Question: Should we refinance our home under these conditions?

(Posted by: dsjnix on 2010-02-24 09:05:57)

We have a home worth in the current market about $187, 000. We have a first and 2nd mortgage. We are considering refinancing the first mortgage because we are told that is our only option. The first is at 6.62 interest rate and my current monthly payment on a balance of $149, 000 is $1314. This payment includes taxes and insuracne for escrow. We have been offered under the Refi Plus program to refinance at 5.52 (high rate because of amount of debt) with 5.8 APR and with 1 point and $750 application and few other minimal fees that would be rolled into the new loan. This will only save us about $125 a month and we hope to sell within 5 years to downsize. Does it make sense financially for us to refinance under these conditions?

Posted by: Beverly S on 2010-02-24, 09:10:00

Well first off if you have a first & second you will have to pay off the 2nd as well because otherwise the current 2nd mortgage would move into first mortgage position & the refi you want to do probably doesn't do 2nd's at 5.8 APR (2nd's are always higher). Did you tell the company you had 2 mortgages.

Posted by: Kourtney M on 2010-02-24, 09:12:54

I'm guessing it is not one of the fluctuating mortgages and I hope it's not. Let's see, 5 x 12 = 60 months. 60 x $125 = $7500. Think of it this way, you can sit aside that money in an account and use it down the road to go towards buying a new house when the time comes.

Posted by: Steve D on 2010-02-24, 09:17:28

It will take just about 2 years to break even, so if you sell at the end of the 5 years, you come out ahead about $4,000. Now assuming that the new loan is for a longer period of time than you have left on the current mortgage, what you also need to do is contact your bank and get the amortization sheet (if you don't already have it). Find out where you are in the table (look for the cell with your current balance). Now the fun part - get the amortization sheet for the proposed loan. Now, comparing the two sheets for the next five years, figure out how much interest and principal you will be paying. Compare them - what you are looking for is to check your equity at the end of the 5 years and also check how much in interest you are going to be paying. Remember that one of the reasons the payments are going down is that you are taking the current balance and spreading it back out over a longer period of time. This allows the bank to collect more interest in the long run If your equity at the end of five years is higher (appraised value minus balance of loan) is higher under the old mortgage, this is money you are losing by refinancing. If the differential is more than the $4,000 you are saving, then the deal is not worth it. You can also do this with the interest being paid, but you would also have to figure in tax savings. So, the mathematical answer to your question is maybe.

Posted by: golferwhoworks on 2010-02-24, 09:19:20

Do not do this loan. You are selling in a few years so you say. If you know for sure you are selling then the cost to do this note and subordination of the second will put you over the 100% loan to value limit. Unless the market comes back in a big way there is no way for you to break even in this process as all loans have cost and they are just giving you surface cost and not total cost. You are also going back in years as well. Look carefully before you jump on this. I am a mortgage banker in TN

Posted by: I Love IDOL on 2010-02-24, 09:55:30

This should be easy math. Add together all the refi charges, divide by $125. and see how many months it will take you to "pay off " the refi charges. Lets say $2500. refi charge divided by 125. = 20 months to break even. If you plan on selling in 5+ years then you will be saving the 125. for about 3 years (36 months)= $3500. Rough calculations but close. Any months you keep the house past 20 months or so is a savings of $125. a month.

Posted by: David Z on 2010-02-24, 10:05:14

No. a 1% reduction is not enough to offset cost of $750 + 1 point.