refinance

Refinancing 30-year mortgage? Switch to 15

Don TaylorQuestionDear Dr. Don,
My daughter owns half of a duplex in Lexington, Ky. She bought it in 2003 for $93,000. I believe the current value is $99,500, according to the system that evaluates the appraised value for free online. Her payoff balance is $73,000. It is that low because she got some financial assistance from the Kentucky Housing Corp., which gave her a grant of $15,000 to pay all closing costs and make a $10,000 down payment. This allowed her to finance $83,000 at 5.5 percent for 30 years with a monthly payment of $472 and change. She has 22 years to go on her current mortgage and, of course, again 30 years on a refinance.

What do you think of her getting a loan for $79,000? With an appraisal of $99,500, the mortgage would be for less than 80 percent loan-to-value. The $79,000 would cover the loan payoff, closing costs and a $3,000 cash-out.I'd expect she could get a 30-year fixed-rate loan somewhere between 4 percent and 4.25 percent. Would this scenario be good for refinancing?

Another question: Are lenders willing to give their best rate to someone borrowing only $80,000, or do they only give this rate to loans of $200,000 and up and don't even bother with loans under $100,000?
-- Earl Equates

AnswerDear Earl,
I'd suggest as a first step that she review the provisions of the grant to make sure that a cash-out refinancing doesn't violate its terms. I took a quick look at the current down payment and closing costs assistance programs of the Kentucky Housing Corp., and it doesn't look to be a problem.

The online home appraisal is only going to give a ballpark number. It's the official appraisal that will drive how much the lender is willing to lend. By targeting an 80 percent loan-to-value, your daughter will be able to avoid private mortgage insurance, or PMI. That's smart.

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Lenders aren't crazy about cash-out refinancing in this market. That may limit her ability to tap the $3,000 over and above her estimated closing costs. Still, if the appraisal comes in high enough to justify the cash-out, she should be able to find a willing lender.

If she can afford the payments, I'd suggest taking a look at a 15-year fixed-rate mortgage. It will be at an even lower interest rate than you're quoting in your letter. As I write this in early October, Bankrate's national average for a 15-year fixed-rate mortgage is 3.46 percent. She already is eight years into a 30-year fixed-rate mortgage. Extending back out to 30 years will add additional interest expense, even with today's low rates.

Readers have suggested to me lenders aren't much interested in refinancing for less than $50,000. Your daughter is looking at an $80,000 loan. I don't think she'll be quoted a higher interest rate as a result of a loan that is too small.

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