Q: We have a 5.25 percent mortgage on which we still owe about $80,000. (Our house is probably worth about $500,000 in the current market.) One mortgage broker I spoke to said that no one would be interested in refinancing our mortgage at today’s lower rates unless we took cash out. That is, that $80,000 would not be worth anyone’s trouble.
Does this sound right?
A: Yes. Unfortunately, it costs some lenders too much to do smaller loans. In some markets, $80,000 is a fine size loan, but in a major metro area, $80,000 isn’t much.
Still, you could take out a new loan for $100,000 or more and then immediately pay off the difference to get you back to the balance you had. But if you have to pay points or fees based on the size of the loan, you’ve wasted some of your money.
There are lenders who might help you out – you’ll just have to look a little harder for them. A final option is to consider a home equity line of credit, which could be a far cheaper way to get the cash. The big red flag here is that typically these loans are priced with a variable interest rate based on Prime. But you might be able to pay a lot less than you are with your current loan.
Finally, remember that if you’re far down the path with this loan, you’ve paid off most of the interest. Refinancing might not save you any real money, especially if you’re adding years to the term of the loan.
If you only have eight years left on the loan, for example, you’d want to come up with a solution that would allow you to pay off the loan in eight years or less, and pay less each month. If you can’t do it with a reasonable home equity loan or home equity line of credit, then you should keep the loan you have and simply focus on paying it off as quickly as possible.
Finally, consider that your interest rate is already relatively low. If you refinance now and pay all of the costs and fees associated with a new loan, you could wind up spending several thousand dollars.
At the amount you’re borrowing, it could take you years to recover the costs associated with your refinance.
Also, if you do decide to refinance, don’t think that you’ve gotten a great deal if you only look at your monthly payment to the lender. If you’re eight years into your existing loan and then refinance into a new 15-year mortgage, you’ll have essentially added eight years of payments and thousands of extra dollars in interest.
Your best bet is to sit down with a mortgage lender and work out whether there’s any benefit to refinancing your loan balance. After you go over the numbers, you might find out that your current loan is a better deal for you in the long term.