I received this email this morning:

From: Catherine, Dated: 1/14/2009
Hello! After listening to your show this past Sunday, you referred a caller to his existing mortgage company for a “streamline loan modification,” stating that it would only cost a few hundred dollars and almost immediately lower his monthly payment. <

Sounded like a good plan to me, so I contacted my current mortgage lender (Wells Fargo) about this, AND wanted to compare my costs and monthly payment of the streamline option with a refinance to a 15yr fixed. From my brief conversation with a broker, he gave me a rate of 5% on the streamline (I’m currently at 6.625%) and 4.87% on the 15 yr.

It doesn’t seem to matter to them what my credit rating is, and getting a lower interest rate doesn’t seem like a possibility without buying points. BUT my main question is with the streamline, my mortgage term would readjust to 30 years. I’ve been in my house for 10 so I was hoping that with this new plan I would have a lower payment for the last 20 years of the mortgage.

So by adding back 10 years to my mortgage term, what do I really gain? Obviously I will lower my monthly payment by about $300 per month, but will I be paying more over all by adding back 10 years? I’m a little confused here. (The 15 yr fixed would raise my monthly payment by about $60/month and closing costs on both options were about the same – $1880.00)

Thanks in advance for your advice.

Here’s my response to Catherine:


My office is in the process of talking to the major mortgage lenders about their streamline modification and streamline refinance policies. As you can imagine, they are in flux at the moment. We will provide everyone with more information as we get it (you can look at
www.thinkglink.com/blog for details as they become available).

To your question, yes, your mortgage apparently will reset for 30 years — but at a lower balance. (This doesn’t always happen with a streamline refinance — sometimes the interest rate is just lowered on the loan and your loan continues. This is what happened to several of my own loans over the years.)

After 10 years of paying down your loan, you have maybe paid off about 15 percent of the amount you borrowed. I don’t know how much you borrowed, but let’s assume you borrowed $200,000 at 6.625 percent for 30 years. Your monthly payment of principal and interest would be $1,280 and after 10 years, your loan balance would be about $170,000.

If you now refinance the $170,000 at 5 percent for 30 years, your monthly mortgage payment drops to $912, a savings of about $368 per month. If you apply the savings each month toward prepaying your mortgage, you’ll pay off the loan in 17 years, saving 3 years of interest. If you choose the 15-year option, your monthly payment will be about $1,333.

The benefit to choosing a 15-year amortization schedule over a 30-year amortization schedule is that the interest rate on the loan will be slightly lower. So not only do you save two more years’ worth of interest, but the overall interest rate is lower, so you’ll save even more money.

I have been hearing that the costs for streamline refinance loans is higher than I mentioned on-air. It has been a couple of years since I last did this and while some lenders had told me that the costs were reasonable, they have clearly gone up. That’s why we’re talking to the major lenders to try to get some answers. So, check back in this space, as I’ll post what I learn here.

Still, even at $1,880, the closing costs are much less than a full-blown refinance.

January 14, 2009