Q: I currently am in year five of a 30-year mortgage at 5.4 percent. My home is valued close to $400,000 and I have $230,000 left on my mortgage.
My salary is $60,000 a year and I am supposed to get $1,120 a month child support but have not gotten any child support in over a year, so I do not want to include that as part of my income. I have excellent credit.
Last year I got a home equity line of credit for $30,000 and have used almost $4,000 paying off some debt. The only other debt I have is a car payment of $290 per month. I have no credit card debt.
I’ve looked into refinancing my loan to a 15-year mortgage since rates are so low, but since I’m not getting child support it would be tough to make the extra increase in the monthly payment. Is it worth for me to look into refinancing to a new 30-year mortgage?
Since the monthly payment would go down, I could contribute more to my 401K which I would hope would outperform the interest I am paying on a new mortgage.
I did discuss refinancing with my current lender but was told that my debt-to-income ratio was not good. They have to consider the full home equity line as a $30,000 debt. Since that is the case, is it better not to do anything at this time?
By the way, I am in legal battles trying to get the child support owed.
A: As enticing as it may be to refinance to get the lowest interest rates decades, I’m afraid your debt-to-income ratio seems a little out of whack. It isn’t just the $30,000 home equity line of credit. You want to borrow $230,000 and you only earn $60,000 per year. Assuming a tax hit of only 25 percent, which is low, that means your take-home pay is at most $3,750 per month (less, if you’re contributing to a 401(k) or other qualified retirement plan at work).
While I don’t know how much you originally borrowed, if you refinanced the $230,000 mortgage balance to another 30-year loan at 4 percent, your monthly payments would be around $1,100 per month, not including real estate property taxes and insurance. If you refinance to a 20-year loan, you’d chop 5 years off of the amount of time you have left on your current loan, you would pay $1,393 per month.
I can see why you might not meet the current steep requirements lenders have for borrowers, and I can also see the appeal of refinancing to pay even $100 per month less on this mortgage. (Getting some child support would certainly help.)
You can always shop around and see if you can find a lender who will help you do this. Just watch the closing costs and fees. You might have to pay a $250 subordination agreement fee to your home equity line of credit lender to keep that loan in line behind your new principal loan. And, there could be other fees as well. At some point, all those fees will make refinancing a less attractive prospect.
Shop around and decide. You may want to sit down with your mortgage lender or another mortgage broker to go over your numbers in detail so that you may understand where you stand in trying to refinance your loan. Based on your income, it’s unlikely that you can qualify for a 15-year loan, but at current low 30-year rates, your mortgage lender may be able to refinance you into a new 30-year rate by looking at your income, the equity in the property and other factors that may affect you.
But understand that even if you didn’t have your current loan and home and were shopping around for a mortgage, you are trying to get a $230,000 with only about $60,000 of gross income. Many borrowers got themselves into trouble trying to overextend themselves over the last many years and got themselves way over their heads. Your best bet is to work with a lender and see what your options might be and see if you can, in fact, get your interest rate down without too many fees and costs.
But if you can’t refinance, know that your interest rate is a fantastic long-term rate, so you’re doing fine.
Good luck, and let me know what you decide to do.