Refinancing Low-Balance Loan Not Worth Costs Of Refinancing

Q: I’m interested in refinancing my 7.9 percent home loan from 1993. My balance is $35,000. I have a HUD Nehemiah Grant of $15,000 attached which shows up as a 2nd mortgage.

The rider states the HUD grant is due in full if I refinance except for purpose other than “sale, equity or property transfer”. Is it possible to refinance only the balance on original home loan?

A: First, it will be extremely difficult for you to finance a home loan balance of only $35,000. Mortgage lenders don’t make enough money on loans of less than $100,000 (or $50,000 depending on where you live), so they generally turn these loans away.

You are about 17 years into your 30-year loan. That means that most of your monthly payment you make to your lender is going to pay down the debt you owe. If you were to refinance now, you could refinance into a 15 year loan, but you’re not likely to see a substantial drop in your monthly payment. But you might have to pay considerable fees in trying to refinance the loan.

You generally can’t get a home equity loan because lenders really aren’t doing those at the moment. The government is requiring home equity lenders to carry 50 percent of the balance of the loan in cash in case of defaults. So, banks aren’t doing many of these.

Your HUD Nehemiah grant is probably an interest-free loan and my guess is that the lender won’t subordinate that loan to your new primary lender. If that’s the case, you’ll be out of luck and will not be able refinance unless you repaid the grant.

But if you add that $15,000 loan to the $35,000 balance you have left, you may be able to get a new loan for $50,000 and enjoy some of the lowest interest rates in decades.

But remember, your current monthly payment is mostly principal. That means most of your payment is not going towards paying down your debt and in 13 years your home will be fully paid for. If you refinance, you need to make sure the costs of refinancing is low. Some lenders may add the costs to your loan, but you’ll just pay that increased debt over time with interest.

If you decide to refinance, make sure you understand the costs involved in refinancing, how long it will take you to pay off your loan, and what your monthly payments will be.

Please talk to a number of lenders (including a credit union, if you belong to one or can join one) about your loan and what options you have.