

    Your dad’s a retired contractor. Pick his brain. I find real estate to be integral to building wealth as it can provide tax breaks/deferment, hard asset appreciation and steady cash flow. I went with commercial.

    I suspect you will hit decamillionaire status late 40’s-early 50’s on your current trajectory. Congratulations.

    #242879 Reply
    Avatar Infinity 
    Participant
    Status: Physician
    Posts: 92
    Joined: 05/25/2019
    I suspect you will hit decamillionaire status late 40’s-early 50’s on your current trajectory. Congratulations.

    Click to expand…

    I am not as optimistic.  I don’t think OP will be in trouble, but to get to decamillionaire status, would take much longer than 10 yrs.

    I love good debt.  Taking a commercial loan to invest is good debt.  Taking primary mortgage to invest in stocks is reasonable.

    However, taking primary mortgage to rebuild a bigger house ($3M+) that comes with a lot of expenses, is bad debt.

    Back to the question, I would take 30 yrs, 3.25% loan and keep recasting until all interests are tax deductible ($750K, please correct me if I am wrong).

    After that, I would start investing instead of paying off the loan.

     

    #243066 Reply
    Avatar sdbill 
    Participant
    Status: Physician
    Posts: 12
    Joined: 03/30/2018

    Thanks again.

    I appreciate everyone’s time they put into reading and writing their posts.

    Just locked in a 30 at 3.25% to combine heloc and primary mortgage.

    Reading the posts/replies really helped make a decision.

    As a point of mortgage write offs. You are allowed up to 1m if your indebtedness preceded the 2017 tax change. Heloc are included in this grand fathered process. 750k allowed for mortgage write off after 2017 changes.

    #243861 Reply
    Avatar Panscan 
    Participant
    Status: Resident
    Posts: 1091
    Joined: 03/18/2017

    Who wants to be a decamillionaire? They are doing fine. And if they keep this up they likely will be ones anyway by 60-70, not that it really matters

    #243862 Reply

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