Is a mortgage refinance right for us? Pitfalls?

Question

We have lived in our house for 3.5 years and plan to purchase a new home in 1.5-2 years. Our mortgage is 6.25 30 year fixed. We took on a 2nd mortgage about a year ago to pay off debt. Now we want to refinance and roll the two together with our existing car loans and credit card, so we can fix any credit problems, make payments easily, etc. so it will be easier to buy the next house. The new rate being offerred is 6.95%. Our mortgage payments will be $400 more, but we will be saving an additional $400 in monthly payments. We figure our credit will improve greatly. We were worried about paying down a credit card "over 30 years", but the refinancing co. reasoned that we will only have this "bigger" mortgage payment and interest rate for the next couple of years; it's the mortgage for the new house we need to be concerned about. (And by doing this, we will improve our credit and chances for a better mortgage next time.)

Hope that's enough info. for detailed info on pitfalls of refi.

Thanks for the replies so far. Here's more info:

Mortgage: 180K
2nd: 30K 15 year fixed at 9%
Credit cards: 8K at 21%
Auto loan: 7K at 8%
Home value: approx. $255K (conservative).
Mortgage payments + current loans = 2400/month.
Refi payment would be 2000, incl. closing costs, taxes, insurance, etc.

We could pay off credit cards by the time we want to move, using bonuses, etc. but right now it is hard to make payments on time.

P.S. I can't do the math figuring the percentages over time, etc. I am just awful at it and my head is already spinning!

Answer 1

The thing that matters most is like you said what will be best for you knowing that you are moving into a new house in 2 years...

A refinance to clean up credit makes ALOT OF SENSE!!!

The new rate is actually lower then what you have now...Even though you have a 6.5%, your 2nd mortgage is probably i assume in the 8% or higher range???

So, interest alone is less with the new mortgage..

Also, the main thing to look at , and as a mortgage loan officer i hear it SO MUCH, is the "paying credit cards over 30 years"...

YOUR NOT!!!

You KNOW you are moving in 2 years... All you are doing is tapping into your equity now, the same way you would if you sold your house and used your equity to pay the credit cards...

The thing to remember is that NO ONE takes out a 30 year mortgage, and stays with it for the full 30 years!!!

The average homeowner sells or refinances a mortgage every 5-7 years!!

Also, how much are your credit cards? Lets say $10k...Now is it really ACCURATE to say it will take 30 years to pay that $10k in credit cards???????????

If you think about it, it will probably only take 2-3 years to have that $10k paid off, so when someone says they dont want to extend credit cards over a 30 year mortgage, it doesn't make any sense.....

Also, to tie everything together...Even if you do pay more money, more interest now, and for the next 2 years until you move, you are doing it for a reason..

To get your credit back up, so that your new house can qualify for a lower rate OBVIOUSLY makes paying a higher rate for 2 years worth while...

Now you wil lhave hte critics say ITS NOT A GOOD IDEA...but the fact is everyone in america are in different situations financially... What makes sense for you may NOT make sense for someone else...

WHO CARES WHAT ANYONE ELSE THINKS??? WHAT MATTERS IS WHAT MAKES SENSE FOR YOU AND YOUR FAMILY AND THEIR NEEDS...

currently, your needs (as you have expressed) are to clean up your credit so that you qualify for a better rate in the future... That is what matters!

Also, i wanted to say that you may be able to get a lower rate then 6.95%... I work with Providential Bancorp, we are a nationwide wholesale lender...

I have been qualifying borrowers at as little as 6.5% on a 30 year... The difference between the 6.95%, and the 6.5% can mean alot of money in your pocket..

Also, being that my company banks all of our loans in house, we have lower fee's then your average bank or mortgage brokerage...

Because most mortgage companies are a middle man, they have to charge extra fee's in order to make a profit on a loan...

They also have to give you a higher rate then you qualify for in order to make profit as well (then investor they use will pay them to give you a higher rate then you actually qualify for)

What i suggest is that you do your due dilligence, and make sure you are getting the best offer...

Feel free to call me and i would be happy to give you an analisys... My name is Jason Fry, you can reach me directly at 312-264-6448, or email me at [e-mail]..

Good luck and i hope this helps! Call at any time!

Jason Fry
Licensed Mortgage Originator
Providential Bancorp
312-264-6448

Answer 2

You should consider the very point that you bring up about paying off your credit card over 30 years. Just because your payment drops by $400 per month, that does not mean it is a good deal. The balance of each of the items that you discuss is the missing component that I need to make a determination if this is a good deal for you. You should set up a spreadsheet and see how much you will owe at the end of 2 years (assuming that is how long before you buy another house). I think the remaining balance may force your decision one way or the other. I assume that your mortgage is the highest balance by far, and increasing the interest on that may outweigh the savings on all of the other items. On the other hand, you will be able to deduct all of your mortgage interest once you consolidate. Take into consideration your refinancing costs as well.

Without having all of the above information that I talked about, I can make a guess for you, and that guess is that it will be better to refinance. You will know for sure by taking all of the factors above into account.

Answer 3

A lot of the answer to this is going to hinge on the refinancing costs.

Since it appears that your total monthly outgoings are not going to change one bit, you'd be better off using those closing costs to pay down the unsecured debt.

Although you might be able to roll the closing costs into the new mortgage you'll lose out when you sell and pay it off as most of that money will still be sitting there on that 30 year mortgage. You'll have to repay it from the proceeds of the sale.

Since your unsecured debt is probably at a much higher rate than the mortgage is, you'll be money ahead in the long run if you simply pay down the debt with an amount of money equal to the closing costs.

Sit down with a fee-based financial planner and have him or her crunch the numbers for you taking into account the time value of the money. It might cost you a couple of hundred for this evaluation, but you'll know EXACTLY what the best deal is for YOUR situation! The mortgage lender wants to lend you the money and will likely tell you anything to get you to commit to a new mortgage. Their advice is not impartial! A fee-based financial planner's advice will be impartial.

Paying down current unsecured debt will help your credit score more than taking out a new mortgage. Taking out that new mortgage will actually LOWER your credit score in the short term, probably by more than the payoff of the unsecured debt will improve it.

Answer 4

It looks like your new loan amount will be in the neighborhood of $225,000. You said your house was worth $250,000 or more. So you don't have to worry about owing more on your house than you can sell it for.

You'll save $400 a month.

I say, go for the refi. Put the extra $400 a month in a savings account to be used for the down payment on the new home you plan to buy in 2 years.

Word of advice, don't close the credit cards you plan to pay off with the refi. Pay them down to zero and cut them up or whatever you need to do to keep yourself from using them, but don't close these accounts. Doing so could actually lower your credit score.