Hi again donaldsg, I was able to use Dave's post to convince my husband to shop around some more and I'd like some advice on alternatives. Good... but ugghh!! These are the best offers & advice he's secured??? Option 1) Home equity loan from our credit union with a fixed rate of 6.24% for a 10 year term, and costs are mortgage tax only, or Even Bernanke has come out & explicitly stated that the Fed is going to keep short-term interest rates low "well into the foreseeable future." Currently, HELOC money is available around Prime (plus or minus maybe 1/4 to 1/2%) That means you can get the money you need (and only draw it *as* needed) at around a net rate of 3%-ish. That's under *HALF* the costs of the fixed loan, without the more dangerous burden of a forced 10 year repayment amortization*!!! If you anticipate the ability to save up enough money over the future 10 years to pay for this kitchen addition... then you are likely far better off using a HELOC to do the job (which is also exponentially cheaper in closing costs... from jest a few hundred bucks,) and then using your "savings power" to apply your budget to retiring the HELOC balance. (* The reason amortization is a responsible person's nightmare is because it removes budgetary control from YOU. Now, this may actually be a good thing for those who know they are "money-management challenged" and if this is true for you I understand... many people are. HOWEVER, if you are indeed a strong income and budgetary manager, then you are far better off keeping 100% control of which direction you send 100% of your money each month (which you can only do when you are NOT constrained by amortization.) The *BEST* way to eliminate your mortgage (for responsible people,) is to accumulate a side "Mortgage Freedom Account" which grows to the point that you can then stroke out a single large check to extinguish the entire balance at once. EVERYONE ought to eliminate ALL of their home leverage (HOWEVER, never a day nor a dollar earlier than it is SAFE to do so!) Option 2) refinance with our current mortgage carrier for a 20 year term at 4.75%, paying closing costs of $5500 and $1920 for points. Again, going the wrong direction on amortization (I am assuming from your self-description you are indeed a tight and responsible budget manager.) Further, 4.75% is way too pricey on today's market for a 20 year loan. EVEN FURTHER, if you are planning on staying in this home longer than 5-8 years, and you accept a higher interest rate offer in order to have a lower closing cost (which will entirely be financed by the loan anyway,) then you will be tilting the cost/savings trade-off into the present, and casting your permanent costs into your permanent monthly payments which will NOT get reduced back down after the 5 year breakeven period. Put it this way.... For approximately every $1 you spend in higher closing costs which results in a lower interst rate.... You save an annual total of about $0.20 in interest costs, permanently, per year. After 5 years has passed, you CONTINUE to save that $0.20 per year, EVERY year. SPEND $5,000 in discount points, save $1,000 per year on interest charges. After 5 years, KEEP saving $1,000 per year. ALTERNATIVELY; For approximately every $1 you REDUCE in closing costs which results in a HIGHER interst rate.... You SPEND an annual total of an additional $0.20 in interest costs, permanently, per year. After 5 years has passed, you CONTINUE to SPEND that $0.20 per year, EVERY year. AVOID $5,000 in discount points, SPEND $1,000 per year in higher interest charges. After 5 years, KEEP SPENDING $1,000 per year, permanently. Make more sense? This is one of the reasons why it pays to use a properly educated planner to structure your finances, if you aren't familiar with all the variables and how they can really affect you over time. Cheers, Dave Donhoff Leverage Planner

Hi helpseeker, So many parts & pieces, and only so much we can really cover anonymously on a message board. Let's look at a few of the pieces; Since then, our family has grown by 4 kids. What an amazing joy (says me as a fairly new Dad! ;~) We have not been immune to the raising costs of everything-real estate taxes have gone from around 4500 to 8000 $8,000 property tax implies a tax assessed value (generally a bit under actual market value... or it should be,) around $500,000 - $750,000-ish... and the fact that it has risen while you have owned it tells me you are not in California (where Prop 13 freezes property taxes during ownership.) At a $500,000 value, minus your remaining $145,000 leverage balance, you have roughly $350,000 of your net worth tied up in real estate as an "investment class" of your family balance sheet. A higher amount if the home value is higher. Question #1; What percentage of your overall net worth does that real estate equity investment represent? Question #2; What's been your functional rate of return (growth? decay?) on that equity... or, put another way, on each dollar you have been sending into your real estate bucket instead of other growth accounts? Clearly you've been saving the cost of interest on each dollar... but that rate of interest saved would actually be the 4.5% face rate *MINUS* your tax deduction (the inverse of your marginal tax bracket.) Thus, if your total marginal tax bracket (state & fed) is 40%, your real savings is 60% of 4.5%... or 2.7% Has the 2.7% rate of savings been rewarding enough to continue adding to the exposure in real estate as an investment class for yoru retirement dollars? To the point, we are now finding ourselves getting closer and closer to not making ends meet despite living modestly. Reserves Question: Do you have at least 12 months worth of all living expenses set aside in safe & liquid reserves? If not, how would you handle an uninsured and unexpected lack of income? Do you have family who have such reserves available for you in such a case? It sounds to me like you are aggressively sending your cashflow into illiquid directions (which are robbing you of safety & security,) at rates of reward that are in no way sufficient for the kind of safe growth you'll need... let alone opening you up you to greater & greater tax exposures. I am beginning to fear that when the time comes to need to do home repairs (our home is 10 years old) we will not be able to afford it. This needs to be accounted for with a "home maintenance" savings account, completely separate from your family reserves. That coupled with our kids getting older, means their costs rise (our grocery bill will not be low when we have 3 teenage boys in a few years). It is likely that when our youngest goes to school in a few years I can work part time. I would strongly suggest establishing a "cost of boys" reserve slush-fund as well (not that girls are necessarily "cheap" either ;~) NOW is the time to put your tax-free college tuition savings plans in place as well (even if only a trickle.) So, what to do, refi, to a 15 or 20 year? Neither, you are in no position to throw a single extra additional penny into more real estate equity. You need a 30 year loan... and you sound like you'd be wisely advised to rebalance equity OUT of your real estate (cash out refi) to fund your emergency reserves, and up front seed funding of your maintenance reserves and your children's educational funding (which can always be re-directed to your retirement if not needed in the future.) The unfortunate thing is that we are really at a sweet spot with our current mortgage-paying a lot more principle than interest. You can *ALWAYS* voluntarily invest your money in more real estate equity WHENEVER you are certain you can actually afford it. There's clearly much MUCH more to be addressed hidden in the cracks of your comments... I'd suggest getting some professional guidance. Any financial professional worth a damn will save you exponentially more than they'll cost (based on the profile you appear to be presenting.) Luck! Dave Donhoff Leverage Planner

Hi Billl, While Dave's plan may make perfect mathematical sense, it really hasn't proven to be a way for the average joe to amass wealth. Actually yes, it has, in big, bold spades. It not only proves to be *A* way, it is indisputably the safest & fastest way. The path that most people seem to have more success with is to just pay off their house early and then live "bill free" in relative comfort. Actually, "MOST" people (literally 9 out of 10, per bond turnover records) who try that approach; A) have more risk of default (and subsequent loss of home) from insufficient reserves, B) Back-slide on their "pay-off plan" when they (completely contrary to their "for sure this time" plans) statistically move every 5-8 years, and/or refinance every 3-5 years. Anyone with the discipline & presence of mind to make a habit of paying a "little extra" to the mortgage will generally have zero problem instead paying that same "little extra" toward a safer Mortgage Freedom Account instead. They don't have to be financial super-athletes... in fact, the action to follow is identical, the difference is simply the safety and speed of payoff (the MFA trumping in both categories.) Of course, the CORE issue all about education... which is the entire reason most people show up to financial communities like this. If our community were the financial equivalent of the average "McDonald's diners" they wouldn't waste their valuable undisciplined time learning about dry topics like finance. FORTUNATELY, the presentation of the best of current financial strategies, and the integration of classic mometary principles, is a worthwhile pursuit for all. Cheers, Dave Donhoff Leverage Planner

Hi Mike, I GUESS we're financially independent; we've accumulated a healthy retirement fund and contribute $1200 to it monthly. We have a $25,000 rainy day fund and increase it monthly. We have no vehicle loans, no credit card debt. The house is worth about $525-550,000. That doesn't fit the definition of financial independence. QUESTION: Do you now recieve (or could you now receive) enough after-tax cashflow income from your retirement accounts, without withdrawing principal, to pay for all your current and future anticipated expenses? IOW, can you stop all employment immediately and live in the lifestyle of your choice on your investment yield alone? If yes; CONGRATULATIONS, you have reached financial independence. If NO... A) don't quit that day job, and more importantly, B) don't burn your growth money in non-growth directions. I guess my question is, why not go for the 15-year to get the lower rate, since the basic monthly payment will remain the same ($2077 vs the current $2055)? Because focusing on the payment as the primary determinant is distracting you from the much more critical issues in your financial life. Again; The wiser outcome (for responsible people) is NOT to try to eliminate your mortgage a little snip at a time, but to accumulate a SINGLE LIQUID ACCOUNT big enough to completely pay off the mortgage all at once... and AVOID sending a single dime to the mortgage that you could have otherwise sent into the growth account. If you do the math (or work with a knowledgable advisor who can do it for you) you will see that you will eliminate your mortgage as a liability faster this way, safer this way, and with far less uncertainties. ================================= Hi Joanne, Dave, are you saying that Mike should not refinance at all, or that he should not pay the extra $1,000/month? No.... Assuming Mike is mature & responsible with his money, the most conservative plan would be to refinance at 80% of the value (or more, if hte existing balance is more) using a 30 year term (unless a 40 year term is available at the same rate.) If he is statistically likely to stay put longer than 6-8 years, he would be wisely advised to buy the interest rate down at the point of rate lock to the lowest rate he can which will lock in enough interest savings to recoup the up front points by the 5th year. That will likely drive his total monthly mortgage payments down (even lower than his current $2,055,) and then all of the payment savings and every dollar of additional discretionary cashflows ought to go into a "cascade of buckets" (meaning a hierarchy of funded accounts, starting with immediate cash reserves, annual reserves, major repair reserves, and then longterm insured tax-advantaged growth accounts.) Further, it is *likely* that once he has his reserves properly funded he will also be able to adjust his various insurance coverages to reduce his premiums. Because of the safety reserves he will be able to increase his deductibles, increase his co-pays, and extend elimination periods. All these savings flow right into his longterm growth funds, which establish a self-climbing UPWARD spiral of funds for a change. but if it's a true no-cost refi (i.e., it's not just that the costs are rolled into the mortgage), then what's the downside? If your finances are poorly structured, and you replace the structure with an identical financial structure but merely drop the rate (all for "free") you are still left with an inefficient structure. GIGO. Most people lose much more money from financial leaks & inadvertant monetary giveaways due to not understanding amortization, taxes & insurance premiums than they can ever gain in a lifetime by increasing their investments by a percentage nor from decreasing their mortgage by a percentage. IOW... most people are trying to sail a boat full of holes across the ocean... and their best idea of a solution is a bigger horsepower engine. Yes, it will make a difference... but plugging the leaks & eliminating the barnacles will do it much faster, safer & more certain. Cheers, Dave Donhoff Leverage Planner