Refinance, Round 2

I refinanced my mortgage back in May of 2009, and it's apparently time to do so again. I'm going about things a bit differently, this time. I'm using the same mortgage broker as last time, though he's with a different company now: First Trust Mortgage. I guess I'm just listening to his advice more now.

Currently, I pay $1400/month, which includes a decent pre-payment amount, and I would currently pay off my mortgage in 230 more months. I decided to formalize that this time around and get a 20-year mortgage, which lowered my rate 0.25% compared to a new 30-year. This puts my required payment at just under $1300/month, which means I'll round up to $1300, of course. So, I'll increase my projected term by 8 months, but save $100/month and pay less in interest.

Another change is that I've opted for a no-cost refinance. Here, the lender pays my closing costs in exchange for an increased rate of 0.25%. I crunched the numbers again, and paying the costs myself for the 0.25% would save me 2 months off the end of my loan. If I refinance again, or pay it off early (likely once I get down to the last few 10,000s in principal), paying the extra money out of pocket now does me little to no good. I don't plan on refinancing again, but I didn't think rates would drop when I refinanced two years ago, yet here I am.

I'm quickly realizing that no-cost refinances don't mean there are no out-of-pocket expenses. I still have to pay the prepaid interest that accumulates between my closing date and the date of my first payment on the new loan. And I have to pay the accumulated interest on my current loan between my last payment and the closing date. I've also opted NOT to waive escrow this time. So, I'm shifting some expenses from December up to now, to the tune of roughly $3300. Add the interest payments, and it'll be more than $4000 out of pocket. It's all money I would be paying this year anyway, though.

One of the main reasons I decided to not waive escrow (I still think this is one of the stupidest terms - you aren't waiving escrow, you're paying in order to not do it) is that I was told you can often call your lender after awhile and request to waive escrow then - with no costs. They don't have to let you do it, but it sounds like they often do. I also have the spare cash now, whereas I didn't have nearly the reserves in 2009. So, I can shift my payments from December to now in order to save $500 or so. And again, if I do refinance again, that money would either be paid to waive escrow again, or I'd be back where I am now.

Another interesting tidbit came from my credit scores. Back in 2009, I averaged around 796, I'm pretty sure. Now, I'm averaging just above the top tier cutoff of 740. I'm pretty sure most of the loss is from getting a credit card back in December that I've been regularly putting large balances on and then paying off again. The combination of the recent credit application, high utilization on that card, and some randomly high activity on a credit card of my parents' that they included me on long ago in order to build my credit history, has resulted in a slight ding on my credit. It still seems to be OK, since I'm over 740 on all three. However, it would be quite annoying to have problems because of these otherwise irrelevant credit score fluctuations. I'll find out within the month!

Q&A: Should I Buy a Bigger House for Roommates?

Following last week's post on the ROI of rental properties, another interesting question is whether you should buy a small one-bedroom condo (for example) to keep expenses low, or a three- or four-bedroom house to gain some rental income. There are two main considerations: ROI and overall financial safety.

As far as ROI is concerned, I think it's very similar to last week's calculations. There are some differences in the details, though. Your principal and interest (P&I) payment will be higher, but when determining the ROI on the rental portion of your property, I think it should be specified as the difference between the large house's payment and the small home's P&I. You would have had the base P&I payment anyway, so it's not really a cost associated with the renters. Similarly for most of the expenses. Property taxes and insurance will be higher for a larger house, usually. Maintenance costs will be higher with the increased wear and tear, and you'll need a larger refrigerator, but maintenance costs haven't risen that much for me. Utilities will be higher, but probably not terribly so.

Your investment amount should be the increase in down payment, or the difference in overall home value. In this scenario, I am strongly inclined to use the overall home value in my calculations. This gets into the overall financial safety aspect. A pure rental property can be abandoned and sold off if you don't want to deal with renters anymore. If you get tired of having roommates, you can kick them out, but you still have to pay for the entire house. Lowering your expenses requires moving and the house-buying-and-selling process and headaches associated with it.

Consequently, I think it is very important to buy a house with many financial cushions included, even when you plan on having roommates. As I mentioned ages ago, I bought my home knowing I could afford the payments and other costs using just my base salary after all my preferred expenses had been taken out - 401(k) contributions, IRA contributions, miscellaneous spending money. Each of these expenses was a cushion, and any rental income was a nice bonus.

And there are other reasons why you may not have roommates anymore. I would guess that most people are single when they contemplate having roommates in a house they are buying. It's possible you meet that special someone that thinks you're a special someone, too. Roommates may get in the way then. It's possible that special someone comes with a second income that's much higher than that provided by roommates, but they might also be going (back) to school, or you might be having kids right away and one of you will be staying home. Either way, it'd be nice to be able to spend your first year together in wedded bliss, rather than struggling to downgrade your home.

For me, it seemed to make sense to buy a bit bigger. It's definitely worked out so far. On the other hand, I'd have a much lower debt than I have now, and might have purchased a standalone rental property already. It's hard to know exactly how things would have been different, but I can't say I've had any major regrets with my house and/or roommate situation.

One-Time Expenses

A couple of days ago, my friend and I were talking about many things. One of these things included a comment about one-time expenses and how there seems to be one every month. I decided to analyze my one-time expenses over the past year and see what I can learn about my budget (as informal as it is). So:

• December: Living room TV: ~$800, second 24" monitor: ~$300.
• January: Video games: ~$100. Not too bad...
• February: Ladder to fix the roof: ~200, paying some guy to fix the roof: ~$60.
• March: No big expenses. Go me!
• April: Nothing again!
• May: Fiona died, and I took Apple in to get tests and shots: $130.
• June: Adopted Mac & Cheese: ~$100, initial vet visit for Mac & Cheese: $110
• July: Apple's eye infection: ~$50, Mac & Cheese declawed: ~$260, new tennis racquets: ~$230, video games: ~$100.
• August: I did good again!
• September: Video games: ~$75, miscellaneous family expenses: ~$200.
• October: File server parts & digital camera: ~$400.
• November: Planned car repairs: ~$400

This puts me at just about $300 per month for one-time expenses. I also want to get a new bed at some point, a storm door for the front, a new car eventually, and probably a few other things I have forgotten about while compiling the above list. The storm door will improve the heating/cooling efficiency of the house. The bed, at least, will likely be purchased at Nebraska Furniture Mart (can you believe I used to be anti-NFM at one point?) and therefore be spread out over the following 24-30 months...

I think the video games will also be a less frequent expense for awhile, since a lot of the video game purchases were large packs of games, and should keep me busy for quite a long time, really. There are still at least 10-20 games I haven't even installed/tried. I really hope my pet expenses (one-time, that is - food and litter are frequent purchases) are very low going forward. Regular check-ups only, please! My file server is running much smoother now (see future post), so that will hopefully truly be a one-time expense for the year or more. I remember justifying my living room TV as roommate retention. It's at least getting use. Some car repairs are definitely necessary - I worry about every strange noise I hear when I drive right now, which is not pleasant at all.

...I think what I learned is that even after compiling a list of one-time expenses while expecting a ridiculously high total, I still went into justification-mode after seeing it. I do keep my regular expenses fairly low, and I'm not at all worried about my cash flow. As I discussed previously, I save $200 each month, and that's after maxing out my 401(k) and Roth IRA contributions every year. I save a lot of money each year, and have multiple layers of financial cushions should I ever need to cut back on expenses. However, even if it's not strictly necessary, I think an occasional analysis of spending patterns is helpful.

Update: Speaking of Nebraska Furniture Mart, I forgot about my living room couch. It was purchased on my NFM card, though, and I technically haven't started paying that off yet - I'm still working on my dining room furniture. Or maybe it is my downstairs TV. I love 0% interest! Also, I think it important to mention my new furnace, since it was almost a full year's worth of one-time expenses by itself. Things happen.

Reserve Cash vs Investing

As I discussed awhile back, here, I have a primary E*TRADE Complete Savings account, and a reserve E*TRADE Complete Savings account. I set up a $200/month automatic transfer from my Complete Savings account to my Reserve Cash account quite awhile ago. This was in addition to a sizable initial funding.

So far, this has worked very well at keeping me from investing this cash in (riskier) stocks. For the most part, I think this has worked because the balance of each account is relatively small, so it doesn't feel like I have that much extra to invest. You'll notice that I don't say spend - I have an automatic transfer of $1200/month to my checking account, which covers all credit card transactions plus those utilities not charged to the credit card. This has been more than enough to cover my limited expenses so far. It also helps me keep the few bigger purchases I make, such as buying a new camera, well spaced throughout the year. My main problem in keeping a cash reserve is that I feel that money is wasted just sitting there, when it could be averaging 8% per year sitting in the stock market.

I think this feeling will become a larger issue very soon, when my Reserve Cash account will surpass my Complete Savings account. At that point, I fear it will suddenly appear to be a much larger chunk of money than it is. To combat this feeling, I think I need a specific goal. For example, MyMoneyBlog's author keeps $100K in reserve, which is way too much cash to have on hand (at least for me). If I take my $1200 spending money plus $1400 mortgage payment, I get monthly expenses of $2600. In an emergency, I can take off more than $100 from my mortgage payment, and can easily cut down spending. But, to be conservative, let's leave one month's expenses at $2500 (a small adjustment for nice round numbers).

My first thought is to keep $10K in my reserve account. This would be at least 4 months of expenses, and is a nice round number. Combined with the fact that I always keep at least $3K in my Complete Savings account just in case there's a problem with my direct deposit for a month, this seems like a more than adequate cash reserve. However, never having had an emergency in my life, I'd be interested to hear other perspectives. Is 4 months of expenses a stupidly low cushion, despite most places recommending 3-6 months? How many months expenses do you keep on hand?

New Car On the Horizon

A few days ago, I was driving home on the highway and may car starting making a noise somewhere between a screech and a whine. It was a constant sort of noise, but once I got off the highway, I found that it varied depending on the speed of the wheel - I assume it was once per revolution. It also sounded worse when I applied the brake. I pulled into the gas station, but did not see anything wrong with the wheel right off.

As I continued to drive home, the noise stopped abruptly with a little *plink* sound, and it looked like a washer or something similar was bouncing around behind my car. This was not a comforting development, even though the noise went away.

I took my car in on Monday, and they charged me $50 or so to diagnose the problem. They didn't actually find anything that would result in the noise and missing part that I described, but they found plenty of other problems:

• Air dam deflector - $151.00 - This is apparently a piece of plastic that scoops air into the engine area. I see no reason to spend $151.00 on a piece of plastic.


• Front brake pads and resurface rotors - $180.00 - I knew I needed new brakes soon, but I think they are now likely to find something else wrong with the brake assembly when they get around to putting new ones in.


• Transmission side cover gasket leaks - $274.00 - This one makes me a bit nervous. It evidently isn't leaking horribly, but a leak of transmission fluid is bad. I am clearly an auto maintenance expert, you can tell.


• Rear sway bar links - $244.00 - I knew about this one from awhile back, and they said it wasn't critical. The sway bar distributes load from side to side, so the fact that mine is broken makes my handling worse on turns, and I'm more likely to slide around. It hasn't been a problem yet.


• Left/Rear strut with spring - $531.00 - They skipped this in their haste to go over the list before closing. It's expensive and sounds important. At the moment, I have to plan on fixing it.


• Serpentine belt - $92.00 - The main belt, apparently. They said it has major cracks and they found part of it wrapped around the axle, so it's already falling apart. This is the most pressing issue.


• Muffler strap - $99.00 - This is just a simple bracket that helps hold the muffler on. There is no reason this should cost $99.00, and I refuse to fix it.

All told, the things that aren't completely trivial would cost $1321 to fix. I also need an oil change soon. Thus, I entered into a cost analysis to see if getting a new car was a better investment than continued maintenance.

Car:	Civic	Corolla	Focus	Prius
Price1:	18225	16750	15995	22000
Monthly cost2,5:	$285.94	$255.21	$239.48	$364.58
Monthly Insurance3:	$25.5	$26.00	$24.83	$21.83
Monthly Total:	$311.44	$281.21	$264.31	$386.42
Months to recoup4,5:	18.69	20.69	22.02	15.06

1. Price is base price of a model, not including any packages. I don't need any packages or options, but dealers rarely have plain cars in stock, so this price will probably be an underestimate. It also doesn't include fees, taxes, charges, whathaveyou.


2. Monthly cost is based on a 48-month 0% loan. I probably can't get that rate at the moment, but it also doesn't account for any down payment or trade-in money, and so shouldn't be too terribly far off.


3. Monthly insurance is the cost to insure the new vehicle minus my current monthly rate on my old car.


4. Months to recoup is how long I would have to keep driving my current car to make the repairs worthwhile.


5. Figures reflect a $4500 price reduction corresponding to a CARS trade-in (my family has an old van that is rapidly dying). This represents an opportunity cost associated with repairing my current vehicle as opposed to buying a new one.

At this point, I find it unlikely that I can drive my car for another year or two without the need for further repairs. The bonus of a $4500 price reduction makes getting a new car very practical!

UPDATE (08.22.2009-1019): It would appear that we cannot get into the safe deposit box that contains our car titles, so there can be no trade-ins. With the $4500 bonus out of the picture, the recoup time becomes just 2-4 months, making the repairs far more practical. No new car for me!