Refinancing Small Mortgages

Refinancing is hard these days, but if you have a small or low balance loan, it may be harder and the refi costs are more important than ever.

Q: In 2003, I refinanced my home with a $100,000 15-year mortgage at 5.25 percent. My balance now is about $50,000 and I have six years left on my loan.

I am considering two options. One would be to refinance the current balance or take out $100,000 in equity in a new refinance loan. What’s the better choice?

A: You can try to refinance your current loan, but you may find that the costs to refinance the $100,000 might be high relative to the benefit you will receive. While you might get a big break on the interest rate (your rate on a 10-year mortgage could be as low as 3 percent), a good share of your monthly mortgage payments go to pay down the balance on your loan.

You are over half way into your loan term. At least half of every payment goes toward paying down your debt. With a new loan, you’d start paying mostly interest, and would add years to the loan term. The question is, why would you want to do that?

If you need money to fix or upgrade your home, then you can make a decision as to whether you can take out a larger loan on your home. You should talk to a good mortgage lender or broker to determine whether you would be able to take equity out of your home.

In the current state of the housing market, you’d want to have a good sense of your home’s value. You’d probably want to make sure that your new loan won’t exceed 80 percent of the home’s market value. These days you want to avoid taking out an FHA loan or even a loan with private mortgage insurance.

FHA loan costs and loans with mortgage insurance have gone up substantially and you have to factor in these costs in deciding whether to take out a higher loan on the property or even if you have the ability to take out money from the property and get a larger loan on the home.

Back in the boom days of the stock market, we would get questions as to whether homeowners should borrow against their homes to invest in Internet stocks. At that time, we told people that it probably wasn’t in their best interests to take out home equity to invest in stocks of any sort, let alone Internet start-ups.

Later, people wanted to take out money from their homes to invest in those same homes, buy cars, take vacations or pay for their kids’ education.

Borrowing against your equity carries risks. You need to have a good understanding of what you need the money for and weigh the risks of taking the equity and using it elsewhere.


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