Mortgage market: Is it a good time to refinance?

What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.

1. Refinance mortgage to add spouse?
2. Scanner recommendations
3. Paying off boyfriend’s debt
4. Investing in bond funds
5. Budget question from Phillipines
6. Financial book for teenager
7. Birthday presents for children
8. Handling extra cash flow
9. Insurance deductibles question
10. Enjoying baseball inexpensively

It’s almost tradition for our family to go to this large field about five miles from our home, set up some comfortable blankets, and watch fireworks. This field is almost directy under the fireworks, so we can lay on our backs and watch the fireworks explode above us.

Sometimes, if the wind is wrong, we’ll get some cinders on us, but they’re well worth it for the wonderful sight of seeing the sky explode before us and hearing the children laugh and point at the lights.

Q1: Refinance mortgage to add spouse?
I recently got married, and my new husband and I are having our first financial disagreement. He has asked me to refinance my house so that he can be added to the mortgage. I bought the house in July 2009, so I have owned it less than two years. I purchased the house for $135K. My rate at the time was 5.125% under a first-time homebuyer program. The bank is currently offering a conventional fixed-rate long-term loan at a 4.49% APR. In the two years of ownership, I have been dutifully putting extra money towards the monthly payment, and have essentially made 4-5 extra payments per year. The loan is currently at $119K.

While I understand the reasons why my husband wants to be on the mortgage, I am hesitant for a few reasons.

1) I believe the costs of refinancing will outweigh the benefits of the slightly lower rate. We have not yet visited a mortgage officer to get actual numbers, but basic online research suggests the costs could be around $3K. I would rather apply that money toward the principal.

2) He is a member of the military and has never owned a home. This gives him advantages such as a VA loan. We would like to buy a larger house or duplex eventually and rent out my house. (Given it’s location and size, we know that in our housing market we can rent it out for the monthly mortgage payment.) If he is added to my mortgage, we are not certain if he would be able to utilize the VA loan if we did not sell my house prior to purchasing a new house.

I have suggested we instead investigate using a quitclaim deed to add him to the title of the house. He does not seem keen on this idea. What are your thoughts on refinancing given the stated situation?
- Margery

Given these facts, I don’t think refinancing is the best option here. I would just leave the loan as it is.

So, what should you do in the interim? I would make sure that your husband has strong credit. Have him get a credit card for a specific purpose like buying gas, use it for nothing but gas, and pay off the balance in full each month. This will steadily build his credit.

You should also focus on paying off that house as quickly as possible. That house payment is a big negative in your home’s cash flow and it needs to be eliminated as soon as possible. Once the deed is in your name, you can certainly add his name to that deed.

Q2: Scanner recommendations
I think I remember an article about a scanner that you used and recommended. What was that and also do you use an external hard drive for making backups, or cloud computing, or what? Too much paper in my life and hoping to scan some of the hard copies out of my life. Thank you.
- Christine

My only recommendations for a scanner were for a specific use. If you’re scanning lots of documents, a scanner with an automatic document feeder is a must. It allows you to just put a pile of documents on the scanner. The device will scan all of them and save them as separate documents.

This sounds like the situation that you’re in, as you’re hoping to digitize as much paper as possible.

As I haven’t purchased a scanner in a long while, I do not have a specific model recommendation. However, if you’re trying to digitize lots of documents, automatic document feeding is essential. It’s a tremendous time saver.

Q3: Paying off boyfriend’s debt
I am 29, and I live with my boyfriend, who is 38. I have no debt whatsoever, and am somewhat militantly anti-debt. My boyfriend has about $5,000 in IRS tax debt, which he pays only the minimum on ($100/month).

My question is, should I help by making extra payments for him (which I really, really want to do), or let him just chip away at it himself, even though the process is killing me because it’s taking forever?

I should add that he has promised he will pay more than the minimum in those months where he is able to do so.
- Mary

The answer to this question comes down to the permanence of your relationship. Are you really in this relationship for the long term? Is he in this relationship for the long term?

I can’t answer that for you. All I can say is that if this is going to last for a decade or more, then it’s financially sensible to help him pay off this debt. If it’s a fairly rocky relationship, it’s not worthwhile for you to do this.

In reality, if you’re cohabitating and sharing costs, his debt is impacting your finances and you’re better off without that debt affecting your finances. The issue is whether you’ll be able to enjoy a period without that debt after it’s paid off. The longer term your relationship is, the longer the period you’ll be able to enjoy without that debt impacting your finances. If it’s not long term, then you’re just helping him pay off a debt early and you’ll receive no benefit from that early payoff.

Q4: Investing in bond funds
I’m 24, make 55k and live in Chicago which has a high cost of living compared to most other cities. If in, say, 10 years I would like to purchase a home with a VERY sizable down payment would you consider it wise to invest in bond funds through a brokerage firm such as Fidelity, Vanguard, etc.? My impression is that bond funds are lower risk than stocks but would have a greater return than a high yield savings account and 10 years would be long enough to see that return.
- John

Bonds generally have more risk than savings accounts but generally have better returns, but they have less risk and lower returns than stocks.

Bonds can fail (if the organization issuing the bond fails), but if you are buying into an index fund made up of highly-rated bonds, you’ll most likely just see a better return than a savings account over the long run.

It sounds like this meets your needs and risk tolerance, so I’d go for it if I were you.

Q5: Budget question from Phillipines
My monthly salary is $604. I have a Total Debt of $ 2,600 and i have ZERO Savings. Below is where my salary goes to every month.

NET PAY – $613.13
Health – $32.56 (5%)
Debts – $154.65 (25%)
Investment (through work) – $60.47 (10%)
Food – $69.77 (11%)
School – $47.67 (8%)
Memorial Plan – $24.42 (4%)
Utilities – $40.70 (7%)
Rent – $93.02 (15%)
Fare – $18.20 (3%)
Church – $46.51 (8%)
Cellphone – $9.30 (2%)
Educational Insurance – $48.06 (8%)
TOTAL $645.33 (105%)

I would really want to Zero-out my debts, i just do not know how can i make it faster? Debts were incurred due to home expenses and bad purchases before. is there any really fast way to pay off all of my debts? I want to pay them all by december 2011. I plan to use all my 1 month ($600)-salary bonus but that would mean a still zero savings for me and my son.

I want to make it faster so that i can start saving up and then finally have the courage to resign from my job. I been here for 10 years. Pay is good. Very near my house ( i can walk from house to the office). But i have this gnawing feeling that i am not growing anymore and i am not happy anymore. Add another stress that an ex is working on the same office and i cant take it…i also want to resign so that i can just forget about my stupidity and finally move on and go on with my life…i just want a new life..a new beggining..i am just scared to do it..because of my son ( i have to care for him and i cant bear him going hungry) or am i just being a real coward? ( i can take it if you thikn that way)…i used to be so brave but when a child is present, life’s decision is more difficult to do..

One of my concern is the rent, am i paying too much for it?..i like the house (2 BR;two-storey;good neighbors; nice mountain view, the free parking space, wide play area for my son. -in short ILOVEIT), It so big for a 2 adults (me and my mom) and for a child. However most of the time, when my big family comes for a visit, i do not have a problem since i have a big ,nice and a clean house for them to stay. But i still think that a $90 a month is too much, what do you think?

I have negative expenses and most of the time , i am helped by my brother. but i cant always do that. I need to manage my finances. I feel so helpless and desperate without savings and such a great amount of debt.
- Lindsay

Right now, you’re spending more than you’re bringing in, which means you have no means with which to pay down that debt early. I’m not entirely clear on how this works. Are you accumulating more debt month over month?

If you want debt freedom, you have to be spending less than you’re bringing in (so you’re not accumulating more debt) and you have to be applying that difference in some positive way (toward the debt, preferably).

Some of these expenses are going to have to go. Do you need a memorial plan? That seems like a significant chunk of your income just to cover a possible funeral. What does your investment through work consist of? Is it necessary when you’re in this kind of financial state? I’m not sure what has to be cut, but something does, and after you make cuts, you have to start applying the remaining money to the debt and get rid of it as quickly as you can.

Q6: Financial book for teenager
I’ve been trying to find a book recommendation for my 18 year old son. He is going to college in August and wants to get a credit card. I want him to read a good economics book first, what do you recommend?
- Audra

I don’t think I’d toss an economics book at him at this point. Books like The Wealth of Nations aren’t particularly relevant to the day-to-day life of most eighteen year olds.

Instead, I’d look for a personal finance book written with people like him in mind. A really good choice for a student leaving high school and entering college is Please Send Money by Dara Duguay, which I reviewed a while back.

The biggest trick will be getting him to read it. You might want to tie the credit card to reading the book first.

Q7: Birthday presents for children
I have 2 small kids (6 year old son, 2 year old daughter). It seems like every month we are invited to at least 2 kid’s birthday parties, mostly friends from my son’s school. My son loves birthday parties and is very social but the whole presents thing is bringing me down. It seems like the gifts the kids receive (based on what my son was given at his own party and also when we do go to the rare party wherein the kid opens the present in front of everyone) are in the $10-15 range.

I am trying to be frugal but this month we have 4 parties which is $40 minimum and it is a tight month financially. I try to stock up when there is a sale on big winners like lego sets and board games and art supplies, but I would love any advice. $40/month x 12 months = $480 which seems like an awful lot to spend on birthday presents for kids that aren’t even my own!
- Meredith

On the flip side of that, if your kids are going to 48 birthday parties a year, then you have a plethora of kids who should come to your own children’s birthday parties.

I think that a small gift like this is the social cost for a young child attending a birthday party when there’s no other arrangement (like a parent saying “no gifts” on the party invitation). You bring a $10 gift and get a couple hours of fun and a few strengthened friendships out of the arrangement.

That doesn’t mean you can’t contact some of the other parents in this social circle and perhaps suggest that you all tone down or eliminate gifts for a year. That’s really the only way to change the culture of the situation. If I were in your shoes and my kids were going to that many parties, this is a change I would relish as I really would not want to accumulate 48 $10 toys in my home.

Q8: Handling extra cash flow
I finally managed to be able to have money available at the end of the month ($1000). What is not very clear to me is what to do with it. The first thing that comes to my mind is to use that money to reduce the debt in my line of credit ($40,000). But at the same time I don’t have an emergency fund. What would you recommend, focus on reducing the debt in the line of credit and then build an emergency fund or using part of the $1000 to build an emergency fund?
- Ernie

I would use the first $1,000 to build up an emergency fund. That amount will help you with most of the small emergencies you’ll face in life.

After that, I would use any additional monthly surpluses to first shore the emergency fund back up to $1,000 (if you’ve used any of it) and then use the rest to pay down your debts.

If you’ve eliminated your debt, I would probably start building up the emergency fund a bit more, up to about two months of living expenses (however much that is in your life). This will be incredibly helpful in the case of job loss or other large emergencies.

Q9: Insurance deductibles question
I am a SAHM of a toddler and a preschooler. My husband works and we barely scrape by. We have not used a credit card since our son was born three years ago. We are trying to pay down our debts but it is a slow process. We have two cars, one paid for and one paid for by a loan from our parents (we make monthly payments to them). We currently have liability only on both of them in order to have lower monthly payments. We also have a high-ish deductible on our home owner’s policy – $1000. We try to keep $1000 in our emergency fund and last week our emergency hit. We had some storm damage that ripped out our electrical wires, leaving us with a $958 bill. Our emergency fund was at $950, so we are wiped out. I’m wondering if it would be smart to lower our deductibles and maybe get more than just liability on our car with the loan since we have nothing to cover ourselves if another emergency comes up. In all likelihood our emergency fund will not be replenished until tax time next year.

I have a feeling you’ll suggest getting that fund back up to $1000 asap, and we plan to do that. But we are living about as frugally as possible. We have sold things we own, rarely eat out, budget everything, and our food budget for our family of four is only $200 per month. (I was shocked when you said yours was $770! That sounds like a dream to me!)
- Jean

Yes, the first step is to rebuild your emergency fund. That’s what you should do first and foremost.

After that, though, the real question is what it would cost you in premiums to lower your deductibles. You’ll need to get some new insurance quotes so that you can decide if the higher premiums are worth the reduction in deductible. My guess is that it won’t be, as tiny deductibles usually mean big premiums.

In my own experience, I found that lowering a deductible wasn’t worth it unless I was having damage that exceeded that lowered deductible more than once every two years. If that’s happening, I’d be concerned about other factors in your life (like the climate you’re in and the structure of your house) more so than the insurance.

Q10: Enjoying baseball inexpensively
I’ve been a baseball fan all my life. Recently, though, I’ve really been put off by the high price of tickets. It’s just so expensive to go to a ball game. What do you suggest for a baseball fan who doesn’t want to bankrupt himself?
- Matt

I go to a Major League Baseball game approximately once a year. When I was younger, I used to go more often; in fact, I went to Wrigley Field five times or so in 1996.

I agree with you completely about the cost of the baseball experience, which is why I don’t go to many major league games any more. The tickets and the food add up to too much to make it a regular experience for me.

Instead, I leave such trips fully in the “splurge” camp. I go once a year and, because of that limited nature, such trips feel very special to me. They’re memorable and more enjoyable than going multiple times a month.

I then follow my team (the Cubs) via the radio and the internet, mostly.

Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag (which, by way of full disclosure, may also get re-posted on other websites that pick up my blog). However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.

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