OK real estate pro's...got a question about refinancing. Got in touch with my current mortgage company about other items and got to talking about refinancing...so it's not some scam company that called me. Have an opportunity to refinance one of my homes and knock off a full interest point. Supposedly (still doing homework) no fees, no hidden charges for appraisals or anything. A $950 fee for a VA funding fee on the VA certificate. Saving a point will take my interest rate down to fixed 4.5% (from a fixed 5.5%) and they'll finance fixed for what ever timeframe I want. Going 30 fixed will knock $320+ off my monthly payment, and that includes taxes and insurance...not just principle and interest.

1% over the life of the loan could mean a lot. And the lower payment means a lot since I have zero plans to retain this home once the market allows me to unload it.

So...I would love to get your random thoughts, but more specifically any negatives hiding here when you refinance. I want to know what I'm overlooking or need to investigate.

Thanks guys.

 

How many years left on your current mortgage?

How many years do you plan on staying in the home?

Yes, your payments will be lower. But if you re-start the clock on a 30 year mortgage, your first few year's payment COULD include more interest and less principal than you are paying now. This may matter if you plan to sell the home soon, and want your principal to be reduced as much as possible. If you plan to sell soon, it also makes the cost per month of the $950 VA fee higher (if you sell in 10 months, it cost you $95/month in upfront costs to the VA).

FWIW, a portion of the $950 VA fee probably goes for the appraisal.

If they will go as many years as you want, have them calculate what the payment will be if you have the loan terminate the same time as your current mortgage. Then ask them to add the VA $950 fee onto the balance. See how much your monthly savings are then (it's going to be less than $320, but this is a better apples to apples comparison).

 

22

No longer than necessary...market dependent.

Fully understand that part. However, my interest (no pun intended) is in the monthly payment. I'm renting it out and loosing about $250 a month. I don't foresee the market recovering good enough for me to sell any time soon so I may very well recover from the principle issue.

See above...highly doubt I'll be selling in the next year. Plus, if my mortgage is covered by the incoming rent, then that's less worry for me monthly and less drive to sell prematurely.


Understand this too, and if I were looking at the long term with this house then yes, you are absolutely right. I don't want the equal payment right now to save a ton of money down the road. I benefit better (I think) now with the lower payment and the plans to sell when the market allows.

 

Assuming the value of the house is in excess of $100k, you will work off the $950 fee within the close of the first year of the mortgage by saving the point.

The long term considerations are of course you will be starting the clock over again and depending on the market, it may take 30 years to come back...none of us know.

On the whole, the 1% savings seems like a good thing and the lower payment may allow you to reinvest that $320 a month in a better performing asset. Of course if you end up holding this house for the full 30 years, I am sure you might be slightly further ahead by retiring the debt in 22 years versus 30 years.

 

That's good to know. I'll have the house for a minimum of another 14 months based on tenants lease alone.


Yep...never know.


Shoooot...not looking at investing in a better performer, just looking at breaking even on the rent!

That may very well be true, and I'd be interested in investigating a way to run those numbers and see. But like I said in the last post...no intentions at all of keeping it past a profitable market position.

 

To me the numbers look like a no brainer. You go from a $250 per month loss to a $70 per month gain. You can take the $70 per month and place it in an account specifically for the house. If anything breaks or needs maintenance (which a house always does) you will have at least a portion of the cost readily available. If nothing ever breaks you can use the money for your closing costs when you sell. The $70 per month savings would be enough to just recover your $950 funding fee when you go to sell the house in 14 months, but when you consider you are no longer bleeding the $250 per month your funding fee is repaid in three months. I would take the refinance. Cash flow is king.

It sounds like your bank is offering you a VA streamline refinance, which can be very good deals. If you are a disabled vet you can have that funding fee waived, which will result in the cost of the loan being even less.

 

The less you owe the more your house it worth to you when you are ready to move on.

I don't know what you should do, but we refinanced, after 9 years in the house, at the end of last year. We had a first mortgage at 6.75 and a second at 6.25. Rolled them together at 4.0. Lowered the term from 30 to 15. Our payments are about the same as our first mortage was. We continue to pay what we did when we were paying two mortgages, to get that principal paid down ASAP. We want to lower what we owe, because like you, when things look better we want to get out of this house and into something more comfortable.

My thought is at this point we are better off lessening what we own than having the low payment. It'll pay off in the long run, assuming that the houseing market ever recovers.

 

We just finished our refinance in April -- dropped from a 30-year mortgage with 22-years left to pay to a 15-year mortgage and our payment actually dropped by $150.00 per month! The numbers were so compelling for us that it was a no-brainer (went from 7-1/8% on the original note to 3-3/4% on the refinance) especially since we will likely stay in this home until retirement age.

The one snafu we ran into was that our property value had dropped so much that we actually had to put up a pretty good chunk of change as a down payment on the refinance (frustrating since we put over $30k down at the time we originally purchased the home!) to keep the loan-to-equity in balance on the refinance. While I'm sure property values will come back around, I don't suspect this to happen for another 5 years or so in this area.

If anyone tells you real estate is a "can't miss" inverstment and that you can't lose money on a home, they're lying to you -- we live in a completely different world than our parents did in decades past......

 

That's the problem we are having. I would love to refinance my mortgage. I would be able to cut 3-4 points off the interest. The reduced loan cost would save me about $1k per month. The one obstacle is we have to pay down about $55-60k. Most of my money is sitting in tax advantaged accounts so that sum is not going to happen.

There are actually government guarantee programs out there for people who are upside down and do not have late payments on their mortgages (basically very low risk mortgagees) but private industry won't write the loans. The VA provides 100% re-fi, FHA also provides 125% re-fi loans both have standard underwriting required to qualify (i.e. <38% back end debt ratios, no liar loans, no low-doc loans, credit score above 620, etc.). The problem is the banks don't offer these programs, even to people with 800 credit scores.

On a personal note, I don't see the real estate market coming back anytime soon. Many people live paycheck to paycheck. Over 20 million people are upside down in their homes. That is 20 million people who are taken out of the market as both buyer and seller. Many won't/can't buy another house until theirs sells and they can't sell their because they owe too much on it. As long as this condition persists the housing market will continue to to be weak. The downward pressure will continue as boomers start hitting their dying years and population starts to level off or decline. So how I see it is just about the time the market starts to make a good recovery, the boomers will start passing causing a housing glut and the resulting price decreases from too much supply.

 

I'm only 21 and have not owned a home and don't plan on it for a while so excuse my arrogance but from what I have learned at school and talks with my dad (Industrial/commercial real estate agent) it seems that when you refinance your home, in the long run, you just end up paying more $ than what your house is worth. And since nobody knows when the market will be up enough for you to sell it you could theoretically have "x" invested in payments, fees, etc and the house is only worth a portion of "x" so then your in the hole even more. So it almost doesnt seem worth it from what I think I understand about it. But like I said I am still young and dumb so I could be totally off. Please correct me if I am wrong.

D

 

It comes down to a simple mathematical equation -- not every refinance makes sense, while others make incredible sense. If I were only a few years short of having my loan paid off, it would make little sense for me to refinance. However, in my case by refinancing I reduced my "total housing cost outlay" over the next 22 years by over $187,000 -- and own my home free-and-clear 7 years sooner!

 

As with anything, if you finance it you will pay more than it is worth. The hope is to buy it at about what it is worth and sell it at some future date for a profit. This doesn't always happen. Paying more than your house is worth is not really the argument. Whether you buy a house or not is kind of irrelevant. Either way you will be paying for a place to live. After 15, 20, 30, 45 whatever years, you will stop paying for your house if you buy. If you rent a comparable house and you pay a comparable amount you will always pay more than if you had purchased, because your payments never end.

Assuming the OP was using the dwelling to live in. If the OP refinances the house, to a lower interest rate, but maintains making the same payments he will pay less for the house than if he hadn't refinanced. Similarly if the OP shortened the length of the mortgage to less than what was outstanding for approximately the same or a little higher interest rate, they would also pay less for the house (exact numbers would have to be calculated to make an accurate determination). If the OP maintains the same mortgage terms (i.e refinancing a 30 year mortgage with 25 years left to a new 30 year mortgage) it would depend on the interest rate. If there is enough of a reduction in the interest rate it is very possible to save money even though the term was extended.

In the OP's situation they are using the building as an investment, even if only temporarily. In this situation the OP convinced someone else to buy their investment for them while they maintain control of the asset. As is taught in business 101, you don't make money from the ownership of tangible assets you make money from controlling tangible assets. In this case the control of the dwelling has led the OP to be able to charge another person for the use of that dwelling. If the OP is able to charged more than their payments for the use of the dwelling they collect a profit. As long as the person controlling the assets is able to on average charge more than they pay for control they will make money. The value v. cost of the dwelling is irrelevant.

 

Ok, so since he has 22 years left it makes sense to refinance the house because he will have a gain of $70 instead of a loss. And by re financing he ends up paying less a month on the house but still makes money by renting it out.

That makes sense.

 

It sounds like you understand it. Edited to add: If you look at the OP's finances as a whole, instead of carving out just the investment on the house, the OP will be taking a $250 per month increase in his pool of money, not just a $70 increase.

The second part is even if the OP doesn't make a month over month profit he can still make money on the deal. Let's say he does not refinance, but holds onto the house for another 22 years and rents it out. His total cost from this month forward would be $66k, not including repairs and maintenance. If the OP had purchased a house valued at $140k and the value kept pace with inflation in 30 years it would be worth approximately $340k. The OP's investment is approximately $100k (66k + his payments from when he lived there). Assuming he could sell it for the appraised value he would still make $240k. Not too bad for showing a month over month loss.

 

Not taking a $250 increase in my montly money pool as I am $250-ish a month in the hole on the incoming rent. A $300 reduction on the monthly housepayment for that house will put me about $30-$50 a month profit.