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I would like to achieve a lower mortgage interest rate than our current 5.75 percent 30 year fixed mortgage with Chase on our primary residence.

Our situation is a little unusual, making it difficult to navigate the normal paths of refinance. I tried to refinance once already but was burned by Chase employees who failed to accurately predict that they would deny our application, resulting in the loss of half of our application fee of $750. So I am very biased against any solution involving nonrefundable application fees.

The facts of our situation:

  • House appraised value is $700k (we know this from the appraisal done when we tried to refinance)
  • Mortgage is $230k
  • Wages and salary income is very low, with much of it self-employed, about $10k/year. I formerly had a high income job making about $250k/year but am taking a few years off from the workplace.
  • Interest and dividend income is about $35k
  • $1.2 million in a taxable investment accounts (bond funds, stock funds, a few ETFs). We also have IRAs with significant assets.
  • No debt other than the mortgage. We pay cash for our cars and pay off the full balance on all credit cards every month.

My understanding is we do not qualify for loan modification because we have too much in taxable "non retirement" accounts, and our experience is that we can't get a refi because we don't have enough income.

It seems like we should be a good loan candidate because we could just pay the loan off at any time we like by liquidating some of our taxable stock/bond holdings. And even if you just look at the loan to value ratio of the $230k mortgage vs. $700k home value the risk should be covered by the value of the home. My experience is that loan processors don't follow this common sense logic, they just look at their checklist and say "no income, no loan".

So given that I have a preference for some debt (I think of our mortgage as essentially margin funding a portion of our investment assets) and a desire to take advantage of current low tax rates, what are my options?

I started looking into two options but they seem like pretty unconventional strategies which makes me want some additional validation:

  1. Pay off the mortgage and take out a margin loan. I can get a $500k margin loan at 3.75% from Fidelity. I would have to take out this higher debt level to get the low rate. The rate for $230k of margin is 6.575%; you get a big discount at the $500k level. I am comfortable with this level of debt and realize there is some risk of margin calls, but our investments are very conservative, making me comfortable with this.

  2. Pay off the mortgage and take out a loan secured by stock. I guess the difference between this option and the margin loan is the tax treatment of the interest is not a investment interest expense. This seems to be a bit more exotic and I am not sure of the rates: I have just seen articles from lenders saying "as low as 3%"

Or...should I go down the refi path again? Would it really go anywhere with our unusual situation of high assets/low income or would it be another protracted laborious process with another denied loan?

I like the idea of mortgage interest deduction, but the reality is that it is not currently a factor for us. We really pay no income tax right now due to the low income. This will probably change in the next few years as either some of our self employment/business ventures start yielding returns or I return to the workplace. At that time the mortgage interest deduction would be advantageous, so my overall preference is to secure a conventional mortgage at today's low rates. I'm just not sure if this is possible...is it?

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    when you look at the deduction info, after about 18 years the interest deduction becomes completely moot, and it's not necessarily that great even before that (depending on many factors, of course, but it's value is overblown no matter what). I'd run some calculators to make sure you don't just want to clear that mortgage from your balance sheet since you can. – justkt Nov 8 '10 at 18:15
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    Just to close the loop, upon reconsideration I decided to just pay the thing off. – Pat Nov 15 '10 at 0:01
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In your shoes, I would pay off the mortgage with the after tax investments and be done.

You have different goals than I do in that you want to keep the debt. So, I would start calling mortgage brokers and asking for someone who does "manual underwriting".

Manual underwriting essentially means they use common sense and look at your situation for what it is instead of saying "income=10K means disapprove mortgage".

It may be that your situation is different enough from mortgage guidelines that you can't now get a conforming mortgage (i.e. one that is readily re-sellable to another mortgage holder). If that is the case, you can look for a small bank or credit union that would be interested in adding your loan to their portfolio and not reselling it.

  • Thanks. Why pay off the existing mortgage and try to take a new one out rather than pursue a refi? Are refi's not done with the "manual underwriting" approach? A refi would avoid the need to churn my portfolio: sell to pay off existing mortgage, get new mortgage, then re-buy same securities I just sold using new mortgage proceeds. – Pat Nov 8 '10 at 18:22
  • @Pat I edited my answer for clarity. Hope my small rewrite adds clarity. – Alex B Nov 8 '10 at 19:11
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The bit I don't quite understand is why you are thinking about staying in debt in the first place - you're basically thinking about shuffling around assets and liabilities in order to stay in debt?

I think what I would do in your situation is to liquidate enough of the investments you have and pay off the mortgage. This doesn't change your net worth position less the fees etc that you might incur, but it'll save you the interest for the mortgage over the remaining term of your mortgage.

  • that's my question as well. After all, the deductions aren't worth that much. – justkt Nov 8 '10 at 19:06
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    I have a tolerance for debt as a means of increasing my investment position. In other words, I believe the returns from my investment portfolio will exceed current mortgage rates. I don't need the mortgage but I do want it. As a meta-point, just a gentle nudge that I don't think your answer is really an answer but more of a clarifying question. Accept the fact that I want to have some debt as stated in my original question. – Pat Nov 8 '10 at 19:09

protected by Chris W. Rea Oct 10 '14 at 21:35

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