I’ve been running the numbers like crazy and I’ve determined that it will be worth it to jump through hoops to rearrange our finances to refinance. If you are considering a refinance, see when it makes sense to refinance [1].
I’ve calculated a minimum gain of $12,000 over the next 5 years less any opportunity costs lost in the shuffle. The maximum gain could be as much as $230,000+ over the life of the loan.
Getting our Finances in Order
We’ve scaled back our credit card arbitrage. It was at $223,000 [2]. It’s currently at about $169,000.
I calculated the monthly payments for the remaining credit lines. Excluding the business credit cards (which don’t count on a personal credit report) the payments range from 1% and less of the balance (Bank of America) to 2% (chase). Citi seems to fall in between at about 1.5%.
The total monthly payments for all the lines is about $1,950. Add in the car $648 and cycle $164 for a total of $2762.
I’ve run the debt to income numbers for our lender and have calculated that they would probably like to see $2180 or less in monthly payments outside of our mortgage, student loans (which is really an extension of our mortgage [3]) and other obligations.
Now, here’s where my work comes in. I need to eliminate about $580 in monthly payments. With the current setup, it looks like about between $30,000-$40,000 total.
In addition, I’d like to clear off the balance on our heloc (where I put money in between balance transfers) in case they won’t subordinate it. This is included in the figure above.
Next Steps
I’ll start eliminating some of the balances starting with those that have the highest payments as a percent of balance. I’ve identified the car as the easy one. Ideally it would be good to refinance after selling the car [4] and before purchasing the new one, but coordinating the timing on that might be a little tricky. I might just move it to a 0% credit card during the refinance which should work just fine since I’m going to be selling it soon anyways.
Because I don’t want to completely eliminate the credit card balances, due to the arbitrage income that is generated, I’m focusing on ways to move the balances off of our credit report. I can transfer some of the balances to business accounts that we still have 0% balance transfers on or open additional business credit cards to carry some of the balances.
I also may need to subscribe to credit monitoring for a month or two, so I can see all the balances and payments revert back to zero. I would hate to do all the work and apply too soon before everything is reporting correctly.
Review our credit scores to make sure each one meets minimum score. It should, but I want to double-check before I apply, just in case.
Prepare to apply for the rate I want. A refinance with my lender does not let you float the rate. You must lock the rate at the time of application. I’ll keep my paperwork ready, and once I see the rate I want, I’ll apply immediately.
More to Consider
One of the risks that I run is that interest rates won’t be as favorable in the future once I have everything aligned, and it will be a lot of work for considerable less gain. But since we can’t predict which way things will go it’s just a factor in my plan.
How come I am not shopping around? Well I could, but I’ve financed and refinanced with the same company multiple times in the past. They offer the product I want (stay tuned to see what I’m aiming for), have terms that I can meet, and they will get it done in a reasonable amount of time. I might be able to get a better rate elsewhere, but with all the things I have to coordinate, it might not be worth the risk.
For those of you who think I’m just plain nuts… why not eliminate all of this and apply like a normal person? Well I would, but it nets quite a bit of money! In addition, I find moving around money and trying to accomplish strategies like this somewhat of a challenge. Consider it my hobby. I actually enjoy it and find it somewhat exciting to be able to squeeze every dollar out of a new strategy.
Stay tuned to see the product I’m considering and my reasoning.
Article featured in: Carnival of Debt Reduction [5].