"100% of people who do not save money do not have any!"--Dave Ramsey

[JSH]

I refinanced yesterday. 2.5% w/ 1 point. (It would have been 2.75 without the point) The company is Loan Depot which found me through Lending Tree.

Now it is time to find a rental.

I'm very interested in something like this:

https://www.zillow.com/homedetails/9...83626917_zpid/


$111,000 in a good part of town. Long term tenants on each side paying $550 a month and taking care of their own utilities.

[Ecky]

If you don't mind my asking, whom did you go with for the refinance?

[redpoint5]

Just the motivation I needed to look into a refi on my property. Might want to look into a refi on my Vancouver property too...

[JSH]

Originally Posted by Ecky

If you don't mind my asking, whom did you go with for the refinance?

Loan Depot

Their loan origination fee is $1595 which is higher than some of the others but the rate was 0.25% less than anyone else. I'm guess the banks with low or no closing costs are offsetting their fees with a higher APR.

It was a bit of a weird process. The more I borrowed the lower the rate. That 2.5% rate started above $200K. We ended up taking cash-out to get above that.

Then there was the loan to equity ratio. If it was 69.5% I had to get an appraisal. At a 70% the appraisal was waived. ??? how does that make sense?

There was also a bit of a car dealership like "take it to my manager" negotiation which was annoying. They started at 2.1 points to get the 2.5% rate. I started at 0 and we ended up at 1 pt.

[redpoint5]

Yeah, I'm simply going to pit 3 companies against each other until one of them says this is their final best offer.

I think keeping money upfront is probably a wiser choice than paying down the interest. That money saved can go into the stock market, which is still discounted. A cash out refi could even make sense to throw more money into the stock market while deducting the interest payments on taxes.

This all gets very confusing trying to weigh paying points, vs simple origination fee, vs no upfront loan cost (increased rate). I'm inclined to believe paying as little upfront is the best strategy since any money saved can earn ~7% return in the market, interest payments are tax deductible, and the banks carry greater risk with the higher loan to value ratios.

[JSH]

Originally Posted by redpoint5

Yeah, I'm simply going to pit 3 companies against each other until one of them says this is their final best offer.

I think keeping money upfront is probably a wiser choice than paying down the interest. That money saved can go into the stock market, which is still discounted. A cash out refi could even make sense to throw more money into the stock market while deducting the interest payments on taxes.

This all gets very confusing trying to weigh paying points, vs simple origination fee, vs no upfront loan cost (increased rate). I'm inclined to believe paying as little upfront is the best strategy since any money saved can earn ~7% return in the market, interest payments are tax deductible, and the banks carry greater risk with the higher loan to value ratios.

I got multiple quotes from 5 banks and this was the best. The problem with bidding is that rates change twice a day (9 am and 3 pm EST).

As this is a cash-out loan I'm not actually paying money out of pocket for the point (locked this morning at 0.866 pts) or other origination fees. The closing costs are just subtracted from the cash-out.

I disagree that banks carry the risk at high loan to value ratios. The only way they carry risk is if loan goes into default and the buyer doesn't have enough assets to cover their losses. If I was to default on this loan, the bank would just sue me to recover their loss.

[redpoint5]

If the loan to value ratio goes above 1, then the banks carry the risk because people will walk away like we saw in 2007. That's what I mean by the banks carrying the risk even though real estate is normally a relatively stable market.

I'll throw together a spreadsheet to help me crunch the numbers, but I think even conservative ROI figures for the stock market and relatively short durations will show that having cash now is better than having equity.

[Xist]

I tried to find articles about buying points or making a slightly larger down payment. I just found something about buying 4 points to go from 8% to 7%.

That seems like a completely different scenario.

Navy Federal keeps calling and sending e-mails and texts trying to get me to submit information. They don't have competitive rates and I haven't found a house.

Both Navy Federal and USAA sent me letters telling me the results of their credit check, but I already had it.

One of them wanted me to sign a letter saying that I received the information.

[redpoint5]

You only need to be pre-approved by any place to show a buyer you're serious. You've got no obligation to use that lender when you actually want to submit an offer. If that lender wants to cash in on the work they did, they can get competitive with their rates to earn your business.

Just as I'm always saying about car buying, advertised rates are bunk. It's irrelevant what someone advertises, only what they are willing to negotiate. This isn't like normal goods like a box of cereal or pair of shoes where you pay the price listed.

I've decided to create a spreadsheet similar to my vehicle total cost of ownership calculator that lets me plunk in various offers from lenders and play out the scenarios. The spreadsheet will decide for me, not some smooth talker. I'll share it when I finish with it.

[JSH]

Originally Posted by redpoint5

If the loan to value ratio goes above 1, then the banks carry the risk because people will walk away like we saw in 2007. That's what I mean by the banks carrying the risk even though real estate is normally a relatively stable market.

Walking away from a mortgage does not end the borrower's legal obligation to pay the debt (at least in the vast majority of states). When someone walks away, the bank forecloses, sells the property, and then pursues the borrower for the remaining balance. This includes the option to garnishing wages until the full debt is collected.

Someone with negative net worth and few assets could declare bankruptcy to discharge the remaining debt but that isn’t an option for people with assets.

Originally Posted by redpoint5

I'll throw together a spreadsheet to help me crunch the numbers, but I think even conservative ROI figures for the stock market and relatively short durations will show that having cash now is better than having equity.

I made a simple spreadsheet that looked at total cost of the loan: closing + (payments x months) and based my decision on that. I used bankrate to calculate monthly payments.

No doubt the stock market has better returns than paying down a mortgage. That assumes someone invests the difference in the market. I’m already maxing out every tax advantaged fund available to me (401K, Roth IRA, and HSA). Any money I put into the market right now would be taxed 30% (20% federal capital gains + 10% Oregon capital gains). So that 7% return becomes 4.9% - 2.5% mortgage rate = 2.4% return. That return isn’t guaranteed and carrying a higher mortgage increases risk. The bigger the loan the bigger the payment and the fewer months my cash reserves last in the case that I lose my job.

It is the same for future rentals. Do we want 10 mortgaged retails bringing in $100 a month or 1 paid off rental paying $1000 a month? Mathematically we should have 10 houses with the least amount of equity possible to maximize ROI. That is what a MBA learns in school. What is ignored in that calculation is the risk. With the mortgages if we get another event like COVID 19 and renters are allowed to skip payments I’m screwed. I have to cover 10 mortgage payments out of pocket while the market is down and I would have to sell assets at a loss. With one paid for house I lose income but don’t have to pay out of pocket. The entire point of investing in real estate is to diversify sources of income so we don’t have to sell assets in a down market to cover living expenses.

No doubt the math works to carry a high mortgage balance and invest the difference in the stock market. However, that is a riskier bet and a risk I’m not looking to take 3 years from our target retirement date. We plan to enter retirement with zero debt.