Mortgage Refinancing??

[TN94z]

How exactly does this work? I have heard people talk about it and getting money back and what not..but how? I have been in my house for about 9 years now, so I have quite a bit of equity built up. I have been trying to sell the house for a while now with no luck. I am now thinking about refinancing and just staying there. My only issue is I have a 2nd mortgage on the house as well. How would this work? Would this be a good thing to do or should I just tough it out until it sells?

[Slammin' Sam]

Depending on how much equity you have in your home, you might be able to refinance in order to pay off the second mortgage and get some cash back as well. There are a lot of variables involved here such as credit rating, amount of equity in the home, how much of the home's value a lender will write a mortgage on, etc., so it's not something I can give you a standard answer on. I have three standard pieces of advice for people thinking of doing this: (1) don't borrow more than 80-85% of the home's value; (2) don't refinance unless you can get a percentage rate that's at least one point below your current rate; and (3) go only with a fixed rate - avoid adjustable rate mortgages. Since you have a second mortgage it is likely at a slightly higher interest rate than your first so I'd use the APR on the second as a point of reference. Current APRs are in the high 4 percent zone for people with average credit, so if your second is in the range of about 5.75 to 6% a refinance is usually not a good idea unless you can "lock in" a rate below 5%.

Good luck.

[Chief Broom]

The whole point of refinancing is to get a lower rate on your mortgage. Combining two or more mortgages when you finance is easily possible, but again you want to get a better rate so you end up saving money in the long run. be careful about taking equity out when you refi. You can do this, but remember this is not free money. It's the money you've been investing in your home's value and what you take out will be added to the amount you have to pay back on the new mortgage. also beaware of the term of the new mortgage. You can do a refi with a term of any time limit you want, but extending the time on your mortgage will drop your payments, but naturally will take that much longer to pay off. Generally speaking if you aren't planning on staying in your home for at least 5 years a refi doesn't make sense unless you are dropping your rate a significant amount (2 or more percentage points). finally I'd avoid adjustable rate mortgages. Those are the one's where your rate can adjust. Fixed rate is the way to go so you don't get any surprises if rates go up. If rates drop you can always do a refi. The immediate drawback of a refi is that it costs about $2-3K, so don't assume that the refi is free just because they wrap the refi costs back into the new mortgage.

[iacas]

We had two mortgages - one for ~ 70% of our home's value for 30 years and another for 15 years at ~10% of our home's value (we got the second to build out the pool room, buy a new furnace/air conditioner, and pay off a car early with the extra cash). We consolidated both into a 20-year mortgage at a lower rate and will save around 40% of the home's current value over the span of those 20 years.

And our total monthly payment basically stayed the same.

See the advice above, too. It only really makes sense to do it if you can get a good drop in the % rate.

[TN94z]

This is the thing I am most wondering about. I have been paying on the house for 9-10 years now, and took the 2nd mortgage out for the same basic reasons Iacas listed. If I go back and refinance now and say combine both mortgages into one...I feel like I will be losing the 9-10 years that I have been paying on the house.

For instance(using nice round numbers as an example), you took out your original loan for 200000 for 30 years. You now owe 150000 after paying on the house for 10 years and let's say it's valued at 250000. You take out a second mortgage for 30000. When you refinance, you get a new combined mortgage for 180,000. So now, in essence, you have payed on your house for 10 years and only have 20,000 paid off of the original balance because you have the 2nd mortgage. Does that make sense? I would hate to think that I have paid on a house for 10 years and only knocked it down by 20k.

Sorry, I have just never really got in depth with this type of stuff and I'm trying to understand it a little bit better.

[sean_miller]

This is from a Canadian's perspective, but if you have good credit, a variable interest rate mortgage is fantastic right now - my interest rate rose by 1.25% in the past 3 months, but it's still 3.5% lower than the lowest 3 year fixed rate mortgage I can get.

Interest rates climbed a bit a couple years ago and they were trying really hard to get me into a fixed mortgage. I almost bit, but after reading a few predictions that prime rates were going to go up then fall again (as they did) I held firm. I saved a lot of money the past two years by not locking in.

A low monthly payment is nice to have, but in the end whatever gets your house paid off as fast as possible is the way to go. Get used to living that lifestyle and pay yourself that amount once your last mortgage payment is made (1 year and 1 month away for us - woot!!).

[Slammin' Sam]

This is the thing I am most wondering about. I have been paying on the house for 9-10 years now, and took the 2nd mortgage out for the same basic reasons Iacas listed. If I go back and refinance now and say combine both mortgages into one...I feel like I will be losing the 9-10 years that I have been paying on the house.

You are right about that, of course. But keep in mind that the money you pay on home mortgage interest in most cases is deductible if you itemize deductions on your federal return. I say "in most cases" because if you use the loan proceeds to improve the basis of your home's value the interest is deductible. If you use it for a vacation, to pay off a car loan, etc., it is NOT deductible.

I also agree with what Sean is saying regarding variable rate mortgages but I think the best variable mortgage rate being offered by American banks at the present time is somewhere in the low 3% range. Given that most variables will allow a cap of somewhere around 2% per year that hardly seems like a good deal if your current mortgage is in the high 4% or low 5% range.

[TN94z]

I think my current rate is 5.625. I can't remember for sure....I haven't looked at it in a while

[sean_miller]

You are right about that, of course. But keep in mind that the money you pay on home mortgage interest in most cases is deductible if you itemize deductions on your federal return. I say "in most cases" because if you use the loan proceeds to improve the basis of your home's value the interest is deductible. If you use it for a vacation, to pay off a car loan, etc., it is NOT deductible.

Most of what you said doesn't apply to me - the deductible part anyway. What do you mean by "cap"? Is that the amount you can pay extra to reduce your principle? That reduces your interest payment and amortization a lot. My 25 year mortgage will be done by year 11 that way.

[Slammin' Sam]

Most of what you said doesn't apply to me - the deductible part anyway. What do you mean by "cap"? Is that the amount you can pay extra to reduce your principle? That reduces your interest payment and amortization a lot. My 25 year mortgage will be done by year 11 that way.

You are of course correct since IRS rules don't apply in Canada (lucky for you). What I meant by "cap" on a variable rate or adjustable rate loan is the maximum amount in a given period of time (usually one or two years) by which your interest rate can be raised by the lender. The initial interest rate is usually tied in to some index like the bond market rate. If the rate goes up, so does your mortgage interest. The cap is usually at somewhere around two points, meaning that the most your mortgage interest rate can go up in the specified period is two percent. Likewise if the rate goes down.

[iacas]

This is the thing I am most wondering about. I have been paying on the house for 9-10 years now, and took the 2nd mortgage out for the same basic reasons Iacas listed. If I go back and refinance now and say combine both mortgages into one...I feel like I will be losing the 9-10 years that I have been paying on the house.

I don't get it. It's the same thing. You either owe $180k on your house (ideally at a lower rate) or you owe $150k + $30k (probably at higher rates).

It's the same thing in the end. Again, we had a 30 year mortgage and took out a 15-year mortgage to get a new furnace, AC, and build the pool room. We were basically three years into paying off both, but we dropped to a 20-year mortgage so while we added back eight years to the second mortgage ($30k in your example), we shaved seven years off the $150k mortgage (again using your numbers). Our payments stayed the same, but since we shaved 7 years of a mortgage that was $150k (5/6) while adding 8 years to a mortgage that was $30k (1/6), the net savings is pretty high... Go talk to a mortgage broker. It's not like you're obligated to do something just by having a meeting. Look at the numbers. Look at the monthly payments and your total payout. My wife and I aren't payment shoppers - believe me, dropping seven years was a BIG deal and will save us six digits in the end.

[vmsea]

Can someone explain why you SHOULDN'T refi unless you get a significant reduction in rate?

i.e. if i have 4.875 now, why shouldn't I refi down to 4.5? assuming it's a no cost refi.. i literally pay nothing?

please help!
thanks!

[iacas]

Can someone explain why you SHOULDN'T refi unless you get a significant reduction in rate?

Even "no cost" refinancings sometimes include additional things like court costs, closing costs, filing fees, etc.

I think there's some general knowledge that says if you can save 3/4% or something you should refinance, otherwise, maybe not.

[TN94z]

I don't get it. It's the same thing. You either owe $180k on your house (ideally at a lower rate) or you owe $150k + $30k (probably at higher rates).

You are right. I just kind of rolled two lines of thinking into one post while typing and didn't go back and edit. I did it while I was at work. I understand it now. Thanks for the reply. I will probably go talk with a mortgage broker and play with some numbers to see if it is worth it. If I could come up with some good numbers, I would stay there and wait for the market to get better and then sell for top dollar.

[vmsea]

Even "no cost" refinancings sometimes include additional things like court costs, closing costs, filing fees, etc.

Oh ok.. when I refinanced. i think I went from 5.5 to 4.875..

but i'm not sure i paid any cost.. b/c they had a schedule of costs.. and literally a credit for all amounts. Apparently the agent makes money from bank kickbacks.. but yah.. it's kinda confusing.. thank you!

[Rexx]

Oh ok.. when I refinanced. i think I went from 5.5 to 4.875..

You are almost always paying a higher interest rate for a "no cost" loan than with a "normal" loan OR the lender simply rolled the various fees into the loan amount. Either way, they're getting their money -- there's no free lunch.

[Fraser]

My only issue is I have a 2nd mortgage on the house as well. How would this work?

The second mortgage can remain open as long as you get the noteholder of the second loan to agree to be subordinated to second lien position. The lender doing your new loan should be able to help with this. Depending upon your combined loan to value ratio, your debt to income ratio and the type of loan that your second is you might need to get the second loan modified, particularly if it is a line of credit.

It makes sense to subordinate a line of credit as the rates on them are currently so low. With rates on second mortgages being particularly poor it currently makes more sense to pay both off and roll them into one.

Can someone explain why you SHOULDN'T refi unless you get a significant reduction in rate?

Depends...look at how much is left on your current loan term, and whether you're getting back on the wagon at the start again.

I work for a mortgage company and have seen people come back and enquire about refinancing their way from being 7yrs into a 30yr mortgage back to square one again to get a lower rate. You've got to look over the Truth In Lending disclosure to see what the total cost of payments is and whether or not you'll really save any money over the life of the loan. Don't fool yourself into shopping payments unless you are truly comparing like for like products!

You are almost always paying a higher interest rate for a "no cost" loan than with a "normal" loan OR the lender simply rolled the various fees into the loan amount. Either way, they're getting their money -- there's no free lunch.

Not necessarily. The company I work for (correspondent lender) does zero closing cost loans and the interest rate isn't hiked up to compensate for the fact we pay the costs. We work with a couple of large banks to get excellent rates and have people who routinely monitor rates of other lenders in our area as well as the big nationwide banks and more often than not we're offering a better rate with no costs to set up the loan. On many occasions when our customer finds out who will be servicing their loan they remark that they shopped that particular lender and that their deal with us was better!

Last week I did a loan for a Senior VP of the mortgage department at a nationwide bank as we were offering a better deal than she could get through her own bank on an employee loan and she'd been there 35yrs! I understand that not all companies that cover the costs work the same way as the company I work for but don't rule out zero closing cost deals outright.

[newtogolf]

Oh ok.. when I refinanced. i think I went from 5.5 to 4.875..

At least in NY you will have to pay fees for credit check, home appraisal if finance amount is over 80% of house valuation, title insurance, and fees for setting up the new escrow account if that's applicable.