Dicey Refinance?
June 27, 2011 9:46 PM   Subscribe

Should I attempt a mortgage refinance after long unemployment and only very infrequent freelance jobs or is this opening a big can o' worms?

I've been mostly unemployed since Dec. of 2008, and only in the past six month have I been able to make a small income doing freelance work (very small, like, around 5-6K so far for the year). However, through unemployment compensation, and savings, I've managed to stay current with all my bills, and have an 'excellent' credit rating.

My wife has a very stable and well paying long time career. We live in a co-op in NYC that I own in my name only, and it's worth at least double what the current mortgage is on the place. Recently my Bank mortgage rep has been calling and offering to reduce my interest rate to like 4.5% (it's currently ~6.5%) for a 30 year-fixed mortgage. This is tempting both for the reduction in monthly payments, and the opportunity to take a little more equity out to pay off some credit card debt I've accumulated and also give me a little more cushion.

This would be a second re-finance, and I figure my wife would have to go on the loan this time around given my current income.

But is this all opening a big can of worms? This would be the first my bank would be learning of my current fiscal condition. (which sucks, but our overall household income is fine).

My worry is that not only would they refuse the refinance, but the information would be used to damage my excellent credit...

What do you think? Should we go for it, or stay away? (I also have a couple of credit cards with the same bank, but they are always paid in full). Also, if it matters, we've been in the place for 12 years, and expect to be here at least another 3. And we've never been late on mortgage or maintenance bills.

The last refinance I did was very smooth, barely any paperwork, but that was 'pre-crash' and I assume the bank would now be doing a bit more due diligence into my money situation.

Last details:
1.My wife also has a mortgage in her name for her mother's co-op. She's never been late, and held that mortgage for about 12 years, and re-financed once on it. It's also worth at least twice what her remaining mortgage is.

2. Also, other than some credit card debt in my name, we have no other debt, no car, no kids.

3. The bank making the offer is one of NYC's major banks.

Normally, I wouldn't have even considered the offer to refinance, but the rates seem so low...
posted by anonymous to Home & Garden (5 answers total)
Lowering your interest rate by two percentage points could save you a lot of money over the long run. It definitely seems worth looking into. Can you talk to the bank informally about your situation and see what they think? They should be able to give you a sense of what will happen before you do a formal application.

My understanding of how credit reports and credit rating works is that it's not possible for your bank's knowledge of your employment status to "damage" your credit rating. The ratings are based on your payment history and amount of outstanding debt, and it sounds like you're good on that score. Hopefully others with more knowledge of credit reporting can answer this.
posted by medusa at 6:07 AM on June 28, 2011 [1 favorite]

There are various refinance calculators out there that will help you determine whether it is worth it to go through the process. Yes, your payments will go down quite a bit, but if you're only going to be there another 3 years it might not be worth it once you are done with closing costs (I'm assuming the bank is going to charge you closing costs... otherwise, what's in it for them?).

How are you on loan to value?
posted by getawaysticks at 8:55 AM on June 28, 2011

The most a good broker would charge to run your numbers would be the firms price for a credit check... probably around $15-$30. Yep. And just as no salesman makes a sale to every potential purchaser; you should be able to find several brokers who will at least advise you before even running your numbers.

Going from a 6.5 to a 4.5 is a good jump, worth pursuing. But for the credit score used to price; the banks will go with the lower middle score between you and your spouse... i.e. if you have a 700, and your spouse has a 730; they will use the 700 score to calculate.

Your household incomes combine/add to one $number that the broker considers. There is no split as in the credit score example.

A 20 year rate is the same as a 30 year; as is a 25 year. Yes; they can write 25s, 15s, 10s, etc... might be another sheet of paper; but it is a no-brainer. And, rather than going back to 30 years of mortgage again; you might even reduce your rate, monthly payment, and years of payments to make.

Too many credit checks in a year (four or more iirc) does 10-30 pts damage to a credit score, that is the only downside to looking into a re-fi. Other than that; it is a win-win scenario.
posted by buzzman at 9:16 AM on June 28, 2011

Talk to a mortgage broker (outside your bank) who has lots of experience with small business and who also can talk to you about structuring your CC debt as a business debt. You may also want to talk to an accountant about better structuring your CC debt as part of your business and so on.

Sure, maybe you don't want a 30-year mortgage, but, if you put aside the same amount of money that you'd be paying if you were on a 10 or 15y mortgage, you are still accumulating that equity without tying it all up in your mortgage. You can always put it down as a balloon payment or you can know it's there for use in emergencies. So you can do a 30y amortization but be disciplined and save the same amount in a savings account. The difference, then, is just the interest. If you're getting a better rate now and you couldn't afford a shorter amortization, then you're possibly better off, especially if cash flow is a stressor.
posted by acoutu at 11:44 AM on June 28, 2011

How long have you been paying off the current mortgage? If its more than 5 years, your effective interest rate may already be low enough as to make refinancing into a new 30 year not worth it, especially if you may not be staying for a long time.
posted by jindc at 5:32 PM on June 28, 2011

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