Can Someone Explain How Home Re-Financing Works?

[Yavin4]

I'm a renter, not a homeowner, so I don't know how it works.

Let's say that I bought a home for $350,000 mortgage with a 8% interest. My monthly mortgage is about $1,400. I've had it for 10 years, and I've paid off about $125,000.

Now, when I re-finance, am I re-financing the balance of the mortgage of $225,000 at a lower rate and reducing my monthly mortgage to $1000 thereby saving me $400 a month?

Or,

Am I re-financing the entire current market value of the $350,000 home for a new monthly mortgage?

Or,

Am I way off the mark and I need to be set straight?

[trotsky]

1. You can do either.

Or somewhere in between. Up your mortgage amount to "cash out" and use the money for repairs, vacation, whatever. Or just refinance the amount you owe and go to for the smallest payment.

Discuss with a good mortgage broker or your bank.

[stopthegop]

2. you can usually refinance up to the amount of your equity

or a little less...depends on whether you want the lower payment (only what's owed) or want the cash (value of house)

[Yavin4]

3. So People Are Cashing Out The Equity On Their Homes?

Oh my God!! Are you serious?

[trotsky]

4. When you have a chance to consolidate debts at 4-5% why not?

When we refinanced we took about $8000 out for various payments, and still ended up with a lower mortage payment.

Don't forget too, mortgage interest is tax-deductible. (For now, anyways. A lot of flat-taxers would like to abolish that.)

[Yavin4]

7. Yes, Some People Are Consolidating Their Debt At Lower Levels

But, the majority are probably paying off credit cards, only to run up fresh new debt. No wonder consumer demand has been so high. People are literally turning their equity into debt, and we're calling that growth?!?!?!

[Don_G]

12. My Freeper Brother Did

Lost over $61K in the stock market day trading (without telling his wife), refinanced his house to afford a new pick-up truck, facing layoffs from the insurance company he works for and his wife brought up the question of funding the college edcuation for their 2 kids at my Mom's death.

Naturally, I'm fairly liberal and it's my fault for not taking better care of my Mom and unfair that the estate is divided equally when they dropped two expensive brats...at the funeral home.

We haven't talked in a while.

[terrisel]

20. Tough to Have Those Selfish-type Relatives n/t

[Don_G]

24. You Should Have Seen Him After The Coroner Left

Five minutes afterwards, he decided to tear apart the house looking for cash. When he and I went out of town to make the funeral arrangements, he had his wife clean the house for the cash, financial records and anything else "they" needed without my knowledge.

What hurts more than anything is that "I guess I can visit Mom' grave when I'm at the lake on my boat."

Bastard!!!!

[Braden]

5. people really are "cashing out"

you should only take on additional mortgage debt for the purpose of making an addition to your home or severe emergency. (on edit My opinion, those who have consolidated your debts good for you. don't mean to sound preachy)

one thing people don't consider when doing a "refi" is that you are generally resetting the period to 360 months.

In your example $350,000 Present Value 8% Int 360 Number of periods 0Future Value =2568.17 Payment

in ten years you would have a balance of 307,036.46 and in year ten your principle payments would be $517.82 per month and Interest of $2050.36

so if you want to refinance at a better rate, say 5.5%

you would start with your balance of $307036 your payment would be $1743.33 per month for 360 months $627,593.
Include the $308160 you paid in the first ten years and you would pay $935,753 for your "$350,000" house.

[sybylla]

14. Not always true

When I refinance my home I can choose a term from 10 to 30 years, whatever fits my needs. So I can refinance my balance and maintain the shorter term. For example, I'm planning on refinancing my home soon. I have approximatley 15 years left on the current mortgage and plan to refinance for either 15 years with monthly payments or 20 years with biweekly payments which will pay off the mortgage in about 16.75 years.

Secondly, I would disagree with you on refinancing to consolidate. With interest rates on credit cards sickeningly high, refinancing to pay off a credit card makes immense financial sense. It is silly to pay 12-18% on a credit card when you can convert it to your mortgage, pay 6% and have all that interest be tax deductible.

Now, of course that only makes sense if you don't run right out and recharge that empty credit card. Refinancing to consolidate bills is sound economically only if you make the right choices.

[Yavin4]

15. Ahhhh! There's The Rub

Now, of course that only makes sense if you don't run right out and recharge that empty credit card. Refinancing to consolidate bills is sound economically only if you make the right choices.

Do you really believe for a minute that most Americans won't run right out and re-charge that debt?

[Braden]

18. the second part of your statement was

my intention. If you don't go out and run up your credit card bills again. In which case you have not done much of anything for yourself.

as for terms. Most tv and radio ads being blasted at us non stop are using the "if you bought at 8 and refinance at 5 you will save $____ per month." While its true if you dont understand compounding and aren't good with a financial calulator you will get yourself in some trouble. The most dramatic savings are from people taking some cash out, and refinancing at thirty year periods. The predatory lenders are my target here. You certainly know what you are doing.

I don't reccomend using credit cards at all if you can't pay off your purchases in 6 months or less. Keep a zero balance at least twice per year.

I understand that's not always possible but thats how I do it.

[sistersofmercy]

6. Most ppl refinance and take some equity out but not all!

You need to keep at least 20% of the equity in so you don't have to pay a PMI(Private Mortgage Insurance, protects the lender). The smart ones in my opinion leave most of the equity alone and roll a little out to pay for closing costs. So yes if you lower your interest rate you save a nice chunk of money.

[BikeDeck]

8. I do mortgages

I do mortgages for a living.

First off, your estimated payment is WAY OFF. A $350,000 mortgage at 8% amortized for 30 years gives you a monthly principle & interest payment of $2,568.18. On top of this you will have your tax and insurance escrows, and Private Mortgage Insurance (PMI).

If you had a $350,000 mortgage, paid it down to $225,000 over a period of years and then refinanced you could refinance the balance of $225,000, you could refinance less and pay the loan amount down, or you could refinance for more money and get some "cash out".

If you, or anyone has any specific questions, I would be happy to answer them. As specific questions are easy to answer as opposed to hypothetical.

And for those interested in a bit of free advice... never get a fixed rate mortgage. Always go with an ARM.

[welshTerrier2]

11. ARMS's: sometimes good, sometimes no good

Always go with an ARM

Why do you say this ???

i agree that in the short-term, ARM's have historically had lower rates than fixed rate mortgages ... and, if you're planning to move or decide to refinance in a relatively short timeframe, you're better off with a lower rate ... the fixed benefit is lessened ...

BUT, rates are at or near historical lows ... if you plan to keep a mortgage for many years, i think locking in a fixed rate is the way to go ... imagine getting a 2 or 3% ARM today only to have the rates go up substantially in a few years ... yes, many ARM's have caps but i sure wouldn't want to be paying 8% instead of the 4.74% i recently locked in ...

i'm always leary of financial advice that starts with the word "always" ... and that certainly applies to "always go with an ARM" ... each person's financial situation should be assessed ... i don't agree with your blanket rule ...

please explain your position on this ...

[BikeDeck]

16. agreed

the word always is one that should rarely be used.

How about this, 95% of the time an ARM is the way to go. Over the past 25 years, ARMs have out performed fixed mortgages.

The avg length that a mortgage is held in America is just over 4 years. Very, very few people hold a mortgage more than 6 to 7 years. Going with a 7 year ARM will save you substantial sums of money over a fixed rate mortgage. Even if you got a 7 year ARM, held it for 10 years, and the rate caps were hit each adjustment for the 8th, 9th, and 10th years you would STILL come out ahead of the fixed rate mortgage. And if you think you will hold a mortgage for greater than 10 years you are mistaken. And if you have held a mortgage for more than ten years you are the extreme exception.

[Shakespeare]

13. Why is an ARM better?

Not disagreeing at all--like Yavin, I'm not well versed in this area. What makes it better than a fixed rate?

[BikeDeck]

17. what makes it better

see my reply post above.

Also, ARMs amortize faster (build equity quicker).

[hackwriter]

22. My $0.02

If you do mortgages for a living, of course you want people to take an ARM, because then they'll be refinancing more often.

Here's my $0.02.

My opinion is that home equity should ONLY be cashed out for NECESSARY home improvements that have some kind of a return on resale -- updated kitchens, baths, additional space. I would NOT take out $100,000 for a really snazzy kitchen in a cape cod when you can get a perfectly serviceable one for $50,000.

I would also NOT tap too much equity at this time. I think home prices/values are going to fall as interest rates rise. I bought my house for $193,000 in 1996 and it's now worth $350,000. I expect that by the time the market shakes out, it'll settle in at around $250K. If I were to take equity out now to the full value of the house, and that were to occur, I would now be $100K in the hole. Not a good place to be.

I have refinanced twice -- the first time from a 30-year, 8.5% rate to a 20-year, 6.75 rate after 2 years. The second time was to a 15-year, 5.75 rate after another 3 years. And that's where I will probably stay at this point.

At some point, the amount you would save over the remaining life of the mortgage makes an additional refi not worth it. For me to refinance now at (if I could get it) a 4.75 rate would save me only $7000 over the life of the mortgage, and $2100 of that would be eaten up in closing costs. Then figure I can take 25% of that as a tax deduction, and it really doesn't pay....plus, unless I took a 10-year, I'd now be LENGTHENING the time I pay.

[welshTerrier2]

25. keep watching the rates

i recently got a 10 year home equity loan with a 4.74% fixed rate and no points and no closing costs ...

the bank is no longer offering this deal but it's worth keeping an eye on the rates until the next inflation cycle hits ... if you can refinance without points and closing costs, you just might find a better deal than you have ... even if it only saves you a few bucks a month, it could be worth it if you don't incur additional costs ...

[welshTerrier2]

9. lots of options

many people make a common mistake as follows:

take your example ... you started with a 30 year mortgage of $350,00 and have paid down the balance by $125,000 over 10 years ... this leaves a balance of $225,000 ...

other factors notwithstanding, you should not refinance the $225,000 over 30 years ... this is effectively incurring additional debt ... depending on your situation, it is often better to take a refinance loan for 20 years rather than 30 ... even at the same rate as the original mortgage, your monthly payments would go down if you refinanced the $225,000 over 30 years ... that's because you're spreading out the remaining balance over 30 years instead of 20 ... if your goal is to lower your monthly payments, fine ... but understand that you'll incur more interest expense over the term of the loan by extending the remaining life of the loan back to 30 years ...

i guess the point of all this is that you need to analyze your situation ... don't assume that the term of the loan should remain the same with a refinance ... if you have the money, you might even consider taking a loan for less than your current outstanding balance or for a shorter term ... the only way to know is to run the numbers ...

[Yavin4]

10. Yeah, I Know That My Numbers Are Off

I was just trying to understand whether people are re-financing their outstanding balance or whether they were re-financing their equity and their outstanding balance.

What scares me is that millions of Americans are re-financing their equity. In a sense, they're converting their equity into debt in order to maintaing their lifestyle which to me is financially dangerous.

[BikeDeck]

19. Not always

What scares me is that millions of Americans are re-financing their equity. In a sense, they're converting their equity into debt in order to maintaing their lifestyle which to me is financially dangerous.

Not the case. Often, as pointed out above, people are paying off higher rate consumer debt (credit cards, car loans, student loans, etc...) and gaining a larger tax deduction.

It is common for someone to refinance their home, "cash out" $20,000 in equity to pay off these debts, and lower their total monthly debt payments $400 or more dollars per month.

I am currently refinancing a gentleman at 90% of his homes value, paying off consumer debt, and reducing his mortgage payment (just his mortgage payment) by nearly $800 a month. Then several hundred more in debt payments are being elminated by paying off the accounts.

[Yavin4]

21. Let Me Paint A Bigger Picture Here

The Fed, in an attempt to prop-up the Bush admin, lowered rates to their lowest levels in 40 years, prompting this re-financing boom, and what this boom really is, is a plan to get millions of middle-class homeowning Americans to convert their equity into debt.

Sure, a lot of Americans will indeed use their re-financing cash to pay off high-interest credit cards, but you and I know full well that the majority of Americans will use run up these zero-balance credit cards in order to maintain their current lifestyle, esp. in a slow-growth economy.

In the end, the consumer-led economy rolls onward even though there's no new job creation to support it. Once again, middle and working class Americans are being economically manipulated in order to justify the Bush admin's backwards economic policies.

[geniph]

23. A re-fi often requires you to pay off all consumer debt

and close those accounts. Mine did. I re-financed for several reasons: to pay off consumer debt, to get the lower interest rate (4.75%), to go to a 15-year mortgage, and to get cash to remodel (adding a second bathroom and upgrading throughout the house). The mortgage company required me to close the paid-off accounts. Now, that doesn't keep me from continuing to get offers for new credit cards, but I called the national OPT-OUT number and requested not to get any more credit card offers. They've almost completely stopped now. Also, my mortgage payment is now high enough to make me a bit less desirable to the credit card companies.

It's likely that I'll stay in this house for at least five more years, at the end of which time, my equity will be significantly replenished (you pay down the principal pretty fast when you amortize over 15 years instead of 30, and at 4.75%, instead of 6.5%, which was my old rate) and home improvements will have increased the value as well.

Equity in your home should never be tapped solely to pay debt unless the debt is crippling you. It should never be tapped to buy transient stuff that won't ever return value. But if the refinance not only pays off debt but also improves your interest rate, pays for improvements to the home, etc., then it's one of the better financial deals out there.

[prolesunited]

26. It probably all depends on your financial situation

I refinanced my house in January. I was a little more than four years into a 30-year mortgage ant 8.5% and was paying PMI. Home values in my area had gone up quite a bit so with the reassessment, I was able to drop the PMI.

I didn't take any cash out. Didn't really have any debt other than my car, which I was within a few months of paying off anyway. I was able to get a 15-year mortgage at 6.5%.

End result, my payments remained almost the same and I'll own the house MUCH sooner. As many on this thread pointed out, refinancing can be a good thing or it can be the road to ruin if you run into problems or aren't fiscally disciplined.

The thing is with credit card debt, it is unsecured. They can't do much but harass you mercilessly. Once you roll that debt into a refi, the debt is now secured — WITH YOUR HOUSE. You screw that up and you're out on the street.

[Yavin4]

27. Again, You're The Exceptions To The Rule

You and I know that many Americans won't stop at just paying off debt.

[ScreamingMeemie]

28. A word of caution from a real estate appraiser on "cashing out"

Many times, we are begged by loan officers to "push the value" in order to 1. help a homeowner drop mortgage insurance 2. Give the homeowner perceived "equity" in their home in order to cash out. Problem happens when you decide to sell your home and cannot get the price you need in order to settle the loan. I am seeing more and more of this happen, and it's leaving a lot of people in the lurch. If the value of your home seems to good to believe. It probably is. They should make loan officers adhere to the same set of standards as appraisers. It is giving appraisers a bad rap. Off my soapbox now.