HELOC on hold. Refinance here I come.

refinance

Last Friday I shared my grandiose plans to take out a home equity line of credit (HELOC) in an attempt to diversify the liquidity available to me.

That HELOC stuff is soooooooooo 1995 last week.

I’m on to bigger and better things now. And by “bigger and better” I mean, it’s time for me to play the refinance game.

 

Some Background

We put in our offer on our house in June 2013. It was accepted the day Ben Bernanke spoke publicly, for the first time, about the reserves plan to slow down Quantitative Easing. Which, in turn, resulted in mortgage interest rates taking a dramatic turn for the more expensive.

May 2013 rates were around 3.5%. By June they had jumped half a percent to 4.07%. And by July 2013 (the month we closed on our home) they were at 4.37%.

We quite literally missed some of the best interest rates in history by 24 hours, locking in at 4.125% instead of 3.5%.

Rates hadn’t moved much over the course of 2014 so refinancing was never really an option, but after my post about taking out a HELOC, some of you suggested I look in to it.

 

So I did.

 

I called a handful of banks to get an idea of what rates they were offering on a 30-year fixed refinance. Most of the large institutions (Chase, Wells, Citibank, etc) came back with a rate somewhere around 3.85% and closing costs of about $4,000 to $6,000.

I then used Zillow’s handy dandy refinance calculator to see what the break-even was on that deal. Here’s the graph…

refinance

As you can see, I would save $44 per month by taking advantage of one of the big banks rates.

But that’s only half the story.

The break-even point was really what I was concerned with. Remember, I’d have to pay about $5,000 in closing costs to get that new rate. That makes saving $44 per month significantly less exciting. According to math, it would take me 9.5 years to earn that $5,000 back. I was hoping for a break-even somewhere around 2 years or less.

Bah humbug. 

Big banks were out of the question.

 

Next up, online lenders. 

After doing some research I stumbled upon, AmeriSave, a direct lender out of Atlanta.

For my situation (credit score, loan balance, etc) they offered the most competitive rate I could find. In fact, AmeriSave blew the big banks out of the water.

They were offering a rate of 3.75% and THEY would cover all of the closing costs. Ummm excuse me?

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Do you want to know what the break even is on the loan AmeriSave was offering? Check out the graph…

 

Screen Shot 2015-01-26 at Jan 26, 2015, 11.10.25 PM

 

That’s right. The break even point starts the day I get my new loan. I get to save $60 per month at no cost to me.

 

Is this too good to be true? 

Maybe. I read some online reviews. Some positive. Some negative.

Fortunately, Girl Ninja and I have excellent credit, all of our financials easily at hand (W2’s, pay stubs, account balances, etc), and a favorable debt to income ratio. I’m hopeful this will help our new loan close with few (if any) hiccups.

I spent quite a bit of time on Friday talking on the phone, and emailing, with my AmeriSave loan officer and so far everything has been running smooth.

side note: I may or may not have mentioned to him that I am a Personal Finance blogger who will be writing about my experience. Thinking that might scare him in to taking good care of me.

The only real risk for Girl Ninja and I is having the deal fall apart, but since we have no out-of-pocket expenses associated with the loan, if things go south we will just walk away and go find a new lender.

I’ve never gone through the refinance process before, but so far it’s been pretty painless.

Here’s to hoping it stays that way for the next 45 or so days.

Standby for more.

Mortgages and Medicine.

Unless you are the dumbest person in the world, you probably have realized I’m not the biggest fan of debt. I think it’s pretty stupid and unlike most PF bloggers, I don’t believe “good debt” exists.

Although I’m a pretty avid debt puncher, I do compromise on two issues…

Home

If you didn’t already know, houses are kind of expensive. The median home price in my zip code is $500,000. Even if Girl Ninja and I were able to stock away a whopping $50,000/yr in savings (which we aren’t), it would take us 10 years before we could pay cash for a house in our hood. And that’s assuming home prices don’t increase during those 10 years we save (which we know it will).

Last year we took on a $280,000 mortgage for our $350,000 home. That means we put 20% down, and financed the remaining 80%.

I would never try to call my mortgage debt “good”, perhaps “necessary evil” is a better descriptor.

Medical

This one goes without saying, and I assume most of you would agree.

If for some reason the crap hit the fan and I was faced with a decision between death or debt, I’m gonna take on some debt. That said, I am doing what I can to ensure I never have to be faced with that choice. I pay a pretty penny for health/dental/vision insurance each month, not to mention I have a decent chunk of change sitting in an emergency fund.

My insurance and savings should significantly diminish the chances of having unpaid medical bills , but on the rare chance I needed to buy an organ on Ebay, you better believe I’d do so. Side Note: How much you think a kidney goes for on the black market? $50K? $100K?

That pretty much wraps up my Tolerable Debt List. I realize my stance may be extreme for some, and for others it’s probably not strict enough. And this leads to today’s question….

Where do you draw the debt line?

What type of debt have you sworn off for good (credit cards, car, mortgage, payday loans)?

What type of debt are you comfortable with (mortgage, cars, 0% credit card offers, etc)?

At what point does debt go from being logical to being ridiculous?


How much credit card debt do you have?

Every now and again I like to pick your guys/gals brains. It’s not only helpful for me to see if I am at relatable to the people who read PDITF, but hopefully it’s also helpful for you to see where you stand against the masses. Since the value in today’s post is probably coming from the comments section, and not these words, I’ll cut right to the chase.

What is your total credit card debt? 

It’s really that simple. Apparently the average household (that has at least one credit card) has nearly $16,000 in CC debt. Let’s see if that rings true for this community.

I’ll get this party started. Our CC balance currently stands at $6,505, and like always, will be paid off at the end of the month. What’s depressing is that our most expensive purchase included in that balance was $140 for car insurance. That means we have a ton of freakin’ small purchases that amount to a rather large balance. Dang.

Your turn. What’s your balance (and why is it what it is)? 

extra credit questions: What is the interest rate on your card(s)?

Removing a credit card late fee was too easy

I received an email yesterday from Bank of America informing me I was charged a $25 late fee on my Alaska Airlines credit card for having a past due balance.

I pooped myself when I saw the email.

Literally.

Mostly because I was on the toilet when I was checking my email, but that’s beside the point.

I made an oath to myself a long time ago that if I ever incurred a late fee, penalty, or interest charge on any of my credit cards, I would immediately cancel them and limit myself to only using my debit card. Credit cards are awesome, but only when used responsibly. Fees and interest negate any benefit they may provide.

I pride myself on being responsible and always paying my bills on time. I knew I made a huge credit card payment recently so I had no clue why I was being charged a fee.

Turns out, I’m apparently a little too responsible. 

My credit card statement ends on the 2nd of each month. In May, I made a payment on the 2nd that I thought would cover my June bill. Submitting that payment a full 30 days earlier than I needed too.

Or so I thought.

I guess my payment, was a few hours too early and was applied to my previous bill, since the new statement had not finished processing. Basically, while I thought I was paying my June statement off early, Bank of America thought I was just submitting an extra payment for my May statement.

This resulted in an $89 balance due on June 1st that I didn’t know I had. I was charged a $25 late fee (that’s a 28% penalty) for not making that payment.

I had read blog posts before about people who have had success getting late fees or interest charges dropped from their credit card, but had no experience with it myself since I’ve never been late on anything. I decided to give Bank of America a call to see if I could persuade them to remove the fee.

Here is how that conversation played out…

BoA: Thanks for calling BoA, how can I help you today? 

Me: Um, I noticed I was charged a $25 late fee on my credit card balance this month. I’d like that removed. 

BoA: I’d be happy to look in to that for you, but first need you to verify your identity.

[we discuss my personal information to verify the account]

BoA: Okay, Mr Ninja. I’ve got your account pulled up here. I’ve just removed the fee. Is there anything else I can do? 

Me: Uhh, nope. Thanks. 

It was actually that painless. He didn’t ask me why I incurred the penalty. He didn’t ask me why I thought they should remove it. I didn’t have to threaten to cancel my card or take my business elsewhere.

I simply asked to have the fee removed and he did it. 

I always hear horror stories about credit card fees and late penalties, and I’m sure they are all justified, but so far my only experience with them was shockingly positive.

Have you ever incurred a fee that you tried to have removed or reduced? Were you successful in your endeavors? 

Patience Grasshopper.

I’m pretty impatient, this was especially true when it came time for me to work my way out from a $28,000 student loan bill. The only thing I wanted more than being debt free, was to be debt free NOW! My intense desire to get out of debt was the best and worst thing that ever happened to me.

Marathon not a sprint:

My minimum payment to Sallie Mae was $178/month. Do you know how frustrating it is to pay over double that, but barely see the principle drop? SUPER FRUSTRATING! The first $170 of my payment went straight to interest, I felt like I was barely making a dent. I felt defeated. I was giving Sallie Mae virtually all of my discretionary income and getting what appeared to be nothing in return.

As my intensity was decreasing and my frustration was increasing, I had an epiphany. I DIDN’T GET IN DEBT OVER NIGHT! No, it took four looooooong years to rack up that $28,000, so why was I expecting to get out of debt in a few months?

Renewed focus:

Right as I was about to crash and burn, this little epiphany completely reignited the fire in my heart. I was ready to kick Sallie Mae in the ovaries, repeatedly. I had a goal and it was simple, “Get out of debt faster than I got in debt.” This took the pressure off each individual payment, and gave me a long-term perspective. My frustration turned to focus.

Focus that I desperately needed.

You know the rest of the story. As my income grew, my $500/month payments turned to $1,000, $2,000, and at one point $10,000 payments. Watching my balance go from $28,000 to $27,000 was disheartening, but watching it go from $10,000 to $9,000 was FREAKIN’ AWESOME! Three years after graduating college, I reached my goal. I was debt free.

I hope this story encourages, but more importantly reminds you that the journey out of debt is a marathon and not a sprint. If you racked up $10,000 on credit cards over ten years, it’s probably going to take you a few years to pay them off. If you financed your undergrad and graduate education (7+ years of loans), you probably wont be getting out of debt in one or two years. Think macro not micro.

I think it would be really cool if YOU shared a little bit about your situation. How long did it take you to get in debt? How long did it take (or do you expect it to take) you to get out? When you feel defeated by your debt, how do you stay focused? Respond in the comments below and let’s encourage one another!!!!!

I’m hardcore when it comes to debt.

My debt journey can be summarized as follows:

  • 0 to 18yrs old: Debt free because I was too young to have debt
  • 18 to 24: Legally allowed to have debt, so why not rack up $28,000 in student loans
  • 24 to 27: Live debt free after realizing I hated Sallie Mae with a passion
  • 27 to Present: $283,000 mortgage debt.

My personal stance on debt is pretty fluid. When I first got in to this whole personal finance thing I swore off everything but a mortgage. As I’ve become a little more seasoned in my PF knowledge, I’m realizing debt is not necessarily as evil as we make it out to be.

Yes, it is often a terrible, terrible thing. But sometimes, it’s not really bad at all.

I’ve decided to outline the Ninja household’s current philosophy on debt…

Credit Cards:

As you all know, I use my airline credit card for just about every purchase I make. I have no plans to change this habit as Girl Ninja and I really enjoy the perks our CC offers. That said, I made a personal commitment to myself when I graduated college, that if I ever miss a payment (yes, even by one day) I will immediately pay my balance off, cancel my card, and switch to a debit only system. So far, so good. Haven’t missed a payment yet. Credit cards can be a great resource if used responsibly.

Car Loans:

As for a car, although we have no plans to buy a new car anytime soon (never say never), I would be open to the idea of taking out a loan if I did. The loan’s APR would have to be really close to 0% and I would have to have, at least, that amount of cash in savings or a taxable investment account.

I think about it this way. If I either had to pay $20,000 up front for the car, or could pay $20,000 back over the course of five years, I’m taking the 0% loan every time. Remember, liquidity is king. The best kind of debt to have is debt that doesn’t cost you any money.

Mortgage:

Girl Ninja and I went from having no debt, to $283,000 of debt in about one hour (how long it took to go through the closing documents when we bought our house). Having a mortgage payment sucks. That’s for sure.

But I have no plans to pay my principle down quicker than the 30 year loan term. Inflation is man’s best friend when it comes to mortgage debt and I plan to let it run its course.

Lastly, I’ll never pay private mortgage insurance. It is such a big fat waste of money. If we had only put 5% down on our current place, instead of 20%, we would have had to add another $200 or so to our monthly payment just to cover the PMI. That’s a sunk cost that you will never see a return on. Maybe you feel differently about PMI?

And that pretty much sums up what debt I find acceptable. I’m not a fan of second mortgages. I would never take out a loan to start a business. I would never finance a luxury item like a boat, motorcycle, or vacation. I have no plans to raid my retirement account early. I will never take out another student loan again. And I will never co-sign a loan, or lend a substantial amount of money, to a friend (or family member) as long as I live.

Never. Ever. EVER.

How does debt fit in to your life (what types of debt do you have)? What types of debts do you plan to continually utilize (auto loans, responsible CC use, mortgage)? What types of debts have you sworn off for good?

Keep your credit card debt. It’ll be good for you.

Do you have an income?

Do you have expenses?

If you answered yes to either of those questions, you darn well better have some financial priorities in place.

While there are a million different things we could talk about in regards to financial priorities, today I want to focus on just one.

Which comes first: investing or paying down debt?

I think financial priorities are something most of us think we have figured out, but don’t always truly understand.

Today I’m going to show you why investing in your 401K is often a better option than paying down high interest credit card debt.

Let’s look at an example:

Jane, makes $50,000 year. She’s 30 years old and her employer fully matches 5% of any contributions she makes to her 401K plan. Jane also has $5,000 in credit card debt, at 15%. What should Jane do, pay down the card as quick as possible, or start building up a nice little nest egg for retirement?

A 15% APR, on a $5,000 balance, means Jane will be paying about $62/month in interest. If she made nothing, but minimum payments, it would take her a little over 22 years to pay that sucker off. She’d also pay $5,729 in interest over that time resulting in a total payment just shy of $11,000. Yikes, that $5,000 original bill became a whole lot more expensive. Better pay that sucker off ASAP, right?

Now let’s examine the investing route.

Jane would be investing $208/month in her 401K if she contributed 5%. Her employer matches that and gives her another $208. If she earned a doable 6% return on this money, and never got a raise in her life, she would end up retiring at age 67 with $683,030 in her 401K. Not bad at all.

If Jane decided to postpone contributing to her 401K, she could use that $208 to make accelerated debt payments each month. But let’s not forget, that 208 number is pretax, so in reality she’d have about $175 extra to throw at her credit card. With the additional payment, Jane will now be credit card debt free in 20 months and will have only paid about $673 in interest. Sounds a heck of a lot better than the 22 years it was going to take in the first example.

Here’s where it gets interesting.

Wanna know what Jane’s 401k would look like if she didn’t start investing until after she became CC debt free? She lost nearly two years of company matching and compound interest, resulting in $596,388 in her 401K. That’s $86,642 less then if she started investing at age 30.

Guys and girls, this point is SOOOO important it can not be overlooked. It is absolutely in Jane’s best interest to start investing in her companies 401K, even though she is not debt free. If she waits until she has her credit card paid off, she loses a crap load of money. I know this seems to go against the grain. Credit card debt is evil, don’t get me wrong, but that doesn’t mean it should always be at the top of our financial priorities.

Obviously, in a perfect world you will have enough discretionary income that you can not only contribute to your retirement, but also pay down your debt quickly. I always have been, and always will be a DEBT PUNCHER, but only when it is in your best interest.

Does your employer offer a 401K match? (I’d like as many people as possible to answer this question since I’ve heard a lot of the retirement benefits in the private sector have been getting cut left and right). Are you taking full advantage of that match? If not, you’re crazy. I’m sorry, you just are. You are literally giving up FREE money. In Jane’s situation would you go the way of Dave Ramsey and still pay down your credit card first, or would you let number’s guide you and start contributing to your retirement?