Should we refinance?

rich69bApril 29, 2014

Hello. I need your input, guys. We're trying to refinance a rental property, and the appraisal came in lower than we expect it to be. FYI, we don't have plans of selling it in the next 5 years and we have the money to pay down the balance (13K). Out of pocket cost will be $3500, give or take.

This is from the lender (copied and paste) Any thoughts? Thank you in advance.

Attached you will find a copy of your appraisal. The Loan to Value Ratio is at 78% LTV. Originally we thought the value was $410,000K it came in at $390,000.00. The lower value brings are LTV from 74% to to 78%. Guidelines for Fannie Mae require that investment properties are at 75% LTV or less. In order to make this loan work we need to bring the first mortgage down to $292,500.00 and no more. Current payoff is $306,215.00, this means in order to do this as one loan, we need to have you bring in funds to close in the amount of $13,715.00 at the close of escrow.

We would like to know f you are able to bring these funds in for closing� With the new loan amount your payment actually drops to $1503.86, vs 1568.13 which is -$64.17 lower monthly which is good for when you�re going to be buying your primary residence.

It saves a total of 23,101.20 in payments in 30 yrs. Therefor by paying down 13,715.00 to bring the balance down, (23,101.00-13,715.00=9386.00) it actually saves you $9,386.00 in additional interest over the life of the loan.

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Is the $13k the only savings you have? In other words, would bringing it to the closing table wipe out your cash reserves?

    Bookmark   April 29, 2014 at 10:15PM
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No, it won't wipe out our cash reserves. I'm just wondering if it's worth to refinance if we'd only be saving 23K for 30 years. I actually thought it will be way bigger saving than that. Maybe I'm not understanding it ð³. Although it would free us $500 a month like the lender said, which will look good when we buy a house when we go back (we're overseas right now).

    Bookmark   April 29, 2014 at 11:11PM
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I think your lender is just writing this in a confusing way.
What he's trying to say is:

They can't do the loan unless it is at 75% LTV or less, per Fannie Mae.

They thought your property was $410K, so 75% would have been $307K--all good. For that loan (Loan A), you would have paid $1568 per month.

Instead, property is only worth $390K--no dice. Loan needs to be no more than $292,500. Payment for that loan (Loan B) is $1504 per month.

By bringing the $13K to the table to do Loan B instead of Loan A, you save $23K in payments over the life of the loan (because the loan is for a smaller amount and there is therefore less interest). This is how much you're saving from Loan A to Loan B ($64 x 360 payments)--*not* how much you're saving over whatever you're currently paying.

What you're saving overall is $23K *plus* whatever you already thought you were going to be saving by refinancing in the first place. You'd multiply your current monthly payment times the number of payments remaining in your current loan and then subtract $541,389, which is the total you would pay over the life of this new loan. You'd pay that much less overall, and it will cost you $13K plus the loan fees ($3500?) Then see if that math makes it worth doing. Does that make more sense?

We were in a similar position a few years ago and did decide to bring money to the table. No regrets whatsoever--it dropped our interest rate and total payments over the loan term considerably. It really depends on how far into your current loan you are and how much your interest rate will change, though. Good luck!

    Bookmark   April 30, 2014 at 12:40AM
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Ditto Artemis's post.

We can't advise on what you'd save because you haven't told us about the current loan you have on the house. What is your current loan's interest rate? How many years are left to pay on it?

Compare that to this new one.

    Bookmark   April 30, 2014 at 12:56AM
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OMG! That makes more sense! Thank you, Artemis! And thank you allðÂÂÂ.

Current interest is 6.5%, and still has 22-23 years left. Balance is 306K. The proposed interest rate is 4.625.

    Bookmark   April 30, 2014 at 2:59AM
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WIth the refinance costing $3500 and a monthly mortgage difference of $500, if you own the home longer than 7 months the refinance will pay for itself.

As long as bringing the extra $ to the table to get the LTV where it has to be doesn't put you in a financial bind then it absolutely makes sense to refinance. You'd have to pay it eventually so might as well do it now IMHO.

    Bookmark   April 30, 2014 at 8:10AM
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My advise is to not pay the $3500 in closing and another $13,7k to re-fi to save only $64 a month.

"But, but, but, you say....what about the $23k in savings on interest we'll get over the life of the loan?!"

My answer: do you really plan to have this mortgage hanging over your head for another 20+ years? That's what you'd have to do to realize $23k in savings. Why not just buckle down on the principle as fast as you can and work to get it paid off? Minimally, pay it down as fast as you can to the LTV requirement and re-fi then (hopefully, with lower closing costs too).

OR, shop around and find a lender who will offer you better than 4.625% and better than $3500 in closing costs.

Just my two cents.

    Bookmark   April 30, 2014 at 8:16AM
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Maybe I'm missing something. In your follow-up post, you said the re-fi will free up $500 a month "like the lender said". Yet, in your first post, your lender specified your monthly payment will only drop $64.17 a month. Clarify??

    Bookmark   April 30, 2014 at 8:49AM
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As I understand it:

The refi will save you $500 a month in loan payments over the current mortgage?

That's $6,000 a year in money from tenants going to you and not the mortgage company?

And to get that $6,000 a year you have to pay them an extra $13,000 at closing?

Gee.... I'd refi in a heartbeat and put the increased cash flow right back where the $13K came from.

    Bookmark   April 30, 2014 at 9:46AM
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That's right, lazygardens. It'll save us $500 a month if we refinance. Which will help a lot since our son is going to college.

Update: our lender said they'll give us $2850 credit to cover the third party cost. So we're paying only $700+ and the 13K we need to bring to the table.

    Bookmark   April 30, 2014 at 2:13PM
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Is the $2850 credit in exchange for a slightly higher interest rate? Since it sounds like you're keeping the property for the long term, paying extra for a lower rate (and lower payment) might be beneficial. Regardless, as long as your break-even point is before you intend to sell, then why not do it?

    Bookmark   April 30, 2014 at 4:59PM
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I am confused... you quoted your lender as saying you would only be saving $64 / month. Where does the $500 come into play?
if the lender is crediting you $2850 in closing costs, you can surely bet that they increased the rate. Ask her to run the #s with you paying all of the closing costs.

    Bookmark   April 30, 2014 at 5:23PM
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The $64 savings are just between the two loan options on the table, neither of which is the current loan.

Sounds like OP pays around $2068/mo now with 22.5 years remaining, and s/he thought payments would drop $500 to $1568. Instead, the property did not appraise, so lender is proposing that OP bring the $13K difference to the table to keep it at 75% LTV, which will yield a new loan with a payment of $1504 for 30 years. So now OP is saving $564 a month instead of $500, but has added 7.5 years to the loan.

OP, is that basically right? If so, then whether or not it makes sense is a personal decision. If you stay in the current loan, you will pay $558K over the next 22.5 years, but you will have much higher monthly payments. If you go to the new loan, you will bring $13,700 to the table and pay $541K over the next 30 years. So it's close to a wash financially.

In our case, it was still worth it to have the lower payments, since that gave us cash flow that could be applied to other things. We do prepay our loan to keep the payoff date as close to the date of the original loan as possible, though--if you have the option of prepaying and applying it to principal, this can be a good compromise because it cuts down the interest paid on the new loan, and makes it more of a no-brainer decision. So you could decide to pay the lower amounts while your son is in college and you need cash, and then as soon as he's done, put some of that saved money into prepaying the principal.

FWIW, our lender did agree to credit half of our closing costs with no effect on the rate the last time we refinanced. Get the rate in writing to be sure if they haven't already provided it, but I don't think that's too uncommon these days, since banks are competing more for business than they were a few years back (and they may be concerned that you're going to balk and not move forward with the loan). I wouldn't assume they have upped your rate without telling you, though. Just ask for a revised Good Faith Estimate reflecting the credit to be sure.

    Bookmark   April 30, 2014 at 5:57PM
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WIth the refinance costing $3500 and a monthly mortgage difference of $500, if you own the home longer than 7 months the refinance will pay for itself.

It's not quite that simple. The payment also goes down because the balance is lower and because the term gets stretched back out to 30 years.

$3500 is high for closing costs. Mine have typically been ~$2000.

    Bookmark   April 30, 2014 at 8:50PM
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Oh, I see... the extra $13,000 that you now have to pay, will lower your monthly payment $64 as compared to not paying the $13,000 like originally thought. I see now.
Like Artemis78 says, a lot of it is a personal choice as opposed to a financial choice.
Weedy is right to... you have to take into account that the new loan starts over, so you are adding about another 7 years to the payoff date.
Here is a calculator that should put it all in perspective...

    Bookmark   April 30, 2014 at 9:02PM
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You're right, Artemis. That's basically it (as I understand it).
I went to different calculators online, the savings varies from 20-60k (?).

My husband and I talked about it, and we're gonna do it if the interest rate remains the same. It makes sense since our son is going to college in Sept. and his brother in 2 years. We'll probably keep the rental for 6 years or so.

Thank you all for your input, you made it easier for me to understand. And thanks for the tips/pointers. I'll ask the lender for a revised good faith estimate to make sure the numbers are right.

    Bookmark   May 1, 2014 at 12:10AM
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