Looking for some advice regarding refinancing a mortgage

In My Humble Opinion
1

I purchased a condo 3 years ago, am looking into mortgage refinancing options, and am hoping for some advice and/or steers on some good resources to do a little research on my own. I’ve contacted a couple banks, and I’m hoping to speak with them in the next few days/weeks, but I’d also like to do my own research, so I can speak knowledgeably with them if/when I do meet with them, and so I can avoid getting “sold” something which may not really be my best option.

My current loan is an FHA, and I only put the minimum down, so I don’t have much equity (if any) unless I get a very favorable appraisal. I’m wide open to ideas at this point, and am hoping to consider all options, including going to a 15 year from my current 30 year, and also possibly borrowing against my 401k to make things work if necessary.

Besides the general advice, and probably 1000 questions I’ll eventually have, I do have 2 specific questions so far. Both are probably speculation, however I’d be interested what other people think:

  1. Earlier this year, they came out with new FHA streamline refinance requirements, which were very favorable to those who purchased before June of 2009. Unfortunately I bought my condo in October of 2009. Any chance this program gets extended to include someone like me?

  2. Although I think I could move forward now, I’d be in a much better position to do something in 3-6 months. Any guesses as to where rates would be then? Am I risking “missing the boat” if I delay until next spring or so?

Thanks for reading, and any advice would be appreciated. Besides the two specific questions I already have, I’d also be interested in more general suggestions or things to do or not to do, etc.

2

If there’s a credit union you’d be eligible to join, try talking to them. They can be a little easier to work with than the major banks. You might also ask around to see if anyone you know has a mortgage broker they’d recommend. We worked with a trusted broker when we refinanced our house, and he got us a great deal (and timed it really well). It was worth the extra cost to hire him.

I’d suggest you not borrow from a retirement account in order to refinance. As for what the rates will be in 6 months, who knows? It doesn’t look like they’ll be rising soon, but I don’t have a crystal ball, and neither does anyone else.

Don’t rush into things because you’re afraid of missing out on today’s rates, though. A mortgage lasts too long to jump into without all the facts.

3

I looked into refinancing a year ago when rates were really low. The problem I ran into was that there was an initial cost to refinance, and the bank (Wells Fargo) wanted the new payments to recoup that initial cost within 3 years to make the whole process worth while.

From memory I think the cost was high, like $3000, so the new monthly payments needed to be $250 lower to recoup the cost over 3 years. But even though the advertised rates were low, they would only knock 1% off, which didn’t lower the payments enough.

4

You should be able to get estimates of closing costs on a number of different mortgage-finder websites. You may even find mortgages with “no closing costs” (where they cover it but roll it into the rate e.g. 4.5% vs 4%). Depending on your current situation and how long you plan to stay, that may be worth considering.

Do you know any stats regarding your condo association’s reserve funds or percentage of units which are rental vs. owner-occupied? Some banks are very reluctant to issue loans where the condo assocation is mostly rental.

Look at sales of condos in your development. Those figures may be available online on your jurisdiction’s website (ours are). That should give you a decent idea of what things have been selling for lately, which would give you a fair idea of how your place will appraise. Adjust as needed - in my county, the tax valuation is often significantly less than the sales value. The year before we bought the house, the tax valuation was 66% of what we wound up paying for it. The year after we bought it, the tax valuation was 80%. Yes, 80% of what it had already sold for!

How long are you expecting to stay in this place? The longer the expected term, the less you have to save on any given month for it to be worthwhile. If your closing costs are 3,000 and you’re going to save 100 dollars a month, then 30 months from now you’ve hit break-even. If you think it’s likely that you’ll be there after 30 months, then that’s reasonable. If you think you’ll sell in 2 years, it isn’t a good idea unless you’re saving at least 125 a month.

Consider that if you refinance, you’re possibly extending the life of the loan. If you’re 3 years into a loan, the balance is 100,000. your payment is 1,000 dollars, so 27 times 12 times 1000 is 324,000. If you refinance and your payment drops to 900 dollars, over a 30 year loan, that’s 30 times 12 times 900 - which is also 324,000. So you don’t have any net savings. You do have a current cash flow improvement, which is nothing to sneeze at (and if you’re not planning to be there in 30 years, you don’t need to worry too much about the 324,000).

You also lose out on some tax deductions, especially initially. If that 1000 is nearly all interest (at this point, it mostly is), and you reduce your payment to 900 a month (still also interest), you’re losing a hundred a month in deductions. Let’s say your taxes net out to 30% of your income: your net savings with that refinance isn’t 100 a month, it’s 70 a month.

In what way will your position be better in 3-6 months? Expected higher income? more cash savings to cover the closing costs? less non-mortgage debt? I’d be pretty leery of touching the 401(k), even as a loan, because of the potential costs of that - but if it’s for a small enough amount and the potential benefit is enough, that might be a reasonable option.

5

Thanks for the replies, especially the steer on speaking with a credit union. At this point I’m really trying to compile information and determine my options, and sitting down with someone to just go over a few questions sounds like a better starting point than actually filling out mortgage applications which it seems like the banks consider to be the “first step”.

To answer Mama Zappa’s question:

Literally all of the above and then some (including fixing up a few things and making some home improvements). By the end of next spring I think I’ll be in a stronger financial position in several ways, as well as have more clarity on some less tangible things. I could definitely move forward on a refi now, but I’d have more resources and information in a few months.