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Mortgage Refinance Odyssey

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The following is a staff writer post from MikeS.  He is a married father of 2.  So, with the cat, he ranks number 5 in the house.  He loves numbers and helping people. Please leave any questions or comments below for either Mike or Crystal.

My odyssey started back in October 2014 and did not end until the end of January 2015.  What I thought would be a pretty straight-forward process, turned into anything but.

The Beginning of Mortgage Refinance

I am not sure how or why I decided to start looking into a refinance, maybe I was just looking to cut another expense.  The thought crossed my mind in October and I mentioned that I might be looking to refinance to a coworker.  Since they had recently purchased a house, she referred me to her lender.  I’ll call them Lender A, so things don’t get too confusing.  I was looking to eliminate the mortgage insurance from my monthly payment.

Since I didn’t have the 20% down payment when I bought the house, I was required to have mortgage insurance.  That mortgage insurance premium represents $300 a month.  When I contacted Lender A, they were sure that they could execute a refinance that would eliminate the mortgage insurance.  After taking the necessary information for the application, they ordered an appraisal of the house.

Appraisal

I’m not sure what delayed the appraisal, but it ended up taking a few weeks before the appraiser was able to issue their report.  The report did not come back as a surprise to me.  When we had purchased the home back in 2011 it was appraised for $345,000.  This appraisal came back at $340,000.  Lender A said that they would be able to refinance using a primary fixed loan for 80% of the value and a variable home equity as the second loan for the remaining balance.

It was around this time that my rate-lock was nearing its expiration.  As it turned out, rates had gone down slightly.  I inquired with Lender A about what would happen if my rate locked expired.  They simply said they would just extend it until my closing.  I can’t say I was very happy about not getting the benefit of a lower rate.  So, I decided to look around to see if any other lenders could give me a better deal.

Other Mortgage Refinance Options

I connected with 2 other lenders, Lender B and Lender C.  Lender B was a little vague at first, so I decided to proceed with Lender C.  Lender C was able to offer me a single fixed rate loan for the entire amount.  This was much more attractive than the variable rate with Lender A.  Once again, I started the refinance process.  This was probably around the beginning of December.  The process with Lender C was very quick.  The appraiser was out in just a few days and we had the appraisal report back shortly thereafter.  That’s when a wrench was thrown into the process.

This appraisal came back at $285,000.  I tried disputing the appraisal, but in the end, Lender C was satisfied that the appraisal was adequate.  Since I owed more than $285,000 on my house, there was nothing they could do for me.

Within the next week, Lender B had contacted me again.  I explained that I would only be looking to refinance if I could have one loan with an interest rate of 4.125% or less.  I had done some calculations and determined that that was my breakeven point.  If I couldn’t get those terms, it would not make sense financially to do it.  I also explained the situation of the competing appraisals.

Lender B said that they would order another appraisal, but that if it didn’t come back with a good valuation, that they could use the first one.  So, once again I started the process and the third appraisal was ordered.  This one came back with a valuation of $345,000.  Lender B now is able to give me the final terms of the new mortgage, 3.99% fixed for 30-years.  My payment would be going down about $320 a month from what I was paying previously.  I closed at the end of January.

Successful Mortgage Refinance

In the end, I paid for an extra appraisal.  Lender C credited me back the cost of the appraisal when the valuation came back in too low.  I was out the $400 I paid for the appraisal for Lender A because I had decided not to proceed with the loan.  I’m ok with that.  I have used that extra $300 a month a couple of ways.  The first was to plow a majority of it back towards my mortgage.  I am applying and extra $215 a month towards my mortgage principal.  With that and allocating some of my bonus every year towards the mortgage, I should be able to pay the house off in about 20 years.  The remaining $100 a month went to shore up some of our monthly expense items.  This should allow me to increase my 401k contributions when my salary review occurs in April.

How are your finances shaping up for 2015?

Expense Reduction

Accounting

The following is a staff writer post from MikeS.  He is a married father of 2.  So, with the cat, he ranks number 5 in the house.  He loves numbers and helping people. Please leave any questions or comments below for either Mike or Crystal.

One of my financial goals is to always try and reduce my expenses. I always want to be efficient with how I am spending my money and to control the leakage that seems to occur when I am not diligent.  That leakage is what got me into financial trouble years ago.  I simply was not paying attention to where my money was being spent and ended up spending more than I was making.

Now, whenever I can, I reduce expenses.  Since I have been doing this for a few years, there are often no big changes, but this year, I managed to reduce my expenses by about $150 a month.  There was another change that began when 2015 started and another change that is currently in the works.  Those two additional changes will reduce my expenses by another $300-$400 a month.

Dry Cleaning

It was probably May or June, when I began to think about cutting out my dry cleaning expense. I wear a shirt and tie every day to work and I would have the shirts and pants cleaned at the dry cleaners.  I would clean the shirts after wearing them just once and the pants I would wear twice before cleaning them.  My average cost per month was about $115-$120.  The more I thought about this, the more I felt this was a want, rather than a need.  There were other areas of my budget that could benefit from this money.  I in turn, could simply clean and iron the shirts and pants myself.  I can say I haven’t exactly been thrilled each time I have to iron my clothes, but at least I was able to chop a significant expense from my budget.

Media

The other area that saw a reduction was my cable/phone/internet bill. I was able to take advantage of a 2-year promotional rate that locks in my price while also reducing my cost.  I generally view most cable providers as interchangeable, so I do not have a problem switching from one to the other.  The switch I did over the summer allowed me to reduce my bill by $25 a month.  The cable bill is one bill most people would probably cut entirely, but it’s a luxury that my wife and I indulge in.  My job is to simply keep the bill as small as possible.

Benefit Costs

The item that changed starting in 2015 was my benefit costs. This expense was one expense that was brought to me, rather than me seeking it out.  My company changed our medical plan to be mainly a high deductible plan and you had three choices for deductibles.  After some analysis, I opted for the highest deductible, $7,000.  This election reduced my medical expenses by $140 a month.  The reduction has allowed me to completely max out a HSA, with money left over.  My fingers are crossed that the money can stay in the HSA and will not be needed for medical expenses.

Mortgage

I am in the process of trying to reduce my greatest expense, my mortgage. I am looking into a refinance option where I would no longer have to pay for mortgage insurance.  Since I have a pretty good credit score, banks are willing to overlook the fact that I do not have the necessary 20% equity in the home.  The interest rate would be slightly higher than I currently pay now, but I would be able to eliminate the nearly $325 a month for the mortgage insurance.  If this happens, my plan is to plow $225 of the savings into paying the mortgage off that much faster.  The remaining $100 would go to some of the other spending buckets, so that we can enjoy a little of the savings.

By staying on top of my expenses, I am able to spend my money in the areas that I most want. This allows me to save for things like vacations and retirement, while still enjoying daily pleasures such as cable.

How have your expenses changed over the last year?

Year-End Financial Grade

Accounting

 

The following is a staff writer post from MikeS.  He is a married father of 2.  So, with the cat, he ranks number 5 in the house.  He loves numbers and helping people. Please leave any questions or comments below for either Mike or Crystal.

There is one number that I am diligent about tracking at year-end, my net worth. I use it as my scorecard to see how I did financially during the previous year – here’s mine for 2014.

My History

As I have said before, I was in a pretty deep financial hole.  I am not sure exactly how deep it was, but my net worth was probably in the negative $30K range.  This past year was not my best year in terms of dollar or percentage increase, but it was solid.  My net worth increased about 22% over last year and about $23K overall.  I am pretty happy with that increase.  I’ll discuss where the biggest changes occurred and where I think I might end this year.

Yay 401k!

The biggest change, by far, was in my 401k. That represented almost all of the gains in my net worth.  Between my contributions, my company’s contributions and market gains, my account was up $20K for the year.  I contributed just over $8K for the year.  That was 7% of my gross earnings, with 6% going to a traditional 401K and 1% going to a Roth 401k.  My company contributed just over $9K.  There is a matching contribution, dollar for dollar, up to 6% and then a flat 2% contribution.  The 2% contribution is in lieu of a pension plan.  The remaining amount came from market gains.  I managed to earn just over $3K having my 401k invested in the stock market.  I have a relatively aggressive allocation, with about 90% invested in a few stock funds and about 10% invested in a bond fund.  Since I probably have about 30 years before I retire, I feel this is appropriate.  According to my statement, my return for the year was an even 7%.  Naturally, I would prefer more, but I will take 7%.

Debt Reduction

The next change was debt reduction. I did not take on any additional debt during the year, I just paid down my existing loans.  Between my mortgage and car loan, I reduced my obligations almost $10K.  I did not prepay either loan.  I plan on adjusting that philosophy if I am able to refinance my mortgage and eliminate the private mortgage insurance.  In that case, I will add an additional $200 or so every month to reduce the mortgage, as well as using a portion of my bonus to pay down the mortgage.

Assets

The final change was actually a reduction in my assets that offset some of the gains I had in the 401k and debt reduction. A good portion of the savings reduction was due to planned purchases.  We had budgeted and saved for a snow blower, which we purchased early last year.  I also took advantage and pre-bought my heating oil.  The combination of the two lowered my savings amount by over $4K.  The other thing that lowered my assets was the depreciation of my two cars.  My wife’s car is a 2012 and mine is a 2001.  I checked on what the values would be for the cars given the current mileage of each.

2015

I obviously can’t forecast what the stock market will do this year, but I can control how much money I save and how much of my debt I payoff. My 401k contributions will remain the same in 2015.  I will contribute 7% of my salary and the company will contribute 8%.  That will mean at least another $14K going into the 401k.  If I am lucky enough to get a raise or a bonus, that number will only go up.

I also plan on continuing my savings in my Vanguard brokerage account.  I am setting aside $85 a month or about $1,000 for the year.  I’m comfortable with that number right now.  If the raise happens to be a significant one, I would likely increase that amount.  The car loan will be reduced on the normal schedule, which means a principal reduction of about $3,600.  If my mortgage refinance is successful, my plan is to use some of the savings from the reduce payment towards the mortgage.  I have estimated that I might be able to reduce the principal by about $8,400.  All in, it looks like I should be able to increase my net worth by about $20,000.  Some of my gains will be offset by the depreciation on the cars, but I also hope to see some market gains as well.  Fingers are crossed.

How was your year-end financial check?

There’s a New Way to Look at Retirement Calculations?

Money Tree

The following is a staff writer post from MikeS.  He is a married father of 2.  So, with the cat, he ranks number 5 in the house.  He loves numbers and helping people. Please leave any questions or comments below for either Mike or Crystal.

This article I found in The Wall Street Journal somewhat surprised me.  It discusses how advisors are now counseling their clients, not on the size of their nest egg, but rather on how much income it might be able to generate.  The surprising thing to me was that this is what I have been doing all along.

It was probably about 5 years ago, that I wanted to seriously analyze my retirement savings.  I had some decisions to make and needed to figure out what my retirement savings would look like in 30+ years.  I tried looking at various on-line calculators, but found myself disappointed in them.  Essentially, the calculators weren’t robust enough for me.  I couldn’t change some basic assumptions that were built into them.  So, I built my own.  It is simply an Excel spreadsheet that takes my assumptions and turns them into an income projection.  The key to the calculations are the assumptions that I made in order to forecast 30+ years into the future.

Employers’ Plans

The first thing I looked at was what retirement benefits my employer offered. The company provides a matching contribution to the 401k, along with a fixed percentage of salary contribution regardless of whether I contribute or not. The assumption I made here was that the plan would remain the same throughout my working career.  Not very realistic, but it would be too hard to guess what the changes would be in the future.  One thing to take note when looking at your plan, is what compensation is included in the employer match?  Is it against base salary only?  Are bonuses and overtime considered?  My company made a change in the past year to include bonuses in the 401k.  Not only am I now able to set a portion of my bonus aside in my 401k, but that the company also matches that contribution.  So, essentially I receive a larger bonus.

Salary

The next assumption I made was related to my salary. How did I think it would change over time?  I wanted to be a little conservative, but also have faith in my ability to grow my earnings.  Here I decided to grow my salary at 4% every year from its current level.  I felt this was reasonable given my track record since I graduated college.  I have managed a 6% average annual growth over the last 15 years.  I might change this in the near future, as my desire to advance up the corporate ladder has diminished.  Keeping pace with inflation maybe a better assumption, I may have to revisit it next year.

Savings

The next decision I made was how my contributions would change over time. This was the biggest drawback I felt to the on-line calculators.  I wanted to increase my savings over time.  For me, I wanted to assume that I would increase my savings by 1% of my salary every year.  The thinking is that when I receive a raise, I can raise my savings rate and not notice a decrease in my take-home pay.  I’d like to say that I have been consistent increasing my savings every year, but that has not been the case.  I have increased it in other ways, such as opening a healthcare savings account.  I considered those savings as retirement funds as well, just not a 401k.

Investment Return

This is perhaps the biggest unknown. I assumed an average return of 9%.  Some will argue that is overly aggressive, but I am comfortable with it.  I feel like over the course of 30 years, I should be able to generate that level of return.

Inflation

Here is another assumption that can have a huge impact. When I calculate what my savings will be in 30 years, what I need to know is will that be enough?  I translate the future amount back into present dollars via the inflation factor.  I used 3% as my assumption.  That has been the historical rate of inflation and I felt it was a reasonable assumption.

Do I have enough?

In the end, trying to figure out if I have enough is just a guess. The bottom-line I looked at was whether my savings would be enough to generate an income equal to my take-home pay when I retire.  I assumed a 4% withdrawal rate.  I figure if I am living off my take-home pay just before retirement, then that amount should be adequate to retire on.  As I get closer to retirement, I’ll have a better idea of what my spending will actually look like.  Have you calculated your retirement number?

Tax Time

Accounting

The following is a staff writer post from MikeS.  He is a married father of 2.  So, with the cat, he ranks number 5 in the house.  He loves numbers and helping people. Please leave any questions or comments below for either Mike or Crystal.

I finally got around to filing my taxes.  I wasn’t procrastinating because I owed money; on the contrary, I was receiving refunds from both the federal and state government.  It just took me awhile to find a solid 2 hour block of time to get them done.  When I was finished, the tax program that I use gave me a comparison to the previous year’s taxes as a way to make sure I didn’t miss anything.  I found it far more useful to see how my finances changed over the past year and since I’m writing about it, that means you get to take a look with me.

Wages

The first item of comparison is wages and only shows a difference of $1,900.  This doesn’t quite tell the entire story.  To satisfy my own curiosity, I looked at my gross pay for 2013 and 2014.  In 2013, I was paid a total of $106,000 between salary and bonus.  In 2014, the number rose by $8,750 as I received a salary increase and a larger bonus.  So, why might you ask did my wage comparison only change by $1,900?  The reason is that my taxable wages only went up by that amount because I took advantage of more tax-deferred accounts in 2014.  In 2014, I contributed an additional $1,200 to my 401k and I also fully funded an HSA.  Those two things combined lowered my taxable income by almost $7,000.  So, while it may not look like my income changed all that much, it actually did and I just increased my savings.

Dividends and Interest

The next two items to look at were dividends and interest.  Now, the change wasn’t huge, an increase of about $300 from 2013 to 2014, they do represent a much improved financial picture for me.  Since I have an additional $300 in interest and dividends that means my savings and investments have increased.  This was due to a combination of a larger bonus than usual, as well as money I received from an inheritance.  We continue to funnel money monthly towards the brokerage account on a monthly basis, but the savings account only has monthly deposits for our spending buckets.

Deductions

I have itemized my deductions every year since I bought a house, as that’s usually the most tax efficient thing for me.  What’s interesting about the comparison this time is that 2014 was significantly higher.  The reason being was that in 2013, part of the inheritance I received was an IRA.  Ideally, I would have left the money in the IRA and just taken out what I was required to every year.  However, it was better for my overall financial picture to take a lump sum distribution.  By taking that distribution though, I lost the ability to deduct mortgage insurance as my Adjusted Gross Income was too high.

That lost deduction was about $4,000, which meant I had pay taxes on an additional $4,000 of income in 2013 as opposed to 2014.  When I file my taxes next year, the situation will be reversed as I was able to eliminate paying for mortgage insurance with my refinance a couple months back.  I’ll happily pay the additional tax if it means I eliminated the $3,600 a year expense.

Refund!

The total tax bill and refund amounts were the last big differences.  Total taxed owed decreased by over $4,000 from 2013 to 2014.  That was driven in large part to the IRA distribution.  The IRA added almost $20,000 to my income in 2013 and as such, added almost $3,000 to my tax owed.

I had planned on owing the additional tax, so it wasn’t a big impact on my budget as I had adjusted my withholdings so that I wouldn’t owe anything come year-end.  In fact, I got a small refund of $161 in 2013.

In 2014 my refund increased to about $1,400.  The larger refund was driven by a larger bonus in 2014.  The taxes withheld from the bonus were higher than needed.  I could have adjusted my paycheck withholdings to minimize the refund, but I planned on using the refund to help fund the surprise trip for my wife.  Since she doesn’t pay attention to the refund amounts, since they are normally really small, it was an easy way to squirrel away a little more money for the trip.

How did your taxes compare with last year?

 

Attempting to Save on Home Annoyances

Home

The following is from my husband, Len Stemberger.  Yes, that is a miracle.  He has only guest posted for my main site, budgetinginthefunstuff.com, once.  In 5 years…

Like most new things, building a new home is a bit of an adventure, and once it is finally done, you enter into a honeymoon period. The house is wonderful; everything is as you always dreamed it would be; and the smallest details amaze you.

Losing the Shine

But, also like most things, this euphoric feeling wanes. The smallest details begin to annoy you, and you realize that your dream idea may not work so well in practice.

For me, this moment occurred rather quickly. And, to be honest, it wasn’t the house’s fault, and it wasn’t the fault of the builder – or at least not the people who actually built the house.

The problem: our dish washer.

Really, I blame my mother-in-law. See, in our last house, my mother-in-law bought us all of our kitchen appliances – refrigerator, microwave, oven/stove, dish washer, washing machine, and dryer. They weren’t fancy – just simple, efficient, and very effective. I loved that dish washer. Not at the time mind you – I didn’t realize how good I had it.

Crappy Dishwasher

It wasn’t until we really got everything moved in and settled in our new home, that we began using the dish washer on a regular basis. The problems emerged.

Our new dish washer is worse in every way compared to our old one. It holds fewer dishes. It does a worse job cleaning (even with pre-rinsing which we never had to do with our old one). It does a lot worse drying – you need a towel to dry the dishes that came out of the washer (and that’s with the fancy heated dry option on).

Now, there is nothing left to do but either live with it or replace it. So every Sunday, when the paper arrives, I flip straight to the Sears ad just waiting for the day that the deal is too good to pass up. I also keep an eye on the Sears section of Groupon Coupons so I can combine a great deal with a discount too!

One day it will arrive, and the scourge of the dreaded dish washer shall be removed from our lives. But, until then, I suppose there are always paper plates when I just can’t bring myself to drying dishes by hand…

What about your home annoys you? Is there something about a previous home that you really miss?

Lesson Learned

Money Tree

The following is a staff writer post from MikeS.  He is a married father of 2.  So, with the cat, he ranks number 5 in the house.  He loves numbers and helping people. Please leave any questions or comments below for either Mike or Crystal.

You would think that I would have learned this lesson over the years: Always do your homework. Maybe I was just lazy, but my mistake probably will end up costing myself a few hundred dollars.  The good news is that I am going to save myself thousands.

The Refinance

A couple of months ago I thought maybe it would make sense to refinance my current mortgage to eliminate the mortgage insurance I was paying.  When I bought my home a few years ago, I did not have the 20% necessary for a down payment.  As a result, I had to pay mortgage insurance.  It was a little over $300 a month.  That’s simply money down the drain.

A friend of mine just bought a house, so she recommended the bank that she had used. I contacted them to determine what options I had for refinancing.  The bank could do a refinance with a primary mortgage and a home equity loan.  The primary would be 30-year fixed at 4%, with the home equity line a variable rate, currently 5%.  The total cost of the loan, compared to my current mortgage was basically a wash.

The biggest upside was that this would eliminate the mortgage insurance.  It would also save me some money on a monthly basis, roughly a $100.  The biggest downside is the variable rate, as I believe interest rates are going up sometime in the future.  If and when interest rates rise, so would may payment.  I was willing to make this trade off, as I am locked into the mortgage insurance for another 7 years.  Since the deal sounded pretty good I started the process of refinancing.  What I should have done, was to investigate other lenders to see if I could get a better deal.  I sent the money in for the house appraisal to begin the process.

The Issue

The appraisal came in slightly lower than I expected, but still high enough to go through with the refinancing. One of the things that changed was that I would have some additional closing costs that would be rolled into the loan.  As all the paperwork was being worked on, I noticed that rates on the bank’s website had come down.  Since the rate lock agreement I had signed was only a couple of weeks away from expiring, I inquired what would happen if the lock rate expired before I closed on the mortgage.  Turns out, if rates went down, I would not get the benefit of the lower rates.  While I understood this, I was not exactly happy about it either.  This was the trigger for me to do the homework I should have done all along.  So, I contacted a few other lenders to see what other deals were out there.

Our Decision

After discussing my situation with other lenders, I found a better deal for my mortgage. The new deal was all one mortgage.  My high credit score qualified me for the lender to pay the mortgage insurance.  When I did the math, I will save about $15,000 over the total cost of the loan.  Even though this loan had a slightly higher interest rate, 1/8 of a percent (4.125% overall), it had lower closing costs.  The first refinancing option also had the home equity portion as well at a higher rate.

The end result is that I will probably lose the money that I paid for the first home appraisal. Had I done my homework initially, I would have found the lowest cost option to start.  I guess, since I went with the best option in the end, there is only a little bit of financial pain.  I will remember that pain then next time I have to make a financial decision.

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