Q: I have a 30-year mortgage held by the former owner of my house that is at 8 percent interest. I paid $63,000 for the property originally and my year-end loan balance is $41,485. My payments are about $403.
I’d like to refinance this loan and take advantage of the still-low interest rates but I can’t seem to find anyone that will refinance me. Every place I’ve checked has not wanted to refinance for less than $100,000. I am able to pay up to $100.00 extra a month, but do not want to pay much in refinancing fees and I’d like to pay my house off as soon as possible.
I am 56 years old and divorced and am trying to get my finances in shape. Can you point me in the right direction?
A: You may not find a lender willing to do a loan for $40,000. It’s just not worth the lender’s while. And, that’s a good thing. You’re already so far into your loan that it wouldn’t really pay for you to refinance unless you were going to cut your loan term to 10 years.
In fact, the amount of interest you’re paying in so much less now, with a lot more of your mortgage payment going toward your loan balance.
You’re far better off taking your extra $100 per month and using it to prepay your mortgage. You’ll wind up making nearly 3 extra payments per year, which will cut the term of your loan significantly.
You might also ask your owner if he’d be willing to lower the interest rate remaining on the loan to 6 or 7 percent. Since the owner isn’t getting more than 1 percent in the bank (if that), he might be willing to negotiate rather than face the prospect of losing his income stream entirely.
I’d start the conversation this way: “I’m thinking about refinancing and I’m being offered around 5 percent. Would you be willing to lower the interest rate on what’s left of my loan to 6 percent?” If your seller is smart, he’ll recognize a good deal when he sees it. Just makes sure your amortization table gets worked out correctly.
In some cases, a seller that is giving you financing may be happier knowing that he or she has the cash in hand from you rather than still being a lender. In that case, your seller won’t be very willing to cut you a better deal.
But keep this in mind, if you were able to find a lender to refinance your loan at a lower rate, you might find out that the fees and costs to get that new loan would be too high to get the benefit out of the lower rate.