Refinancing a piggyback-mortgage loan
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 Dear
Dr. Don,
I recently learned that my credit union is offering a 100 percent mortgage available at a rate of 7 percent. I currently have an 80/20 mortgage on my home. The 80 percent first mortgage is a 30-year fixed rate at 6.375 percent and the 20 percent second mortgage is a home equity line of credit, at prime plus 2 percent. My question is, does it make sense to take out the one fixed-rate mortgage as opposed to the two I currently have?
My home is worth approximately $327,000. The loan balance on the first mortgage is $253,000 and the loan balance on the line of credit is $64,800. I've been in the home for two years, and expect to remain in the home for at least two more years.
Thanks for your help.
-- Tom Tinkerer
 Dear
Tom,
I recommend that you stay with your current loans for a couple
of reasons. First, you aren't sure that you'll be in the house for very long.
Refinancing a first mortgage is an expensive proposition. According to Bankrate's
2006 national survey of closing
costs, you should expect to pay somewhere around $3,000 to close that loan.
Second,
your existing first mortgage is 5/8 of a percent less than the credit union's
mortgage loan rate. Saving 5/8 of a percent on a $253,000 loan balance doesn't
quite trump saving 3¼ percent on a $64,800 loan, but my guesstimate (below)
has only a $525 difference in interest expense in the first year of the refinancing.
If you pay $3,000 to refinance, then it'll take about six years to recoup that
cost. You're not sure how long you'll be in the house, so it's hard to justify
it on that basis.
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Refinancing vs. keeping original loan | |
Home
value:
$ 327,000
| | | | |
First mortgage:
$ 253,000 | 6.375% | 7.000% | -0.625% | $
(1,581.25) | Second
mortgage:
$ 64,800 | 10.250% | 7.000% | 3.250% | $
2,106.00 | | | | | | $
524.75 |
As of February 2007,
prime plus 2 percent equals 10¼ percent. That's expensive for a line of
credit, but it's priced to reflect the lender's risk when a homeowner has minimal
equity in the property. By your estimate, you have 3 percent equity in the home.
I'll be the first to tell you that I don't know where interest rates are headed,
but the expectation is that the prime rate is at or near its high for this interest
rate cycle and its next move is expected to be lower. Instead
of refinancing both loans, focus on making additional principal payments on the
line of credit to get to a point where you can refinance that loan at a rate closer
to prime. Closing costs on a new line of credit are measured in hundreds, not
thousands, of dollars. That presumes that there's no prepayment penalty on the
line of credit. Check with your lender if you're not sure about a prepayment penalty.
To ask a question of Dr. Don, go to the "Ask
the Experts" page and select one of these topics: "financing
a home," "saving & investing" or "money."
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