Need advice on refinancing

[Anonymous]

We owe 715K on our home that is worth about 950K. We're currently in a 5/5 Arm from Pen Fed with an intro rate of 3%. We think we will likely move in ten years or so, but ideally would like to keep the house and rent it out when we do that.

We're interested in doing a cash out refinance that leaves us with 80% equity in the house so we can put the $$ to some student loans that are fixed at a high rate (8%).

First question - can we refinance into a fixed rate loan with no closing costs and then refinance again back into the pen fed 5/5 arm and do a cash out? Pen Fed's rates have dropped to 2.5% to start so it seems like even if we ended up at the highest reset it wouldn't be so bad, especially because the balance we would owe by then would be lower. Are most loans limited though to how quickly you can refinance after you take them out? Would Pen Fed not take us back because we just refinanced away from them so recently?

Next question - should we be looking at fixed rates only with the intention of staying in that? Is it stupid to do an arm when fixed rates are so low? We're not sure though if we'd keep the house when we move in ten years, and lower payments are more important to us now because we're still paying on student loans and have big child care costs.

Any insight would be appreciated. Thanks

[Anonymous]

Lot going on here.

You won't be able to jump out of PenFed's 5/5 ARM to a fixed and back to a 5/5 without incurring a huge amount of costs. Most "no closing cost" loans require you to stay in the loan for some minimum period of time (typically 3 years) or pay them. And, that 2.5% 5/5 PenFed product you will notice now costs 1 point, which means you'll have to pay $7,150 right off the top to get back in the loan.

Also know that if you cash out to pay off other debt, that interest is no longer tax-deductible.

Personally I'd stay in your Pen/Fed and just hack away at your student loans. Or, sell you house and buy something cheaper if you cannot afford your lifestyle.

[Anonymous]

Couldn't you get a HELOC to pay off the student loans?

[Anonymous]

Anonymous wrote:Couldn't you get a HELOC to pay off the student loans?

pp here: I almost suggested this, but I'm generally not a fan of trading unsecured debt for secured debt (although I know student loan debt cannot be discharged in bankruptcy).

Also note that the interest on the HELOC would not be tax-deductible if you do this. That matters for some people. At least the student loan interest is tax-deductible.

[Anonymous]

Is the HELOC interest only deductible if it's used for home improvement? As far as I know, student loan interest is not deductible if your income exceeds something in the range of $75,000.

[Anonymous]

Anonymous wrote:

Anonymous wrote:Couldn't you get a HELOC to pay off the student loans?

pp here: I almost suggested this, but I'm generally not a fan of trading unsecured debt for secured debt (although I know student loan debt cannot be discharged in bankruptcy).

Also note that the interest on the HELOC would not be tax-deductible if you do this. That matters for some people. At least the student loan interest is tax-deductible.

I thought 100k of HELOC was tax deductible, whatever you used it for?

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Couldn't you get a HELOC to pay off the student loans?

pp here: I almost suggested this, but I'm generally not a fan of trading unsecured debt for secured debt (although I know student loan debt cannot be discharged in bankruptcy).

Also note that the interest on the HELOC would not be tax-deductible if you do this. That matters for some people. At least the student loan interest is tax-deductible.

I thought 100k of HELOC was tax deductible, whatever you used it for?

No, it's not. It's only deductible if you use it for home purchase/improvement.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Couldn't you get a HELOC to pay off the student loans?

pp here: I almost suggested this, but I'm generally not a fan of trading unsecured debt for secured debt (although I know student loan debt cannot be discharged in bankruptcy).

Also note that the interest on the HELOC would not be tax-deductible if you do this. That matters for some people. At least the student loan interest is tax-deductible.

I thought 100k of HELOC was tax deductible, whatever you used it for?

No, it's not. It's only deductible if you use it for home purchase/improvement.

OK, this is not correct, and is making me question your other advice.

http://www.irs.gov/publications/p936/ar02.html#en_US_2012_publink1000230008

Home Equity Debt


If you took out a loan for reasons other than to buy, build, or substantially improve your home, it may qualify as home equity debt. In addition, debt you incurred to buy, build, or substantially improve your home, to the extent it is more than the home acquisition debt limit (discussed earlier), may qualify as home equity debt.

Home equity debt is a mortgage you took out after October 13, 1987, that:

•
Does not qualify as home acquisition debt or as grandfathered debt, and

•
Is secured by your qualified home.





Example.

You bought your home for cash 10 years ago. You did not have a mortgage on your home until last year, when you took out a $50,000 loan, secured by your home, to pay for your daughter's college tuition and your father's medical bills. This loan is home equity debt.

Home equity debt limit. There is a limit on the amount of debt that can be treated as home equity debt. The total home equity debt on your main home and second home is limited to the smaller of:
•
$100,000 ($50,000 if married filing separately), or

•
The total of each home's fair market value (FMV) reduced (but not below zero) by the amount of its home acquisition debt and grandfathered debt. Determine the FMV and the outstanding home acquisition and grandfathered debt for each home on the date that the last debt was secured by the home.




Example.

You own one home that you bought in 2000. Its FMV now is $110,000, and the current balance on your original mortgage (home acquisition debt) is $95,000. Bank M offers you a home mortgage loan of 125% of the FMV of the home less any outstanding mortgages or other liens. To consolidate some of your other debts, you take out a $42,500 home mortgage loan [(125% × $110,000) ? $95,000] with Bank M.

Your home equity debt is limited to $15,000. This is the smaller of:

•
$100,000, the maximum limit, or

•
$15,000, the amount that the FMV of $110,000 exceeds the amount of home acquisition debt of $95,000.




Debt higher than limit. Interest on amounts over the home equity debt limit (such as the interest on $27,500 [$42,500 ? $15,000] in the preceding example) generally is treated as personal interest and is not deductible. But if the proceeds of the loan were used for investment, business, or other deductible purposes, the interest may be deductible. If it is, see the Table 1 Instructions for line 13 for an explanation of how to allocate the excess interest.

Part of home not a qualified home. To figure the limit on your home equity debt, you must divide the FMV of your home between the part that is a qualified home and any part that is not a qualified home. See Divided use of your home under Qualified Home in Part I.

Fair market value (FMV). This is the price at which the home would change hands between you and a buyer, neither having to sell or buy, and both having reasonable knowledge of all relevant facts. Sales of similar homes in your area, on about the same date your last debt was secured by the home, may be helpful in figuring the FMV.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Couldn't you get a HELOC to pay off the student loans?

pp here: I almost suggested this, but I'm generally not a fan of trading unsecured debt for secured debt (although I know student loan debt cannot be discharged in bankruptcy).

Also note that the interest on the HELOC would not be tax-deductible if you do this. That matters for some people. At least the student loan interest is tax-deductible.

I thought 100k of HELOC was tax deductible, whatever you used it for?

No, it's not. It's only deductible if you use it for home purchase/improvement.

OK, this is not correct, and is making me question your other advice.

http://www.irs.gov/publications/p936/ar02.html#en_US_2012_publink1000230008

Home Equity Debt


If you took out a loan for reasons other than to buy, build, or substantially improve your home, it may qualify as home equity debt. In addition, debt you incurred to buy, build, or substantially improve your home, to the extent it is more than the home acquisition debt limit (discussed earlier), may qualify as home equity debt.

Home equity debt is a mortgage you took out after October 13, 1987, that:

•
Does not qualify as home acquisition debt or as grandfathered debt, and

•
Is secured by your qualified home.





Example.

You bought your home for cash 10 years ago. You did not have a mortgage on your home until last year, when you took out a $50,000 loan, secured by your home, to pay for your daughter's college tuition and your father's medical bills. This loan is home equity debt.

Home equity debt limit. There is a limit on the amount of debt that can be treated as home equity debt. The total home equity debt on your main home and second home is limited to the smaller of:
•
$100,000 ($50,000 if married filing separately), or

•
The total of each home's fair market value (FMV) reduced (but not below zero) by the amount of its home acquisition debt and grandfathered debt. Determine the FMV and the outstanding home acquisition and grandfathered debt for each home on the date that the last debt was secured by the home.




Example.

You own one home that you bought in 2000. Its FMV now is $110,000, and the current balance on your original mortgage (home acquisition debt) is $95,000. Bank M offers you a home mortgage loan of 125% of the FMV of the home less any outstanding mortgages or other liens. To consolidate some of your other debts, you take out a $42,500 home mortgage loan [(125% × $110,000) ? $95,000] with Bank M.

Your home equity debt is limited to $15,000. This is the smaller of:

•
$100,000, the maximum limit, or

•
$15,000, the amount that the FMV of $110,000 exceeds the amount of home acquisition debt of $95,000.




Debt higher than limit. Interest on amounts over the home equity debt limit (such as the interest on $27,500 [$42,500 ? $15,000] in the preceding example) generally is treated as personal interest and is not deductible. But if the proceeds of the loan were used for investment, business, or other deductible purposes, the interest may be deductible. If it is, see the Table 1 Instructions for line 13 for an explanation of how to allocate the excess interest.

Part of home not a qualified home. To figure the limit on your home equity debt, you must divide the FMV of your home between the part that is a qualified home and any part that is not a qualified home. See Divided use of your home under Qualified Home in Part I.

Fair market value (FMV). This is the price at which the home would change hands between you and a buyer, neither having to sell or buy, and both having reasonable knowledge of all relevant facts. Sales of similar homes in your area, on about the same date your last debt was secured by the home, may be helpful in figuring the FMV.

It depends on how much of a HELOC we're talking about.

http://www.houselogic.com/home-advice/tax-deductions/deduct-mortgage-interest/

[Anonymous]

It is not true that most no closing cost loans require you to keep them for a period of time. I have seen that on no closing cost HELOCs but I have not seen that on no closing cost refis. The banks make their money on a no closing cost loan but giving you a slightly higher interest rate than you could get if you paid closing costs (which in turn is slightly higher than the rate you could get if you paid closing costs and points).

Also you can generally deduct interest on 100k of a HELOC even if you use the money on hookers and blow.

[Anonymous]

The PenFed product is a case in point of the limitation. Read the small print:

"Reimbursement of Closing Costs: If you pay this loan off and close the account earlier than the 36-month anniversary date of the loan closing, you will be obligated to pay PenFed a prorated amount of the closing cost credit received from PenFed. This amount will be added to any loan payoff amount requested prior to the 36 month anniversary date. The reimbursement amount will be prorated in equal amounts on a monthly basis."

https://www.penfed.org/55-Adjustable-Rate-Mortgage/

Wells Fargo does the same thing.

[Anonymous]

you can deduct 100k of home equity but the OP is just doing a cash out so who cares

[Anonymous]

Anonymous wrote:The PenFed product is a case in point of the limitation. Read the small print:

"Reimbursement of Closing Costs: If you pay this loan off and close the account earlier than the 36-month anniversary date of the loan closing, you will be obligated to pay PenFed a prorated amount of the closing cost credit received from PenFed. This amount will be added to any loan payoff amount requested prior to the 36 month anniversary date. The reimbursement amount will be prorated in equal amounts on a monthly basis."

https://www.penfed.org/55-Adjustable-Rate-Mortgage/

Wells Fargo does the same thing.

Then I would try Amerisave, who doesn't, and Eagle (who may or may not).

[Anonymous]

I would just do a HELOC.
You already have a good interest rate so you wouldn't gain much by refinancing. I wouldn't worry about the ARM unless you are sure you will keep the house for a good amount of time, or you want to extend the term.
For the amounts you are talking about, your interest payments on a HELOC would be tax deductible, which (assuming your income is over the threshold, which it probably is given you have a million dollar house) your student loans are probably not.
Then I would do what you can to cut expenditures and increase income to pay it down quickly.

[Anonymous]

Anonymous wrote:

Anonymous wrote:The PenFed product is a case in point of the limitation. Read the small print:

"Reimbursement of Closing Costs: If you pay this loan off and close the account earlier than the 36-month anniversary date of the loan closing, you will be obligated to pay PenFed a prorated amount of the closing cost credit received from PenFed. This amount will be added to any loan payoff amount requested prior to the 36 month anniversary date. The reimbursement amount will be prorated in equal amounts on a monthly basis."

https://www.penfed.org/55-Adjustable-Rate-Mortgage/

Wells Fargo does the same thing.

Then I would try Amerisave, who doesn't, and Eagle (who may or may not).

Does Amerisave not charge closing costs?