Refinancing a mature mortgage doesn’t always make sense

June 15, 2012

Q: I have a house. The original mortgage I took out was for $110,000 at 7.5 percent, and I still owe $37,000.

My problem is that no one will refinance the $37,000. They all want to do a much bigger loan for over $100,000. I do not want to do that. Can I take out a home equity loan to pay off the $37,000 at a lower interest rate? Will I save money if I do that?

I’ve been in the house for 23 years. I have already refinanced the loan once and still have 10 years to go.

A: If you only have 10 years to go on your loan, you probably won’t save much by refinancing at this point.

You’re probably better off simply paying down your loan faster. You’re almost done paying the interest on the loan. If you refinance (that is, if you could get anyone to refinance an amount less than $50,000 to $75,000), you’d start the clock ticking all over again on the interest rate.

You might be able to do a home equity line of credit (HELOC) or a home equity loan. A HELOC is flexible, and you borrow what you need, when you need it. Not many banks do true HELOCs anymore, especially for more than $30,000. Most are doing simple home equity loans, or the standard second mortgages.

The problem is that second loans might have a 15- or 30-year amortization schedule. You don’t want that. What you should try to get is a 10-year amortization schedule and an interest rate that is somewhere around 5.5 percent or less.

Assuming you have excellent credit (above 700 for some lenders, and above 750 for others), BankRate.com says there are home equity loans in Georgia being offered at interest rates as low as 5.49 percent.

That isn’t today’s 3.87 percent 30-year fixed-rate mortgage that is available for home buyers with excellent credit and at least a 20 percent down payment. But it is less than what you’re paying now, particularly if you can get a loan that’s amortized based on the $37,000 you owe. It should reduce your payments some, perhaps even substantially.

To consider your options, review your loan statement to see how much of your loan payment is interest and how much goes toward reducing the principal on your loan. If very little is going toward interest, compare that to how much interest you would pay each month with a new loan.

If you talk to a good mortgage lender or mortgage broker and go through the numbers, you might find that keeping your current loan makes sense, especially given the costs of refinancing.

Remember: When refinancing, the goal isn’t just to lower your interest rate; it’s to lower your interest rate, reduce your payment and pay off your loan faster. If you can get all three, without paying too much in points and fees, you’ll hit a grand slam.

Good luck.

Q: Recently in my local paper, I saw an article you wrote on strategic foreclosure. I now cannot locate it. Would you be kind enough to forward it to me?

A: We don’t have anything on ThinkGlink.com about strategic foreclosure, but we’re guessing that what you’re interested in is a concept known as “strategic default.”

We write about strategic default about once a month. The term refers to someone who can afford to make the payments on their property but chooses to turn the keys over to the lender instead, thus defaulting on future payments.

When homeowners are severely underwater — i.e., by more than 25 percent — they are much more likely to choose strategic default, which makes lenders nervous about the current real estate environment, especially in areas of the country where home prices continue to decline.

As home prices decline and more borrowers are pushed underwater, the chances of additional mortgage delinquencies and defaults, strategic or otherwise, increases.

Here is a link to the stories we’ve written about strategic default: www.thinkglink.com/tag/strategic-default. We hope this helps.

Ilyce R. Glink’s latest book is “Buy, Close, Move In!” Samuel J. Tamkin is a Chicago-based real estate attorney. If you have questions, you can call Ilyce’s radio show toll-free (800-972-8255) any Sunday, from 11 a.m. to 1 p.m. Eastern time. Contact Ilyce and Sam through her Web site, www.thinkglink.com.

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