Realistically- what will the house appraise for today?
I'd be worried.

And you are not "geting rid of all your debt"- you are moving it, and putting off paying it. You're choosing to pay interest on it for 30 years, too.

It was originally purchased for $470k. I put $220 down. I was told it would appraise for approx. 380k right now. it seems kind of low, but who knows in this economy? So you're saying it's not a good idea since i'm paying interest on it over 30 years as opposed to paying it off myself over 1 or 2 years.

I wholeheartedly agree with cearbhaill. It is one thing to refinance to lower your rate and mortgage payments, but I would not roll that kind of debt into the mortgage for the same reason - you are now paying 30 years of interest potentially on things like toilet paper and groceries. Also consider that now your loan goes back to 30 years.

'Closing costs' I am finding is a misnomer. Is it truly $6k in stright up costs, or is some of the tax payments and escrow? If so, I do not consider those actual closing costs, personally.

I hope you find peace with whatever decision you come to.

It's hard to say what makes sense based on the information you've given.

What would be your interest rate after refinancing? Fixed or variable? How much of the closing costs are fees and how much are things such as tax escrow? How long do you expect to remain in the house?

Once we have answers to these questions, it might be possible to make some rational suggestions. As it is, we're just throwing darts at a dartboard.

I am not including escrow. I'll be paying the taxes on my own. the interest rate after refinancing would be 5.125, down from 6.5. it's a fixed 30 year loan. the fees are about 6k. 2.3k is an interest buydown. 2k is the bank fee, 500 for pre paid interest. the rest are lender fees; appraisal, etc....

FYI, mortgage is through countrywide. this is who i called regarding this information.

I expect to be in this house at least 7 or 8 more years if not more. if it were up to my wife it would be for life.

I would keep looking for a better deal, 6k in costs for a 250K loan with 67% LTRV is too high in my book.

what is LTRV? loan to what value?

what would be a good value? That's why I'm kind of cautious about the fees. They did seem high.

Well, there are two separate questions here: (1) Is it a good idea to refinance at all? (2) If you do, is it a good idea to borrow additional money to pay off other debts?
The answer to (1) is fairly straightforward: You are paying about $5k in fees in exchange for a 1.375%/year interest-rate reduction on a $241k loan. 1.375% of $241k is slightly over $3.3k, so that's what the reduction is worth to you.

So if you are going to stay in the house for two years or longer, you come out ahead by refinancing. Of course, you might be able to find a better deal, either now or within the two-year window, so you might be able to do even better; but if your choice is between doing nothing or refinancing on the terms you've cited, it seems pretty clear that you come out ahead by refinancing.

The other question is easy to answer in principle but harder in practice. In principle you always gain by refinancing higher-interest debt at a lower rate, and that is what you're proposing to do by refinancing to pay credit-card debt.

The reason I say it's harder in practice is that erasing your credit-card debt may make it easier for you to run up additional debt in the future. Frankly, I think that's the only negative aspect of your plan.

In particular, the people who say "you are paying 30 years interest on toilet paper and groceries" are, in my opinion, mistaken. Money doesn't come in different colors depending on what you buy with it -- debt is debt, and ultimately what matters is just how much of it you have and what the interest rate is. In particular, a long-term loan is better than a short-term loan with the same interest rate because you always have the option of paying it off more quickly if you so choose.

So if you have a bunch of debts now, and are confident that you can afford to pay them off, I say refinance to get the debts into the lower interest-rate pool.

After that, I think your next priority should be to build up an emergency fund in case you lose your job, or get hit with more hospital bills. The usual recommendation is 3-6 months of expenses.

Once you've eliminated short-term debt and built up an emergency coushion, it would be a good idea to sit down with a financial planner and plot a long-term strategy that takes into account your goals, risk tolerance, etc. But for the short term it would seem to me to be a smart move to get the interest rate you have to pay on your debts to be as low as possible, even if you have to pay fees that take a year or two to come back as savings.

So you're saying it's better to just refinance (if I can find a better deal than 6k of fees) without taking any money out and slowly paying off my debts?

Or are you saying to refinance taking out money for debts that have higher interest rates than my mortgage? My credit card interest rate is 7%, and the mortgage interest rate would be 5.125, so I would get ahead in time if I stayed in the house long enough to make up this difference, correct?

Let's say I didn't take any money out of the house and just refinance to get a lower rate, an equity line of credit is always an option in an emergency right? I'm not talking huge sums of money...maximum of 5k. I think the interest for an equity line of credit is around 1% from what a friend of mine told me.

Hi Faromic,

Several points;

A) Real prima-facie transaction costs on any mortgage are typically 3-5% of the balance, with a minimum of $3,500+. Everyone gasping & thinking of all the retail adverts & something-for-nothing pitches they hear (or the "but my credit union or local bank branch does it for just $1,500 because they love me," or whatever,) are all having smoke blown up their tukai. If the borrower doesn't pay the costs, the end-buyer of the mortgage note does, and the difference is reflected in a higher interest rate.

You can't have one w/o the other.... costs & rates are like thos long circus-animal balloons... you can squeeze & twist & contort them all you want, but the volume of the contents never actually go away, they are merely shifted.

HAVING SAID THAT... there is definitely a "time cost of money" issue that you can structure to your advantage. If you know you'll not sell or refinance for at least 3-5 years, you can benefit greatly by avoiding the bank paying any costs (and thus reflecting in higher rates) and actually using your equity balance to BUY DOWN your longterm interest rates, thereby using the home's resources to secure longterm savings.

You can get more about that here;
An Insider's View of Refinancing

B) I agree with *almost* EVERYTHING Alphacat just said... with ONE exception;

C) Get your financial planning done FIRST! Ultimately, your home financing is a *HUGE* piece of your total portfolio balance sheet, and if you refinance BEFORE your financial planning, and the planner (very likely) finds that a more finely tuned financial structuring would be safer & get you to financial independence faster... you'll have to pay an entire additional 3-5% cost to get it re-done the right way.

Luck!
Dave Donhoff
Leverage Planner

Here is a link that might be useful: An Insider's View of Refinancing

Just a point of reference - I'm closing on a refi with Countrywide in 1 1/2 hrs - our closing costs are $1000. That includes everything except accrued interest.

wow. that is way cheaper than what I was told. In reality, the closing costs are about 6.3k - the 2.2k 1% buydown = 4k. It would be a no brainer if it were 1%. I'm going to call them back and see if I can get it lower....I think they have a lot of fat built into their costs.

amazing... like I'm talking in a vacuum....

I don't like the idea of paying for last year's dining out at a restaurant, paid for on the credit card, stretched over 30 years.

And, with zero balance owing on the CC, there's a great temptation for many to add more (supposedly more or less necessary) stuff on the credit card.

Paying for last year's expenses this year ... and next year ... and the year after that ... stretched out for 30 years is ...

Tell me - when did you ever ask for an interview with your boss and ask for a cut in pay?

You're voluntarily choosing to give yourself a cut in pay, this year, aren't you? Paying for last year's expenses with this year's income ...

... plus interest on the loan.

And next year. Plus interest on the loan.

And the year after that. Plus interest on the loan.

I prefer to have money work for me, rather than using someone else's money now ... and having to pay him for the privilege. For quite a few years.

ole joyful

Dave ... you are! LOL! Some of why we are having the housing problems we have now, are because people have been using their homes as their personal ATM's.

Keep refinancing, paying off other debt, incur that other debt again, and repeat ... hopefully the OP won't do this, but lots of people did. They ate up their equity to pay for daily living expenses, and property values dropped ..

faromic, I'm far from a loan expert, but I'm guessing what you're missing is that you can probably close a loan with countrywide for $1000, but the rest of that 6.3k is going to go somewhere- and *you* are going to pay for it one way or another.

I recently applied for a refi, with the intention of paying 100% of costs up front rather than roll them into the loan. The loan specialist I spoke with made me feel like that was the exception, not the rule. When someone says they got a loan with very low closing costs, they are not realizing where the rest of those costs ended up. Believe it or not, I know a lady who bought her house for $169,000 and now owes $185,000; she never took any cash out, she just refinanced with costs rolled in so many times that her loan amount keeps climbing- the stunning part is that she doesn't even realize how little sense it makes. (shaking my head)

The way to decide on this refinance is to compare your principal positions at points in time. You do this using loan amortization tables, comparing the 2 loans. Start by comparing loan a to loan b without taking the cash out. Loan a starts at $241 and the principal balance increases a little bit each month... Loan b starts at $247 and the principle increases a little bit each month.. At some point in time the principle an loan b should overtake the prinipal in loan a. That is your breakeven point. Then keep adding more assumptions.. For example if you do refinance you get to keep $153 per month. At today's savings rates you can straight add that to your principal in the loan B scenario, causing your breakeven to occur sooner.

Ultimately you want to compare "Plan A" to "Plan B". Plan A is to stay in current loan and pay your bills specifically somehow. Plan B is to refinance. At some point in time Plan B may or may not be better than plan A on the basis of your principal position (the breakeven point).

I would say that breakeven is likely to be over 5 years out, without running all the numbers. That can be estimated since you are saving $150 / month and it's costing you $6500. Not a great breakeven on a Refi. I think if you run the numbers properly you will show yourself it does not make sense to refinance and step backwards in your principal position becuase it will take too many years to break even.

It's a bad idea to refinance any more than the balance of the loan (if you want to roll the closing costs into the refi, that's probably OK).

If you take money out to pay off consumer debt, you are not "paying off debt". You are simply refinancing it and even if the interest rate is lower, you are financing it for a longer period of time. It will cost you more in the long run.

Your parents may be "old school", but they are right. My sis and bil refinanced their home a number of times to pay for college costs and "pay off consumer debt". When they retired, they could not afford the mortgage payments on the home they had lived in for 30 years (and wanted to stay in forever). They had to sell, move to a smaller (less luxurious) home and they STILL have a mortgage.

I'd refinance the mortgage balance and closing costs. Then I'd take the $153 difference that is freed up and put all of it onto the consumer debt with the hightest rate of interest.

I'd negotiate with the hospital to make payments on that $4k debt and work aggresively to pay off the rest.

Hi z8g,

I've got to correct some of these assumptions as erroneous;

It's a bad idea to refinance any more than the balance of the loan (if you want to roll the closing costs into the refi, that's probably OK).

NOT true, unless you have no safer and more productive places in your overall balance sheet to re-balance the equity over to. In the OP's case, there is definitely better places to employ the equity than keeping it retained in the real estate.

Not sure what your justification is for rolling closing costs in being OK... and ignoring all other preferential uses.

If you take money out to pay off consumer debt, you are not "paying off debt". You are simply refinancing it and even if the interest rate is lower, you are financing it for a longer period of time. It will cost you more in the long run.

It will NOT "cost you more in the long run" UNLESS you fail to take advantage of the money you are saving from the lower interest costs.

Your parents may be "old school", but they are right. My sis and bil refinanced their home a number of times to pay for college costs and "pay off consumer debt". When they retired, they could not afford the mortgage payments on the home they had lived in for 30 years (and wanted to stay in forever). They had to sell, move to a smaller (less luxurious) home and they STILL have a mortgage.

This had nothing to do with their mortgage management, and everything to do with a consumptive habit... they burned their money on things that didn't appreciate or generate income and thereby ended up on the short-end of the stick. THAT was a discipline and education problem.

I'd refinance the mortgage balance and closing costs. Then I'd take the $153 difference that is freed up and put all of it onto the consumer debt with the hightest rate of interest.
I'd negotiate with the hospital to make payments on that $4k debt and work aggresively to pay off the rest.

If the goal is to single-mindedly eliminate debt (regardless of the delaying of actual financial independence due to the retarding of safe retirement account accumulation,) then the refinance of EVERYTHING is better, with the total household monthly savings then used to accumulate the "mortgage payoff" account.

BOTTOM LINE;
The lower the interest rate overall (not just one account or the other,) the better.

ASSUMPTIONS;
A) Emotional responsibility around money,
B) Willingness to consume less than you generate in income
C) Willingness to safely invest toward future financial freedom.

If you can't fit these 3 characteristics... the truth is, it really doesn't much matter WHAT you do... you'll eventually find your way into trouble anyway.

Luck!
Dave Donhoff
Leverage Planner

I did some quick calculations.
if you take on the larger loan balance, it will take you 105 months to catch up to your current loan. Assuming you roll the monthly savings back into the loan.

This is a pretty big leap backwards in your house paydown (9 years).

Landmarker,
What are your assumptions on interest rates currently being paid on the consumer debt, amortization burdens, and safe credit rates on funds deposited?

I'm suspicious that your "quick calculations" may be seriously off to the OP's detriment. Please share how you got there.

Dave Donhoff
Leverage Planner

here are my assumptions.
Loan A is $241K at 6.5%. At the end of month 105 the principal balance is $210K and change. Loan B is 256K at 5.125%.. Both 30Yr Fixed. The diff in monthly pmts is $89.. By adding that savings back into the loan each month (i.e. comparing these 2 loans on a net cash flow of the original payment), the Prin balance on loan B is $210K and change at the end of month 105.. Thus that is the breakeven. But you are correct I did not factor in the loan terms of the credit cards that would be paid down in option A.. That would take me too long. Also, I did not set the loan A back 2 years to see the true amortizaiton... That should technically be done also.

You are correct Dave that any analysis will show that at tne end of the 30 year horizon the only thing that matters is interest rates. Lower rate will win over time. But there is a period of time line that staying in the current loan will win out.. Primarily due to closing costs of the new loan.

I think the "old school" philosphy of steadily marching toward a home payoff instead of refinancing and removing home equity has been proven superior at this point in time.

Care to elaborate about that vacuum you are referring to, Dave and pam?

Could it have something to do with locking a rate and THEN negotiating down on the closing costs?

Hi Landmarker,

You are correct Dave that any analysis will show that at tne end of the 30 year horizon the only thing that matters is interest rates. Lower rate will win over time.

No, that's incorrect... or, at least, its incomplete.

A) the best household leverage ratio (the highest returns on deposits, *AND* the lowest rates on total credit, in the appropriate balance for safety,) is what matters,
AND,
B) when applied, it pays off much MUCH sooner than the "old school" idea of "put it on auto-pilot & sleep through the changes, cross your fingers & pray for the best."

But there is a period of time line that staying in the current loan will win out.. Primarily due to closing costs of the new loan.

SOMETIMES this is true... but in many cases a re-balancing eliminates so much waste it *IMMEDIATELY* breaks even.

An extremely simplistic example is the now-extinct "no cost refinance" where 100% of all transaction costs would have been lender-paid, and the rate drop (even at a premium) created instant savings.

While such mortgage animals no longer roam, the waste of poorly balanced household leverage and credit remains, and can often pay for itself in savings in just a handful of months, if not instantly.

I think the "old school" philosphy of steadily marching toward a home payoff instead of refinancing and removing home equity has been proven superior at this point in time.

If that were true, our new president wouldn't be stabbing in the dark trying to fight the changes in the housing markets as they reflect in mortgage balances LTVs.

Its really NOT "different this time."

===================================================

Hi Patser,

Care to elaborate about that vacuum you are referring to, Dave and pam?

No... if you look at the explanative post I wrote just a couple posts above my "vacuum" lamentation, you'll read me explaining the 3-5%-of-balance factual realities of transaction costs, and illustrating that shopping for loans based on closing costs is not only futile for the consumer, it is detrimental to their financial best interests.

IMMEDIATELY following that explanation you posted that you actually believed that $1,000 "included everything" in the costs of your loan.

5 minutes later faromic got excited, buying into YOUR magical-thinking belief that Countrywide somehow got a transaction accomplished "cheaper than what 'OP' was told." Based on this "magic" 'OP' 'thinks they have a lot of fat built into their costs.'

LISTEN... I normally don't waggle my finger at generally clueless consumers who have no reason nor resource to know better... BUT I *JUST* EXPLAINED IT IN THE VERY SAME THREAD!!!

I'm sure there's some kind of gentle answer I am missing, and maybe I'll appear as the big mean bruiser about the whole thing... but it just had me shaking my head, astounded.... simply astounded...

Add appropriate expletives wherever you imagine I may have deleted them.

Could it have something to do with locking a rate and THEN negotiating down on the closing costs?

No, rate-locks include the cost structure... you can't lock one side w/o locking the other.

Cheers,
Dave Donhoff
Leverage Planner

So now you are presuming that in my example, I was shopping based on closing costs? And you also presume to know what I was and wasn't thinking about our mortgage refi process? And you presume to know my level of expertise with mortgages and the mortgage industry, in general?

Why should I bother stating the "gentle answer" when you have used bold font and tons of exclamation points to communicate in a way that is anything other than gentle?

Have a nice day.

Hi Patser,

So now you are presuming that in my example, I was shopping based on closing costs? And you also presume to know what I was and wasn't thinking about our mortgage refi process? And you presume to know my level of expertise with mortgages and the mortgage industry, in general?

A: None of the above!

You made statements, I directly commented on what you wrote. There were no "presumptions" nor embellishments.

No matter how much you might think you know, your mortgage financing did not likely cost "$1,000 including everything" and all of the transaction costs above $1,000 were charged to you, permanently, in a higher interest rate.

Simply the costs of appraisal, title, and escrow run more than $1,000... and everyone else required to be involved isn't doing it for free. Countrywide has to pay them from a higher rate revenue.

In the current market environment, anyone with the equity to do so is far better served, financially-speaking, to get the LOWEST longterm interest costs of leverage... which generally means paying 100% of the real costs of the transaction, and often securing additional interest discounts with buydown points.

Best day to you as well.
Dave Donhoff
Leverage Planner

Hmm . . . isn't Countrywide one of the banks that's practically in the toilet? My understanding (I could be wrong about this) is that if they are taken over, the new owner doesn't have to honor the terms of these mortgages. If Countrywide finds a buyer for these mortgages, I think the rates stay the same.

Check this out on some financial blogs, like Calculated Risk.

Hi Glenna,
A) Countrywide was already taken over by Bank of America,
B) Loans are bilateral contractual commitments... they can't be unilaterally dishonored by a subsequent assignee/buyer of the previous lender.

Cheers,
Dave Donhoff
Leverage Planner

I've noticed a trend on these threads lately, someone will come in, post a question seemingly looking for advice, get everyone worked up with good intentions, and then you never see them again...most times they have joined gardenweb the very same day of posting the question. I don't understand what people get out of it. This recently happened in the laundry forum and the cleaning forum.
Anyway, I just wanted to say I appreciate all the helpful advice that's given, even if the OP doesn't. I've been a long time lurker on this forum.

Not that way here - "faromic"'s been on hand to participate in the discussion several times.

ole joyful

I know, but all his posts were on the same day...and nothing since. But no big deal, I just wanted people to know their advice is very helpful and much appreciated including yours ole joyful.

When you play with sharks and snakes you will get bitten!

Looking for FINANCIAL PEACE?

Dave Ramsey.com

The bottom line is, it is IMPOSSIBLE to BORROW your way out of debt. You should develop a sound, disciplined plan to pay off your debts QUICKLY and not get in that debt again.

There are many many scamsters in the mortgage business. But, when all is said and done, one way or the other the borrower will pay for all costs of the loan. Lower your interest if possible. Try not to have your total payment be more than 25% of your take-home pay with a 15 year fixed-rate mortgage. There is the possibility of getting a conventional mortgage for only the years you would have remaining on your original loan. There is no rule that says you cannot have a 25-year or 20-year, or 27-year mortgage for that matter, you just have to push the lender for it.

Look at any financial dilemma from a reverse point a view. If your house was paid for, would you spend 6k for a loan to pay off your CC's? Just a thought...

Hi Wierdo,

Look at any financial dilemma from a reverse point a view. If your house was paid for, would you spend 6k for a loan to pay off your CC's? Just a thought...

GREAT POINT... but, have YOU actually done that?

Lets!

Imagine you have a $250,000 home free & clear.
The home value rises or falls regardless of whether the equity is used.

Let's say you have $60,000 in credit card or other consumer debt.
(Not unrealistic for the kind of people YOU are referring to.)

Let's say you've "seen the light" and have mended your evil consumer spending ways...
tightening your discipline and behaving responsibly from here forward.

You're paying 8% - 12% - 18% up to as high as 34% INTEREST....
(again, regardless of whether your home value rises or falls.)

Let's imagine you are paying 18%* interest on credit cards...
(*we're being kind here.... the types you are referring to are usually higher than this,)
your credit SUCKS, and the BEST you can qualify for is 8% mortgage* interest rates.
(*We're being conservative... there is no more SubPrime lending, and currently the highest rates for ANY mortgage financing are in the mid-7%s... but let's set the hurdles as high as we can for me here...)

Let's ALSO imagine your closing costs to access those funds are a whopping $5,000* (for $65,000 total.)
(Again... massively conservative. For a $65,000 loan it won't be near this, really.)

Your AMORTIZED payments are $476.95/month.
Your INTEREST payment portions are $433.33/month.

your INTEREST SAVINGS over the consumer credit INTEREST-ONLY costs are $466.67/month.

If you *ONLY* pay exactly the SAME as if you were paying ONLY THE INTEREST on the credit cards,
you ELIMINATE ALL of your debt FASTER! (You wouldn't be eliminating it on the credit cards at all!)

If you pay $100 more (as though you were attacking the credit card debt itself,)
it would take you;
50 years if you didn't refinance to optimize the use of your equity...
but only
17.5 years if you did it the smart way and used your equity at a lower cost.

If you pay $500 more than minimum interest, it would take you;
10 years without refinancing.
7.3 years if you do refinance.

Math matters! ;~)

Cheers,
Dave Donhoff
Leverage Planner

True...math matters. And if it were as simple as living by the math, then mathematically your plan makes sense.

Unfortunately, we are creatures of emotion. As one poster implied, refi'ing only relocates the debt...it doesn't eliminate it. When we suddenly have a whole new available credit (pronounced spending) limit available, simply from the 'magic' of mathematical reallocation, our emotions are are gleeful and we feel like we can afford more stuff.

But when we realize the stupidity of financing dinner and movie at 18% for the next umpteen years, then buckle down and work the burden of paying it off, then we get the satisfaction of a sense of accomplishment accompanied by the sweated brow that reminds us NOT to ever go there again. Not to mention, the added benefit that we didn't sit for hours playing with mortgage calculators...nor feel guilty for not choosing a financial degree.

Cheerio!

Hi Wierdo,

Unfortunately, we are creatures of emotion. As one poster implied, refi'ing only relocates the debt...it doesn't eliminate it. When we suddenly have a whole new available credit (pronounced spending) limit available, simply from the 'magic' of mathematical reallocation, our emotions are are gleeful and we feel like we can afford more stuff.

Voluntarily paying a higher cost of interest than you qualify for, for a longer period of time than necessary, is a rather expensive solution to your emotional problem as stated.

Therapy, coaching, and/or education is probably cheaper (and much more rewarding.)

Chau,
Dave Donhoff
Leverage Planner

Here is another thought to ponder: I have a couple that are having financial trouble due to the husband losing his job. Just last year they refinanced their home loan, rolling into it various unsecured debts. They are now having a hard time making their mortgage payment. They inquired about the possibility of bankruptcy. However, at this point in time it won't help them much -they successfully converted unsecured debt into secured debt. Big mistake but an eye opener. We never plan for the worse but this is something to consider when consolidating debt...

Can someone please tell me what extra fees to look out for when I close on my home loan. The local news here was telling me mortgage companies are adding extra fees into home loans. I would like to be educated before I close.

Thank you

Hello everyone,
I'm posting to give an update on my decision. Also, I'm not one of those guys that disappears on the forums. I got a lot of good information and decided that $6600 in closing costs is ridiculous. I did some research and inquired about refinancing with my bank (I looked at several overall), and managed to get a much much better deal through my bank. The closing costs including everything were $1700, much lower than the 6600 from Countrywide. Correct me if I'm wrong, but countywide probably makes their money off of refinancing mainly in this economy and needs to make some money somehow. I can't think of anything else. I got a 5.125 interest rate without a buydown and lowered my payments by $240. I also decided not to take money out to pay of the CC. Over the last 2 months we've been very careful and have actually paid off %25 of the total balance. Within a year we should be out of all our debts. Thanks for everyones help. I would say that a closing fee greater than about 2000 is too much based on my research. This is obviously without an interest buydown.

Hi Faromic,

Hopefully by now you have learned that its a "pay me now, or pay me later" situation.

The structure you chose is cheaper up front, and more expensive after about 2.5 - 3 years, and forever more out of your pocket until such time as you eventually sell (as you'll most likely never see rates low enough to make sense incurring the unavoidable sunken costs of the basic transaction again.)

As long as your outcome is less conservative, and shorter term, you'll be fine.

MOST folks, in the current environment, are looking for longer-term permanent savings. If the short-term "cheaper" loan at the cost of higher future equity expense was the better choice for you though, "good on ya!"

Cheers,
Dave Donhoff
Leverage Planner