TSP Loan for Home Refinance

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mstrzerg
Posts: 50
Joined: Mon Sep 08, 2008 9:15 am

TSP Loan for Home Refinance

Post by mstrzerg »

So I have encountered a dilema. When we bought our home 2.5 years ago, rates were pretty good, but now they are phenomenal! Roughly speaking 2% difference. I would love to refinance, but because we got a 100% financing loan and home values fell a bit, our homes value is probably not greater than our current loan. Rates are so different that I could switch us to a 15 year mortgage and pay only a few hundred more a month, saving literally $100k+ over the life of the loan. On top of the difference between our current loan and the homes value, would be the various loan fees, which I am assuming I can pay with cash on hand.

Option one is to pay extra to the home, from money currently being allocated to student loans. We've been making a massive effort to get rid of student loan debt the past 12 months. While all the student loan debt is at lower rates than our mortgage, it represents a very significant portion of our income each month and I would like them gone in case of emergencies. The current plan has us paying them off in two years with the extra payments we are making. Switching those payments to the house would make refinancing possible in about 6-8 months, but would delay paying off the student loans. Purely speaking numbers, this option makes the most sense; however, I am not keen on delaying the student loans.

Option two, would be to get a TSP loan and use that money to pay the home down below 97% LTV and refinance. Probably we would get a 30 year loan, but pay it as a 15 year, providing some buffer for emergencies and the like. I think I would make the TSP loan a two year loan. This would allow us to refinance 'now' and continue paying the student loans down, though obviously at a slightly reduced rate. The current interest rate for TSP loans is somewhere around 1.3%, which is taxed, but goes back into your funds with the loan. Obviously there would be some opportunity cost since my money couldn't be making C, S, I fund interest.

Anyone have any thoughts on this matter? I didn't want to get too specific with numbers here and I understand that makes things harder to comment on.

I'm entirely open to other suggestions too!

crondanet5
Posts: 4330
Joined: Tue Aug 19, 2008 8:51 pm

Re: TSP Loan for Home Refinance

Post by crondanet5 »

I am beginning to see better home values in my neck of the country. Perhaps you would be wise to talk to some realtors about home values where you are before seeking to refi. Also the refi would only be on the lower appraised value and not on the total amount so you would not have to make 2 mortage payments instead of the current one payment? Is the interest on the student loan tax deductible as is your mortgage interest? My gut feeling is to say go with your current plan to wipe out the student debt and then go for the mortgage. Your decision, best of luck. Anybody else got ideas on this?

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inthecloud
Posts: 213
Joined: Mon Dec 13, 2010 9:48 pm

Re: TSP Loan for Home Refinance

Post by inthecloud »

Any chance you're on a VA loan? If so, you can do a VA IRRL refinance. The value of the home won't matter. I just went through this...very minimal paperwork and a great lower interest rate to boot. Bought our home about 2.5 years ago too.
Brian

Reese99
Posts: 142
Joined: Tue Jul 20, 2010 3:26 pm

Re: TSP Loan for Home Refinance

Post by Reese99 »

I'm personally opposed to 15 year loans unless you've got so much money you don't know what to do with it (hint: buy physical gold and silver if you're in this boat). A 30-year loan that you pay off faster, pretending it's a 15, is a much better play, as you say, so you can adapt to emergencies if you need to.

There are a couple of things to consider before you take out a TSP loan (again, all my opinion):

1. will your reduced mortgage payment be reduced by an amount similar to your loan repayment? That is, if you refi and save $200/month, is your TSP loan repayment going to cost you $250 a month, and give you a net loss on your monthly income?

2. the market is nearing a correction, theoretically, and having your money available to buy equities when we start to bounce back up from a correction is the best way to make money in your TSP (or any other stock investment, really). Having a chunk of your investment money tied up in a loan means you'll not have as much to invest when we finally bottom out. There is a cash value to what you'll lose out on here over the life of your retirement savings, and you should try to estimate that against your estimated savings over the life of your refi.

3. try to look at your overall monthly expenses, and assess how a refi will impact you right now, not 2 years from now. A lot can happen in 2 years, and being house-poor for two years because you'll be in great shape after those 2 years may end up destroying you financially (I certainly hope not, but we're planners here, right?). If you're going to be freezing up more of your monthly assets in order to afford a refi, even over a 2 year period, just so the beginning of that third year and beyond is better, I'd be very VERY cautious about making that move. If, on the other hand, you've got other safety nets (like a big savings account somewhere), then this isn't as big a concern.

In any case, good luck!
-Reese

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Pocono13
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Joined: Mon Dec 22, 2008 4:40 pm

Re: TSP Loan for Home Refinance

Post by Pocono13 »

It is hard to decide what to do without knowing what the interest rates are on the student loans.
When I had student loans. they were at 3 percent and my hoime mortgage was 16.25 percent. It was a no brainer to take as long as possible to pay off the student loans.
i wonder about your age? Do these student loans belong to you or your kids? They sound like yours. If they are yours, you are probably pretty young. In which case, you are probably married and perhaps planning a family. If you are planning a family, etc et.There is just too much left to my imagination here.

mstrzerg
Posts: 50
Joined: Mon Sep 08, 2008 9:15 am

Re: TSP Loan for Home Refinance

Post by mstrzerg »

crondanet5 wrote:I am beginning to see better home values in my neck of the country. Perhaps you would be wise to talk to some realtors about home values where you are before seeking to refi. Also the refi would only be on the lower appraised value and not on the total amount so you would not have to make 2 mortage payments instead of the current one payment? Is the interest on the student loan tax deductible as is your mortgage interest? My gut feeling is to say go with your current plan to wipe out the student debt and then go for the mortgage. Your decision, best of luck. Anybody else got ideas on this?


We've got a pretty good idea of the homes value from talking to a few realtors. The refinance would payoff the original loan, assuming we went the TSP loan route. We would then have a new mortgage AND a TSP loan say $5-10k. We will continue paying the student loans, it's just the extra payments that we would reroute.

Reese99 wrote:1. will your reduced mortgage payment be reduced by an amount similar to your loan repayment? That is, if you refi and save $200/month, is your TSP loan repayment going to cost you $250 a month, and give you a net loss on your monthly income?


Yes, even with the TSP loan we would come out ahead. Though changing the loan to 15 years (via extra payments) would change this.

Having the loan money tied up is a concern as always, though frankly I'm not convinced long term I can do much better than my mortgage rate. People often seem to estimate they can get 6-10% a year in interest, but I've rarely seen it in practice.

inthecloud wrote:Any chance you're on a VA loan? If so, you can do a VA IRRL refinance. The value of the home won't matter. I just went through this...very minimal paperwork and a great lower interest rate to boot. Bought our home about 2.5 years ago too.


No luck there, we are on a USDA loan. The USDA refinance would be great, but we now longer meet the income requirements. A very good idea for others though.

Pocono13 wrote:It is hard to decide what to do without knowing what the interest rates are on the student loans.
When I had student loans. they were at 3 percent and my hoime mortgage was 16.25 percent. It was a no brainer to take as long as possible to pay off the student loans.
i wonder about your age? Do these student loans belong to you or your kids? They sound like yours. If they are yours, you are probably pretty young. In which case, you are probably married and perhaps planning a family. If you are planning a family, etc et.There is just too much left to my imagination here.


Yep, sounds like the kind of things always fishing in my head! The student loans are about 50/50 my wife's/mine. No immediate family plans, but it would be nice to be free of a student loan debt that is a pretty significant amount of our monthly income within the next few years.

"Smart money" would be to take all these extra loan payments and put them into the TSP/Roth/other investment vehicle. Some short term fiscal security has it's appeals too :D

dcramer29
Posts: 327
Joined: Thu Jan 12, 2012 10:56 am

Re: TSP Loan for Home Refinance

Post by dcramer29 »

Would probably remain status quo...and knock out those pesky student loans. Then turn ur focus on the house.

Don't like messing with TSP funds...mainly because that cripples your opportunity to make money when the market is going up.

lmunson
Posts: 42
Joined: Sat Apr 04, 2009 3:43 am

Re: TSP Loan for Home Refinance

Post by lmunson »

This may help you to crunch some numbers....http://www.vertex42.com/Calculators/deb ... lator.html.

brinky
Posts: 31
Joined: Mon Sep 06, 2010 10:31 pm

Re: TSP Loan for Home Refinance

Post by brinky »

So you created a dilema, because you got a 100% financing. How's that MPI working out for you? It sucks, you say? You just couldn't wait till you saved the standard 20% to put down on it? Oh, you say you couldn't save 20% right now due to college loans? as, "it represents a very significant portion of our income each month"- and you "would like them gone in case of emergencies" You say you "can pay with cash on hand" So do you or do you not have an emegency fund of 6 months income? If so you don't need to use the excuse of needing a 30 year mortgage, sounds like if you get a 30 yr. mort. you find an emergency or an excuse not to pay it off in 15. College loans : "The current plan has us paying them off in two years with the extra payments we are making."
1. Sell your house- you can't afford it.
2. Rent or move in with your parents.
3. Pay off you loans, all of them, College, cars, credit cards etc.
4. Save a minimum of 20% to pay down on your next home. ( cheap pyts)
5. 15 years maximum, if your can't pay the payment, buy a smaller house.
6. Pay that thing off in 10 years or less.
7. Now you may be ready to upgrade to a bigger home.
8. Have you been maxing out your contributions to your TSP or are you still taking out loans?
9. You are now retired from your Gov. job. Are you really retired, or are you working as a door greeter at Wallymart.
10. Did your wife get to stay home and raise the kids, or were they in daycare or at the sitters house?

I am only posting from my personal experiences with no debt, just food and electric and plenty of "Cash on hand"
Do not touch your TSP, you'll need it Soc-Sec will not exist.
Discuss this plan with the wife and get her input.

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li3carney
Posts: 7
Joined: Thu Apr 30, 2009 2:41 pm

Re: TSP Loan for Home Refinance

Post by li3carney »

brinky wrote:...
8. Have you been maxing out your contributions to your TSP or are you still taking out loans?



I'm going to throw a caveat onto your #8. Because I've only been in the TSP for about 5 years I've been maxing my contributions, but I will be changing that strategy in a few years. I think it's nice to pump up the contributions early so as to have a bigger foundation from which to grow.

That being said, we are currently in a pretty good tax environment. That will change in the future, and it won't change for the better. If my TSP earnings are tax deferred, I don't want the majority of my investments to be of that flavor because I'll be paying more taxes down the road. Better to pay some of those taxes now before the rate goes up.

Moreover, if I'm of the mind that I'm going to have less income when I retire, then I probably don't have the best investment strategy in place. I should be making more money when I retire, not less. That's certainly my goal, and the assumption of an unfavorable, future tax environment will help drive my wholistic financial planning strategy.

mstrzerg
Posts: 50
Joined: Mon Sep 08, 2008 9:15 am

Re: TSP Loan for Home Refinance

Post by mstrzerg »

brinky wrote:So you created a dilema, because you got a 100% financing. How's that MPI working out for you? It sucks, you say? You just couldn't wait till you saved the standard 20% to put down on it? Oh, you say you couldn't save 20% right now due to college loans?


Nice bit of snark, but unwarranted. The USDA loan has a funding fee, which we paid with upfront cash, but has no PMI. I do not regret doing the 100% financing as we were able to get into a house with a mortgage at the same level we were paying for rent. We could afford this house on one salary, but hey we have two incomes so why not pay down some loans. I am not looking to save money monthly on a refinance, I am looking to save long term.

crondanet5
Posts: 4330
Joined: Tue Aug 19, 2008 8:51 pm

Re: TSP Loan for Home Refinance

Post by crondanet5 »

brinky, I think you've been watching quite a bit of the Suzy Orman Show. Interestingly enough, you might be close to the core of the problem: too much house, too much debt, flipping from one type of debt to another so the total debt owed equation reads better. But it all comes down to the same fact: they have a lot of debt. If the house values where they live are recovering, it, like my TSP balance, can recover its former value without taking any further refinancing action. And that means they can focus on getting rid of the student debt load. I strongly recommend they listen to the Dave Ramsey show. He counsels quite a few people about student debt. And the Dave Ramsey TSP allocation is like 143rd on the 15 day list if I'm not mistaken. How did that happen?

mstrzerg, no new cars, no vacations, no new furniture. Pay off the student loan. We're all behind you on that. Are you at the baccaulaureate level or the Master's?

TSPKip
Posts: 1225
Joined: Mon Sep 27, 2010 7:34 am

Re: TSP Loan for Home Refinance

Post by TSPKip »

I believe that on separation for any reason, the TSP loan becomes due and must be paid [with TSP allocations or private lending.] Can you pay that much including the taxes or get a private loan?
Seek Wisdom where it can be found.

mstrzerg
Posts: 50
Joined: Mon Sep 08, 2008 9:15 am

Re: TSP Loan for Home Refinance

Post by mstrzerg »

This has gotten well off track from the intent of my post, but some of it has been useful to think about. The real question is, under what circumstances does taking out a TSP loan to pay off a debt make sense? The most conservative answer is never, but I think that is wrong. If you pay off a 20% interest loan from your TSP, most scenarios I can think of would call that a good plan. As that interest rate drops things get much more murky and definitely not as black and white as some of you seem to propose. Ultimately we are talking about trading a potential gain in the TSP for a garaunteed gain in paying less towards the mortgage.

For this particular situation, additional questions that need to be considered are:
Will mortgage interest rates continue to fall?
How long until mortgage rates rise to the level they were at 2 years ago?
Will home prices rise/fall between then and now?
Enough to make up the difference between home value and loan?
Will the market drop during this period?
Do you expect to make more money in the market than your current mortgage interest rate?
How much money may be gained paying student loans early? Mortgage? Extra TSP payments?

crondanet5
Posts: 4330
Joined: Tue Aug 19, 2008 8:51 pm

Re: TSP Loan for Home Refinance

Post by crondanet5 »

Sounds like you have a lot of homework tonight. Good summation of the issue. One more thing to add might be how the loan impacts the value you of your TSP account over the life of the loan. What can you do and not do with your account while the loan is in affect? How long will it take to recover the lost revenue in your account during the life of the loan?

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