Dear Dr. Don,
We owe about $407,000 on a 30-year, fixed-rate mortgage at 5.75 percent. In addition, we have a $175,000 home equity loan for seven years at 0.25 percent less than the prime rate. Our home recently appraised at $800,000.
We applied to refinance our mortgage and were denied because of our income versus debt ratio. Our credit rating is 740. We have never missed a payment and have never been late on a payment.
We need advice. Should we just stay where we are at? Should we try to refinance utilizing the borrower’s assistance program? Or should we try to refinance our home equity loan in two years?
— Tressa Timing
You need to determine what financial problem you’re trying to fix with a refinancing before you start chasing a solution.
Are you planning to do a cash-out refinancing to pay off the home equity line, consolidate mortgage payments and lock in a low fixed rate? If so, a front-end ratio that prevents you from qualifying for a refinance will stymie such plans.
If you’re trying to minimize total interest expense, you may be better off staying in your current loans. The risk to that approach is that interest rates could increase when the home equity loan comes due and it’s time to refinance.
The good news is that several factors are working in your favor. The home is worth more than the outstanding mortgage balances, you won’t need to pay private mortgage insurance if you do refinance, you’re current on both loans, and you’ve got good credit. You just don’t have the income levels to qualify to refinance.
The government does have an assistance program for homeowners who don’t have a front-end ratio high enough to qualify for a refinancing on their own. You can also learn more about these programs in the Bankrate feature “Check your mortgage help eligibility” or at the government’s MakingHomeAffordable.gov Web site.
If you’re not having a problem making your current mortgage payments, you should consider standing pat. You have a 30-year, fixed-rate mortgage that is only about 0.5 percent higher than the current Bankrate national average for that type of loan. If you can use the mortgage interest deduction on your taxes, the differential on an after-tax basis is even less.
You also have a great rate on your home equity mortgage. I’m assuming the home equity “loan” to which you refer is actually a home equity line of credit because you quoted the rate as the prime rate less 0.25 percent. Home equity loans have a fixed rate of interest over the loan term while HELOCs are adjustable rates that change with changes in the interest rate on which the loan is based.