Q: My husband and I are at different ends of the spectrum about refinancing our first mortgage and home equity loan.
The first loan has a $98,000 balance at 5.12 percent and has 9.2 years left. The second loan is a 15-year balloon at 6.3 percent. We’re paying $200 per month extra in order to get it all paid off in 15 years, and we have about 11.2 years left on the loan.
With our low interest rates I do not want refinance but my husband does. What do you think we should do?
A: You don’t mention in your letter what your financial goals are if you were to refinance.
If you’re looking to refinance both mortgage loans and take more money out of the equity you have in your home, that’s one reason to refinance. Another valid reason might be to refinance both loans and get a lower interest rate by consolidating both loans into a new first mortgage.
If you refinance each of your mortgage loans separately, I don’t believe that you would be able to refinance the second mortgage loan for much less – if anything – than what you’re currently paying. You can try, but many lenders aren’t even doing home equity lines of credit or home equity loans unless you have a ton of equity in the property.
The total loan-to-value ratio can’t exceed 75 percent at the moment. Right now, you have a total of $163,000 in loans. If your property isn’t worth at least $225,000, you would have trouble refinancing for the existing balance on your two mortgages.
When I’m asked whether refinancing is a good idea, there are a couple of big issues you should consider: Can you lower the interest rate on your mortgage loans by refinancing? Can you lower your monthly payment by refinancing the mortgages? And, can you shorten the loan term on the mortgages?
In your case, unless you combine your first mortgage and second mortgage into a new loan, it’s unlikely you’ll be able to lower the interest rate by refinancing all that much on the second mortgage loan.
Can you lower your payment by refinancing the mortgages? Lowering the monthly payment doesn’t seem to be a primary driver for you, since you’re already prepaying on the mortgage loans.
Can you shorten your loan term on your mortgages? Your mortgage loans have just about 10 years left (9 years on one mortgage loan, 11 years on the other – but I assume you’d quickly pay down the remaining balance on the second mortgage loan by using the payments from the first once that one is paid off). So, it’s unlikely you could refinance and shorten the mortgage loan term further.
Finally, you should think about how much it would cost to refinance your mortgages and compare that to how much you would save per month and reduce your monthly mortgage payments or how much shorter the mortgage loan term would be.
My sense is that if you had to spend $3,000 to $4,000 to refinance your mortgage loan, it would take you years to pay off that cost. You’d be better off simply prepaying that amount to the loans and paying them off that much faster.
The only way to know for sure is to shop around and then compare the costs and savings.