Which Refinance Offer to Take?

January 8, 2009 6:43 PM

RefiFilter. I have a couple options for refinancing my mortgage and I'm trying to figure out the best option. More inside.

Back in the halcyon days of 2004, I refinanced my mortgage with a 5-year ARM at 4.75%. I now owe about 122K on that mortgage. I make monthly payments of $928, including taxes.

A couple years later, I took out a home equity loan through my credit union to make some improvements and consolidate some debt. It's a 10-year loan at 6.35%. I make monthly payments of $327. The balance stands at $23K.

I need to refinance at least the ARM. My credit union is offering a 30-year at 4.875. The closing costs are about $3k ($2k with a discount my credit union is currently offering).

Countrywide, which currently has my ARM, is offering to refinance both loans at 4.875%. This would lower my monthly payments by about $200. I would lose a little equity in the process. Closing costs are also about $3K.

Which option makes more sense? Lower payments sound nice but I think I can pay off the second mortgage in a few years considering I just got a promotion. I'm planning on staying in my condo for the foreseeable future (it's worth about $190k). My credit score is about 770.

I appreciate any advice you can offer.

posted by wintermute2_0 to work & money (5 comments total)

Depends on what your goal is. If your goal is immediately lowered payments, then combine both at 4.875%; if your goal is longer-horizon and you're willing to sacrifice a little over the near term to get rid of that pesky 2nd, but ending up with a substantially reduced 1st, then refi just the first.

If you really want to know the options and your decision will be based SOLELY on the numbers (as opposed to the allure of having a lower payment longer, etc...), then pay a CPA a couple of hundred bucks to figure it out for you if you're not mathematically inclined.

Personally, I'd refi just the first with the CU and payoff the 2nd ASAP. Cut out a few Starbucks, movies, and dinners out a month, and you've got the 2nd payment right there. Not a bad situation to be in, at all.

P.S. Pay no never mind to any answers you get telling you to consider tax "savings." Remember, you only get a tax break on a mortgage if you're paying someone else (the bank), and you only get your taxes reduced by pennies for each dollar of mortgage interest paid out to the bank.
posted by webhund at 7:15 PM on January 8

What do the numbers say? I don't think there's enough here for me to say what's best.

There are many factors you could base your decision on - what's best for your credit score(consolidating, probably); what's the lowest monthly payment; what's the lowest total of payments; what do you think your condo will be worth in the future; what do you think your money is going to buy in the future...

Personally, for me the opportunity cost of giving up my direct trade organic lattes from Stumptown is way too much for me to care about paying down my principal. Lattes make me happier. And since it's apparent that the value of my investments is declining, the money in my pocket is worth more now than it will be in the near future. Best to do my part to prime the pump of the economy.

Point being, a lower payment now, coupled with a low interest rate (and low points) is the way to go. Use any extra cash to make your life more pleasant in the present.
posted by valentinepig at 10:23 PM on January 8

Does the CU know about the 2nd mortgage? They will require that it be paid off in this refi unless you can get the 2nd mortgage holder to subordinate their lien. Without a subordination agreement, the CU would be lending you 100K+ in the second lien position. They'll never let that fly.

As for which option, personally I would combine both at 4.875%. That is an excellent rate and I am kind of surprised CW is offering that low of a rate. If I understand correctly, CW's refi only costs 1K more...approximately .5% of your property value. I can't see why you wouldn't do this option. Apply the savings to your new mortgage and you'll recoup closing costs in no time.
posted by curlyelk at 6:51 AM on January 9

Can you roll the 2 mortgages into a 15 or 20 year mortgage at an even lower rate? Sounds like you can afford it, and paying off the mortgage by 2028 is way better than 2038.
posted by theora55 at 7:50 AM on January 9

I think you're doing the right thing, locking in one of these great fixed rates. Smart move.

Personally, I would choose the credit union over Countrywide simply on the basis that credit unions are cooperative ventures where the members are shareholders. That means they're not constantly trying to pick your pocket to line someone else's.

Generally credit unions kept their heads and didn't get caught up in the mortgage shenanigans of the last decade. When I was buying and refinancing houses, all the real estate people considered them too slow and picky compared to other lenders. In hindsight I think that shows better management. I would much rather trust my money to competent businesses. (And I do: I've got two houses and the mortgages are held by CUs. All our checking/savings/CDs/etc. are at CUs, too.)

In contrast, Countrywide was the one that ran the ads with the dancing aliens on each and every web page I saw from 2005-2007, if I remember correctly? For something as important to the fundamentals of my family finances as a mortgage, I wouldn't touch them with a ten foot pole.
posted by Sublimity at 11:28 PM on January 9