Is it smart to refinance our mortgage(s)?

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Our house value is around 300k (just one year ago it was 347k) We have a 5/1 interest only mortgage due for change in April 2011 – interest is 6.467% and balance 181k. Also, we have home equity loan with balance 81k and interest 5.99%. Monthly payments for both (including escrow for taxes and insurance) are $ 2800. I could possibly refinance getting 4.85%, 30 years fixed with 0.650 points, all fees and closing will be around $ 4500 and I can combine both mortgages together for one payment. We would like sell our house in about 2 years from now maximum, maybe less providing real estate market better conditions . Do you think that we should go ahead with refinancing or not? All input greatly appreciated. Thank you.

4 Comments
  1. Reply
    wealthkeeper
    May 2, 2011 at 5:58 am

    absolutely !!!!!!
    get a fixed rate as soon as possible and do not borrow extra at this time

  2. Reply
    chatsplas
    May 2, 2011 at 6:09 am

    Interest only loans are NOT a good idea. This means you are NOT creating ANY equity with all your payments, only paying interest–might as well be renting. And you have way too much debt on this house. Combining everything into one loan is a good idea, but doubt if you can still get an interest only nowadays–and NOT good idea in this economy. And if you’re selling house in two years, not sure you recover your re-fi costs.

  3. Reply
    loanmasterone
    May 2, 2011 at 6:19 am

    In the two years that you sell your house for would you get back what the refinance cost you with points and fees for the refinance.

    Your current interest rate is fixed until 2011 which seems to cover the 2 years in which you are gonna remain in the house before selling.

    Will this refinance save you any money by reducing your monthly mortgage payment on your two current mortgages?

    I don’t know if the real estate market will change in the next 12-18 months, but that is a call you will have to make when the time arrive.

    I hope this has been of some use to you, good luck.

    “FIGHT ON”

  4. Reply
    Steve D
    May 2, 2011 at 7:14 am

    Running the numbers real quickly, you actually end up costing yourself about $ 900 if you refinance. Here’s why:

    Since you are interest only for the next two years, (and without running continuous compound interest), your current mortgage should cost you about $ 23,350 in interest for that time. Your second mortgage at the rate you gave is going to be another $ 9,720 in interest (I didn’t take into account any paydown of principal which would actually lower that figure – but I figure it a wash with the additional compound from the first mortgage). So, over the next two years, you will pay about $ 33,069 in interest if you do nothing.

    If you refinance and combine the two mortgages into one, at the rate given, you are talking two years of interest that will total $ 25,042 (I used the mortgage/amort calculator at bankrate.com). Add in the closing costs of $ 4,500 and the points of $ 1,709 and you get total costs of $ 31,251, which looks like a small savings. However, the new mortgage (assuming the appraisal is correct at $ 300,000) puts you $ 2,000 over the 80% loan to value ratio needed to avoid PMI which will be another $ 113 a month. Assuming you roll the entire points and closing costs into the new mortgage (which will increase the interest also, but I am ignoring that), you won’t get below the 80% mark where you can drop PMI until after the 2 years is up. So, PMI for two years will add up to about $ 2700, putting you at 2-year costs of almost $ 34,000, compared to the roughly $ 33,100 you would pay out now.

    If you don’t roll the closing and points into the new mortgage, you would be able to drop PMI in about 6 months, meaning you would spend only $ 678 on PMI and end up saving about $ 1,000 over the next two year. If you can come up with an additional $ 2,000 down, plus closing, plus points, that would drop PMI altogether (plus lower your interest a bit) and save you about $ 1,7000.

    Of course, if you sell much before the 2 years, the refinance will almost certainly cost you money.

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