Refinancing to pay off truck and camper Ask Dr. Don by Don Taylor, Ph.D., CFA, CFP • Bankrate.com

Dear Dr. Don,
I am interested in refinancing my home. My husband is on the deed but not on the loan. I would like to add him to the loan. The current mortgage is a 5/1 ARM at 5.875 percent with a loan balance of $78,054. We are making biweekly payments. It is locked in at that rate until 2010.

I have been corresponding with a mortgage company that is offering 6.25 percent fixed. We currently have about $90,000 in debt including the house, truck and camper. I would like to add them in to the mortgage and by refinancing I would save about $200 a month.

The truck loan has a balance of $3,500 at 13.25 percent and will be paid off in March of 2010. The camper loan has a balance of $6,125 at 12 percent, and is paid off in March of 2011. We both have good credit. We also have one credit card with a balance of about $2,600.

The problem is that the house needs to appraise for over $100,000 for the refinancing to work. It appraised for $84,000 three years ago. The lender is confident that it will appraise for the amount needed to refinance. I am not so sure. Do you think it is a good idea to go ahead with this plan or am I crazy?
--Darcy Debts

Dear Darcy,
Refinancing and putting your husband on the note has him share the responsibility for the loan payments. Since his name is already is on the deed, that doesn't seem unreasonable.

There is a question of law that I can't answer for you in terms of whether the lender is disadvantaged by your husband being on the deed and not on the note and if there are provisions in the existing loan document that would allow him to be added to the note to perfect the lender's claim on the home in a foreclosure. You need to talk to a real estate attorney to get an answer to that question. In other words, you may not need to refinance to get your husband's name on the note -- it's possible that it should have been there in the first place for his name to be on the deed.

Some other things to consider before consolidating these debts by refinancing are: how long you plan on living in this home, the cost of refinancing, the difference in interest expense under the two scenarios and how important it is to free up that $200 per month in expenses.

The table below is a rough estimate of how the refinancing changes your total interest expense based on the information you provided. The table ignores closing costs, assumes that your ARM stays at 5.875 percent for the life of the mortgage and doesn't consider any income tax savings by refinancing the truck and camper with mortgage debt.

Refinancing

The table does a good job in illustrating how taking 24 years to pay off the camper and the truck will mean spending a lot more in interest expense, even though the loan balances are financed at a lower interest rate. Paying closing costs on the new loan also adds to the expense of restructuring this debt. According to Bankrate's 2006 Closing Cost Survey, the national average for closing on a new first mortgage is $3,024. That almost pays off the truck.

The appraisal will come in where it comes in. There's not much you can do to tweak it. Even if the home appraises for $100,000, the mortgage will be for far more than 80 percent loan-to-value so you'll wind up paying private mortgage insurance, or PMI. You may have that insurance on the existing mortgage, so the difference in premium is what is relevant in your decision.

Assuming no prepayment penalties on the truck or the camper, I'd rather see you chip away at the outstanding loan balances on these two loans rather than refinance. If you don't really need to free up the $200-plus per month, then the only compelling reason to consider refinancing the first mortgage now is to lock in a relatively low fixed rate and avoid the risk of what could happen to your mortgage payment in 2010 and beyond. If you don't plan on being in the house much more than that reset date, however, then the interest rate isn't that big of an issue.

I'm not a big fan of biweekly mortgages, in general because you can do as well on your own by making additional principal payments. By taking the additional principal payments approach you haven't made the payments contractual and you don't have the service fees that tend to accompany biweekly mortgages.

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