Hey guys, I need your suggestion. I am trying to refinance my home loan where I am getting 1% lower rate than what I am paying now (down to 5 from 6 with no closing cost). I thought go with refinance. However, when the lender validated my home, they said I need to add atleast 35K on this 300K home (Current value). I have that money in a Savings/CD accounts where I'm getting less than 1% interest. Is it wise to add additional equity on a home when home prices falling!! on the other hand, I am thinking that whatever I am adding now (35K) can be assumed as yielding 5% interest (mortgage rate). Anybody agree on this?
Message edited by: jind on 2009-10-23 14:19:48 CDT
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Is your job secure? What about your spouse's? Do you have enough saved to survive loosing one or both jobs? How much are the closing costs? How long before the savings pay for the closing? Do you need to reduce your monthly payments? If not, what would dropping 35K on your current mortgage do to the amount of interest you are paying? By that I mean each month you pay interest and principal. Will the 35K drop that interest portion down to the same level as the refi interest amount?
All that you're really giving up is access to the cash, and the possibility of walking away from the mortgage; that probably isn't really your right, but you might be able to get away with it in a negative equity situation.
shadyj said:Do you need to reduce your monthly payments? If not, what would dropping 35K on your current mortgage do to the amount of interest you are paying? By that I mean each month you pay interest and principal. Will the 35K drop that interest portion down to the same level as the refi interest amount?Since the refi will reduce the interest rate in addition to cutting that amount out of the principal, clearly not. Right?
If they're looking for a LTV of 80% that suggests you probably have 25K in equity as it is... so walking away is expensive (if that is even in your mind).
Shady is right about weighing your job security/etc.
1% rate reduction is $200/month less interest on a 240,000 loan... plus you've got $35K (your extra payment) effectively earning 5% for the life of your mortgage instead of what you can make in liquid accounts (~1.7% or ~4% w/ rewards checking).
If it were me and I had some confidence in my employment situation I'd probably pull the trigger and do it.
The interest rate comparisons aren't direct. You have to pay taxes on the 1% you're earning on savings. The money you pay on interest on your mortgage is tax deductible, meaning you pay that with pre-tax money and therefore the effective rate is lower. Probably too picky to bring into the analysis with rates this low.
Do it but make sure that at least 6 months expenses are in liquid assets after the dust settles.
Looks like you are doing a 30 year fixed. Do you plan to stay in this house for very long?
If you have short term outlook (means you will sell the house in 1-3 years), there is no point in paying 5% rate for the security of fixed payment for 30 years. Get a 3 year ARM at 4% and save some money.
VanceWade said:The interest rate comparisons aren't direct. You have to pay taxes on the 1% you're earning on savings. The money you pay on interest on your mortgage is tax deductible, meaning you pay that with pre-tax money and therefore the effective rate is lower. Probably too picky to bring into the analysis with rates this low.
This is a common misconception.
Let's say you either pay down mortgage @ 5% or you invest in savings at 5% and we're talking about 100K, and tax rate (state + fed) of 40%.
Mortgage: $5,000 less interest, but you lose a $5,000 tax deduction & hence $2,000 tax savings ==> net savings, $3,000.
Savings: $5,000 interest earned, but you have to pay taxes on it - 40% is $2,000 ==> net savings, $3,000.
needdealsnow said:Do it but make sure that at least 6 months expenses are in liquid assets after the dust settles.
Looks like you are doing a 30 year fixed. Do you plan to stay in this house for very long?
If you have short term outlook (means you will sell the house in 1-3 years), there is no point in paying 5% rate for the security of fixed payment for 30 years. Get a 3 year ARM at 4% and save some money.
Going with a 3 yr ARM seems risky to me since the OP apparently has less than 10% equity at the moment. If values continue to drop in the area and rates climb over the next 3 yrs, OP would be in a bad spot.
And question for OP, you say "no closing cost". Are you certain that some transaction costs are not being rolled into the principal? This was typically the case when companies like Countrywide marketed "No Cost Refi's" a couple years ago. It seems odd that someone wants to refi your home for literally no cost. If so, what's the company's name?
If there are any costs, you have to factor those in, especially if you don't plan on staying in the home for the long term.
companies offer different options and you can decide what you want. for example when i was refiing, i had these choices: a. 3.75% 0 points and $2500 cost b. 4.125% -1 point and $2500 cost
that -1 point neatly balanced the refi cost for me.
So it is not exactly free. but no OOP expense upfront gives you flexibility in short term rate movements. if another rate makes sense 2 months down, you can take it without thinking twice.
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