Time to Refinance

Interest rates are really low right now – it’s not a secret. And refinancing can save home owners a lot of money!

Have you considered refinancing your mortgage? Now is a great time to do it, and it can require very little out of pocket money.

Of course, not everyone should refinance. We found it was to our advantage for three reasons:

1. We are currently on a 7/1 ARM with interest only payments. This was useful to us for the short term, when we faced two mortgage payments. Maybe not the smartest when it comes to counting nickels and dimes, but sometimes the best solution costs a little more. But the thought of only paying interest and having no idea where the market will be in 6 years is a scary thing!

2. That 7 year ARM has a 6.875% interest rate. When we locked in the rate back in June 2007, this was a decent rate. Not so anymore! Our good credit qualifies us for the best rate available right now.

3. We have two large required expenses we have to pay immediately that range in the tens of thousands of dollars – our upgraded septic system, and the amount we still owed on our North Carolina mortgage when we closed last Friday. When we refinance, we’ll be able borrow enough to cover these expenses against the equity in our home.

When should you refinance?

These aren’t hard and fast rules – like anything, you have to consider your own situation and how it will affect you.

1. If the current interest rate is more than 1% lower than your current interest rate. Today’s interest rate, according to Bankrate.com, is 5.5% This varies – even looking at banks in our area, I could go to one and get a 5.3% rate and another for a 5.8%! If you can refinance for a percentage point or more, the time it will take to recoup your closing costs will be fairly short – less than two years.

2. If you plan on living in the house for more than a couple years. When you refinance, you will have to pay closing costs on your new loan. In our case, if we go from paying 6.5% to 5.65%, without adding in the extra money we will be taking out for the septic and other mortgage, we’ll break even in about 22 months (we underestimated when we spoke to the gentleman who is doing our refinancing – our actual interest rate is 6.875%.) Since we don’t plan on moving anytime soon, and we’ll be trying to pay down our mortgage, this works to our benefit in the long run.

3. If you want to lower the term of your loan – if you have 20 years left on a 30 year fixed mortgage, it can save a lot of money to refinance into a 15 year fixed – not only will your term be shorter, but depending on the balance on the loan, you may find your payments would actually be smaller. And that doesn’t even account for the amount of money you would save on interest!

4. If you need to switch the type of loan you have. We don’t want to be stuck with a 7/1 ARM in 2014! If we only pay the amount on our statement each month, we’ll still have the same amount of principle 7 years from now. That doesn’t make good financial sense. So if you want to switch from an ARM to a fixed rate, refinancing will allow you to do this.

5. If you want to drop PMI on a home that has increased in value. Homeowners are required to buy PMI (Private Mortgage Insurance) if they are putting less than 20% down on a house. Premiums can be hundreds or thousands of dollars each year. By law, lenders are required to cancel the PMI once the mortgagee pays off 22% of the mortgage. However, if you have a house that has appreciated greatly you may benefit from refinancing – the house will be reappraised in the refinancing process and you may not have to pay PMI any longer.

An example:

Purchase Price in 2000: $100,000
Mortgaged amount: $100,000

Percentage of Home’s Value Mortgaged: 100%

Home’s Value in 2008: $125,000
Current Mortgage Balance: $90,000

Percentage of Home’s Value Mortgaged: 72%

A person who is still paying Private Mortgage Insurance in this scenario would save hundreds or even thousands a year by refinancing with the home’s new appraised value.

6. If you need to tap the equity in your home. In my opinion, this reason needs to be used really wisely. Good things to spend home equity on are things that improve your assets – home repairs, home improvements that raise the home’s value (like our septic system or a bedroom/bathroom addition) or to consolidate secured long term debts, like other mortgages. You shouldn’t use home equity to pay off your credit cards (30 years’ worth of interest is a lot more than 2 years’ worth, even if it is spread out) or to buy new clothes, electronics, or to go out to eat. I have seen people who have carefully and successfully used their home equity to live off of when both members of the family were laid off, but it’s a scary thing. Thankfully, they are currently employed and are on their way to paying off that debt!
It’s a lot to consider, but if you think refinancing would be beneficial to you, it’s very easy to go into any bank and get some more information, including the actual costs. We’ve had our appraisal and we are waiting for the settlement statement from our closing in North Carolina. As soon as we get those, we’ll be signing and filing the paperwork that will save us a lot of money in the long run!

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Unhappy about Necessary Debts

I admit it.  It’s been over a week since I’ve posted.

This past week has been frustrating – and disheartening.

On the positive side – we close on our house in NC on Friday!  That’s nearly $180,000 of debt gone!

However…we have to bring $10,677.82 to closing.  Ouch.  (I did an estimate before and I was way off.  I didn’t include the 2o08 taxes we would owe, the final mortgage interest payment, or the deed and register stamp fees.  All told, that was about another $2000 we have to bring to the table.)

We struggled a lot with how to deal with this.  The closing attorney didn’t get the exact numbers to us until this morning (we knew it’d be between $8000 and $12,000.)  We had already talked to our bank about doing a short term loan until we refinance in a couple weeks (more about that later) but there was no way they’d be able to process the money in time.  After hearing about our situation, both lenders we spoke to though that we should consider doing  a cash advance or using a balance transfer check on our credit cards – because it was the only way we were going to get the money wired to the closing attorney on time to close.

Thankfully, my husband talked to a businessman in our church about our situation and he and his wife offered to lend us the money for the next two weeks.  We’re hoping to have it directly wired from his account to the attorney.  We will be paying all fees, of course, and we want to offer them the interest we would have otherwise paid.  I also told my husband that although there is no way I’d let the debt go unpaid, I wanted to write out a promissory note.  It would make me feel better knowing that they have legal recourse against us if we didn’t pay.  I absolutely hate the thought of borrowing from a friend!

But there’s more:

We not only owe this amount, but by law, all homes sold in our county now have to comply with new septic laws, which means that most people will have to install new septic systems.  We knew this when we purchased the house, and we got quite a bit off the price because of it.  We were expecting our old house to sell with cash to spare, which we would use to pay for the septic.  Unfortunately, the market being what it is, we had to sell for nearly $50,000 less than what we originally asked, so we don’t have the funds we expected to have.  Oh, well!   It’s truly a case of “You win some, you lose some.”

So between the new septic system and the money we need to pay off our old loan, we are going to need about $25,000.  There’s no way around it, and we can’t wait on either.

But here’s where “we won some” – mortgage interest rates are low right now.  We just locked in at 5.65% for a 30 year fixed, which is quite a bit lower than our current 6.875% 7 year ARM.  It will take less than 2 years to break even after the closing costs.

So we plan to refinance, but we will actually be refinancing for more than we owe. We’ll refinance for around $122,000 and take the extra $25,000 to pay for the septic and to pay back our friend.  This will happen as soon as we get the appraisal and the settlement statement for the closing on Friday.  That day we’ll wire the money we owe back to our friend and stick the rest in savings until the septic company bills us.

Not the ideal.  I hate adding more debt, but I knew this was coming.  Still, it’s disheartening.  It’s just more debt.   It will also raise our mortgage payment to about $900 a month, which will make things a little tighter.  Thankfully, we are close to getting another card paid off, which I’ll post about soon in my January Progress Post – 5 days late!