Should I refinance when I currently pay extra every month?

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Currently I owe $ 92,000 on a house worth $ 130,000 at 6%. The mortgage is $ 600 and we pay an extra $ 150 every month.

Should I refinance to a 4.875% for a $ 103,000 loan (I would like some money to repair a part of my house). There are lots of refinance calculators on the internet but none of them tell you how much the “extra payment” will help. The cost of the refinance is $ 1,500 and it would save us about $ 50/month which we would then add back in to the “extra payment” we make, so the mortgage would be $ 550 + $ 200 extra per month.

Thanks. The reason I don’t want a 15 year loan is because we are thinking of having a child soon and don’t want to be locked into that higher monthly rate. By paying extra we can stop if we need to.
Toni – I put 24% down so I’ve never had PMI. If you look the 103K is to keep to loan-to-value at under 80%.

  1. Reply
    Stupid Flanders
    May 18, 2011 at 12:38 pm

    I would say for you to definitely refinance.
    However, the smarter move would be to re-finance at a 15 year loan at a rate of about 4.375%. and forget about making ‘extra’ principle payments in a deflating housing market.

    Your payment would be about $ 250 a month higher, but it will save you $ 56,000 in interest over the term of the loan.

    I assume the whole point of you paying extra principle is to lower the amount of time it takes to pay off the loan, right? The 15 year loan takes care of that, in itself. It also puts more of your payment toward the principle so you are in a better position to sell (if you need to) in a few years.

  2. Reply
    May 18, 2011 at 1:08 pm

    Consider taxes too. If you refinance, your house can be reassessed at it’s current value. Depending on where the value of your house is compared to when you bought it (Hopefully up) it might impact your decision.

    I have the same approach you do, I pay extra on my mortgage every month at *my* option.

  3. Reply
    May 18, 2011 at 1:19 pm

    You are very smart to question whether or not it is worth refinancing. You don’t owe a very large amount and you are already prepaying every month.

    There are a few things you need to consider. First, how much will your closing costs be? How long will it take you to pay off the closing costs? Will you be in your home long enough to satisfy the closing costs versus the savings in interest.

    There is a lot of conflicting ideas about this stuff. Some advisors say the rates are so low, you shouldn’t ever prepay your mortgage. Instead you should invest your extra money because interest rates will keep going up. I am starting to think this is the right train of thought too. The only exception will be if the government takes away our mortgage interest deduction.

    I faced the same dilemma as you a while back, and in the end I refinanced. You need to really analyze the numbers and decide what is most important to you. If you repair your house, it will enhance the home’s value and you will get to enjoy the fruits of your investment.

    Good luck!

  4. Reply
    May 18, 2011 at 1:42 pm

    That re-fi quote of only $ 1,500 does not sound right.
    Sometimes companies offer these “low-offers” but the costs are well hidden.
    Re-fi costs about 4% to 6% of the value of the loan on average.

    Money Magazine had an article:
    Do not refi unless you can get 1.93% lower interest rate.
    And you must make sure you will live in the house for 5 to 7 years.

    I would stop making extra payments towards the house, and build up a savings account to pay for the repairs in the home.
    Also, if you don’t have 20% equity for that re-fi, you will also be hit with PMI.
    PMI is nasty as you know. it does not go towards principal, interest, and its not tax deductible.

    Do you know if you are currently paying PMI?
    It does not come off by itself sometimes. You have to request it.
    My dad paid it for 10 years, even after he had 50% equity in his home – he had to ask for it to be removed.
    This could save you some serious money.
    Look at your statement, and see if you have 20% equity built up, and get that PMI removed.
    If you are close to 20% you will need to pay for an appraisal.
    But it you are over 25% to 30% equity – they may remove it without.

    Also that article sated to re-fi for a LOWER term of years.
    Re-financing for another 30 year if you currently have a 30 year is a bad financial move !!!

  5. Reply
    May 18, 2011 at 1:49 pm

    I would agree with the refinance of your mortgage loan. However I would still get a 30 year mortgage loan and continue to add the extra monthly payments to the monthly mortgage payment.

    Going to a 15 year mortgage would offer no flexibility on your part if you would want to make a decision to use the $ 200 for other uses. With the 15 year mortgage you would have no option of not paying the $ 200 per month extra.

    Therefore do the refinance, make the necessary repairs or remodel your home, but take the 30 year mortgage and retain your option of paying the extra or not per month.

    You might consider placing the extra $ 50.00 in to a savings account each month and still paying the extra $ 150.00 per month thus doing two things at once. Adding to your net worth with the $ 50.00 savings and reducing the mortgage debt.

    PMI is a tax deductible item to certain individuals in certain income tax brackets, how ever it appears as if you are below or at 80% of the property value.

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

    “FIGHT ON”

  6. Reply
    Spock (rhp)
    May 18, 2011 at 2:12 pm

    in the present economy, you’d do well, imo, to maintain flexibility as much as possible. no one knows when a stint of unemployment or a wage cut may be coming. Even government employees are going to be feeling the pinch here within a year.

    the way you find out how much it would take to pay off your present loan is to call the servicing company and ask them. the telephone number is in your paperwork, or the notice they sent you if the servicing company was changed.

    that leaves the repairs — do they need to be done soon? decorative repairs might well be put off in this economy in order to preserve funds. however, a leaking roof does need to be taken care of.

    the refi still makes pretty good sense. If you could lock in 4.875%, the interest savings on 90,000 owed would be just over 1,000 a year. since your refi cost is thought to be 1500, this is worth doing. you’ll get your money back in only 18 months and be saving after that.

    unless you’re very sure you’re not going to be laid off or have to take a pay cut [or an increase in your benefits cost — remember family health care coverage [baby] could easily reduce your income by $ 250 a month or more [ask the health insurance people at your employer(s)], I’d think about ceasing to pay extra on the mortgage and instead put that into a savings instead.

    if hard times come to you, you’ll need the cash and you can’t skip making the payment on the mortgage. paying extra ahead of time doesn’t let you skip paying on the mortgage — ever.


  7. Reply
    May 18, 2011 at 2:21 pm

    Most people I’ve seen here say not to refi unless it’s going to save you 2% or more. However, if you want a cash-out for repairs, that’s another matter. I think it’s a good thing to make certain improvements and to maintain the property, in general.

    On a 30 year note, as everybody knows, one additional payment per year will save you 7 years on the payoff. If you can’t calculate the effect of the extra $ 50 online, you can buy a TI BA 2 calculator that will amortize it for you.

  8. Reply
    Beverly S
    May 18, 2011 at 2:40 pm

    I would in your position since the fees are only $ 1500.00 & you need money for repairs. I recently went from a 20 year loan at 5.625 to a 15 year at 3.75% (under 80% so no PMI) & my payment went down. Actually I would see if you can’t get a slightly better rate than 4.875%. I just locked a cash out refi this morning at 4.5%… Good luck!

  9. Reply
    May 18, 2011 at 3:32 pm

    Since you are borrowing additional money for home repairs, that makes more sense to refinance. Simply refinancing the balance would take at least 36 months just to break even on your fees. If you continue to pay $ 750 on your current loan it will be paid off in 191 months. With the new loan $ 750 will pay the loan in full after 201 months so essentially you will pay $ 7500 additional 16 years from now in exchange for $ 9500 today. The other factor to consider is that if you borrow the $ 9500 for repairs through some other means, how much will it cost? It isn’t likely you’ll get it for 4.875% fixed for that length of time. I also assume that with a child coming you probably want to at least maintain your current levels in your savings accounts rather than pay for the repairs out of pocket.

    $ 1500 is unusually low for closing costs. In my area the appraisal, title and recording fees can easily cost that much before my company charges a thing. Even if your costs are $ 1000 more it still appears to be a good plan for your situation.

  10. Reply
    May 18, 2011 at 4:09 pm

    you have to see how many months it will take with th lower payment to pay back that $ 1500 refinancing costs and then decide if it is worth it and if you will be staying in the house long enough to recoup that cost – do you expect to be there more than 30 more months? because it will take that long to break even

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