Refinancing a mortgage has become extremely attractive due to the ridiculously low interest rates these past weeks. But you may be asking yourself whether you should wait, refinance your house, or if your income allows for it try to pay off your mortgage early. Previously, we have covered three reasons why you should not refinance a mortgage.
Don’t assume you won’t qualify for a conventional loan. You should find out whether you can get a FHA Refinance. “FHA” stands for the Federal Housing Administration. It has programs that allow people who wouldn’t otherwise qualify to buy a home with a 3.5 percent down payment, which is very low compared to the conventional 20 percent. Just keep in mind that you will need to pay for mortgage insurance, which is a percentage of the overall loan and since 2011 can no longer be deducted from your taxes.
If you want to refinance, go to the bank currently holding your mortgage loan and ask them about a “streamlined” refinance. This deal will reduce the cost of refinancing dramatically. The caveat is that you cannot convert from one loan type to another. For example, you cannot go from FHA to conventional; only FHA to FHA. In addition, if you go to a conventional loan you don’t need money in the bank to pull this off…you can simply roll the cost of refinancing into your new mortgage. But of course you still have to pay a down payment.
What if your home loans add up to more than 80% of the value of your homes? The Home Affordable Refinance Program, or HARP, allows high loan-to-value mortgages if they are guaranteed by Freddie Mac or Fannie Mae. The one condition is that you must have paid your mortgage payment on time for the past six months along with only one late payment at max in the six months prior to that.
But you may want to see the math. “Show me the money!” you say. My current mortgage, which was refinanced in 2009, is roughly $610 based upon a 30 year fixed 5% interest rate on a $78,000 principal (yes, I got a good deal). The house cost $74,200 but the cost of refinancing the first time was bundled into the loan. We’ve paid it down to $64,500 principal. If we refinanced at around 3.5% with a $9,500 down payment (in other words, refinancing at $55,000) then our monthly payment including P&I (principal and interest), $30 mortgage insurance, taxes, and house insurance should be around $400. Assuming the refinance cost out of pocket is around $4000 at max (likely much less), the refinance would pay for itself in 20 months; less than two years. The good news is that I ever ended up relocating that low monthly payment would make the house easier to rent at a profit.
Another option is refinancing at a sub-three percent 15-year fixed. We’d still save $80+ a month and pay the house off much faster. In addition, if I switched from my current FHA loan to a conventional loan I’ll save that $30 a month.
But what if you are facing hard times and you think the economy might hit a second recession. The bonus chapter in the book Aftershock has a “survival guide” checklist and I was fairly surprised to see #8 “DON’T pay off your fixed rate mortgage faster than necessary.”
That chapter contained explanation on why but I can guess:
1. Dumping money into an asset that is expected to devalue is a bad idea.
2. Need liquid assets (cash) to survive the hard times.
3. Inflation and a devalued dollar should lead to increased salaries/wages AFTER the projected bubblequake has passed and it’ll be easier to pay off the house at that point.
4. That cash could be used to generate income from investments during the hard times.
But personally I think those points need to be balanced against…
1. They seem to assume you have an income. If you lose job(s) during higher unemployment then you lose the house and whatever cash you’d put into it as well as all belongings. Of course, that assumes anyone bothers to kick you out of the house in a second great depression where many are unemployed and houses are sitting empty…
2. Not having a mortgage payment makes it easier to weather the higher cost of inflation.
3. If you have a paid off house and lose all jobs then at least you’re not homeless.
So overall, I think their advice makes perfect sense if you’re talking about making extra mortgage principal payments with no hope of paying the mortgage off in the next few years. In that case you’re potentially throwing money away if you go to foreclosure and that money could be used to prevent foreclosure in the first place. In the end, depending on your situation refinancing your home now might make the most sense.