How to reduce mortgage rate with low income but high assets
"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." 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.
You could consider turning your current place into a Rental Property. This is more easily done with a fixed rate loan, and you said you have an ARM. The way it would work: If you can charge enough rent to cover your current mortgage plus the interest-difference on your new mortgage, then the income from your rental property can effectively lower the interest rate on your new home.   By keeping your current low rate, month-after-month, you'll pay the market rate on your new home, but you'll also receive rental income from your previous home to offset the increased cost. Granted, a lot of your value will be locked up in equity in your former home, and not be easily accessible (except through a HELOC or similar), but if you can afford it, it is a good possibility. "As this is anonymous, can you give us actual numbers? I can make guesses based on your percentages, but it would help. Lets assume you both make $35k (since you said child care would take up the bulk of your wife's income, it must be fairly low incomes) The answer usually isn't a simple ""do this"", but small adjustments in your lifestyle which add up. Church offering is 17%, the standard tithe is 10%. Lower it? It's the most obvious large non-required expense. Transportation is almost 10% of your income. If my numbers are right, that is somewhere around $500 per month? What kind of car/cars do you have? There are very cheap used cars which cost very little in upkeep / fuel. Is it possible your cars are more expensive than needed? My wife and I bought a used car for around $8k in cash a few years ago. Still running strong, only have done oil changes since then. Food is 12%, which would be perhaps $600 or $700 per month. That seems awfully high. Maybe I'm wrong about your salaries :) You said you were cheap, but now the numbers don't add up. Mortgage of 35% ($2k with escrow if I'm guessing on salaries right) seems reasonable. I'm assuming you don't want to downsize, particularly if you're going to have kids. Do you have a great mortgage rate? I assume you're on a 30 year fixed already?" "We’re buying the home right over $200,000 so that means he will only need to put down (as a ‘gift’) roughly $7000. I'm with the others, don't call this a gift unless it is a gift.   I'd have him check with the bank that previously refused him a mortgage if putting both of you on a mortgage would allay their concerns.  Your cash flow would be paying the mortgage payment and if you failed to do so, then they could fall back on his.  That may make more sense to them, even if they would deny each of you a loan on your own.  This works for them because either of you is responsible for the whole loan.  It works for him because he was already willing to be responsible for the whole loan.  And your alternative plan makes you responsible for the whole loan, so this is just as good for you.   At what percentage would you suggest splitting ownership and future expenses? Typically a cash/financing partnership would be 50/50, but since it’s only a 3.5% down-payment instead of 20% is that still fair? Surprisingly enough, a 3.5% down-payment that accumulates is about half the equity of a 20% down-payment.  So your suggestion of a 25%-75% split makes sense if 20% would give a 50%-50% split.   I expected it to be considerably lower.  The way that I calculated it was to have his share increase by his equity share of the ""rent"" which I set to the principal plus interest payment for a thirty year loan.  With a 20% down-payment, this would give him 84% equity.  With 3.5%, about 40% equity.  I'm not sure why 84% equity should be the equivalent of a 50% share, but it may be a side effect of other expenses.  Perhaps taking property taxes out would reduce the equity share.   Note that if you increase the down-payment to 20%, your mortgage payment will drop substantially.  The difference in interest between 3.5% and 20% equity is a couple hundred dollars.  Also, you'll be able to eliminate any PMI payment at 20%.   It could be argued that if he pays a third of the monthly mortgage payment, that that would give him the same 50% equity stake on a 3.5% down-payment as he would get with a 20% down-payment.  The problem there is that then he is effectively subsidizing your monthly payment.  If he were to stop doing that for some reason, you'd have what is effectively a 50% increase in your rent.  It would be safer for you to handle the monthly payment while he handles the down-payment.   If you couldn't pay the mortgage, it sounds like he is in a position to buy out your equity, rent the property, and take over the mortgage payment.  If he stopped being able to pay his third of the mortgage, it's not evident that you'd be able to pick up the slack from him much less buy him out.  And it's unlikely that you'd find someone else willing to replace him under those terms.  But your brother could construct things such that in the face of tragedy, you'd inherit his equity in the house.  If you're making the entire mortgage payment, that's a stable situation.   He's not at risk because he could take over the mortgage if necessary.  You're not at risk because you inherit his equity share and can afford the monthly payment.  So even in the face of tragedy, things can go on.  And that's important, as otherwise you could lose your equity in the house." A $500K mortgage at 4.5% is $2533, right near the $2500 in your example. Interest the first year would be less than $22K, and your tax benefit (taking littleadv's answer into account, of course) would be $5500, max.  The tax benefit is the least of the reasons to get a mortgage. On your hypothetical $100K income, and too-high mortgage, a $5500 benefit is nothing. If one needs this tax benefit to make the numbers work, they are budgeted too tightly.  If you are considering trading a $1000 rent for a $500K mortgage with a $2500 payment, I'd look very carefully at the numbers. Search this board for the associated expenses of homeownership. To start, I hope you are aware that the properties' basis gets stepped up to market value on inheritance.  The new basis is the start for the depreciation that must be applied each year after being placed in service as rental units. This is not optional. Upon selling the units, depreciation is recaptured whether it's taken each year or not. There is no rule of thumb for such matters. Some owners would simply collect the rent, keep a reserve for expenses or empty units, and pocket the difference. Others would refinance to take cash out and leverage to buy more property. The banker is not your friend, by the way. He is a salesman looking to get his cut. The market has had a good recent run, doubling from its lows. Right now, I'm not rushing to prepay my 3.5% mortgage sooner than it's due, nor am I looking to pull out $500K to throw into the market.  Your proposal may very well work if the market sees a return higher than the mortgage rate. On the flip side I'm compelled to ask - if the market drops 40% right after you buy in, will you lose sleep?  And a fellow poster (@littleadv) is whispering to me - ask a pro if the tax on a rental mortgage is still deductible when used for other purposes, e.g. a stock purchase unrelated to the properties.   Last, there are those who suggest that if you want to keep investing in real estate, leverage is fine as long as the numbers work. From the scenario you described, you plan to leverage into an already pretty high (in terms of PE10) and simply magnifying your risk. Your wealth will go up if your effective rate after taxes is less than the inflation rate.  That is, if your interest rate is R and marginal tax rate is T, then you need R*(1-T) to be less than inflation to make a loan worth it.  Lately inflation has been bouncing around between 1% and 1.8%.  Let's assume a 25% tax rate.  Is your interest rate lower than between 1.3% and 2.4%?  If not, don't take out a loan. Another thing to consider: when you take out a loan you have to do a ton of extra stuff to make the lender happy (inspections, appraisals, origination charges, etc.).  These really add up and are part of the closing costs as well as the time/trouble of buying a house.  I recently bought my house using 100% cash.  It was 2 weeks between when I agreed to a price to when the deal was sealed and my realtor said I probably saved about $10,000 in closing costs.  I think she was exaggerating, but it was a lot of time and money I saved.  My final closing costs were only a few hundred, not thousands, of dollars. TL;DR: Loans are for suckers. Avoid if possible. This is a very interesting question. I'm going to attempt to answer it. Use debt to leverage investment. Historically, stock markets have returned 10% p.a., so today when interest rates are very low, and depending on which country you live in, you could theoretically borrow money at a very low interest rate and earn 10% p.a., pocketing the difference. This can be done through an ETF, mutual funds and other investment instruments. Make sure you have enough cash flow to cover the interest payments! Similar to the concept of acid ratio for companies, you should have slightly more than enough liquid funds to meet the monthly payments. Naturally, this strategy only works when interest rates are low. After that, you'll have to think of other ideas. However, IMO the Fed seems to be heading towards QE3 so we might be seeing a prolonged period of low interest rates, so borrowing seems like a sensible option now. Since the movements of interest rates are political in nature, monitoring this should be quite simple. It depends on you. Since interest rates are the opportunity cost of spending money, the lower the interest rates, the lower the opportunity costs of using money now and repaying it later. Interest rates are a market mechanism so that people who prefer to spend later can lend to people who prefer to spend now for the price of interest. *Disclaimer: Historically stocks have returned 10% p.a., but that doesn't mean this trend will continue indefinitely as we have seen fixed income outperform stocks in the recent past. On $4K/mo gross about $1000/mo can go to the mortgage, and at today's rates, that's about $200K of mortgage the bank might lend you.  Income is qualified based on gross, not net, so if $48,000/yr is wrong, please scale my guesstimate down a bit. In the end, today's rates allow a mortgage of nearly 4X one's gross income. This is too high, in my opinion. I'm answering what the bank would approve you at, not what I think is wise. Wise, in my opinion is 2.5-3X one's income, tops. "9% would be an absurdly high rate in the US by today's standards, so you should at the very least consider refinancing to fix that. Paying off completely is of course another way to fix that.  Which approach makes more sense depends on what you plan to do with the money instead if you do refinance -- if you can put it in an investment which yieds a higher percentage than the loan costs you, than refinancing the mortgage could actually be a profitable decision. You also need to consider what the bank will want to see in order to give you a mortgage on the new property. I have no idea whether they'd be happier that you had no prior mortgage, that you had the mortgage but also had the cash to pay it off, or if they wouldn't care. Remember that you want to be able to make at least a 20% down payment on the new property to avoid the insurance fees. That requires that you have a reasonable amount of cash-equivalent on hand. And generally, ""house rich but cash poor"" is an awkward state to be in." I suggest that you first decide on what %'s of the home value you each have a legal claim to. Then split the mortgage using the same %'s. Then, if someone feels their % is slightly higher, they are compensated because they 'own' a correspondingly higher share of the house. Use the same %'s for downpayments (which may mean that an 'adjustment' payment might be required to bring your initial cash outlay from 70/30 into the %'s that you agree to). Tenant income gets split the same way. Utilities are a bit more difficult - as heating depends more on square feet, but water and hydro depend more on how many people are there. You can try to be really precise about working out the %'s, or just keep it simple by using the same %'s as the mortgage. "I'll start by focussing on the numbers. I highly recommend you get comfortable with spreadsheets to do these calculations on your own.  I assume a $200K loan, the mortgage for a $250K house. Scale this up or down as appropriate. For the rate, I used the current US average for the 30 and 15 year fixed loans. You can see 2 things. First, even with that lower rate to go 15 years, the payment required is 51% higher than with the 30. I'll get back to that. Second, to pay the 30 at 15 years, you'd need an extra $73. Because now you are paying at a 15 year pace, but with a 30 year rate. This is $876/yr to keep that flexibility. These are the numbers.  There are 2 camps in viewing the longer term debt. There are those who view debt as evil, the $900/mo payment would keep them up at night until it's gone, and they would prefer to have zero debt regardless of the lifestyle choices they'd need to make or the alternative uses of that money. To them, it's not your house as long as you have a mortgage. (But they're ok with the local tax assessor having a statutory lien and his hand out every quarter.) The flip side are those who will say this is the cheapest money you'll ever see, and you should have as large a mortgage as you can, for as long as you can. Treat the interest like rent, and invest your money.  My own view is more in the middle. Look at your situation. I'd prioritize  In my opinion, it makes little sense to focus on the mortgage unless and until the first 5 items above are in place. The extra $459 to go to 15? If it's not stealing from those other items or making your cash flow tight, go for it.  Keep one subtle point in mind, risk is like matter and energy, it's not created or destroyed but just moved around. Those who offer the cliche ""debt creates risk"" are correct, but the risk is not yours, it's the lender's. Looking at your own finances, liquidity is important. You can take the 15 year mortgage, and 10 years in, lose your job. The bank still wants its payments every month. Even if you had no mortgage, the tax collector is still there. To keep your risk low, you want a safety net that will cover you between jobs, illness, new babies being born, etc.  I've gone head to head with people insisting on prioritizing the mortgage payoff ahead of the matched 401(k) deposit. Funny, they'd prefer to owe $75K less, while that $75K could have been deposited pretax (so $100K, for those in the 25% bracket) and matched, to $200K. Don't make that mistake." What you propose is to convert unsecured debt into secured debt. Conversion of unsecured debt into secured debt is not generally a good idea (several reasons).  The debt you currently owe does not have assets securing the debt, so the creditor knows they are exposed to risk, and may be more willing to negotiate or relax terms on the debt, should you encounter problems.  When you provide an asset to secure debt, you lose freedom to sell that asset.  When you incur debt their is usually a spending problem that needs to be corrected, which is typically not fixed when a refinance solution is used.  You do not mention interest rate, which would be one benefit to conversion of unsecured to secured debt, so you probably are not gaining adequate benefit from the conversion strategy. This strategy is often contemplated using 'cash-out' refinancing to borrow against a home you already own, and the (claimed) benefit is often to lower the interest rate on the debt.  Your scenario is more complicated in that you have not purchased the home (yet).  Though it may be a good idea to purchase a home, that choice depends on a different set of considerations (children, job stability, rental vs. buy costs, lifestyle, expected appreciation, etc) from how to best handle a large debt (income vs. expenses, how to increase income or reduce expenses, lifestyle, priorities, etc). Another consideration is that you already have a problem with the large debt owed to one (set of) creditor(s), and you have a plan which would shift the risk/exposure to another (set of) creditor(s) who may have been less complicit in accruing the original debt.  Was the debt incurred jointly during the marriage, and something you accepted responsibility to repay? You mention that you make great income, and you specify one expense (rent), but you neither provided the amount of income, total of all your expenses, nor your free cash flow amount, nor any indication of percentages spent on rent, essential expenses, lifestyle, nor amount available to retire debt.  Since you did not provide specifics, we can take a look at three scenarios, scenario #1, $4000/month income scenario #1, $6000/month income scenario #1, $8000/month income Depending upon your income and choices, you might have < $500/month to pay towards debt, or as much as $3000/month to pay towards debt, and depending upon interest rate (which OP did not provide), this debt could take < 2 years to pay or > 5 years to pay. Have you accepted the responsibility for the debt?  It will be a tough task to repay the debt.  And you will learn that debt comes with a cost as you repay it.  One problem people often encounter when they refinance debt is they have not changed the habits which produced the debt.  So they often continue their spending habits and incur new unsecured debt, landing them back in the same problem position, but with the increased secured debt combined with additional new unsecured debt.  Challenge yourself to repay a specific portion of the debt in a specific time, and consider ways to reduce your expenses (and/or increase your income) to provide more money to repay the debt quicker. As you also did not disclose your assets, it is hard to know whether you could repay a portion of the debt from assets you already own.  It makes sense to sell assets that have a low (or zero) return to repay debt that has a high interest rate.  Perhaps you have substantial assets that you are reluctant to sell, but that you could sell to repay a large part of the debt? I work for a mortgage company but one that sells the loans we fund to banks. I've never heard of that risk mitigation incentive (lower rate for auto payments) but I know for a fact you will have a higher interest rate if you choose to pay your taxes and insurance out of your own pocket and not escrow them. I would contact the CFPB instead of an attorney and they will be able to tell you very quickly whether this is an acceptable practice or not. It's worthwhile to try and find a better minimum down-payment.  When I bought my home, I got an FHA loan, which drastically reduced the minimum down-payment required (I think the minimum is 3% under FHA).  Be aware that any down-payment percentage under 20% means that you'll have to pay for private mortgage insurance (PMI) as part of your monthly mortgage.  Here's a good definition of it. Part of the challenge you're experiencing may be that banks are only now exercising the due diligence with borrowers for mortgages that they should have been all along.  I hope you're successful in finding the right payment.  Getting a mortgage to reduce your spending on housing relative to rent is a wise move.  In addition to fixing your monthly costs at a consistent level (unlike rent, which can rise for reasons you don't control), the mortgage interest deduction makes for a rather helpful tax benefit. This is a case where human nature and arithmetic lead to different results. Depending on the your income, the effective interest rate on the mortgage is probably right around 2.5%.  So purely by arithmetic, the absolute cheapest way to go is to put the $11k to the bigger car loan, then pay off the mortgage, then the smaller car loan. The Debt Snowball is more effective however, because it works better for people. Progress is demonstrated quickly, which maintains (and often enhances) motivation to continue.  I can say as a case in point, having tried both methods, that if does indeed work.  So, I am with you ... pay off the car loan first, and roll that payment into the bigger car loan. If you add no extra dollars, you should get the small loan paid off in 6 to 8 months and the bigger car loan in another 16 to 18 months. It sounds like from your message that you have another $1500 or so a month.  If that is the case ... small loan paid off in two months, bigger loan paid off in another year.  If you stick with the Ramsay program, you then build an emergency fund and start investing. Good luck!