Potential Mortgage Refinance

[Slug]

I have been in my house for about 1.5 yrs. I purchased using an 80/10/10 strategy for $341k in a lowball offer situation. So I have 2 loans:

$34,100 @ 4.25% (VARIABLE HELOC)
$272,800 @ 5% (FIXED 30 yr)

I will stay in this home a minimum of 5 years from this point and probably much longer.

Currently I am trapped in a loan that won't let me out of escrow. Taxes and insurance amount to $5,595 per year or $466/mth.

My home is valued at $415k on Zillow and $396k on Cyberhomes with a tax value of $379k. I need an appraisal to come in at $380k to consolidate both loans at 4.5% or lower for a 30 yr loan and get out of escrow. Closing costs on the re-finance will be $2310 including appraisal. I have accepted the $400 sunk cost of the appraisal because I think it's worth it, and there's a decent chance I'll get it. However, I thought I'd put it out here as a thought exercise and see if there's anything I missed. Lots of moving parts:

The HELOC is currently at a lower interest rate than my potential refinance with rates showing no imminent signs of rising. Is it worth it to consolidate this loan now to lock in the rate? It's a question of risk tolerance I guess, and I'm leaning towards let's set it and forget it.

The savings of a 4.5% loan on $272,800 vs. 5% is roughly $30k over the life of the loan. I hope to accelerate payment, but regardless that's a nice chunk of change.

By consolidating the loans, my payments (excluding escrow) won't be that different, but the ability to have that additional $466/mth at 1.5% in my money market should be worth almost $50/yr.

Assuming the appraisal comes in as I desire, how long can I hold out and use this appraisal to re-finance (i.e. what if I want to wait a little longer to see I can get an extra 1/8th or 1/16th


I'm sure I left out something so ask away. Thanks in advance for helping me think this through.

[jIM_Ohio]

I have been in my house for about 1.5 yrs. I purchased using an 80/10/10 strategy for $341k in a lowball offer situation. So I have 2 loans:

$34,100 @ 4.25% (VARIABLE HELOC)
$272,800 @ 5% (FIXED 30 yr)

I will stay in this home a minimum of 5 years from this point and probably much longer.

Currently I am trapped in a loan that won't let me out of escrow. Taxes and insurance amount to $5,595 per year or $466/mth.

My home is valued at $415k on Zillow and $396k on Cyberhomes with a tax value of $379k. I need an appraisal to come in at $380k to consolidate both loans at 4.5% or lower for a 30 yr loan and get out of escrow. Closing costs on the re-finance will be $2310 including appraisal. I have accepted the $400 sunk cost of the appraisal because I think it's worth it, and there's a decent chance I'll get it. However, I thought I'd put it out here as a thought exercise and see if there's anything I missed. Lots of moving parts:

The HELOC is currently at a lower interest rate than my potential refinance with rates showing no imminent signs of rising. Is it worth it to consolidate this loan now to lock in the rate? It's a question of risk tolerance I guess, and I'm leaning towards let's set it and forget it.

The savings of a 4.5% loan on $272,800 vs. 5% is roughly $30k over the life of the loan. I hope to accelerate payment, but regardless that's a nice chunk of change.

By consolidating the loans, my payments (excluding escrow) won't be that different, but the ability to have that additional $466/mth at 1.5% in my money market should be worth almost $50/yr.

Assuming the appraisal comes in as I desire, how long can I hold out and use this appraisal to re-finance (i.e. what if I want to wait a little longer to see I can get an extra 1/8th or 1/16th


I'm sure I left out something so ask away. Thanks in advance for helping me think this through.

I am in about same situation as you on the loans
352k house (2005 purchase), 280k 1st mortgage 5.75% 30 yr and 52k 2nd mortgage 7.7% 30 year.

We owe less on each loan now, I have not checked exact balances in a while.


The math which I see is the following:

1) 5% for you on first is excellent, do not do anything which raises this rate even if short term cash flow is better with a refi.
2) 30k pays off the 2nd mortgage, this is $1000/mo for no more than 2-3 years. Can you do this?
2a) in my case we are pay $100 extra on 2nd now, and that will increase to $200 extra next month and eventually 2nd is paid off within 5 years without any special refi to do it (eventually we will pay $1200/mo on 2nd but a few other ducks need to fall first).
3) Any refinance I do must save me 8% on my monthly payment to make it appear valueable to me (8% means I save 1 mortgage payment per year). Others use break even timelines which is an effective way to measure this.

3a) the math is the following- you purchased house 1.5 years ago, so I am calling that Jan of 2009 on purchase. Your payoff date is Jan of 2039.

3b) calculate total interest paid on current loan terms in Jan of 2039. This is your baseline
3c) calculate interest paid on new loans with the following criteria:
i) payoff date of Jan 2039 (pay extra to principal to get this amount)
ii) then calculate interest paid with "early" payoff of new loan (to keep the timeframe fixed)
iii) if you extend repayment beyond 30 years, its tough to compare, because you will be paying for house for 31.5 years (and not 30) if new loan is 30 year fixed and you make the minimum payment on the new loan.
iv) closing costs- I would add these costs to the interest paid column, others just balance the difference in interest paid vs closing costs.
v) if you pay off 2nd mortgage before refi, consider refi to a 15 year fixed to lower interest rate even more.

For each new loan considered, repeat step 3c (calculate interest paid and closing costs). Compare to 3b each time and compare to other scenarios.

I would emphasize paying more on 2nd mortgage now to gain 20% equity. I am having some issues refinancing now, and am playing chicken with interest rates (I am trying to free up money to pay down the 2nd and refi first only at less than 5.75%). I doubt rates stay this low for the 3-4 years I need to gain 20% equity, but IMO its the best move I can make.

[Slug]

I am in about same situation as you on the loans
352k house (2005 purchase), 280k 1st mortgage 5.75% 30 yr and 52k 2nd mortgage 7.7% 30 year.

You need to refinance. It's worth it. Really. I like you. You should refi. Not kidding.

[jIM_Ohio]

You need to refinance. It's worth it. Really. I like you. You should refi. Not kidding.

Keep in mind I have "tried" but without two things

20% equity
and a good comp close to my house in my neighborhood

it does not make sense to refi away from fixed rate loans
and gaining 20% equity for me means I need to pay off 100% of the second and about 20k off the 1st just to borrow 280k on a house which might appraise for 350k on a good day and likely appraises for closer to 325k than 350k. My best bet is to pay off the 2nd mortgage, then look at picture again.

BTW if house appraises for 300k I need 60k equity and have only about 25k equity right now, so I am further under than you (our purchase was 85-15-5).

I can get 20% equity if I used a 401k loan, but the comp is impossible- no house on my block will appraise for close to mine (granted mine is among 5 biggest houses on street), and there have been recent sales in the 300's, but not holding my breath my house is 16% higher than those.


My plan is 4 fold right now

1a) pay down some other short term debt (car loans) and redirect those funds to 2nd mortgage
1b) continue trying to get sum of all retirement accounts to about 400k before end of 2010 and to 800k by end of 2018 (both ambitious goals to financial independance)
3) pay off the 2nd mortgage
4) refinance 1st mortgage to 15 year fixed with intentions of paying mortgage off the year I retire (for example if I retire in 2026 "as planned", then a 2010 refinance will get mortgage paid off 1 year ahead of time).

My focus is on retiring in 2026 or close to it... so retirement accounts which grow at 9% are more important than debt (even at 7.7%) because I know I can wipe that debt out once the cars are paid off.

1a) also has to happen because a portion of the car payments will also fund kids elementary school education, so lowering debt footprint in next 3 years is very important.

5.75% is also the lowest mortgage rate I have every had, and it quite low by historical standards. So while I can get maybe a 4.5% rate if my cards aligned (comp and 20% equity) the amount of work to achieve that goal sets the primary goal (early retirement) back about 5-10 years.

[Slug]

We struggle with the comps too. Our neighborhood is very economically diverse. The home next to hours sold for less than we bought ours for, and the home across the street from theirs is on the market for $900k. There's a lot of $500k and $700k homes too. All unique homes. It would be much easier if I just lived in a cookie-cutter neighborhood, but then I would live in a cookie-cutter neighborhood (and probably have an HOA).

[Slug]

UPDATE: My re-appraisal went well. Very well. So, we can easily justify the re-fi. Rates dropped today, and I locked in a 30 year at 4.375%. The savings over the life of the loan if I didn't prepay would be $40,000. Plus, I'm out of excrow so the $5k that the mortgage company was taking each year can now grow in my bank account instead of theirs.

Somehow I don't feel $40k+ richer though.

[jIM_Ohio]

UPDATE: My re-appraisal went well. Very well. So, we can easily justify the re-fi. Rates dropped today, and I locked in a 30 year at 4.375%. The savings over the life of the loan if I didn't prepay would be $40,000. Plus, I'm out of excrow so the $5k that the mortgage company was taking each year can now grow in my bank account instead of theirs.

Somehow I don't feel $40k+ richer though.

Refinances are usually about cash flow.

One issue with pre-paying a mortgage is that it does "save" you money, but you only see that money (that savings) once mortgage is paid off.

[dfeucht]

Refinances are usually about cash flow.

One issue with pre-paying a mortgage is that it does "save" you money, but you only see that money (that savings) once mortgage is paid off.

Jim - I assume you are not paying PMI right now on your primary loan. I was in a similar position to you I have a primary loan at $327K @5.5% and a HELOC balance of $39K at 5.0% with falling home value. Apparently there is some "program" to refinance the primary loan without PMI (if you aren't currently paying PMI and your loan is a Fannie or Freddie loan) as long as the LTV in total (HELOC and primary) is below 95%. The cost was slightly higher (about 0.5 points to get the lowest rate or you sacrifice 0.125% of the loan rate).

You also need to get the HELOC/2nd loan to subordinate to the refinance - but all I did was talk to the head underwriter and they saw good payment history and high credit and they said it would be an issue - up to 100%.

Anyways, I am refinancing my 5.5% loan down to 4.375% paying 1 point (locked last week) no PMI and my LTV is 85% on the primary and 94% in total. Not ideal home values obviously, but maybe something you can look into with a mortgage broker.

[EconoMutt]

UPDATE: My re-appraisal went well. Very well. So, we can easily justify the re-fi. Rates dropped today, and I locked in a 30 year at 4.375%. The savings over the life of the loan if I didn't prepay would be $40,000. Plus, I'm out of excrow so the $5k that the mortgage company was taking each year can now grow in my bank account instead of theirs.

Somehow I don't feel $40k+ richer though.

Great News !!!

[jIM_Ohio]

Jim - I assume you are not paying PMI right now on your primary loan. I was in a similar position to you I have a primary loan at $327K @5.5% and a HELOC balance of $39K at 5.0% with falling home value. Apparently there is some "program" to refinance the primary loan without PMI (if you aren't currently paying PMI and your loan is a Fannie or Freddie loan) as long as the LTV in total (HELOC and primary) is below 95%. The cost was slightly higher (about 0.5 points to get the lowest rate or you sacrifice 0.125% of the loan rate).

You also need to get the HELOC/2nd loan to subordinate to the refinance - but all I did was talk to the head underwriter and they saw good payment history and high credit and they said it would be an issue - up to 100%.

Anyways, I am refinancing my 5.5% loan down to 4.375% paying 1 point (locked last week) no PMI and my LTV is 85% on the primary and 94% in total. Not ideal home values obviously, but maybe something you can look into with a mortgage broker.

My loans are not FHA or thru fannie/freddie.