Why Bother Refinancing – I
by Evan Vanderwey on 09/03/10 at 10:24 am
Appraised value may not be enough – should I take the risk?
I made this one first because this conversation is at least a part of nine out of ten discussions with clients who are evaluating a refinance.
Mr. Client (Joe) called in and said that he owed 150,000 on his mortgage. We ran the numbers, and a refinance would definitely be very beneficial. He has an interest rate of 6.75% right now. Even though he makes payments to a local bank, Fannie Mae is the lender who funded his loan – that means he could refinance even if his home is worth far less than his mortgage balance. How much less? If his home appraised for $125,000, he could still participate without bringing a lot of money to closing.
A refinance could put him in a 20-year mortgage for just a few dollars more than the payment he makes on his current loan which still has 27 years left. His principle and interest payment is right around $1000. That means his savings would be $84000. Seven years of payments – 84 months X’s $1000 per month. This would make a lot of sense.
But he’s concerned about his home’s value. He purchased it three years ago at the top of the market and put very little down. He knows of two homes that are about the size of his on his street that recently sold for over $100,000 – but not much over. Both of those sales were bank-owned properties, and the three homes that are currently listed for sale on his street are listed at around $115,000. He has called a Realtor and paid her to see if any homes have sold in the last 3 or 4 months that were not bank-owned and may have gone for more money. Nothing turned up. This is a rather large neighborhood that is bordered by main streets on almost all sides. We think his value would come in right around $110,000 based on the information we have.
In this case I had to tell the client that he should not bother paying for an appraisal – his home would not likely appraise for enough money to make this worth his while.
Now having said that, we did discuss the possibility of his coming to the closing table with some money. Because his mortgage is owned by Fannie Mae, he is eligible for a mortgage of 125% of what ever the value is. That number would be $137,500.
If Joe had $12,500 in his account and the ability to cover about $2500 in closing costs on top of that, then he might be able to get this done. He would have to move some money from his cash reserves into the equity of his home. If he has a cash reserve – and taking this money would still leave him with a minimum of three months of his expenses – then I would recommend he do it. In fact, if he did that, then he could potentially squeeze into a 15-year fixed mortgage – his payment would be just a few dollars over $1100. Then is total savings over 15 years would be around $130,000!
Now that would be quite a return on $12,500.
