While interest rates are low, I (like many others) am considering refinancing. When I called a bank to talk to them, they said that I should get a home equity loan instead. Their reasoning is that with a HE loan, there are no closing costs, their rates are “comparable” and it’s a lot less hassle. They’ll do a free “drive by appraisal” to determine my home’s value.
My specific situation is: Paid 70K for my house (housing is cheap in Oklahoma) 7 years ago. Got a 15 year mortgage for 56K at 8.5%. I made extra principle payments some time ago and now owe 26K. My current P&I is 550/month. It’s difficult (for me anyway) to determine exactly how much longer I have to pay on my current loan because of my extra principle payments and my mortgage company wants $15 for a new amortization schedule. I’m guessing that I have about 7 years left.
The new company tells me that they can give me 26K for 5 years at 7% and my P&I will be 515/month. This sounds like a good deal to me. In fact, it sounds like too good of a deal. I’m a firm believer in the “if it sounds to good to be true it probably is” axiom. Are there any gotcha’s that I need to know about? Any advice or experiences that anyone can share would be greatly appreciated. Thanks.
According to the payment function in Excel, the monthly payment for a 60 month loan of $26,000 @ 7% interest annually (0.5833333% per month) is indeed $514.83.
Actually, that’s how I came up with the payment. The bank just threw out an interest rate. If they don’t come up with a payment of 514.83, I’ll really know to be suspicious.
I think you can beat 7% right now. My HE loan is currently 4.5%. Of course, that’s a variable interest rate. A fixed rate would normally be more, but then you’ve got a LOT of equity built up. I’d shop for something in the 5% range before I signed any papers.
I agree with John Carter of Mars, although fixed rates are creeping up and 5% might be a little optimistic. There’s also the question of your financial situation as a whole. Do you hold any credit cards, have any auto loans, etc, which would be better to pay off before your mortgage? Just a thought.
I recently refinanced my mortgage when rates were bottomed out and saved about $350 a month on my house payment. By turning that directly into extra principle payments, I’ll shorten my amortization time by several years. Altogether a good deal.
I’m a little surprised that your mortgage company wants $15 for an amortization schedule. Many major lenders offer that service online for free. Or you could simply use Excel.
For a term that short, you should certainly be able to do better than 7%. Consider whether, if you get a lower interest rate, closing costs might be worth the whole refinance.
Shop around. We managed to refinance back when rates were at their lowest (it pays to have a mortgage broker who’s a good friend and who’s on the ball), and we got 5% on a 30-year loan.
Seems like your first step should be to pay the $15 for the amortization schedule. These are big decisions, and for me, it would be worth it to know exactly what my current situation is before I considered making a switch.
The other thing I’d consider is whether you would still be able to itemize the interest payments of the home equity loan on your tax return. That can make a big difference, too.
Thanks for all of the replies. One of the reasons that my rate is higher than expected is that I don’t need to borrow very much. The banks that I have talked to require a 35K loan in order to get a “good” (6.25%) rate. I don’t have any other debts so I’m not very interested in borrowing more than I need.
The 7% offer is a fixed rate and there are absolutely no other out of pocket costs. There’d better not be at 7%.
What exactly is the difference between a home equity loan and a true mortgage? I’ve always thought that “home equity loan” was just a different name for a second mortgage.
You can only get a home equity loan for the actual amount of the house that you own. If your house is worth $100,000 and you still owe $40,000, you can only get a home equity loan for $60,000. You them could use that $60K to pay the $40K, and have $20K left. But you could do a mortgage re-fi for the total $100K.
That’s certainly the impression that I’m being given. Other than the amount available for loan, I don’t see a difference. The mortgage company will put a lien on the house just like the original mortgage company did. I don’t understand vunderbob’s “less forgiving” comment either. I guess that if you’re late with a payment, they might be able to raise your interest rate. I’ll have to check into that.
