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.
Hope this helps
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 just got a new mortgage and got 5%. Within the last month. I think you can do better, too.
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%.
I would be suspicious of a home equity loan becoming a primary mortgage. HELs are much less forgiving than true mortgages.
You should be able to find someone to refinance your primary, as most people have said already.
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.