Robbing Peter to pay Paul

March 16, 2008 8:52 AM

Refinance my mortgage filter. Should we do it or wait a little while longer?

We have 2 home loans, one fixed (340,000 at 6.125, year 3 of 30 year) one Interest Only (100,000 at 4.65, year 2 of 10 ). We are considering refinancing and locking in the whole amount in a 30 year fixed. We have been quoted 6.5% for the whole amount (440,000) for the 30 year fixed.

What events on the horizon should I be aware of? Should I wait a month or two or just go for it? What would you do? How should I be thinking about doing this?
The whole mortgage meltdown because of sub prime lending has me freaked out. Should I be?

posted by anonymous to work & money (10 comments total)

6.5% is a higher rate than either of your current mortgages. Why would you take it?
posted by Dec One at 9:39 AM on March 16, 2008

See if you can at least lock in on the IO.
posted by jerseygirl at 9:59 AM on March 16, 2008

Doh. Lock in on a fixed rate non-IO mortgage on the 100k.
posted by jerseygirl at 10:00 AM on March 16, 2008

Look for a better rate, possibly at a credit union; 6.5 is higher than rates listed at bankrate.com. Make sure your credit score is as good as you can make it; home mortgage is the most important use of your credit rating; lots of threads have covered this topic.
posted by theora55 at 10:28 AM on March 16, 2008

The main reason you might be freaked out by the subprime mortgage crisis is that the ripples from it may affect the entire economy. This could cause jobs to be harder to find or to pay less or to not keep up with inflation (same thing), which could result in making the mortgages harder to pay. If you are making timely payments, though, a lender's collapse is not going to affect you in any way. Some other bank will buy the mortgages from any lender that goes bankrupt (at a significant discount).

You may also end up "upside down" on the mortgages (in fact, you may already be if your property's value has declined significantly and you didn't put much down), which would mean you'd take a huge loss if you sold, but this not really a problem if you can hold the property until the value comes back up (say, 10 years).

In general, there is rarely any reason to refinance at a higher rate. One thing I might see doing is to refinance for a longer period of time so as to reduce your payment if you're having trouble making it, but this will cause you to pay more interest in the long run, so it's not that great an option. Converting the interest-only to a 30-year fixed will result in you paying off that mortgage eventually, which is nice, but will actually increase your monthly payment significantly and you'll end up paying much more interest overall. You have to weigh that against the likelihood that interest rates will be much higher in eight years when you have to refinance the interest-only, but I think it's hard to forecast that this far out.

So it all comes down to what your goal is. Why are you considering refinancing? The Fed is expected to lower interest rates again next Tuesday, which could reduce the rate you could get, so whatever you decide, I'd wait at least until then before locking anything in.
posted by kindall at 10:29 AM on March 16, 2008

As Dec One said, why would you refinance at higher rates? I assume the $100,000 is a 10 year balloon, so why not work hard at saving the cash to pay down most of the $100,000 in the next eight years?

My rough calculations are that your monthly payments will go up by about $325 per month if you refinance as you propose. Instead of refinancing, just save that $325 each month to go toward your balloon payment, about $4000 per year. In addition you save the refinance fees. If necessary, eight years from now you should have no problem refinancing the interest only loan by paying off most of it with the cash you saved.

A lot of people are in a panic to refinance now because they have large rate resets or balloons due in the next year or two and if the value of their homes go down they are afraid they won't be able to refinance because of negative equity. That is unlikely to be the case eight years from now so why the rush to refinance?
posted by JackFlash at 10:32 AM on March 16, 2008

Seconding Dec One, this doesn't make any sense. Your monthly payments will go up, and you'll be adding 2 years to the length of the deal. If the IO is variable, you have a legitimate concern, but take a look at the option of a 20 year mortgage, for which the rate will be lower than your current rate, I'd guess.

But, the risk on the variable IO can't be all that big. You're paying interest now of $387.50 a month. If the rate doubles sometime during the term, you're paying an extra $387.50, for up to 8 years. But if you tacked the $100,000 on to a 6.5% mortgage now, that adds $632 a month to the deal, which goes on for 30 years.

I think your best bet is to figure out how much more you can pay per month right now; and either sock that away in a money market fund to accumulate a kitty from which to pay off the $100,000 when it is due (you'd need to save about $930 a month at 3% for 8 years to do that), OR, pay down your other mortgage by the equivalent amount, so that when the time comes to refi 8 years from now, it's affordable. I'd take the latter option, because in effect by doing that you're making 6.125% on your money, rather than 3% in the money market.
posted by beagle at 10:39 AM on March 16, 2008

You don't say where you are, which would help. Your problem is that 440K is probably over the conforming limit for mortgage loans, so you will be paying more than 1% higher interest than you would if you managed to get a conforming loan (your single loan is likely considered a jumbo loan). The conforming loan limit is generally 417K, though that depends on where you live, as the limits vary by area. There is also a current move to raise conforming limits significantly but temporarily, but again that varies by area and it is not yet clear that it will really significantly lower interest rates.

I would not take the refinance offered. I would, as jerseygirl suggests, try to roll the IO loan into a fixed-rate loan. Again, you don't mention it, but most IO loans are adjustable rate, so at some point in the future you most likely would expect the interest rate on it to go up, so you probably want to avoid that.

If you email the moderators so they can relay what county you live in, what your credit score is, and how much your house would reasonably appraise for (not what you wish it would appraise for), we could tell you more about your immediate prospects for getting into one of the temporarily limit raised conforming loan. Or you can read this post at Calculated Risk and see where you fit in.

Bear in mind that Fed interest rate cuts have not been making into the mortgage markets, so don't count on relief that way.
posted by procrastination at 10:40 AM on March 16, 2008

Some of the Fed interest rate cuts *have* been making their way into the mortgage market. There are 50/50 odds of a 0.75% rate cut being announced at the 3/18 Fed meeting (that's next Tuesday). I would wait until at least Wednesday or Thursday and consider the refreshed rates at that time.
posted by crazycanuck at 12:11 PM on March 16, 2008

Many people have a fundamental misunderstanding about how the federal funds rate affects mortgage rates. The fact is they don't, or at least not directly. The federal funds rate influences short term loans, not mortgages. Mortgage rates are determined by the bond market which in turn is influenced by expectations of inflation 30 years from now. When the fed lowers short term rates, it is not uncommon for mortgage rates to go higher because lower short term rates generally mean higher future inflation. Here is a chart that shows mortgage rates moving quite independently of fed moves.
posted by JackFlash at 2:37 PM on March 16, 2008