Q: I have a house. The original mortgage I took out was for $110,000 at 7.5 percent, and I still owe $37,000.
My problem is that no one will refinance the $37,000. They all want to do a much bigger loan for over $100,000. I do not want to do that. Can I take out a home equity loan to pay off the $37,000 at a lower interest rate? Will I save money if I do that?
I’ve been in the house for 23 years. I already refinanced the loan once and still have 10 years to go.
A: If you only have 10 years to go on your loan, you likely won’t save much by refinancing at this point.
You’re probably better off simply paying down your loan faster. You’re almost done paying the interest on the loan. If you refinance (that is, if you could get anyone to refinance for less than $50,000 to $75,000), you’d start the clock ticking all over again on the interest rate.
You might be able to do a home equity line of credit (HELOC) or a home equity loan. A HELOC is flexible, and you borrow what you need, when you need it. There aren’t that many banks doing true HELOCs anymore, especially for more than $30,000. Most are doing simple home equity loans, or the standard second mortgages.
The problem is that second loans might have a 15 or 30-year amortization schedule. You don’t want that. What you should try to get is a 10-year amortization schedule and an interest rate that is somewhere around 5.5 percent or less.
Assuming you have excellent credit (above 700 for some lenders, and above 750 for others), Bankrate.com says there are home equity loans in Georgia being offered at interest rates as low as 5.49 percent.
That isn’t today’s 3.87 percent 30-year fixed-rate mortgage that is available for home buyers with excellent credit and at least a 20 percent down payment. But it is less than what you’re paying now, particularly if you can get a loan that’s amortized based on the $37,000 you owe. It should reduce your payments some, perhaps even substantially.
As you consider your options, you might want to review your loan statement to see how much of your loan payment is interest and how much is going towards reducing the principal on your loan. If you see that very little is going towards your monthly interest payment and you compare how much you’d pay on a new loan for your monthly interest payment, you’ll actually be able to compare the loans and what you might save.
If you talk to a good mortgage lender or mortgage broker and go through the numbers, you might find that keeping your current loan might make sense to you, especially given the costs you might face in refinancing your loan.
Just remember, when refinancing the goal isn’t just to lower your interest rate, it’s to lower your interest rate, reduce your payment and pay off your loan faster. If you can get all three, without paying too much in points and fees, you’ll hit a grand slam.