Is refinancing a good option for me

[Bob B.]

I've posted in the forums previously about a house that we own that we no longer live in. My family moved 3 1/2 years ago, and the house has been on the market and unsold ever since. We owe about $105,000, and my best guess is (with input from our Realtor) that it's worth somewhere between $95,000 and $105,000 at this time. The house is located in a small villge in the northern part of Michigan. The list price on the house is $109,900, which when Realtor commissions and closing costs are added in, puts us about $4,500 in the hole.

One week ago, we had new renters move in. They are interested in buying the house, but are not in a financial position to do so right now. We struck a deal with them to remove the house from the market for 12 months. They are paying $100 per month above what we asked for rent in exchange for us removing the house from the market (we had been asking for $800 in rent, and they are paying $900 per month.) Also, when the 12 months is up, the (presumed) $1,200 they've paid in addition to the rent will be put toward a down payment.

So ... on to my question. Would it be a good idea for us to refinance our loan while we wait? We are paying $6.25% interest. The original amount borrowed was $120,000, and we are paying $738/mo. Int + Prin.

There is of course no guarantee that our renters will buy the house in July 2012, but I'd like to use 12 months as my planning horizon.

Over the next 12 months, I will pay $6,500 in interest on the loan as it currently is.

If I were able to refinance for 5.25% (one point lower than current), I would save $158/mo. in mortgage payments and $1,000 in total interest payments, assuming a 30 year refi.

Or we could refi at a 20 year payoff, keep our payments approximately the same, and bite off more principal each month.

What are mortgage rates these days? What can I expect for closing costs? Clearly, I don't have 20% Loan to Value.

Any thoughts would be appreciated.

Thanks

[riverwed070707]

My gut reaction is that you won't be able to re-fi even if you wantedd to. First, most lenders won't refinance an income property (which is what this is even if you're not earning anything on it becuase it's not your primary residence). Second, unless you plan to bring some money the table, no lender is going to finance more than the house is worth.

12 months probably isn't long enough to see any sort or return on closing costs, etc that go with re-fiing anyway. I'd just leave it as it. Have you already agreed on a purchase price? Are they giving you your full asking? Why would you have to pay realtor fees? I would consider this a FSBO -- all you'll need is a lawyer.

[creditcardfree]

Riverwed makes a good point on the realtor fees. If you house is no longer under contract with the realtor, and you have a buyer, all you need is a document signed by all parties agreeing to the purchase (this is where a lawyer is helpful). The buyer presents document to their bank for financing, bank arranges closing documents generally with a title company, which nets you a check that is sent to your mortgage company. Sold!!

I stated on your blog that I didn't think you could recoup your closing costs in 12 months. If it helps I too have a 6% mortgage and because I've known for over two years that we would be moving, I have not refinanced because of the inability to recoup our closing costs.

[JoshuaHeckathorn]

Even if the refi were a good idea, I doubt you could find a lender to do it for you in this market. And I haven't run all the numbers, but it doesn't sound like the refi would financially be a good idea in the first place if you're going to be selling in the next few years. I would sit tight, keep renting it, and continue paying down your mortgage as much as possible.

[Hector]

I dont think you would able to refinance as you dont have enough equity in the house. leave it the way it is for now.

[disneysteve]

Originally Posted by Bob B.

My family moved 3 1/2 years ago, and the house has been on the market and unsold ever since.

We owe about $105,000

it's worth somewhere between $95,000 and $105,000

The list price on the house is $109,900

If the house is wroth 95K-105K, why are you asking 109.9K? Drop your price to actual value and maybe you'll get the place sold.

Is the renter fully covering your costs? If so, I see nothing wrong with hanging onto it for another year and hope that the market recovers a bit so that you can then be more successful selling it. It doesn't sound to me like the current renter is a viable prospect. If they can't afford it now, what makes you think they'll be able to afford it in a year?

If the renter is not covering costs, keep it on the market but drop the price to get it sold as you're losing money every month that you keep it.

I agree with the others that you probably can't refinance and I wouldn't refinance anyway if you might be selling in a year. You won't have enough time to recover the costs.

[thefrugaltoad]

I recently talked to several mortgage brokers about a refinance and they all said we needed to have no more 80% LTV and several said because we lived in Phoenix, a depressed housing market, we need to have 70% LTV.

Paul- The Frugal Toad

[Bob B.]

Thanks all fr your replies. It's settled. I will not be lloking into a re-fi. This site is a great resource.