Help a Reader: Good Time to Refinance?

Here's a reader question I just received:

Is it a good time to refinance my mortgage right now even amidst all this craziness happening in the market? Currently I have an 80/15 split. The 80 I have at 5.75% until 05/2010. The second I have at 7.49% until 5/01/2010. I think the second one is a balloon (whatever that means). Any thoughts would be helpful.

What do you think?

Comments

[HeavyLee]

I think the reader is potentially in a lot of trouble. I say this because she/he has signed a mortgage that he *thinks* is a balloon mortgage, and doesn't know what a balloon mortgage is.

My suggestion is to first find out for sure if it is. If it is, educate yourself about exactly what a balloon mortgage is. Then re-assess your situation at that point.

[Chad @ Sentient Money]

This reader is in trouble if he doesn't know what a ballon means and he SIGNED the contract. The largest amount of money 95% of us will spend at one time in our lives and he/she doesn't know what they are signing?

The best advice is to GET THE HELL OUT! Get a fixed rate 20 or 30 year mortgage and be done with it. However, from the cluelessness of the question and the type of loan, I would bet this person is in a house that is too expensive for their income. It might be difficult to get out of at this point. This person won't find many willing to take any risk at this time.

Sorry for being harsh, but this person deserves it.

[guesterino]

A balloon means that your second mortgage is interest only (or close to it) and at the end of the term (05/2010?) the entire balance will be due. If your credit is good, you should be able to refi it into a P+I fixed rate heloc at about 7.5% with no closing costs - check into this right away.

Refinancing your first mortgage is also necessary but much more difficult and costly (depending on your credit and income you may not qualify for many mortgage refis). Your rate may increase substantially in 2010. If you can't refinance it, you may have to consider selling the house.

[BobL]

The most important information that is missing is how much equity they have right now. Is it still 5%? Has it grown or (more likely) shrunk? If they're in a place where they owe more than the house is worth then they may be eligible for some of the programs being offered by mortgage companies. At the very least they wouldn't want to refi with negative equity...

Talking to the mortgage company(s) about their concerns wouldn't be a bad idea either. Its not like they will make you pay more if you ask them a question.

[Kevin]

I think you better figure out quick if that is a balloon or not. You could be on the hook for paying that 15% in under 2 years. Do you have that kind of money sitting around? I wouldn't worry about refinancing the 1st, that is a pretty low rate.

If you're planning on staying in the house and could refi into a 15 or 30 year mortgage for the whole balance (pay off both loans) that might work, but it doesn't sound like you have enough equity to meet the 80%.

[LC]

First figure out what kind of mortgages you have. Balloon payment means that you will have to pay off the entire loan in 2010. So either have that money saved up or be paying extra so that the balance is zero by that time.

It sounds like your other mortgage is also an ARM ready to adjust in 2010. This means that your payment will likely go up. You want to find out what your new payment will be at that time and see if you can afford it. Many ARM's have a stipulation that the rate can't change more than 2% at a time.

Now is a great time to refinance to a fixed rate if you can. That way your payments will be constant and you will be paying less in interest.

ARM's are not necessarily deserving of the bad rap they have gotten. They are a good option for many people as long as you can afford it. We have a low fixed rate (5.875%), and we are actually planning on refinancing to an adjustable rate mortgage because the rate is so much lower and we will have it paid off before it resets. Even after it resets, the rate will still be lower than what we are paying now. I wish we had gotten one from the start because we would be ahead of where we are now, but no one explained what they were they just said you don't want one.

Based on the loans you have, it is possible that you have a house that you can't afford. Your house payment should not be more than 30% of your take home pay, and the total mortgage shouldn't be more than 2 times your income, unless your other expenses are very low. I would take a hard look at whether this is something you can afford and possibly think about selling.

[Hal]

I'm not even going to assume whether this person can afford the mortgage or not--that's neither here nor there. However, I would suggest that the reader understand exactly what mortgages s/he has. Also, we don't have enough information to answer this question--what's the LTV of the mortgage's combined? The reader may not qualify if s/he's upside down on the house!

I would argue that if the reader's not upside down, the stability may be worth refinancing if s/he can't afford the balloon payment or afford to pay off the second mortgage. However, if s/he can afford to pay off the second mortgage, I also would argue that it may be more prudent to pay down the second mortgage and keep the first. Guaranteed 7.49% return--great in any market, phenomenal in the current one. Besides, 5.75% on the first mortgage is hard to beat in this market.

[Jim]

Yes I'd try and refinance the entire balance into a single 30 year fixed mortgage if you can. Assuming you plan to stay in the home for at least a few years.

I wouldn't worry about the 'crazyiness' in the market right now. Rates are still fairly OK for mortgages. The problems the banks are having right now shouldn't concern you as far as your mortgage goes. If a bank holding your mortgage fails then they'd just sell the contract to someone else and another bank would acquire the mortgage.

Jim

[Anitra]

We also have an 80/15 split, where the 15 has a higher rate and a balloon payment - but in our case, the rates on both loans are fixed. We've been doubling our payments on the 15 so that the balloon payment is not a worry.

Even so, we are seriously considering re-financing into a single fixed-rate loan within the next 6 months or so. Rates are low, we're still responsible borrowers, the only question is how much we'll have to pay in fees to re-finance.

I would suggest that the reader get themselves into a true fixed-rate mortgage, and soon; otherwise, they will probably be facing a large increase in their payments 2 years from now.

[MonkeyMonk]

Don't necessarily assume that just because people have an ARM loan that their payments are going to go up. E.g., many of these loans are pegged to indexes such as the Libor which is tracking very low right now.

I have a 5-year ARM coming due in about 9 months. I looked into refinancing but when I contacted my loan company I discovered that (if the current rates holds) I should see a 0.25% reduction in my interest rate for next year. I plan to move in the next couple of years so that wasn't much of an incentive for refinancing.

I would only consider refinancing into a true 30-year loan if you're definitely committed to staying in the house for a while.

[Trent D.]

There's not enough information given here, and that scares me.

1) No mention is made whether this is a FRM (fixed rate mortgage) or an ARM (adjustable rate mortgage). I'm guessing it's an ARM, by the very low rate on the first mortgage.

2) It is CRITICAL to find out whether or not your 15% loan is a balloon or not. If it is, your number one priority must be to either pay off that loan before it "pops", or refinance to a standard fixed rate loan.

My suggestion? IF these are fixed rate mortgages, AND the second loan is a Balloon...You're not going to get a lower overall rate right now, so I'd personally pay extra on the balloon, getting it fully paid off before the total comes due. I'd then enjoy my nice 5.75 rate on my remaining 80%

IF these are adjustable rate mortgages, immediately consolidate and refinance with the best rate you can get for a fixed rate mortgage. That'll probably be in the 6-6.75% range, depending on your credit.

[Meg]

First things first: In almost every circumstance now, you CAN'T refinance unless you have some equity in your home. Many banks aren't even doing the 80/15 thing anymore and lots of them won't re-fi you at ALL unless you have 10% equity in the home (or are willing to put it down in cash). Something tells me this borrower very well may not, which rules out his question.

Second, does the borrower have good credit, some liquidity, and a debt-to-income ratio under 35%? If not, forget the idea because your rate won't be much better anyway.

Even if he can re-fi, the only reason to do so would be to fix the interest rate, which he may not be able to do if that would increase his payment too much so that his debt-to-income score is too high. Add in the hassle factor plus fees and closing costs and I'm betting he won't be able to do this.

A better idea would be to pay extra on your 7.49% loan - or at least put in savings what extra you can afford to pay on it. That way you'll have more equity (or cash to put down) when it's time to refinance in a few years. You avoid all the fees and hassle and save as much or more as refinancing to a lower rate.