Q: I keep hearing about these really low refinance opportunities but nobody seems to say which bank or mortgage broker is offering them. I have a 15-year fixed rate loan at 4.25 percent. I financed my loan under the Home Affordable Refinance Program (HARP). Can I even get another refinance at a lower rate?
Also, I have a second home that my daughter and grandchildren are living in and that loan is at 8 percent with a $53,000 balance left. I would love to refinance that loan as well and take advantage of the low interest rates but I keep getting told that I can’t get those rates on an investment home and/or they don’t want the loan because the loan isn’t big enough. Do you have any advice?
A: You have a great rate on your current home loan. While your interest rate at 4.25 percent isn’t as low as 3 percent or lower, you had to go through HARP because you didn’t have at least 20 percent in equity in your property. If you’re underwater, it will be impossible for you to refinance at all.
Even if you could refinance, you’ll end up having to pay closing costs. Those closing costs will push up the effective interest rate on the property. And if your credit score isn’t in the top tier, today’s historic interest rates won’t be available no matter how much equity you have.
Let’s run the numbers: If you currently have a $100,000 loan, you’re paying about $4,250 (in easy-to-use round numbers) in interest per year. If you were to refinance to a new 15-year loan at 3 percent, you’d pay about $3,000 in interest per year. Your interest rate savings would be about $1,250 in the first year (but your overall payment might be higher because you’re paying down the principal faster).
If you refinance your loan, you might have $2,000 to $3,000 in closing costs to pay. So, it will take you two or three years to start benefiting from the lower interest rate.
Given that you indicated that you obtained a HARP refinance a couple of years back, you probably had little to no equity in your home – or even more likely were underwater. If you’re still underwater, your only option would be a HARP refinance, but since you’ve already had one, you wouldn’t get another. And even if you did, the interest rate on HARP refinances is higher than conventional loans where homeowners have 20 percent in equity.
Once you have at least 20 percent equity in your home, or can do a “cash in” refinance where you put down more cash in order to get to that 20 percent equity level, you can try to refinance with a conventional lender.
On the other hand, it doesn’t surprise us that you’ve met with considerable amount of resistance when attempting to refinance your second property. Because you don’t live in the property, it is considered an investment property. That’s the first obstacle. The second is the loan amount of $53,000 which is a very small and unprofitable amount for most lenders.
When you talked to lenders about your second home, they must have told her told you that they couldn’t provide you a loan for an investment property. What that tells us is that these lenders aren’t in the market for investment properties.
You should shop around for a different lender who is willing to consider this property a second home for you and not an investment property. Or, who is willing to refinance the property without charging you an arm and a leg.
Another option would be to sell the property to your daughter for a reasonable sum and then she would be able to refinance the property as “owner occupied.” If she has good credit and at least 20 percent equity in the property, she ought to be able to refinance to a lower interest rate and begin building credit in her own name.