Real Estate NewsRefinancing Pros and Cons
Question: We owe about $55,000.00 on a 30 year, 9% mortgage that is 19 years old. We are in the 31% tax bracket, but plan to "retire" within the next five years. We intend to continue to live in the same house following retirement.
Should we continue with our monthly payments on the existing mortgage, or should we refinance? If so, should it be for 15 or 30 years, or should we pay off the principal? Please advise. The process of refinancing a home mortgage is confusing to us and seems to be fraught with uncertainty and financial risk
Answer: Currently, mortgage interest rates are in the 7-7-1/2% range, depending on the number of points that you pay. Oversimplified, each point is the equivalent of approximately 1/8th of a percent on a mortgage. Thus, you could get a 7-1/2% rate with no points, but if you pay 2 points, you may be able to get a 7-1/4% rate.
You indicate that you have only 11 years left to go on your mortgage. However, you are paying what is now clearly too high a rate of interest, and I strongly recommend that you give serious thought to refinancing your existing mortgage.
No one wants to extend their mortgage debt. Thus, the temptation would be to substitute a new mortgage (refinance) for a 15-year term period, which would be roughly equivalent to the remaining time left on your current mortgage.
In any discussion of mortgages and refinancing, one has to sit down and "do the numbers." Let"s look at some typical examples based on your situation.
Unfortunately, when a person refinances their existing mortgage, there will be closing costs involved. A new title search has to be accomplished, a survey has to be obtained (if it is not a condominium), and various lender and recording charges have to be paid. Roughly, these costs will range (including the payment of points) between $1,000-$2,500.
Since you currently owe $55,000.00, and presumably your house is worth considerably more than that, I would recommend that you include these costs into your new mortgage, rather than pay the settlement costs out of your own pocket. Thus, let us assume that you will be refinancing for a new mortgage of approximately $58,000.
If you could obtain a 7-1/2%, zero point 30-year loan, the monthly payment of principal and interest will be $405.55. If you were to get a 15-year loan, in most cases lenders will charge you a little lower rate of interest. Thus, the monthly principal and interest payment for a 15-year loan at 7 % would be $521.33. For purposes of this discussion, we are not including any escrows for taxes or insurance in the calculations.
The difference between the 30 year payment and the 15 year payment is $115.78 a month, or $1389.36 per year.
Even though the monthly payments on a new 15-year mortgage will probably be less than you are currently paying on your 9% loan, I cannot recommend that you obtain a 15-year loan.
Consider refinancing for a 30-year basis if there are no prepayment penalties. My strong recommendation is that each and every month you make an extra payment toward principal. You could, for example, add the $115.78 to your monthly payment each month and have the benefit of a 15-year loan, without having the obligation to make these higher monthly payments.
Currently, savings and investment opportunities carry low rates of return. However, if in the future you find some interesting investment opportunities, you would be better off to take that additional payment and invest it in some other way.
There is a very dramatic decline if you make an extra principal payment each month. For example, on a 30-year loan, if you make 13 months payment per year (i.e., one extra month payment), you will reduce your loan by at least eight years. Indeed, if you were so inclined, you could even make larger payments on your mortgage so as to reduce the loan even less than 15 years.
However, you indicate that you intend to retire five or six years from now. I caution you to consider your situation after retirement. There are too many individuals in this country who unfortunately are "house rich and cash poor."
What value is it if your house is paid off in full, but you do not have any liquid cash to support you during your retirement years?
Keep in mind that your house will no doubt appreciate over the next few years. It will do so whether or not you have a large or a small mortgage. The more equity you have in your house will put more money in your pocket when you sell it, but while you are living in the house it is only "dead equity."
I also strongly recommend that you consider obtaining a home equity loan, either at the time you refinance or shortly thereafter. Such a loan permits you to keep a checkbook in your desk drawer, and you pay interest only on the monies that you actually borrow. This is an opportunity to tap your equity when you need it, without having to go through the lengthy and time-consuming process of obtaining yet another mortgage loan. Keep in mind that when you retire, you probably will not be able to obtain a new mortgage loan, unless your income is still strong.
Thus, a home equity loan is the equivalent of putting your equity in the bank о without having to pay any interest until you need the money.
You should understand, however, that a home equity loan is a second deed of trust (mortgage) on your home and you could lose your valuable asset if you are not careful.
You also asked whether you would get a better deal from the company currently serving your mortgage, or should you shop around. My advice to everyone is always shop around.
Contact your current lender, and contact several other lenders as well. In today"s marketplace, lenders often sell their mortgages. The lender that made your original loan may no longer be in business. Your current lender may only be an out of state servicer, and not at all interested in assisting you with the refinancing. But clearly you must shop around to obtain the best rate and terms.
For more articles by Benny Kass, please press here.
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Copyright 2001 Benny Kass. Posted by Realty Times with permission.
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