Background (you can skip this): bought the house in 2004 in San Francisco during a time of bidding wars and frenzy. Paid $60K more than I wanted to for any house, let alone this one. Able to pay interest-only on the mortgage, had been counting on increasing value to re-finance to a lower rate. Re-financed once in 2006 mostly just to consolidate the 2nd and 1st mortgages. All mortgages to date are with Wells Fargo. Current interest rate is 6.25% apr.
I would have re-fi’d a long time ago to get that lower rate except that since 2009 the value of my house has been below what I owe.
Two things have happened to change that: we have done a lot of remodeling in the house, including changing an unwarranted bedroom and bathroom to warranted; also home prices in SF are on the rise again.
Just as I was about to finish the 2nd round of remodeling,and try to get an appraisal good enough to re-fi, Wells Fargo contacts me offering to lower my interest rate to 4.25% on the existing loan (not to start over). This would be an interest + principal loan so the payment would end up being larger than my current interest-only payment.
I was hoping to apply elsewhere (or to WF for that matter) for a real re-fi at rates that are more like 3.75%, and start over at 30 years so the payments would be smaller.
I can afford my current payments and expect to be able to continue to afford them. I could afford the $150 increase that WF is proposing. But life would be easier if I could get a smaller payment, especially since I am retiring in under 3 years.
Should I accept WF’s offer (there is a time limit to get this interest rate), and then look for a re-fi (probably elsewhere) anyway? I won’t be able to get a new appraisal before the time limit is up.
FTR, WF has done nothing wrong to me ever, except possibly allowing me to buy this house with only 5% down.
Roddy
It means that it is now up to code; if it’s not up to code, it doesn’t count as living space for appraisal. So what this means is that we officially had a 2 bedroom, one bath house, now it’s 3 bedrooms, 2 baths, plus an office.
Roddy
What is the term of the loan they are offering you? I’m guessing that it is pretty short in order to have your monthly payments go up despite such a big decrease in interest rates.
When does the interest only period on your loan run out?
My mortgage is with Wells Fargo also. We thought about refinancing, again, and found the very low advertised rate comes with a bunch of fees, unlike the loan we got the last time we refinanced with them.
I live in Fremont, and there have begun to be bidding wars also here, but also some homes sold for 5% under asking price. How far are you under water? Things seem to improving pretty quickly. If you are not far under, you might find another ban to refinance with, but I’m not sure you’d get a better deal.
There is 24 years left on the current loan, 4 years until the fixed interest rate period runs out. I’m not sure what happens then, I want to be sure to be out of this loan by then. I only took it in the first place because I assumed I would be able to re-fi again before the fixed-interest period expires.
So in place of a 4-year fixed interest plus 20-year variable interest loan (not sure if I could continue to pay interest-only for the whole loan) I would have a 24-year fixed interest loan where payments include the principle. That’s why the payment goes up, but not by very much.
Roddy
Have you run the numbers on a 15-year loan? We just did a refi on our place - the value had dropped since we bought it in 2010, but not enough that we were underwater. But I was shocked to find out that we could refi to a 15-year loan, and because the interest rate was so much lower (2.85% instead of 5.375%), the payment only went up a teeny bit (PMI is cheaper on 15-year loans, too). Can’t hurt to ask. Good luck, whatever you decide.
Thanks for the suggestion; if I go looking for a real re-fi, I will definitely run the numbers for shorter terms.
I guess what I really want to know is whether this Wells Fargo offer seems like a good deal, or not so much. Since they are doing it under compulsion, I’m sure it is the minimum they can get away with. I don’t know how they are coming up with this 4.25% interest rate, which seems to be higher than market right now. I think they are assuming that I am still under water and have nowhere else to go.
Roddy
It would be nice to be able to say to WF “hey, this other bank is offering me a much better deal, so can you beat it?” Right? If not a formal appraisal, can you get a comparative market analysis from, say, a real estate agent that takes into account the changes you’ve made? And then take that to another bank to get a competing offer?
Also, what fees are they including? It would be annoying to get stuck with a couple grand in WF fees if you’re just going to get a better deal soon elsewhere and then incur another couple grand in fees.
So basically, what do you have to lose by saying “hey, your numbers seem high. What’s up with that?”
You have a variable-rate mortgage, which varies according to the prime interest rate. Currently, the rate is 0%, meaning the bank will probably charge you 2.5% (ish) when your rate hits the variable phase. The reason they want to give you a 4.5% rate, which looks like free money, is because they’re either going to charge you fees up front or they want to lock you into a higher rate than you’re about to receive via the Fed.
You won’t know until you visit the competition. You don’t have to get your house appraised - just ask how much to roll over your current loan. That will depend on your credit score more than anything.
15 year loans are good, but the cash flow is much worse, and if you are getting out in a few years the cash in your pocket might trump the lower interest rate. Again, there is nothing like finding out.
Advertised rates usually assume the best credit or lots of equity. Again, you won’t be able to tell if it is a fair rate until you check.
With the rise in home purchases in the Bay Area, I suspect the banks aren’t as hungry as they used to be. Our last refi had no fees, the one we looked at recently had lots.
The key in all this will be the fees. The in place WF loan should have little or no fees. The non inplace new re-fis will likely have substantial upfront charges for loan points, appraisal costs, and titlework fees. These will potentially amount to several thousands of dollars.
If you will hold the home for some time a competitive refi (with costs) makes sense. if you intend of flipping out of the house in a few years the in place WF deal probably makes more sense.
Is this a mortgage readjustment with no fees, or an actual refi?
We did a readjustment with Wells Fargo a year or so ago, and I read through all the paperwork and I couldn’t find a reason we wouldn’t. Absolutely no fees - not even an appraisal - they just offered to lower our interest rate.
If that’s the case with you, I don’t see why you wouldn’t take it and continue to shop around for something lower. As others have said, the fees are the issue, and if there’s no fees, there’s no issue.
What kind of fees are involved? If there aren’t any (or they are minimal), then jump on it. It seems like a no-brainer in that situation. You can always do a “real” refi afterward if the house’s value supports that. The only hitch would be if that 4.25 comes with a prepayment penalty.
Your payment may be going up 150 a month but I’d bet that is all going to principal, so while your cash flow is changing, that’s money “in your pocket” so to speak. And this way you’re not at the whims of the current interest rate when the interest-only period expires in a couple years.
If you like playing around with numbers, look at your current loan docs and see what the rate might adjust to in any given year (there’ll be a lifetime cap and perhaps an annual cap). If you were to stay with the current loan, what might your payment go up to?
Not relevant to your situation, but we’re currently at 4.25%, 2 years into a 30 year loan. We could refinance to 3.5 or so (30 years) but at this point the cost savings wouldn’t be worth the hassle, so we just pay a bit extra so we’ll be done in 22ish years. We could refinance to a 20 year loan (3.25 or so) but the payment would increase enough that it’s really a hassle. We could certainly manage the higher payment, but at this point it’s easier to just pay extra on the current loan. Some financial writers say they’d rather have the lower mandatory payment, and prepay when they can, vs. the higher mandatory payment for the shorter loan (because you can always pay extra, but you can’t pay less if it’s a cash-poor month).
So right now you are on an interest only loan? You Need to get out of that, those are never interest only forever and when the interest only portion ends your payment will go WAY up. 4.25 is a great rate, if the fee’s are reasonable take it. Of course make sure that’s fixed not ARM because rates will go up.