Question by Goddess: Mortgage refinancing question?
Would it be worth refinancing a home loan to get a lower rate? We could decrease the rate from 6.5 to 5.5 but it would add $ 12,000 to my current loan amount. It would remain a 30 year fixed. We’d also get to skip two months of payments (which is actually added into the loan, not really “skipped”); but it’s still money in hand. The current mortgage is less than a year old. Would the refinance be worth it?
I forgot to say, there are no prepayment penalties. And the added money to the mortgage will make the mortgage more than the house is currently worth (though that may change eventually…hope I hope).
Answer by Danny Girl
For a 1 percent savings that probably would be worth it in the end. Just make sure you don’t get any pre-payment penalties attached!
Know better? Leave your own answer in the comments!
as long as if your house is appraised at what it really is worth..I know here in Florida the house market has dropped terrible..I have been trying to refinance but having a bit of a problem..
No, you’re better off with what you have for right now.
If it lowers your payments by a significant amount, then it might be.
Looks like you are paying “points” and closing cost and this amount is added to the balance… Still it costs you $ 12,000. It’s very easy to calculate if it’s worth it. Lets say you payment is $ 1,500 a month now and your new payment is $ 1,400 (just an example! use your real numbers.)
You are saving $ 100 a month. It will take you 120 months (10 years) to “cover” the $ 12,000 you spent on this refinancing. If you are planning to stay in this house for longer than 10 years, you are fine.
I would need to know the loan amount before I can answer that.
I will assume the $ 12,000 is equal to 2% of your loan amount. That is a $ 600,000 loan amount. If that is correct, you will actually break even after two years.
If instead the $ 12,000 is equal to 4% of your loan amount, that is a $ 300,000 loan amount, If that is corrrect you will break even after 4 years.
These are rough calculations. The fianancial purists will note that I did not consider the cost of money in my calculations.
If you plan to keep the loan for longer than these periods you will be money ahead to refinance
If you are planning to sell before then, you will not recover your costs.
One very important thing to keep in mind is that my experience with loan officers is that they often make promises that they cannot keep.
At the sign off the interest rate, terms and fees are often dramatically different and much more than I was originally promised.
Be prepared at the sign off for your loan to go over the interest rate, the terms and fees in great detail.
Do not sign off if they are more than you were quoted by the loan officer.
Also, you mention that this may very near the value of your home.
If the amount of your mortgage is more than 80% of the value of your home you will also be required to get private mortgage insurance. That will often add a cost that is approximately equal to 1% of your loan amount every year. That would put your cost right back up to the 6,5% that you are paying now.
If the interest rate and the terms and the other costs at the sign off are significantly higher than what you were quoted by the loan officer you must be prepared to refuse to sign off and direct the lender to canel the refinance at no cost to you.
Since the loan amount is approximately equal to the value of the house I would be very surprised if there is not a very high premium added for private mortgage insurance that will wipe out the amount of money that you are saving on the interest rate.
The loan officer will not tell you about this. You have to dig this out on your own.
Be prepared to refuse to sign off on the loan and cancel it if it is not what you were promised by this loan officer.
You must be very tough on this.
Why would this add $ 12,000 to the mortgage amount?
You cannot take out a mortgage if the house is worth less than the loan. You would be “upside down” and have to put your own cash into the situation. I believe you are stuck where you are. Skipping two months is a marketing gimmick and is not a sound financial practice.
Take the refinance and do not add anything additional to your loan amount. What’s the $ 12,000 for? Is that ‘equity’ you are attempting to take out of the property, or is this some sort of fee you are paying to reduce the interest rate ?
NO. No. and No. Paying closing costs twice in a year’s time is really a bad move….paying to add $ 12K to the loan balance is never a good idea.
6.5% isn’t that bad of a rate….sounds like you’re being offered a gimmick type loan while you are holding a good old fashioned all American quality note.
Leave well enough alone. Start budgeting to make an extra principal-only pymt periodically….Before that, pay down your unsecured debt (i.e. credit cards/student loans/even your car). Then you’ll have real flexibility in home loan choices.