Refinancing a Tiny Mortgage?

My suggestion: borrow a lot more money, and then immediately (say, in

4 months) prepay whatever is the amount that you did not need. i

Since he has excellent credit, he probably could borrow 42K from another lender, without collateral, at a low interest rate. Then he could pay off the mortgage entirely, tell the bank goodbye, and make payments to the new lender at the lower rate.

I doubt that he can get unsecured loan at a lower rate than a secured loan.

i

Maybe not, but the difference between the "old" and the present rates could be huge. I get the impression the bank people are trying to pull a fast one and would hate to see them get away with it. Your idea could be better.

I agree with Igor. Just make sure there is no prepayment penalty in the new loan.

The problem with this is that prepayments shorten the remaining life of the loan ("curtailment") rather than lowering the monthly P&I costs.

Just to make up some completely fake numbers here for demonstration purposes, suppose he has a mortgage for $40,000 now with 10 years left on the mortgage, at 6%. His monthly payments for the next

10 years are $444.

Now he refinances into a 15 year at 4%, and does a cash out, so that his new mortgage balance is $100,000. His monthly payments for the next 15 years are $739.69.

And now he prepays that extra $60,000 so that his remaining mortgage balance is the same as it was before. His monthly payments remain $739.69, but now he's only got 4-1/2 years remaining life on it.

He comes out way ahead by doing this, but his monthly cashflow hit is quite a bit higher.

If he refis to a 30-year, with say a 4.25% rate and does the same prepayment ($60,000 after the first month), the monthly payment is $491 and he'll have the whole thing paid off in about 8 years.

Play with a mortgage calculator (there are many online) and find one which allows you to factor in a one-time prepayment.

I'm surprised that no one mentioned a HELOC. Mine is now at about 2.5%. Get one for as much as the lender will go, pay off the 1st Mort and leave the rest to lay around until you need it for something else. You only pay interest on the amount you have used.

Chip

[snip for brevity]

Amend your statement to "... possible problem... " and your elaboration is perfect. My friend had been planning on upping his monthly payment towards his mortgage to around $1000 a month. This is a measure of how much he wants outright ownership of the house.

So thanks, Igor, Bill, and Bread. I will share with my friend.

A few follow-up questions:

So he borrows way more. He should check for no prepayment penalty and also how much more the fees will be, right? Since points are usual, and this of course is a fraction of the total loaned? Might this result in this plan not being to his advantage? (Pardon my naivete. I do not routinely contemplate mortgage permutations.)

I grant that superstar borrowers like regular joetaxpayer (see his blog on this) often have no points, no fees yada when they re-fi. But my friend is not finding this.

Chip, I hear you about the HELOC. My friend had some reason for not going this route, but I will see what he will share.

Don, ditto on other lenders that do not require collateral. In this crazy low interest environment, I cannot rule this out just yet.

Have you tried a mortgage broker (who has a large list of banks available). Also, there was an article about FHA I skipped because I already have a mortgage - they might be more willing to handle 42k. I'm not sure that's a "tiny" amount of money.

And the interest would not be tax deductible. Maybe not an issue since the loan is not large enough to exceed standard deduction. -- Doug

Have your friend go to a credit union that gives mortgages and stop trying to deal with the crooks at the banks. Thumper

Yes, credit unions are a good idea. Another point, perhaps overlooked, is the equity and the market value of the property. The equity could determine what options are available. If the 42K is what is left of a

150K mortage on a property now worth 200K, that is one thing, and financing options may be limited. But if the 42K is what is left of a 500K mortgage of a property now worth 1 million, that is a different matter, and there should be no trouble getting a loan at a favorable interest rate.

For most people, the interest amount doesn't need to exceed the standard deductions. Interest + property taxes + state income (perhaps) needs to.

Brian

Every bank have different policies. Why don't you ask to another bank. And by the way all banks will be charge for refinancing. The best option will be to payoff credit as he planned.

No. There are banks advertising here no points/no closing costs. In this case, rate and potential early pay off penalty are all that mater. ("here" is Massachusetts, by the way. I imagine, but am not certain, banks all over are offering such deals.)

Joe

And how is that different from "all banks will charge for refinancing"?

Charges are charges, whether they're paid at closing from separate funds, financed into the closing as additional costs or get reflected in higher rates or early pay off penalties.

For the person looking to pay off their home in three years I can almost guarantee you that it will NOT pay to refinance. Even if he gets a 2 point drop in the rate, he'll still have to pay recordation fees, attorney fees, appraisal fees and other costs. Considering he only has 3 years left on the mortgage now, most of what's paying is principal anyway. I don't see any realistic way for someone in this position to refinance and come out ahead.

Gene E. Utterback, EA, RFC, ABA

Gene - did you read my reply? My last refi had no points/no closing costs at all, no recording fees, no nothing. No early payoff fee, I just warned that with no point/no closing that was the one 'gotcha' to watch out for. Years? I broke even after two months for the time spent going to the bank to sign, the rest was gravy.

"Not all banks charge for refinancing"

Joe

Who pays for the bank's lawyer, deed registering and other various mandatory charges? Thumper

I suppose the bank absorbs the cost. Not really my concern, right? The current advertisement I see shows 4-1/8% 30yr, no costs at all.

In the situation where there are closing costs, one has to calculate the savings-months required to break even. And while doing that math, also be sure to adjust for the fact that the stated payment is likely for a different term that what remains on the current one.

Joe