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Help a Reader: Move Forward With Mortgage Refinance?

This article was written by in Debt Reduction. 6 comments.

Yesterday I received an email from a Consumerism Commentary reader who has a question about her mortgage refinancing options and is looking for advice. I tend not to offer too much personal advice, but I responded with some thoughts and offered to open up the discussion to other readers. Please read through and see if you have any thoughts for Heather. Please feel free to leave a comment after this post.

Hi. I’m a long-time reader of your blog, occasional commenter, and I thought you might have an opinion. My husband and I are looking for advice.

We paid $319,900 for our house almost four years ago. We put $120,000 down and got a 30-year fixed at 5.875%.

We were looking at refinancing and were offered 5% with one point, making the total loan around $196,000. We anticipated our house currently being worth roughly $220,000. Using the Fannie Mae Refinance Plus Program, since we did not previously pay mortgage insurance, we would not need to again.

Our appraisal just came in at $190,000. If we want the same rate, we’d now need to pay 2.3 points, which would put our loan at roughly $198,700, which is both a much larger up-front cost but more distressing, it immediately puts us upside down.

We’re not sure if this is still a good decision. Do you have any thoughts?

I initially responded to Heather some additional questions to clarify her situation. Here are more details.

Q: Do you intend and reasonably expect to stay in the house or do you think you might sell and move within the next few years?

A: We are reasonably planning to stay in this house. (In my ideal world, we’d move closer to where I work, but in real life, after having lost so much value and sinking $60K into structural repairs, we’re not going anywhere.)

Q: Are the monthly payments unmanageable with your current mortgage?

A: Our monthly expenses are not unmanageable at all. Besides the mortgage, we have one car loan and one student loan, but no other debt. Both of us are teachers, and both of our districts both gave pay cuts and increased copays/deductibles. So while expenses aren’t necessarily going up, our income went down. My husband decreased his 457 contributions, which I didn’t agree with but it was a fight not worth fighting.

Q: How do you intend to use your freed-up cash flow (such as invest, pay other bills that are being neglected, save, etc.) if you don’t mind sharing.

A: At this point, the $120-ish per month that we’d save would really allow us not to cut back as much. I have a few side interests that I’m hoping will turn profitable, but in the short term, I can’t count on that at all. (I’m good with ideas and with doing, but I’m not good at marketing/selling myself. Working on it.)

Also, we gave the nice refi guy $495 to lock the rate and get the ball moving. At least $350 of that is not refundable, as it paid for the appraisal. I don’t know at this point if the remaining $145 is refundable or not.

We need to get him an answer in the next couple of days, as far as I know.

Happy to answer any other questions as wanted/needed.

Do you have any suggestions for Heather? Please feel free to leave your thoughts in the comments.

Published or updated September 9, 2009.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 6 comments… read them below or add one }

avatar 1 Anonymous

I would leave well-enough alone, unless you are going with a 15-year, which does not seem to be the case. Try increasing your principal payments instead…. If you can send an extra $50 – or even $20 – (principal only) every two weeks, you will reduce your principal that much quicker, and pay less in interest as well.

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avatar 2 Anonymous

The other information that is missing is what is the total of the other closing costs in addition to the points. So the points cost about $4500 (maybe a little less). Closing costs could typically be about the same. If that were true that means an up front layout of cash of around $9,000 (it doesn’t matter if they are rolled in the loan or not, its money gone up front).

So to save 7/8 percent on an approximately 195,000 loan saves about $1700 in the first year and will be close to that for a number of years. So that would mean if there were another $4500 in closing costs it would take almost 5.5 years to break even on the refinance from an equity standpoint.

There are other considerations such as the extra cash flow it frees up but unless that is of high importance then the 5.5 years to break even is the major decision point. Unless you are nearly 100% certain that you would be in the house for atleast 7 or more years then this would just not make any sense from an equity stand point. If you knew that you would be there for 20 years and would not expect to be making any extra payments then it would be a very good idea.

All things considered I suspect that from an equity standpoint this is likely not worth the risk. 7 years is a long time and even if you do stay long enough, the amount you would gain won’t be significant until you get out to 10+ years.

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avatar 3 Anonymous

5.875% is not a bad rate. I don’t think I’d refinance. It sounds like their closing costs would be fairly high with the points and fees and they are only getting 0.875% less on the interest. Plus it sounds like they are going to go to a 30 year which would mean they’d be making their mortgage payments an extra 4 years compared to their current loan. I think in the long run refinancing and paying it off in the 30 year period would end up costing them more in the long run. If they threw their numbers into a “should I refinance?” calculator, it will probably tell them refinancing will cost them more in the end.

I’d find other places to cut some costs.

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avatar 4 Anonymous

As a rule of thumb I wouldn’t refi if the rate is less than 1% difference.
I also think closing costs should be equal to or less than the difference in payments x 12.
In this case $120 x 12= $2400.
I’m guessing closing costs would be more than that.

I’d stick with the current mortgage and look at other ways to cut expenses or make more. Even people that are bare bones on expenses can sometimes find enough “fat” to save $120/mo.
Shopping for auto insurance, cancelling subscriptions, getting rid of eating out, etc could all be considered.

Good luck!

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avatar 5 Anonymous

I completed my refinance 7/31/09 and started the project 12/15/08. Great credit, money in the bank, no money out, lots of equity, wife and I with good stable jobs. Turned down 4 times, paid for 3 appraisals. Finally got a re-fi from 6% to 4.875. If I was in your situation, I sure wouldn’t go through that hell again for a $100 or so a month in savings. Never mind paying $10,000 on top of it.

It’s a nice feeling to have a bit lower interest rate, and good to have $100/mo more, but the new Obama re-fi rules will kill all of those gains. You have to get new appraisals every time you are turned down or object to the mortgage companies outright lies, and closing costs are wildly unpredictable.

You need to take the advice of Suze Orman and Dave Ramsey and cut your expenses drastically and stock pile cash. You might soon will be living on only one income.

You’ve done great managing your finances up to now, don’t blow thousands to get bragging rights on a half percent interest rate.

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avatar 6 Anonymous

Thanks for your thoughts. We had been leaning towards ‘no’ anyway and this helped us feel more confident that we were making a good decision.

@Jim: we did crunch the numbers originally, and with the first offer, we would have saved both short term and long term. We never re-crunched them, though I couldn’t tell you why…

@Maurice: unless one of us is incapacitated, we won’t be living on one income for at least another nine months — we’re both contracted teachers.

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