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Refinance question! Please advise!

Posted by eosinophil (My Page) on
Fri, May 23, 08 at 15:50

I'm a new poster, and I'd love some help.
My husband and I moved about 1000 miles for a job. We bought in our new location using a 12 month bridge loan from our equity in our old house, which is on the market - we didn't have the luxury of waiting to move/renting at the new location.
Yes, you guessed it! Six months later, old house isn't sold. And the market stinks, so I have no reason to think it will be sold in another six (or more) months at this point. I'm thinking we should re-arrange our financial stuff to a more sustainable plan. But I don't know what that might be - please, any advice?
Here are our specifics. Old house has an existing mortgage - 5/1 ARM, 30yr, originally owed (12/2003) $225K, paid down to about $100K now (although payments still based on the 225, so relatively high). With taxes and insurance totalling 7K and 4K(dunno why so high - gotta check that!) a year, respectively, this check is about $2200 I think a month. The old house is currently on the market at $475K. (Which, best as I can tell, is an appropriate price.)
Okay, the new house- paid 500K. Put $275 down, using a bridge loan of ~270K based on old house. That loan runs around 1500 a month, and I think is interest only? Our new mortgage is $225, a 15 yr fixed at around 5.75% I think? that one runs, w/ tax and insurance, around 2500 a month I think. I think this house has taxes around 5500/year and insurance maybe 1000 -
not sure. Oh, and the new house appraised 6mo ago at $525K.
Anyway, we are fortunate that we 1- have excellent credit and 2- enough money to pay all this. But if I can't sell the old house, I want to start paying down that 270K. And quite frankly, a little less money bleeding out each month would be nice.
Help! What should we do?
Besides, of course, unload our old house, which we would LOVE to do!!!
thanks in advance for any pointers!


Follow-Up Postings:

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RE: Refinance question! Please advise!

check is about $2200 I think

1500 a month, and I think is interest only? You don't know?
fixed at around 5.75% I think?

that one runs, w/ tax and insurance, around 2500 a month I think. I think this house has taxes around 5500/year and insurance maybe 1000
I'd start with more specifics.
The costs, exactly, for each mortgage, the interest rate, for each, the amount for property taxes and insurance.
The exact amounts - not estimates.

Also the costs of refinancing - a detailed list

It's impossible to make smart decisions when you don't have all the facts to begin with.


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RE: Refinance question! Please advise!

Sorry, I didn't mean to be vague or seem unaware - those were the values off the top of my head (and rounded) while at work. I've checked and they in fact are all accurate (albeit, as stated, rounded - unless you want the dollars and cents). I'm not sure why I wrote the "interest only" as "I think" - trying to deny a not-so good-decision!
I suppose the taxes and insurance weren't necessary -can't change them!

I'm not sure of the costs of refinancing - what's the best way to find out?

It seems that I need to specify a product to get a "cost", as in the mortgage person saying "do you WANT to pay points?". Well, of COURSE I don't want to pay them! but SHOULD I?

Does that make it a bit clearer?


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RE: Refinance question! Please advise!

What you need to find out - and you can simply ask the mortgage person (ask several so you can compare)
1) What are the closing costs?
2) How much are points, and what is the interest rate per point?
3) What is the interest rate for 15 yr fixed? 30 yr fixed?

Well, of COURSE I don't want to pay them! but SHOULD I?
It depends on several things - can you afford to pay the points up front? Or would they be wrapped into the mortgage so you are paying interst on them as well? Do you plan to be there for a long time?

If they ask you, "Do you want to pay points?", you can say, "It depends on how much the points are and by how much they will reduce the interest rate. So how much are the points, and what is the interest rate if I pay 1 point? 2 points?"

I paid 1 and 1/2 points when we financed our house 3 years ago. We plan to be here forever and don't plan to prepay the mortgage, so getting a fixed rate of 5.375% was worth 1 1/2 points to me. YMMV

One potential problem that I see is - what if the house doesn't sell for what you expect it to? Have you considered lowering the asking price of the house?


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RE: Refinance question! Please advise!

Have you considered lowering the asking price of the house?

Also, have you ever considered and added up just what the house at the old location is costing you per month...taking into account...Insurance (and did you change your insurance to it being a vacant house...there is a difference, especially if it is vandalized), taxes, interest, utilities, upkeep (yard, grounds). Adding all that up, what did it cost you to have it setting empty per month?...and for 6 months? How much less could would you take to get it sold, and be rid of the expenses, payment, and concern over it selling?...setting yourself up for the best 'deal' on your new mortgage?

You might also stop over at the forum linked below and see if the folks there have any selling suggestions.

I have a friend with a small (inexpensive) home for sale. The payment is $500 a month plus taxes, ins, utilities, and upkeep. They would have been many $$ ahead if they would have just lowered the price years ago, and gotten it sold quickly. I don't know if it ever sold, and it has been on the market for years. For them to lower the price now, would certainly be a loss, considering they should have and could have done it years ago. Hind site is 20/20 as they say.

Sue

Here is a link that might be useful: Buying and Selling Homes


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RE: Refinance question! Please advise!

Actually, the question of points is fairly simple. The general rule is that you should almost never pay points when you refinance because you can only deduct 1/30 of the cost each year (or 1/15 if it is a 15 yr. loan). On an initial purchase, the entire amount is tax deductible the first year.


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RE: Refinance question! Please advise!

Thanks for the advice about selling the house. I actually lurk (a bit obsessively) over on the buying and selling page, so we were careful about preparing it and listing it.
Our old house is a tricky house to sell. Comps are few and far between, so a careful extrapolation of the comps led to our price. We listed lower than the realtor suggested and we've dropped it $50K so far. Our realtor is the top seller of our region who goes on every showing and follows up. He doesn't think lowering the price will help, just that it's going to take time. Because of our house's quirks, it really is a waiting game to find someone who falls for its pluses and isn't hampered by its minuses.
Specifically, it's an old farmhouse and while large enough for a family, isn't really set up for one. (Its price reflects that.) It is set up well for a couple and for entertaining. It is in an area where that is a reasonable set up, but there are automatically fewer buyers. It is old, which again makes it limited to those weirdos (like me) who like that. You have to lower the price a lot to make an old house appeal to someone who wants vinyl siding and replacement windows!
Our other option is to pull it off the market and rent it, relisting when the market is at least stable. I'm leary of that as I live 1000 miles away.
Thanks for all of your suggestions about the old house - in some ways I wish it were a cookie cutter house that you know will sell in a reasonable time if you list it a little less than the last, identical house in the development sold!

Anyway, my real question is what options are best to replace my bridge loan?
Other than strict cost per month, does it matter if I refinance my new vs old house? How about getting one big loan on each house vs two smaller loans? Is it wiser to spread the loans evenly over both houses, so I retain a similar equity in both?
How about tax advantages -which ones are deductible? If I rent it, does that become "income" that I then offset with the "costs" of running my new rental real estate empire? Can you tell I didn't do well in economics class?
Thanks for your responses!


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RE: Refinance question! Please advise!

Does the insurance company covering your former home know of the change in situation?

My renter's insurance requires (as does my rental agreement) that if I am to be away, I am to have someone check the house at least once in 3 days.

I wouldn't be surprised that your insurance company will require that some sort of check is made regularly on that house.

Is it generally apparent that it is unoccupied?

Do you know someone there who could check it fairly often and possibly park a vehicle that they don't use a good deal, there, moving it from time to time when they visit to check the home, to have it appear that it's being used?

I'm sorry that you're having problems with regard to selling a home ... in many areas of the U.S. in recent times, the prices have dropped substantially, as rates quoted were temporarily low, with the extra added to the loan, with adjustment to be made later. A number of those mortgages were made with no money down, as well.

Now many are for sale, as the buyers can't afford the higher interest rates. Also, many such homes are being foreclosed ... and with so many houses coming on the market, the prices have dropped substantially.

Maybe drop more, before the market levels off with fewer houses being for sale.

My daughter refused to buy in Arizona, something less than a year ago, when there was $5,000. difference and neither party was willing to budge, then she returned to this area.

Within about two months, I think, she heard that the house had been re-evaluated ... $20,000. lower.

She has bought a home there now and is moving ... not the original one under consideration.

I hope that you can get your situation resolved to your satisfaction.

ole joyful


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RE: Refinance question! Please advise!

Hi Eosinophil,

FIRST of we need to back away from the minutiea... up, up, up to get some bigger picture perspective, like an architect starting with very simple pencil sketches on a blank piece of paper... so that we can THEN come back down to the nitty-gritty and micro-fit the situation to your specifics.

What is more important to you;
Eliminating your outstanding leverage balances on an accelerating basis, or stopping the monthly bleeding?
(These are at counter-points for you currently.)

Are you more concerned about the balances on one property versus the other... or about your overall family position on balance?

How much accrued liquid cash reserves do you have socked away?
How much is your gross family monthly revenue?
How much is your current gross (including minimum payments for all debt and homes) family cost of living?

You are paying to rent the money you are using for retaining the ownership of the old home (the interest costs.)
This interest is a "sunk cost" each month you pay it, if you have no tenants paying you for its useage.

Is your continuing ownership giving you *any* appreciation currently?
(Keeping in mind that market appreciation is a VERY tentative guess, at best, in the current environment... and if it is negative, you need to honestly figure it that way as well.)
IF so, how much is the appreciation when calculated into monthly dollars?
How much of your sunk interest costs are being ofset by your potential monthly appreciation gained?

Whatever your sunk costs of interest, minus your dollars from appreciation (or plus the dollar costs, if depreciating currently,) is what you can call your "monthly burn." This is the consumption of your net worth you are incurring to continue carrying this property.

NOW... this home CAN be sold (gotten under contract with a 30 day escrow period, or less) within a 2-6 week marketing time, AT SOME LEVEL OF PRICE, AND ADVERTISED EXPOSURE. This "price level" is what we call the "quick-sale price value."

If your agent were to (honestly) determine the realistic quick-sale price level in that local market... it would likely be lower (perhaps much lower) than where you are holding out right now... and the agent would likely need to ramp up some significant marketing costs... which they might only be comfortable doing with some funding (or guarantees) from you. All of this, naturally, is going to be a revenue burden off of what you were previously hoping to sell your home for.

NONETHELESS... this is a numeric exercise that is CRITICAL to do... RIGHT NOW... because it will give you the numerical difference between where you are right now in realistic net worth, were you to do this immediately..... VERSUS how much you are "burning through" on your monthly burn rate if you simply close your eyes, cover your ears, pray really really hard, and just keep waiting it out.

KNOWLEDGE AND AWARENESS IS POWER... and you can't make an objective financial decision unless/until you have the actual facts in front of your face to review and think about.

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

OK... soapbox aside.....

*IF* you decide that you have reason to believe that simply waiting longer will actually be worth your while in a higher sale price... then there *is* investment property financing available in the range of 3.5% to 4.5% APR, on an interest-only basis, up to 70-75% LTV, strictly on a fully documented (income, employment, assets) basis... which could very significantly reduce your monthly burn overall. Its something I have at my firm... but not to be 'spammy' there may be other brokers (perhaps your regular loan broker) who have it as well. Its not a retail program, so you'd definitely need to connect with your broker for it.

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

ALL THINGS CONSIDERED...
(And in truth, we haven't seen enough details to truly consider all things...)

I would *PROBABLY* be leaning toward advising you to take a deep breath, swallow hard, plug your nose... and have your agent re-price the home to the local quick-sale price... and get it over with while we're in the summertime "moving & home-buying season."

All the best!
Dave Donhoff
Leverage Planner


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RE: Refinance question! Please advise!

thanks for all your help. Dave, I was hoping you'd chime in!
I will certainly discuss the pricing with the realtor - you (all) have made that point very clearly.

A little extra financial info:
Right now, our total housing costs (all costs of both homes, as currently financed) are a bit less than 1/3 of our gross income. We have no other debt (cars/credit), nor children. We don't have a ton of cash available right now, what with moving/ and recent new vehicle purchase. We are saving at an appropriate rate for our retirement in thirty years or so. We have multi year contracts for our current jobs and have every reason to believe these are likely permanent positions. So lack of sustainability of our financial situation is not driving our decisions.

If, once we've discussed it with our realtor, we for whatever reason DO decide to keep our old house as a rental, is there a better way to structure our debt - avoiding the current (stupid) interest -only loan?

Thanks again.


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RE: Refinance question! Please advise!

Hi again, eosinophil,

thanks for all your help. Dave, I was hoping you'd chime in!

Youi're welcome!

A little extra financial info:
Right now, our total housing costs (all costs of both homes, as currently financed) are a bit less than 1/3 of our gross income.

That's good.

We have no other debt (cars/credit), nor children.

Assuming that's the preference... that's good too.

We don't have a ton of cash available right now, what with moving/ and recent new vehicle purchase.

THat's definitely not good... potentially very risky.

We are saving at an appropriate rate for our retirement in thirty years or so. We have multi year contracts for our current jobs and have every reason to believe these are likely permanent positions. So lack of sustainability of our financial situation is not driving our decisions.

Always keep in mind the definition of "suprise." Complacency can kill...

If, once we've discussed it with our realtor, we for whatever reason DO decide to keep our old house as a rental, is there a better way to structure our debt - avoiding the current (stupid) interest -only loan?

A.) Yes, probably there are better ways to structure your leverage (debt that is married to growth assets,)
B,) The "stupid" comment throws me... the interest-only feature on your newest financing may be one of (or your only) saving grace in your current scenario. Its the AMORTIZED loan on the old home that is putting you in danger by preventing you from controlling your own budgetary cashflows.... (UNLESS you see yourself as monetarily irresponsible... and thus having more control of your money is a bad thing for you?)

Luck!
Dave Donhoff
Leverage Planner


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