I am considering a cash out refinancing of my mortgage for the purpose of consolidating my debt to one loan and reducing the total effective interest rate. I would appreciate some feedback, especially if I am doing something stupid.

My current situation is that I have five loans totaling around $77,000. The interest rates vary from 2.25% to 5.48%. Details of my debts from the end of January are in the thread below.

viewtopic.php?f=2&t=61922&start=0

The benefits include having only one debt payment per month, a lower effective interest rate, and a lower monthly outlay required to stay current on my debt. The first two benefits are obvious and the third would help me in the event of a job loss as my EF would last longer with a lower minimum payment. My current minimum monthly payments on all my loans is about $1350 per month. I have also been putting an additional $400/month toward my debts. The two mortgage options I am considering are as follows.

15 year @ 3.00%, ~$520/month, ~$1650 closing cost.
10 year @ 2.875%, ~$720/month, ~$750 closing cost. (Reduced closing cost is part of a promotion.)

The downside is that I will extend the time until I am debt free and end up paying more interest as a result. The goal of this reduction in the rate of loan repayment would be to fully fund a Roth IRA, get me EF to a 1 year value, and free up cash to remodel my home. I bought a bank owned fixer upper and should probably fix it up at some point. The kitchen is 1959 original!

To sum it up, I have spent the last 4 years aggressively paying down my debt and have reached a point where the amount I owe does not cause me much concern. I see the low rate on a single debt as allowing me to relax on my debt focus. I want to increase retirement savings and improve the place I live. I believe that I am disciplined enough to not simply waste the money not spent on debt reduction, although I could be wrong.

Please let me know if you think I am making a bad financial move, or if you have any suggestions of other things I should consider.

Thanks,
Andrew

What would the total cost (principal & interest ) be if you took out the 10 year loan, BUT kept paying the $1,350 vs. the cost of not doing anything different and continuing paying the loans as is.

How long would it take you to pay each off?

Make sense?

Currently I am putting around $1,800 toward my debt as I am prepaying and have been for several years.

Keeping to this pattern, I will pay over $7,200 in interest before all debt is paid in 50 months. After the tax advantage of mortgage interest the total effective interest paid drops to $5,930. I am in the 25% tax bracket.

Refinancing the mortgage for a total amount of $80,000 (this is more than necessary to make the numbers conservative) will result in a total of $4,830 in interest if I pay $1750 per month and the loan will be paid in full in 49 months. After the tax break this becomes $3,625 resulting in a savings of $2,300. I guess that this option is good even if I continue to aggressively pay ahead on my debt.

If I only pay the minimum of $767.88 per month, I will pay a total of $12,145 in interest with an after tax cost of $9,110. The benefit would be that I would free up $1,000 per month. $5,500 of this will be dedicated to fully fund a Roth IRA, and I will plan to continue fully funding a Roth IRA from here forward. The remainder will be split between increasing my EF and a home remodeling fund.

Thank you for the questions. They made me do the calculations and see that there is no downside to a 10 year refi as long as I stay in my home for another 3+ years.

Bringing my post back, I did decide to go ahead with a 10 year mortgage. Now I need to see if I have the discipline to keep from wasting the increase in cash flow.

The end result is that my five loans will become with a single $720 / month payment.

I ended up going through my local credit union, because according to both Chase and Bank of America I was not borrowing enough to get their advertised rate. They quoted me rates about 0.75% higher than the credit union, and closing costs that were triple what I ended up paying.

Thanks for all the input,
Andrew

Financing 9 grand of car loans for ten years with the equity in your home? Not sure I can say I can see where that is ever a good idea. As you have demonstrated the ability to pay extra and not get additional consumer debt this may work out. Only IF you dont go out and do the cc thing or buy another car (for ten years!). Otherwise all you've accomplished if to free up credit.

Ray,

I have to say that I did not think of this as financing 9k of car loans for 10 years. I will admit that when worded that way sounds really bad. At the same time, I am condensing 20 years of student loan payments to the same 10 years. I view this as looking at my current situation and deciding if there is a better position.

I believe that a lot of my thinking comes down to weighing my savings/debt repayment with current spending. I have spent the last several years focused on improving my financial position through debt repayment while maintaining a minimum 15% contribution to retirement. I am now in a position where putting all my debt into a 10 year loan will result in a payment that is 18% of my take home pay. This will allow me to save for the much needed remodeling on my house, and also fully fund a Roth IRA. Perhaps I should start a fiscal fitness journal with these goals to keep myself honest.

I will also say that going out and doing the cc thing is not my style. I have never paid interest on a credit card and have no desire to start. I use a credit card for the convenience, it is a pain to rent a car for a business trip without one.

As far as buying a new car goes, I plan to purchase any future cars with cash. I also expect it to be another five years before I get a new car that costs more than $2,000. My 1998 Chevrolet Metro (cost me $1,000 and a lot of time welding) winter beater has some rust issues that may lead to its demise in another two or three years.

I do appreciate the input,
Andrew