My wife and I bought our house in 2007 for $139,600 with a 30-year mortgage at 6 percent, and we owe around $119,000. Our payment is $1,011 per month, and that includes private mortgage insurance (PMI), our homeowners’ insurance premium and our real estate tax escrow.
Our house is worth around $125,000. The loan we have is through the local credit union and is not owned by Freddie Mac or Fannie Mae, so we don’t qualify for the HARP program.
We have a good faith estimate for a refinance with a 20-year loan at 4.375 percent, but we have to pay $376 upfront for an appraisal. We’re not sure if this is a good deal. We do not have money to bring to closing if the property does not appraise for what we owe. We need help. What other options do we have?
You’re one of the unfortunate few who bought a property at the height of the housing-market bubble. In 2008, the housing market in Georgia (and elsewhere) started tanking, and homes in your area fell by as much as 60 percent in value. The good news, however, is that your home value seems to have recovered somewhat. You bought seven years ago without much of a cash-down payment, and the value has returned to 90 percent of what you bought it for. That’s no small potatoes.
However, if you want to refinance the property, then you will need an appraisal. Paying $376 isn’t too bad for an appraisal. The key thing to find out is what kind of loan you’re being offered.
You clearly don’t have 20 percent in equity on the property, so the loan you’re getting might be an FHA loan, with steep mortgage insurance premiums attached. If that’s the case, then you have to find out exactly how much you’d save on your monthly payment, if anything. Your taxes won’t go down (unless you fought them), and while you’re reducing your interest by nearly 2 percent, mortgage insurance may be more costly now than it was then.
Hopefully, you are saving something. Using the ThinkGlink.com refinance calculator (on my Web site, under “tools”), we guessed that your original loan was for around $135,000 at 6 percent interest. If you started that loan in January 2007, you’d have about $119,800 left on the mortgage. Your current monthly payment (excluding taxes and insurance) is around $809.
If you refinance to a new 30-year loan (which means you lose seven years of payments) at 4.375 percent, your payment drops to $599, a savings of about $210 per month. That’s a significant savings. If you only have to pay the cost of the appraisal out of pocket, it will take just two months to recoup that cost and truly start saving money.
According to my calculator, you’ve made 89 of 360 payments, and paid a total amount of interest to date of about $57,000. If you started with a new 30-year loan, your savings would actually become a loss since you’d be adding seven more years to your loan. Or, if you actually qualify for a 20-year loan at maybe 4.375 percent, you’re cutting three years of loan payment off the original 30-year term. You’ll save quite a bit of money by switching to the 20-year loan.
A 20-year loan would actually decrease your monthly mortgage payments a small amount with the lower interest rate, so you may have a little in savings there along with a shorter loan term (you now have 23 years left on your current mortgage, compared with 20 years on the new one).
In any case, you need an appraisal to move forward. If you’re fairly certain you’ll have some equity in the property, even a few thousand dollars, we’d recommend you move forward. In the long term, you will force yourself to save by paying a greater share of each monthly payment toward reducing your loan.
Ilyce R. Glink ’s latest book is “Buy, Close, Move In!” Samuel J. Tamkin is a Chicago-based real estate lawyer. If you have questions, you can call Glink’s radio show
(800-972-8255) any Sunday from 11 a.m. to 1 p.m. Contact Glink and Tamkin through the Web site www.thinkglink.com.