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Refinancing Home Mortgage
My mortgage payment is $1500 a month, my interest rate is 8.55%
I purchase the house in April 2007 for $175,000. I have $158,000 left on the loan. I call my mortgage company and they told me If I refinance before march 2009 I will get a pre-payment penalty for $7000.
My mortgage is attach to libor, my credit score is around 630.
I was wondering should I take the hit with the $7000 and save money or should I wait for march 2009.
I have check the calculators online and I saw my payment might drop. Please help any comments is appreciated.
This is about mortgage information questions.
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7 Responses to Should I refinane now?
Tracy
April 27th, 2010 at 5:39 pm
I used to work at a mortgage company that specialized in refinancing. It’s been about…8 years…but..I do recall you must wait a year before refinancing. Try calling a different lender. Contact the bank yourself. If you go through a mortgage company, you will pay more in closing costs.
The $7000 hit…couple things to consider…how much interest will you have paid if you wait until March 2009? If the interest is less than 7000, wait. How much will you actually SAVE between now and then AND will your new interest rate be less than 8.55%? ALSO, consider the drop in real estate sales. You have equity in your home right now and who knows what will happen to the market in a few years. We may not be able to get even close to what we paid for our houses!! So, in saying that, if you can’t afford your mortgage payment because of this crazy economic turn, you should sell. If you can refinance for the better, do it. But not for a higher interest rate. Make sure it is fixed rate, if you didn’t already know.
Hope I helped…
Carolinahomerates.com
April 27th, 2010 at 6:22 pm
if you’re going to do anything…then do it NOW..
you dont want to be paying a high interest rate for 1yr…then decide to do refinance…there wont be a point then.
7,000 is prepaid interest that is tax deductible.
With FHA you should get 6.875% or lower on a 30yr fixed…and they dont have any prepayment penalties
Ryan S
April 27th, 2010 at 6:49 pm
This is a tough decision. Many areas are depreciating in value so what little equity people have is being eaten by the falling housing market.
I know you’ve been looking at the on-line calculators, but have you talked with a Mortgage Professional to see if you qualify for refinancing. The guidelines have become more difficult than the past to obtain/qualify for a loan.
If you can provide documentation of your income, then I would look into refinancing…yes, you’ll take the $7K hit, but who knows if the equity in your home will be there in the future, where interests will be and if the guidelines to qualify will becoming even more difficult.
Many companies will offer a free evaluation for you to see if it makes sense and to see if you qualify. Please make sure that you’re dealing with a honest Mortgage Professional. Make a gut call, if the person sounds like they only have their best interest and not yours in mind….run away.
Let me know if I can be of any further assistance.
All the best!
Ryan Smith
thebigcheese1993
April 27th, 2010 at 7:41 pm
Times your mortgage amount by the number of month left to avoid the prepayment penalty.
Then figure your new payment with the new interest rate.
In most cases its better to refinance.
The prepayment penanly is just the interest you would have paid to the bank over the set term.
Either way, you pay 7k. Now or over the course of the term.
lepr0kan
April 27th, 2010 at 8:08 pm
Since you bought the house in April it’s gotten far more difficult to refinance with poor credit, so you’d probably not improve your interest rate by much if anything if you refinanced. Additionally you’d have to pay that prepayment penalty plus another couple thousand dollars in closing costs. As long as you don’t have an Arm that will expire before April 2009 I’d just wait and refi then, you’ll have more equity in the house plus interest rates will probably be better by then so you could get a much better deal and not have to pay the penalty.
SpanishJuly
April 27th, 2010 at 8:27 pm
As a loan officer, I get this question asked all the time. In your situation, I would first analyze why initially you received an 8.55% interest rate. Without knowing your full situation, my instant reaction is that you currently hold a very high interest rate. Why is that? Analyze your situation back in April 2007 when you got qualified to purchase your home. What factors caused you to receive an 8.55% interest rate. Was there an issue with your credit, your debt ratio (all your current monthly payments recorded on your credit report with mortgage payment including taxes and insurance payment, divided by your monthly overall gross income), validating source of income, and/or available of equity (purchased at 100% financing or with a down payment). Refinancing without resolving any of these issues prior to, would be a waste of your time and money. When you refinance, one goal is to obtain a lower interest rate and the lowest interest rate possible. Without resolving any of the issues above, you don’t give yourself the chance to obtain the lowest rate possible. Now in deciding whether it is worth it or not, the answer is much more than just knowing that you can get a lower monthly payment. Unless you are financially strapped and a lower monthly payment of $100 – $150 is attainable, then financial freedom is always worth it. If that is not the case look a little deeper at the numbers to see if it’s worth it. I did the math on a loan amount of $175,000 at 8.55% on a 30 year loan (you did not mentioned the term so I am assuming it is a 30 year loan) and your principle and interest payment is $1,351.80. I am sure the other $148.20 is your taxes and insurance monthly portion. You have what is called an impounded account. So I will be making comparisons on your $1,351.80 payment that goes directly to the loan. Now if you refinance your current loan amount of $158,000, you add $7,000 prepayment penalty, and add the assumed $5,000 closing costs for the refinance process, that is a new loan amount of $170,000. Assuming you qualify for at least a 7.55% interest rate, based on a new loan amount of $170,000, your new monthly mortgage payment would be $1,194.49. Now, the difference between $1,351.80 and $1,194.49 is $157.31 monthly gain in saving. You spent $12,000 ($7,000 prepay penalty + $5,000 closing costs) to do the loan. If you divide the cost of $12,000 by the monthly savings of $157.31, you get 76.28. That is, it would take 76.28 months or 6.35 years in the monthly savings to cover the $12,000 cost of the new loan. To make the refinance worthwhile, you must be confident and disciplined that you will not refinance or sell your home before 6.35 years. If you do refinance, the money spent is wasted. If you don’t refinance, any month after 6.35 years has the closing costs evened out and provides a true monthly savings. Good luck and I hope this helps.
buchoman
April 27th, 2010 at 8:58 pm
In order to determine whether or not to refinance, I would consider whether the financial benefit from refinancing exceed $7,000 (the penalty charged by your institution) or not. The financial benefits from refinancing at a lower rate stem from two sources:
1. Your payments will be lower over the remaining term of your original mortgage; and,
2. You will also own more equity in your home at the end of the mortgage term.
To illustrate this, consider a simple example based on the following assumptions:
– Outstanding Loan: $160,000
– Amortization Period Remaining: 240 months
– Term Remaining: 60 months
– Mortgage Rate: 8.55% compounded semiannually.
Given the above parameters, the required mortgage payment (at an interest rate of 8.55% compounded semiannually) would be $1,379 per month. Assuming that the above mortgage loan cound be refinanced at (say) 7.00% compounded semiannually, the required payment would drop to $1,231 per month (a savings of $148 per month).
Over the 60 remaining months in the mortgage term, the homeowner would save payments of 60 x $148 = $8,860 on an undiscounted basis. On a discounted basis (at 7% pa), the value of these future payments would be about $7,458.
In addition, the increased equity in the home (after 60 months) would have a value of about $3,017 (undiscounted), or $2,549 (discounted at 7%).
The total financial benefit (in present value terms) would be $7,458 + $2,549 = $10,006.
I prepared an Excel spreadsheet to calculate the benefits of mortgage refinancing, which can be downloaded at:
http://dcf-models.com/spreadsheet/mortgage-refinance.xls
The model description can be viewed at:
http://dcf-models.com/mortgage-refinance.html