Refinance mortgage? Help!

[amandaleigh37]

I am clueless about this stuff. I tried reading different websites and messing with calculators and I just don't get it.... maybe someone here can explain some of this in basic terms to me.

We are VERY tight on our budget lately and want to know if we can save money on our mortgage. We've NEVER had a late payment (it's taken automatically) and we have great credit (though I don't know the scores offhand).

Our current mortgage:
30 years, fixed interest rate is 6.75%
Current principal balance is 81,983
We are 5 years (to the month) into the mortgage, so 25 years remaining.
Monthly payment is $785.02 (includes taxes, insurance, PMI)

DH called our bank and they faxed him a "good faith estimate" if we were to refinance. I am looking at this and don't understand at all....

It says the interest rate for a new (starting over?!) 30 year mortgage would be 5.375. The financed amount says $85,000. Our monthly payment (including insurance, etc.) would be $634.17. It also has a bunch of fees listed (appraisal, underwriting, etc.) that total $3160.

My DH said that the lady told him the $3160 would be included in the loan, so we would NOT have to pay that up front. I'm not sure that's correct though. I also think that is a crazy amount to pay in fees..... surely if we shop around we can find another bank who can do better.

I have the feeling this isn't really a good deal to save $150/month. But I'm not sure how to do the math to figure this out for sure. We do NOT want to stay in this house long, but with the market and the fact that our street is already full of foreclosures, I don't see how we would sell this place anytime soon and not go broke doing so

Any advice you can give me would be great. Or any good websites that make this stuff easy to understand....... thanks!

[songbird45]

The fees are closing costs, same as when you bought the house. It does sound like they're being rolled into the loan, hence the higher financing amount (that's why it's $85k instead of $81k).

This is a good idea if that extra $150 a month is something you really need for your budget. It is not a good idea if you are concerned with the overall amount you're paying in interest and fees. Over the course of the mortgage your costs go up because you have added 5 years to your mortgage and are paying an extra $3000 in fees. I'm not sure the interest rate reduction makes up for that but you can run the numbers on any debt calculation website (just put in your current numbers and the new numbers and see how much you pay in interest in each scenario). However since you're not planning on living there for 25 years this might not matter that much to you.

[Delicateflower]

Also a rate estimate given to you late last week is going to be wrong. The bond market went psycho last week, rates jumped and now they're dropping again.

[amandaleigh37]

Ok thanks. The difference would be if we sold the house though right? Those extra fees that are increasing the loan amount..... if we sold the house for $80k (which is a stretch... ) we'd have to come up with the difference on our loan, so either $1k or $4k, right?

And this is a totally unrelated question but I was wondering (this is our first house we've owned) - if we did sell and it didn't pay off our mortgage, do we have to come up with the remainder or can it be rolled into a mortgage for another house?

[limette]

I don't know how it works in the U.S but in Canada when I refinanced I pitted my current lender against a new one. Told the current lender I was shopping around and they offered me a new mortgage without the fees at a lower rate.

The original mortgage was 25 years at 6% I think but we were 4 years in so 21 years left. We refinanced at 4. something but for a shorter term. We kept the payment the same so we could reduce the term, we now have 16 years left on the mortgage instead of 21.

The competing lender offered us a slightly lower rate but were charging us the fees. We calculated it out and it was better to refinance with our original lender (fees waived) at the higher rate.

[amandaleigh37]

Thanks! Yes I definitely want to "shop around".. I have no idea if this amount of fees is normal though. When we bought the house, we didn't pay any closing costs. The seller paid them as part of our purchase offer, but I believe they were under $2500 total.

So is it best to just call other banks? Can I do this online? Are there any special programs for refinancing that we might qualify for (low-income)? Thanks for everyone's help.

[mnnice]

I know closing costs vary a lot depending on region of the country, but both times we refied (2002 and 2003 so not real current either) we paid less the $1000 in closing costs.

I'd look around some more if it was me.

[cristeen]

Honestly, those fees sound a bit low for this area. So it really depends on where you are. We're in the middle of a refi right now and every bank I talked to was charging over $4K in fees. And yes, it is right that the cost of the loan is being rolled into the loan amount, that's why there's such a difference in the numbers.

Essentially, the answer is that if you're lowering your interest rate by 0.5% or more, it's probably worth it - long term. Your numbers here say you're lowering it by 1.4%, that would be more than worth it, in my book.

The big question is how long do you plan on staying. Ultimately if the difference in payment is $150, it'll take you 20 months just to recoup the cost of refinancing the loan in out-of-pocket savings. If you're not planning on staying that long, then it's not worth it.

Since you want out of the house, something to question is the current value of the house and the current loan amount... can you drop the PMI? It usually requires an appraisal (which you would need if you refinanced anyway), but if you can get rid of the PMI, that will help your monthly payment right there, without the cost of the refinance.

And yes - anytime you refinance, the loan term will "start over"... so if it's a 30 year loan, and you refinance 3 years in, then the 30 years starts over... unless you go for a 20 year loan. This is how my parents have owned the same house for 35 years and still have 30 years to go on their mortgage.

[amandaleigh37]

Thanks for the replies so far!

I don't think there's any way we can get around PMI. The house appraised for $89k when we bought it (5 years ago), and though we have done a lot of improvements, our neighborhood is in bad shape. We have had foreclosed houses all along our street, many that were sold for pitiful amounts... so I'm assuming that would drag our value down as well.

[lilyka]

that all sounds right. the fees are closing costs and that is what a refinance does, it starts your mrtgage over so you can have a lower payment. you don't have to do a 30 year loan but then your payments probably won't be lowered. you may want to check with a primerica agent. they have an equity builder program that can lower your payment and pay off your house sooner. however since you have only been making payments for five year depending on your comps you may not have enough equity to refinance. my comps came back below what we owed after 9 years of payments. it sucked. seeing as how there was no equity i did not get the refinance. your house is going to have to appraise really well.

[cristeen]

Originally Posted by amandaleigh37

I don't think there's any way we can get around PMI. The house appraised for $89k when we bought it (5 years ago), and though we have done a lot of improvements, our neighborhood is in bad shape. We have had foreclosed houses all along our street, many that were sold for pitiful amounts... so I'm assuming that would drag our value down as well.

In that case I would question whether you're even going to be able to refinance... if your appraisal doesn't come back favorable, then refinance may not even be an option.

[MacKinnon]

You might be able to qualify under the gov't refinance program, that will let you go to 105% of the value of your home but typically, you cannot refinance if you are upside down in your loan. And many lenders now are requiring up 5 to 10% equity to refi. And no, you can't roll it into another loan, per se, but if you could get cash out at closing you could pay it off, or you would have to qualify for a short sale, which could ding your credit, or you would be responsible to pay it off at closing with savings. Good luck!