I’ll start with some tangible numbers just to keep things clear…
The wife and I bought a house last summer and have the following two mortgages:
$112,000 owed, 6.625% APR
$20,000 owed, 8.375% APR
(both rates are fixed)
Given especially the high APR on the second mortgage, I contacted her recently about refinancing. She seemed to agree this was a good idea for saving lots of interest money, but she then surveyed the current value of my house and said that it wasn’t “worth the effort” currently to refinance.
I took her at her word, but upon further thought, started wondering why it wouldn’t be worth the effort, or what she meant by that. Even with a small interest rate reduction, we’d save thousands and thousands in interest over the life of the loan.
I got a second opinion from another mortgage broker, and he too said something about how a flat home value (only purchased last year) might not make it feasible to refinance right now. He never got back to me with a final answer.
Did the brokers mean it wasn’t worth THEIR effort to refinance, or does home value have some impact on my ability to refinance that I’m not aware of? Should I get a third opinion, or investigate do-it-yourself refinancing?
Just guessing, but did you finance 100% of the purchase price of the house, or pretty close to it? I’m making that guess because of the two loans. If the value of your home has dropped in the last year (likely) then you are probably “upside down” in your mortgage. That means you owe more on the house than the house is currently worth. In that situation, nobody is going to want to refinance for the full value of the loans, because there isn’t enough value in the house itself to secure the loan.
Well, the value of your house certainly has impact on your ability to get a loan secured by a mortgage on that house. If the house value drops, the amount of money the creditor will likely be able to raise in foreclosure will drop as well, which makes the loan more risky and thus hikes interest rates.
Do mortgage brokers get a percentage of the loan as a fee? If so, it might not be worth her while to work on such a small loan, especially if the other factors mentioned are valid.
Here in Austin, values have been pretty flat and even gone up a bit in the last year. Not sure about my value specifically, though. Would being upside down by only a couple thousand still make it hard/impossible to score a loan?
EDIT: We put five percent down and mortgaged the other 95.
That makes perfect sense. My broker recommended I drop more into each monthly payment to build equity. (Which I’m already doing.)
I was mostly wondering if the rejection was my broker not thinking it was worth her time, or the market not wanting to give me the better loan. Sounds like it’s more the latter.
Oh well, I’ll just live with my crappy rate for now…
Yeah, that’s basically what the mortgage brokers are telling you. It’s not worth the effort of going through all the paperwork, getting the appraisal, trying to find a lender, etc. Lenders (at least not reputable ones) aren’t going to take the risk when you have so little equity. Even if prices are flat or slightly up in your area, there’s no way to know for sure they aren’t going to go down in the near future.
Just saw your most recent post. It’s both. You aren’t going to get the loan because lenders aren’t going to touch this one, so your mortgage broker doesn’t want to do the work for nothing. And she’s exactly right that the best thing you can do is pay ahead into the principle to build equity.
Paying ahead, especially early in the loan the way you are, also saves a lot of interest payments. Take a look at the amortization schedules for your loans and figure out which is a better deal for you to pay ahead on.
That’s the going rate for 1960’s-1970’s houses around here in my beautiful Ohio suburbia. As you see, happywaffle lives in Austin. There’s a variety of places around the country with affordable houses.
Yes - I popped in here to say that. The 80/15/5 type of loans are much harder to come by now, so even if the OP’s house is worth exactly what it was a year ago, a lender might not approve such a loan. You could plunk down hundreds of dollars for an appraisal and up-front fees, to have the loan denied.
Possibly it’s best in the short term to throw a few extra dollars each month at the higher-rate loan. That’ll get the amount to be mortgaged down a little faster and perhaps in a year, if the house price stabilizes and you’ve paid down that secondary a bit, you’ll be closer to being able to refi.
Just so you have a target to shoot for, Wells Fargo told me that they would refinance if I had paid my mortgage down to 90% of the home’s current value.
Look at the bright side, though: ten years ago, you might have had to pay PMI (Mortgage Insurance) for financing above 80%, and the PMI payments were typically far, far in excess of the extra 2% you are paying on the second mortgage. Plus I don’t think PMI was tax deductible (although I’ve heard Congress might have changed that recently).