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 Dear
Dr. Don,
We refinanced our home three years ago for $100,000 with
an 8.75 percent fixed mortgage on a 20-year loan. We are being offered 6.12 percent
for a 30-year fixed rate loan with 2 points and total closing cost of almost $5,000.
The mortgage company said they can pay the balance
on our loan ($95,000) and our credit card balance ($20,000). We really need to
reduce our total household expenses and if this loan goes through, we'll be saving
about $300 per month on house payments and $500 per month on credit card payments.
Another company says we should shoot for the lowest monthly
payments and get an ARM with a five-year cap. We're scared of ARMs, but the loan
broker said that the rate will be lowest, thus lower monthly payments and that
we should not be worried since we're going to sell our house within a year anyway.
Which is the best step to help us get by for another year? The
interest rates on our four credit cards run from 13.5 percent to 23 percent APR,
with the highest balance of $6,000 at almost 23 percent APR. If neither loan is
approved, can we just get a payoff on our mortgage and take a balance transfer
with zero percent financing for one year?
-- Star Structure  Dear
Star,
If you only plan on being in the house for another year, it
doesn't make any sense to refinance. Paying 2 points on $115,000 is $2,300.
You say that total closing costs are around $5,000. You're paying up to get
some temporary relief in your monthly budget. Paying points when you plan
to be out of the house in a year raises the effective rate on your mortgage interest
to over what you're paying today because the points aren't spread out over 30
years -- they're spread out over one year.
One alternative,
if you have the equity to do so, is to take out a home equity line of credit or
a home equity loan and use that money to pay down the credit cards. A home
equity line or loan should have minimal closing costs and you use your money to
pay off the loans instead of paying closing costs on a new first mortgage.
A balance transfer with a low introductory rate can get you
out from under paying 23 percent on one of your credit cards if you qualify. Credit
card providers don't extend those offers to every customer. It's worth a shot.
The Bankrate feature, "5
balance transfer trip-ups," can help you avoid some common pitfalls when
transferring a balance from one credit card to another.
In the early years of a mortgage,
most of the monthly payments go toward interest
expense, not principal repayment. As I write
this, Bankrate's national average for a 5/1 ARM
is 6.37 percent compared to 6.47 percent for a
30-year fixed rate loan. The APR on your
6.12 percent loan paying $5,000 in points and
closing costs is 6.55 percent -- when the points
are spread out over 30 years. There's no
reason to be scared of a 5/1 ARM if you plan to
sell in a year. But if you plan to sell in a year,
refinancing doesn't make a whole lot of sense.
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