Refinance Help

bubbamommieFebruary 5, 2008

I'm a long time reader of the home and garden forums and I know a lot of good advice gets exchanged, so I'm asking for some opinions and advice from you good people. I am sorry this is so long!

We are currently looking into refinancing and I'm having a hard time deciding what to do. This is our first home and our first time refinancing so we are afraid to take the leap and make a decision we might regret.

In lieu of overexplaining why we got such loans and rates in the first place - here is what we currently have:

1st mortgage - 6.75% on a 30-year fixed (balance is $170K)payment is $1182.00

2nd mortgage - 9.00% for 15 years with a balloon payment (balance $44K)payment is $385.00

We want to get rid of the 2nd and get a lower interest rate overall to lower our monthly payments. We do NOT want to cash any out as we have very little equity.

The house was purchased in 2005 for $225K and due to market conditions now, it might be worth $250K if we're lucky. We've made lots of improvements but homes just aren't selling in our area (SW Washington) So....

Our loan to value ratio is roughly 88% - so we're not in an ideal position for refinancing - but we both have excellent credit and very low debt to income ratios - so we feel like we should be able to get a much better deal than this.

One offer we received was for 6.32% with no PMI and only $1150 to close (yes it's a legit offer). So with this we would lower our monthly payment by $196.00 and not add thousands in closing costs onto our mortgage balance. We would also get a $300 Costco card from the deal.

Other offers we got are pretty standard, anywhere from 5.5% - 6% with points of course, and we'd have to pay PMI until our home reaches 80% LTV. With paying points, our closing costs will be on average $4,000+ - which we would be tacking onto the mortgage balance (we don't want to come up with that much cash at closing).

Whew - I apologize, I know this is long!

Our Dilemma:

1. If we take the first offer, which sounds fairly good to us, we would have to refinance again once our home reaches the 80% LTV, this could take a long time, and who knows what interest rates will be by then.

2. If we take on of the other offers, we'd have to pay PMI until our home meets the 80% LTV. Also our closing costs will be much more.


1. Would it be better to pay PMI until we have enough equity, or pay the higher interest rate with no PMI? The payments would be roughly the same either way.

2. Should we just wait and see if interest rates drop further?

And finally, does anyone have any recommendations on banks or lenders that they have had positive experiences with in the past?

A HUGE THANKS to anyone who read this and weighs in!

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I don't have a suggestion for you, however, you may not be aware that PMI is now deductibe as interest (this is a very recent change), so you might want to factor that into your number crunching.

Also, I'm wondering if you've considered talking to a mortgage broker...

Just throwing out a couple of thoughts...

    Bookmark   February 5, 2008 at 6:27PM
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Congrats on providing enough information to answer your question!

Grandma makes a good point. Shop hard for the best mortgage rate!

The simplest way to deal with your dilemma is to choose the fixed mortgage that with zero closing costs and the same term (30 year, 15 year, or 10 year) results in the lowest monthly payment. Include any incentives such as the value of the Costco card in your calculation.

    Bookmark   February 5, 2008 at 8:18PM
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Chemocurl zn5b/6a Indiana

1. If we take the first offer, which sounds fairly good to us, we would have to refinance again once our home reaches the 80% LTV, this could take a long time, and who knows what interest rates will be by then.

I'm curious as to why you would have to refinance then.
Have I missed something?


    Bookmark   February 5, 2008 at 8:44PM
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I believe PMI is only deductible for those with incomes less than 100,000 AGI.

    Bookmark   February 6, 2008 at 8:42AM
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8grandma - Yes I just decided to talk to a local mortgage broker sometime this week, I think it would be easier to let them weed thru the offers! I was not aware that the PMI was deductible.

Sue - I guess we don't HAVE to refinance again - but once our home reached the 80% LTV I imagine we could get a much better interest rate, so it's something we would consider doing once that happened. We just don't like paying a lot of interest, we keep our credit cards clean each month and are down to one car payment for another year. Just trying to put us in the best financial position possible.


    Bookmark   February 6, 2008 at 3:53PM
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Why couldnt you get a standard 30 year first, get it to the best possible rate you can and then pay down the 2nd and have them suboridinate the rest of the balance to the first?
You would eliminate PMI have a much smaller 2nd mortgage. Sometimes it is worth it to pay points, if you plan on living in your home for quite awhile. Talk to a broker and have them work up payments on a loan with points and one without.

Good Luck!

    Bookmark   February 6, 2008 at 5:18PM
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I would look some more. We are about to refinance and contacted our mortgage broker from when we bought the house. He is getting us a 5.5% 30yr. with little bit of closing costs that will be factored into the loan(like $300 for the appraisal)and I don't think we have PMI. We are saving several hundred dollars a month with nothing out of pocket. I think you can find a better deal if you contact a broker. I did call around to lenders and did not get this good of a deal from them and some wanted thousands in closing costs.

    Bookmark   February 6, 2008 at 7:52PM
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tishtoshnm Zone 6/NM

Of the options presented I can't tell you which one is best but one thing to consider is that with a refi, the 2nd mortgage will then be spread out over 30 years. I think one excellent idea would be that once the car is paid off, that you really hunker down and try to wipe out the 2nd mortage with extra payments and eliminate it all together. That is the plan in our household.

    Bookmark   February 12, 2008 at 6:31PM
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Hi Bubbamommie,

A) as advised above, if your AGI (adjusted gross income) is under $100,000, you can deduct PMI, and you'll actually have a lower total cost of leverage by doing a single loan with regular PMI,

B) Instead of randomly shopping retail, and asking "what can you offer me".... instead, set your OWN conditions of satisfaction... a "target" loan rate, term and closing cost structure... then find yourself a good, trustworthy BROKER and tell them you are willing to pull the trigger IF/WHEN that particular broker can find and/or negotiate that target deal with their wholesale banking resources.

Be in control... stop drifting around whatever retail advertisers you might randomly find.

Dave Donhoff
Strategic Equity & Leverage Planner

    Bookmark   February 12, 2008 at 7:25PM
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Thanks Dave!

Great advice, I started working with a broker this week and plan to do just that.

We realize that although we're dealing with a higher LTV ratio, we have excellent credit scores and are otherwise financially stable, so we aren't going to settle for a sub-par offer this time around.

Right now we're waiting to schedule an appraisal to see where we stand on our home value.

    Bookmark   February 13, 2008 at 12:49PM
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Just posting a follow up - we were quoted a decent rate from a broker which would lower our payment $200 a month, great right?

No - the closing costs total $8,000 which they would add to our loan making our mortgage balance $3,000 higher than the purchase price of our house! Who in their right mind would do such a thing?

I politely thanked the broker for her work and declined. She took off $1,000 - leaving the fees now at $7,000.

Basically we are going to wait until the market heals - who knows how long that will be. But currently our home value has declined 10K in the past year, leaving us at a 92% loan to value ratio - not good.

I've learned a lot of valuable information in the process.

    Bookmark   February 14, 2008 at 3:29PM
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Sounds like the Fed may lower rates yet again. You could always wait to see how much lower they take it, but rates are really pretty low right now as it is. Personally, I have decided to do a refi on my mortgage, as i have a rate of 7.8% on a 30-yr mortgage. My new rate will be 5.6% on a 15-yr mortgage. My monthly payment is only going up $100 a month, plus I'm getting an extra 5 grand out in cash to make a few repairs around the house that we've been needing for a while.

It's a great time to refi folks!!

    Bookmark   February 29, 2008 at 11:08PM
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There have been several interest rate reductions recently, and I don't think that we've seen the bottom of the mortgage hassles yet, so there could be more reductions in the cards.

Especially since this is an election year and the gov't. folks will want to keep things running as smilingly as possible until Nov.

How do you react to the idea of saving those ancillary costs and paying them upfront, if they turn out to be required, as adding them to the mortgage amount will mean that you go on paying on the increased amount for 15, 30 years?

Are you finding it onerous to pay the current rate?

My opinion is that it would be best to keep paying at that level, if possible, for reducing the monthly payment extends the time of paying by a substantial amount, especially since only a small amount annually in the early years goes to reduce the principal amount, as the current interest cost on that large debt is so high.

Dave doesn't seem to agree, but quite a number of people feel that, so long as one has some cushion to tide one over emergencies, it's a good idea to make extra payments, as the contract allows, to pay down some on the principal annually, as far as one is able, for reducing that principal owing means that a smaller amount of the monthly payment must go to pay interest in each future year, resulting in the mortgage being paid off much earlier.

I hope that you are pleased with your choice, throughout the life of the mortgage.

ole joyful

    Bookmark   March 1, 2008 at 1:44AM
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