Need advice about refinancing.

[Elly]

Hi all! This is my first post over here but I lurk a lot and value your opinions even more. I have a blog and I posted this over there as well. I am not sure if all the same people read blogs and the forums so I wanted to post both places.

I need some advice about whether or not refinancing would be a good idea. We currently have a 30 yr fixed FHA loan with an interest rate of 6%. The balance we owe is $126,915.43. Our principal and interest payment is $814.24 and our PMI is currently $52.35 monthly. Our escrow (taxes and insurance is $413.36 monthly) According to the Central Appraisal District of my county, the value of our house is $145,393. I believe that would give us a loan to value ratio of 87%. I know that mortgages with a loan to value ratio of 80% require PMI.

I called my lender (Wells Fargo) and inquired about a FHA streamline refinance. They told me that there is no appraisal required and no pulling of credit required for a streamline refinance.

They offered me two options for a 30 year fixed refinance. The first one is a 5% interest rate with 1/2 of a point. There would be closing costs of about $3,500 rolled into the loan. The second one is a 4.875% interest rate but we would pay $4,200 out of pocket for closing costs.

I don't want to pay anything out of pocket so we are looking at the 5% one. With this the principal and interest would be $722 a month and PMI would be $54 a month. The quoted me a monthly payment of $1,162.00 including escrow.

They also told me that we have an escrow shortage of $876.00 and our payment will go up in June to $1,324. We are currently paying through escrow $66 a month for insurance and $264 a month for taxes. In June, insurance will increase to $73 and taxes will increase to $311.

The total new 30 year loan would be for $134,507 and would include upfront FHA insurance, the loan payoff and closing costs.

All of this information has my head spinning and I am not sure if refinancing would be the best option for us.

We are following the Dave Ramsey plan and just finished baby step two this week. We don't know whether it is worth it to refinance for the lower interest rate or if we should just try to keep it as is and pay extra as we can. I also thought about checking into a 15 year FHA refinance to see how the payment would increase with that. With a lower interest rate I am wondering if that would be an option since the payment is not really an issue.

Any advice y'all could give is sincerely appreciated.

[maat55]

Basically, you want to divide your savings in payment by your added cost for the loan. This will give you a breakeven point.

Example: Closing costs 3500, new payment 150 less. 3500 divided by 150= 23.3 payments or 2 years. If you intend to stay in the house longer, it is worth the refi.

I would do the 15 year note based on the same time-line as above, and if you do not intend to save the difference in payment from the 30 to the 15.

[jIM_Ohio]

I think it is a bad move based on one fact:

now you owe $126,915.43
if you refi you would owe $134,507

concentrate on that- you will owe $8000 more to save $90/month. It will take 88 months (7+ YEARS) just to break even on loan amount.

This does not even factor in closing. It might help cash flow, but it does not help you long term financially.

[creditcardfree]

Originally Posted by jIM_Ohio

It will take 88 months (7+ YEARS) just to break even on loan amount.

Yikes that is a long time.

I already mentioned on your blog that I didn't think it was the best idea, but here are a few more thoughts.

Think about the progress you could make in 7 years if you stay with your current mortgage. I bet if you look at the amortization table you would be much farther along in paying it off than if you refinanced.

It is so important to look at all the numbers when refinancing...not just the lower interest rate or the lowered payment.

[jIM_Ohio]

The 90/month is 11% of current mortgage payment- so the cash flow savings is high.

If you can close with money out of pocket you will come out ahead quickly...

The calculation you have not done...

you closed on current loan in mm/yy
it is now april/2009
and would be paid off in nn/yy+30

which is xx months (payments) later

your new loan would close in 04/09
your new loan would be paid off in 04/39
what payment would it take to pay it off by original payoff date nn/yy+30?

you are effectively extending the term of your loan, and taking on more debt (both are bad things financially long term). If you looked at "what payment would it take to maintain same payoff date", you will see things differently- because my guess is that $90/month you save would just need to be applied back to principal just to "break even" on month and year of payoff.

If you could maintain same payoff date and save 8% on current mortgage payment, that is the deal you want.

Current payment is $815. Saving 8% is a new payment of $750. Meaning if you can keep same payoff date AND have a payment under $750, that is the deal you want.

That $750 needs to include any additional payments to principal to keep same payoff date.

[Shane Watson]

I believe there is more than that. You simply can’t drop time value of money. It may turn out that, you are basically paying less money by expanding the time.

[b4freedom]

The math gets complex. Try this tool: Will you save by refinancing your mortgage?

Several other tips:
1) Check with other lenders. Be sure to check out a Credit Union in your area. Often the terms are much better.
2) Explore a fixed Home Equity Loan. Often times you can get a HEL for up to 80% of your house and you don't have to pay any closing fees.

[swanson719]

Switch to a 15 year. Do the math on that. Your closing costs will be the same, but you will save so much in interest with a 15 year compared to a 30 that it is well worth it. The payment won't be drastically higher, maybe $300 a month. You'll recoup closing much faster, and it would be the best bet if you're going to be in the house for 5+ years.