Refinance? Hold On? Lower payment? Can’t decide?

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I have a house in LA that was worth 1.2 ml a couple of months ago. I owe about 950 on it (second mortgage). my payments are about 6500 every month. My friends tell me to refinance, lower my payments and maybe let go of the house since the prices will drop even in the next two years. I will have prepayment penalty with that one. I also have anothe option of refinancing and getting about 100,000 cash but my payments will go up to 8000 a month, no prepayment penalty, interest only loan. I am very confused. I hate finance, but I don’t want to get stuck with a mortgage that is higher than the price of the house. Are there any fortune tellers out there that know what will happen to this housing market and should I stick it out with my house?

  1. Reply
    May 1, 2011 at 2:37 am

    It depends a lot on what your plans are for the next 5-7 years!
    If you are likely to stay put, hold on until the interest savings on a refinance makes mathematical sense or the prepayment penalty period is overcome . But if not, I suggest you sell as I believe your friends are right about the housing prices dropping even more in your market, but will likely recover a few years after. But, that is easier said than done because everyone and their brother are facing the same dilemma as you are.

  2. Reply
    1 Hr Bookkeeper
    May 1, 2011 at 3:33 am

    The question is, will you need the $ 100K for anything? If you think you might, or you might like to have that money for an emergency, refinance and take cash out. Obviously, you can afford the $ 6,500 payment, so the $ 1,500 difference will be supplemented by that $ 100K and get you through more then the next two years.

    Since housing is dropping right now, it’s a good idea to get the loan while the value is up. This gives you more power and will help you get through the difficult down phase of this real estate period. If you wait, you won’t have the option next year…but in a couple more years, you’re equity will be back up.

    If you don’t like the idea of paying $ 8K a month right now, then refinance for what you owe and bring your payment down. It will go down because you owe much less then what it’s worth. After, get a Home Equity Line of Credit (HELOC) on the balance. Then, you can borrow the money whenever you need it and only pay interest when you borrow the money.

    Hope this helps.

  3. Reply
    curious george
    May 1, 2011 at 3:38 am

    I have to agree with your friend. You should either refinance to lower your payments and lock in a low interest rate, or sell your home. When the real estate market is falling, on average it takes about 10-15 years for a recovery. With that in mind, unless you’re planning on living in your home for 10+ years, you could end up selling it for much less than 1.2M.

    Do you need that 100,000 cash? If you don’t need it, don’t put yourself deeper in debt.

    I’d recommend that you shop around for a broker/lender and compare the different terms they give you.

    Things to keep in mind:
    -Get a fixed rate. This way your payments won’t go up.
    -Stay away from interest only. These loans have temporarily low payments in the first year or so, but your payments shoot up afterwards. The vast majority of people who get these loans forget about the hike, get used to spending the extra cash, and get screwed when the payments shoot up. That, and you aren’t paying off the principle so you won’t have equity in the home.
    -By shopping around you can reduce the chances of meeting a crappy broker/lender who tries to charge you more. A fraction of a percent difference in interest rates is a big chunk of cash for unscrupulous brokers/lenders that will come out of your pocket. Compare interest rates and pick the lowest one to save yourself money.

    If you need a broker recommendation I know that has partner brokers who can help you with selling your home, refinancing, or developing a home equity loan or line of credit.

    Hope that helps and best of luck!

  4. Reply
    May 1, 2011 at 3:59 am

    If you hate finance so much, look up financial advisers in the yellow pages. Do some research to find a reputable adviser. This is way too complicated to fully answer here. Briefly, you have to add up the costs involved with doing the refinance for each of the ways available to you and then choose which is best for your financial position. The financial adviser can help you with the calculations and not miss any of the details which are critical to making the decision,

    Why do you want to take out 100K in equity? What do you need the money FOR that you are considering 8K per month in payments? Interest only, variable rate loans are what caused the housing market to drop a bit and foreclosures to rise. People living paycheck to paycheck went into debt and then a couple of years later, the sper low rate starts rising and they end up robbing peter to pay paul and eventually default on the mortgage. Anyone can be caught with a loan bigger than the value of the house if the market drops. I’ve always wondered about lenders who offer to loan you 125% of the value of your house. It makes NO sense to me why people would WANT to borrow more money than the house is worth, and then what do you do if as is happening now, the market drops? Best to have the lowest mortgage at the lowest rate and pay it off as fast as you can. Be sure any loan you get has no prepayment fees or penalties. You can see the problem since you have one which has a prepayment fee. Prepayment fees and penalties are there to compensate the lender for future interest income the lender loses when you pay the balance early. One way to avoid the prepayment penalty is to simply include extra to apply to principle. This pays down the balance sooner than if paid by the schedule and the loan concludes early without incurring the penalty. You can turn a 30 year loan into a 10 year loan by doubling up on the payments and applying the over amount to principle.

  5. Reply
    May 1, 2011 at 4:41 am

    My crystal ball is murky about what the future holds, but I’ll give you my opinion.

    Ask yourself… can you afford it? do you like your home? do you plan on moving in the near future (2-3 years)?

    If you can’t afford it you have to do something, selling is the only logical solution. DON’T refi into an interest only situation… eventually you WILL get burned.

    If you can afford it and don’t plan on moving in the near future, even if you don’t like it hold on. Markets are cyclical. Even real estate. If the housing crunch gets worse prices may drop over the next several years in your area, but they will eventually rebound. If your mortgage is higher than your home is worth, but you like your home and aren’t being relocated, don’t worry it will rebound. (This is what I would do)

    If you know you’ll be moving in the next year or 2 it may be best to sell if you believe your market will decline further.

  6. Reply
    W. H
    May 1, 2011 at 5:24 am

    The best thing to do is talk to an advisor. With refi-ing u could send 10s of 1000s of $ $ s just on closing cost alone. PLease in the higher a,ounts, prepenalty can kill you. Also if prices are going down, the price u get for your house will go down. Also, some of the more exotic loans might save u money a month now but in 6 months may cost you more. Intrest only loans are dangerious. You may end up witha loan higher then what you can sell it for. Talk to an advisor, they can look deeper into where you’re at and where you want to go. And yes 100k sounds nice, but u do have to pay it back. If you invest it into the home and are willing to sell down the road that may work.

  7. Reply
    vincent t
    May 1, 2011 at 5:43 am

    Sell, Sell, Sell, the housing market is for buyers right now. If your planning on keeping the home take as much cash out of the home as you can because I guarantee your home today at 1.2 won’t be worth a million this time next year. Make sure you take the cash you get an invest it wisely to make it worth your time refinancing.


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