Cutting the Big Stuff: Considering Refinancing

Just three years ago was a pretty good boom time for us. We had just our son in day care three days a week, I was going gangbusters with work and my husband had a nice bonus, too. We took out a home equity loan to get the house painted and have some landscaping done, in preparation to sell. Then we didn’t sell. Right now I can’t remember exactly why. I think it just got too close to when baby #2 was due.

Today, I’m working less with two small kids, and while I’m hitting my income targets, our mortgage plus home equity payment is simply more than we can afford right now. Especially when my checks are late, it puts us in the hole each month, and we can’t seem to recover. Our “enough” simply isn’t.

Back in the fall, we looked at our committed expenses, and what we’d need to do to get them down to no more than 60 percent of our budget. We slashed our food bills. We have finally paid off the loan for our used Volkswagen. But now it’s time to tackle the big thing that will make the most difference. With interest rates so low, our next step is researching refinancing to reduce our monthly payments. It’s either that or sell the house and move, but in this environment, waiting seems more plausible. We’re in the school district we want to be in, so that is more important right now than roomier digs.

I’m reading a book I highly recommend right now called All Your Worth: The Ultimate Lifetime Money Plan by Elizabeth Warren & Amelia Warren Tyagi (a mother-daughter team who also wrote The Two-Income Trap). They divide your budget into must-haves, savings, and wants, and make it easy to quickly see where you’re out of balance and what you can do about it. According to them, because our must-haves exceed 65 percent of our budget, we’re in the “must-have crash zone.” We can’t save, and yes, every little thing that comes up usually has to go on the credit card. And yes, we’re aware that we can’t sustain that, and feeling lucky that we can change this.

How are you doing right now? I know people who are struggling because they bought too much house. I know people who’ve had bankruptcy. I know people who’ve had to move because losing a job means they can no longer afford their home. Dire circumstances quickly reveal the skeletn of finance — income, expenses, and savings — and its relative sturdiness. Mint.com can’t show a gigantic stalagtite of negative cash flow for long before you reach a tipping point.