Remember last week when I said it might be a century ’til we could refinance our mortgages again? Well I may or may not have stumbled across something that verifies me as either a huge super genius, or a bumbling idiot. You’ll have to gauge for yourself after reading this ;)
It all started with me being pissed that every time I call up places to see if we can get refi’d now, we’re pretty much laughed off the phone. “Umm… you DO know you’re underwater, right? By like, a lot?” Noooo, I had no idea? Really?? I only see the numbers EVERY SINGLE DAY when I log into my accounts!! Ughh… Or perhaps even worse, “Sure, you can refinance! Just come up with $100,000 and we’ll hook you up.” *Shakes head*…
($100k is the amount we still need paid off in order to go from being underwater by $35k, to having 20% equity in the property due to stricter rules. Well, $91k paid off really, but an additional $8k-$9k in closing costs too that we’d need to bring to the table)
This happens without fail every time. Which is approximately twice a year, spread out in 6 month intervals – apparently the perfect amount of time for me to forget about how upset I get and magically think this time around will be different! Haha… Well, it never is… though at least now we’re down to $100,000 in cash needed instead of $115,000 – yipee!
Anyways, all this repeated itself last week after my regular check-in with the 2 main places: Chase, where my current 1st mortgage is, and who graciously allowed us to refinance 1 1/2 years ago which we’re still shocked about!, and then USAA – the place I’d prefer to have my mortgage at so I could complete my “all accounts under one roof” mission :) This time around I decided to stop for a second, though, and see if there’s something I’m missing here.
WAS there a way to get around all this $100k nonsense?? Could I swap money around and somehow *trick* the companies?? Or trick myself, even?
I got to thinking long and hard about it (that’s what she said!), and this is the magic that popped out:
What if I could get someone to loan me a huge pile of cash, just so we can pay down the mortgage enough to be refinanced, and then I could simply repay them back? With the money I’d normally had sent to the mortgage company anyways, and at the same 5.5% interest rate too? You know, ‘cuz plenty of people have tens of thousands of dollars laying around to do that ;)
I started running the numbers, and the longer I did the more it made sense:
- If we refinanced today, we could probably drop our rate down from 5.5% to 3.5%. For the same 30 year fixed as we have now, since a 15 year wouldn’t save us any each month in terms of cash flow, which will be needed for this plan to work. Plus, we’ll have the house paid off in 8 anyways.
- The interest drop itself would save us around $300/mo.
- But our overall payments would ALSO drop from around $2,000 to $1,200! Cuz now we’d have a lower principal balance left over from all this money moving…
- Leaving us with a net “savings” of $800/mo. Though of course now we have that little matter of paying off the huge ass loan we just took out which this would be applied to.
- We’d also have ONE simple mortgage on the books now. No more 2nd maxed out home equity line, which was opened on day #1 to get us into our home – back when the industry was cray cray.
So by taking out a personal loan instead of waiting X number of years to pay down $100k of our mortgage as we’re currently doing (even WITH our extra $2,000/mo payments!), we’d basically be saving a $hit ton of cash every month, AND have a locked-in really low interest rate. Which is only bound to go up over the years, especially whenever we paid it off enough for us to even consider this route again (at which point it wouldn’t be worth refi’ing anyways).
I think I’m explaining all this okay? In other words, we’d swap out a chunk of money we’re paying to our mortgage company every month, and pay it to a generous lender friend instead. Thereby dropping our mortgage low enough to be a contender for refinancing. Which again requires #1: that we no longer being underwater, and #2: that we have 20% equity in the place.
Here are the action items that would need to occur for this to be pulled off:
- We need to pay off our 2nd mortgage (the heloc) of $34,000
- We need to pay off an additional $65,000 (which includes refi costs) to get to 80/20 loan-to-value
- We then need to get approved for this refi and make sure nothing explodes in our faces!
Pretty easy in a nutshell, really, but throwing it into the real world is a whole other story :) And I don’t think we’d be comfortable borrowing $100k from someone even IF they offered it up, especially as we have a solid $77,000 in cash savings just sitting there.
So the plan I’ll be introducing to the wifey here shortly is as follows: (I’m secretly hoping she sees this first so it won’t come at her all at once, haha…)
- We take $34k from our cash savings and pay down the 2nd mortgage ourselves- thereby not needing to borrow more. The kicker here is that it would totally screw up the promise of keeping $66k into it which is the only thing my wife has ever asked :( But I’d be sure to siphon off some of the new savings to help refill it back up too! Just not as much, or fast, as she’d probably want.
- I hit up a few people to lock in a personal loan for the remaining $65,000, and I offer to pay them the same 5.5% interest we’re paying currently. Hopefully making it more of an investment for them, rather than just a loan helping out a friend – which I wouldn’t want anyone to be pressured by. It would have to be a total win all around for it to work, meaning this 5.5% would have to beat out anything else they’re currently invested in. Maybe making it a road block instantly, depending on how conservative they are or not (for ex., money in the bank making piddly squat vs. money loaned to me at 5+% would be a MUCH greater return). I’d then make it a priority to pay off as much as I can every month using that $800 we’re now saving, plus all additional money already set aside for extra principal payments via our $2k mortgage payoff plan.
- If no one wants, or can, lend it to us, I then check rates at credit unions and similar places for personal loans and see if that would do the trick. And/or maybe pull some from my investments and break my “no touch” rule of retirement accounts? If I can finagle a penalty/interest-free loan to myself? Hmmm… I’m 99% sure it would still be a big no-no in the end, but I’d be lying if I said I wasn’t rolling the idea around in my head ;) Gotta explore ALL options, right?
- I call up my accountant to make sure none of this messes too much with taxes or anything.
- And then USAA to figure out the *best* way to pull this off so I don’t shoot myself in the foot. Like whether or not to pay it all down first and then refinance, or just wrangle all the money up and wait for settlement to release it all… I’m sure there are right and wrong ways of doing it here.
And that’s it! The gist of my brilliant refi hack :) At least what I have so far after some initial brainstorming… I’m 99% sure this plan would work, but I’m also trying to be cautiously optimistic here. What am I forgetting? Is there a red flag anywhere I’m too naive to see? Is this too good to be true, or am I doomed from the start as I’ll never find a lender anyways??
I’d love to hear your thoughts on it now. And please don’t hold back :) Tell me straight up if you think I’m gaming the system like a champ, or if I’m being a total moron. I need some fresh eyes on this as I’m knee-deep in thought right now… And to be quite honest, a little bit too excited than I should be ;) This is a lot of money we’re playing with here, so def. keep it real!
PS: Before you mention it, our home (or situation?) doesn’t currently work with HARP – I asked :( They say there’s “a chance” it would change later this year, but I’m not putting my hopes in it…
[UPDATE: Here's what we ended up deciding.]
[Photo by: Tsahi Levent-Levi]