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Refinancing question re: Home appreciation, loan consolidation

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Refinancing question re: Home appreciation, loan consolidation

Old 10-07-05, 05:41 PM
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Refinancing question re: Home appreciation, loan consolidation

First, a brief history:
Currently we have two mortgages, 80/20. We have a 5 year ARM (1.5 years into it) and a HELOC that really sucks (variable rate, payment has doubled in the past year) for 20% of the home price to avoid the insurance. I think this is a pretty common starter loan siutation these days. No down payment, and picking up a 2nd loan to get into a home.

I am estimating based on the sale price of homes on our street (not a perfect indicator of course), one of which is an identical home 2 doors down, that we have gained at least 60K in appreciation of our home already. That's being conservative (actual sale price is closer to 80-100K more than we paid ). The market is crazy, so there is slight hesitation as prices may actually drop, but avoiding a fully variable rate loan in 3.5 years is essential to me.

The goal:
Get rid of the variable rate loans before the ARM comes into effect, kill the second mortgage if possible and get into a single payment, fixed rate situation.

The question:
Is this possible? What I'm thinking is that if we sold our home for 60K more than we bought it for, we could put that 60K towards a down payment on another home. I don't know how refinancing works exactly, but if we were essentially selling to ourselves, we could put a hefty down payment on our house, elimintate the second mortgage, and potentially get a fixed rate loan for the remainder while rates are still good. I don't know if this is "allowed" or how it works... we may have to pay for an estimate, perhaps closing costs, and obviously it would be contingent on getting approved for the higher loan amount, though the final loan amount would probably not be much different from our current one since any equity would hopefully be used as a down payment.

Any insight is greatly appreciated.
Old 10-07-05, 05:44 PM
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Just call up a bank and do a simple refinance with no money out. www.compareinterestrates.com

Easy stuff, don't overthink it.
Old 10-07-05, 06:01 PM
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Well, I have no idea what's involved with refinancing and I trust otters more than "experts" who have a stake in the situation.

Does what I describe above make sense? Does appreciation come into play when you refianance, allowing me to put it towards a down payment?
Old 10-07-05, 06:09 PM
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Maybe I'm wrong, but...


Just refi for 80% of your CURRENT appraised amount to eliminate the need for the MIP or escrow (save your own insurance/tax/whatnot). This will more than pay off both your loans, it sounds like (unless your house is like more than $400,000 or something).

Or did I miss something?

For example:

Old loan 80-20
House original cost - $200,000
First loan - $160,000
Second loan - $40,000

NEW appraisal value - $260,000 ($60K appreciation)
New loan amount - 80% of $260,000 = $208,000

This would get rid of MIP and escrow. Fees probably need to be paid in there somewhere. But that's the gist, no?
Old 10-07-05, 06:11 PM
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Completely. And it is all a silly thing on refinance. When you bought the house, the appraisal probably mysteriously came in about $5k more than you bought it for. You will tell the lender how much you think it is worth, and they will appraise it for about $5k more than that. And that will be your 20% equity, and you will get rid of the ARM. Go with a simply 30 year fixed. If you want to pay more to make it a 15 year, do that, but rates are low enough that going 30 year gives flexibility.
Old 10-07-05, 06:14 PM
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Sounds about right.

Original loans:
$216,000
$54,000
Total: $270,000

If we refinance for $330,000
80% = $264,000... so it's close and we might appraise for more.

So what would we do... get our house appraised, then apply for a new loan and use it to pay off the existing loans? Might as well just apply for a loan of the exact amount of the first loans combined, right? Is that the proper sequence of events?
Old 10-07-05, 06:14 PM
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Don't get rid of the escrow unless you have a very specific reason to. Banks now seem to want to charge you .25% more on the loan if you want to do your own.
Old 10-07-05, 06:16 PM
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Originally Posted by Thor Simpson
Sounds about right.

Original loans:
$216,000
$54,000
Total: $270,000

If we refinance for $330,000
80% = $264,000... so it's close and we might appraise for more.

So what would we do... get our house appraised, then apply for a new loan and use it to pay off the existing loans? Might as well just apply for a loan of the exact amount of the first loans combined, right? Is that the proper sequence of events?
1. Follow link above for best rate.
2. Call them or fill out application.
3. Tell them what you want it to appraise for.
4. Sit back.

Call a lender first.
Old 10-07-05, 06:20 PM
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Call a lender first for what reason? Aren't they a lender?
Old 10-07-05, 06:22 PM
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For a better rate. Don't call your current one unless you know they have a good rate.
Old 10-07-05, 06:45 PM
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Thor

This is fairly straight forward and a fairly common thing people do.

They will estimate the value of your house and expect you to have 20% equity from that estimate.

If the house estimates at 330k, then yes, you need to have 66k in equity and you take out one fixed loan for 264k. NO mortgage insurance or extra loan or any BS like that.

You can then get a new loan as if you put 20% cash down and pay off your other loans.

Look out for pre-payment fees on your old loans
Look out for fees on originating the new loan (should be 1%-3% of total loan value) of course you want to find the lender with the lowest bullshit list of "fees"

The last time I refied I went through priceline.com it was fairly painless, they even sent someone to my house to sign the papers and I didn't have to go anywhere.

One thing I found is that most lenders try to play the shell game with their fees. They changed drastically from the good faith estimate to when we hit the nitty gritty. I walked away from 3 of them before I went priceline.

Last edited by 4KRG; 10-07-05 at 07:53 PM.
Old 10-07-05, 07:00 PM
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The best way to see the fees is the APR. If you have a rate of 6% but the APR is 6.48% you have enough fees to make your effective rate 6.48. That is a lot of fees. However, you can still expect that the fees will run a total of $3,000 to $5,000 on your refi.
Old 10-07-05, 07:33 PM
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Thanks for the help. After thinking about it and the costs involved, we're probably a couple of months away from being able to do this but it sounds straight-forward enough. Obviously I want to act as soon as I can to capture the current rates, but I'll deal with that when I come to it.
Old 10-08-05, 01:26 PM
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There are no real costs involved. All the fees, etc. get rolled into your new mortgage. I would guess that the only out of pocket fee would be for an appraisal, and even that isn't always true.
Old 10-08-05, 01:37 PM
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Originally Posted by Thor Simpson
Well, I have no idea what's involved with refinancing and I trust otters more than "experts" who have a stake in the situation.

Does what I describe above make sense? Does appreciation come into play when you refianance, allowing me to put it towards a down payment?
The appreciation in your home definitley helps. It will lower your LTV ratio which will allow for a larger loan and still remain with the lender's loan program guidelines for the given loan product. In order to document the appreciation, the lender will most likely want to get an appraisal though.

Last edited by Jack Straw; 10-08-05 at 01:39 PM.
Old 10-08-05, 02:44 PM
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Originally Posted by kvrdave
There are no real costs involved.
OK, this statement bugs me to no end. The real cost is a fricken fortune when you factor in 30 years of interest on any fees they roll in. You have to work the math in each specific case to determine what is a good deal.

This is just like a car salesman asking you what kind of monthly payments you can afford, while they figure out how much they can rape you and keep you within those payments
Old 10-08-05, 02:46 PM
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Sorry, I meant "out of pocket" costs, which was where he seemed concerned.
Old 10-08-05, 02:58 PM
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Originally Posted by kvrdave
Sorry, I meant "out of pocket" costs, which was where he seemed concerned.
No matter how you turn it, the costs come out of your pocket. Either now or later

My only point in picking on this statement is that many people feel a refi is free if their monthly payment drops. Thor needs to be aware, that is not the case. You pay for it one way or another and the cost of the loan changes with time. It is not hard math, but it needs to be worked. Usually the deciding factor is how long you plan to stay in the house (which for most folks is a moving target)
Old 10-08-05, 03:45 PM
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I suppose, but that doesn't tell the whole story either. My first loan was $150,000 at 7% with payments of $997 a month. 30 years of that is $299,910. I refied after 2 years and stayed at $150,000 with 5.125% (paid about $3k out of pocket rather than have it put into the loan) and then had payments of $817 a month. So you can say that it costs money, but it saves $2,160 per year. So effectively you have paid for your refinance in less than 2 years. That saves $60,480 in the remaining 28 years that would have been on the loan, and only increases 24 payments of $817, which is $19,608, so you still have a net savings of $40,872. And that assumes that Thor's ARM doesn't go up, and it will.

And generally "out of pocket" refers only to what is actually coming out of your pocket to pay, not what the actual cost of something is.

Just because there is cost associated with doing a refinance doesn't mean it isn't the smart thing to do. The out of pocket cost in the long run is much greater by not having the refinance.

This all assumes that you live there 30 years, which isn't realistic, most likely, but in any event, it pays for itself in less than 2 years.

I don't know what you mean by "the cost of the loan changes with time."
Old 10-08-05, 06:56 PM
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Originally Posted by kvrdave
I suppose, but that doesn't tell the whole story either. My first loan was $150,000 at 7% with payments of $997 a month. 30 years of that is $299,910. I refied after 2 years and stayed at $150,000 with 5.125% (paid about $3k out of pocket rather than have it put into the loan) and then had payments of $817 a month. So you can say that it costs money, but it saves $2,160 per year. So effectively you have paid for your refinance in less than 2 years. That saves $60,480 in the remaining 28 years that would have been on the loan, and only increases 24 payments of $817, which is $19,608, so you still have a net savings of $40,872. And that assumes that Thor's ARM doesn't go up, and it will.
That is the exact math he needs to work. I never said it was bad to refi, I just said you need to do the math and figure it out.

A guy I work with needs to pay $3000 as a penalty to pay his old loan off early. Plus he has to pay $3000 in costs on the new loan he wants to get. he will end up saving $100 in his monthly payment. Since he is in a 1 bedroom condo, he plans on moving in 2 years. When I work the same math for him, he ends up losing

He doesn't get it because his payment is lower.


And generally "out of pocket" refers only to what is actually coming out of your pocket to pay, not what the actual cost of something is.

Just because there is cost associated with doing a refinance doesn't mean it isn't the smart thing to do. The out of pocket cost in the long run is much greater by not having the refinance.

This all assumes that you live there 30 years, which isn't realistic, most likely, but in any event, it pays for itself in less than 2 years.

I don't know what you mean by "the cost of the loan changes with time."
I agree. What I really meant to say was what you said above. You get money back every month when you refi to a lower payment, so the cost of the refi will eventually be paid back over the life of the loan, etc. I just didn't word it well.
Old 10-09-05, 09:18 AM
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Originally Posted by Thor Simpson
Sounds about right.

Original loans:
$216,000
$54,000
Total: $270,000

If we refinance for $330,000
80% = $264,000... so it's close and we might appraise for more.

So what would we do... get our house appraised, then apply for a new loan and use it to pay off the existing loans? Might as well just apply for a loan of the exact amount of the first loans combined, right? Is that the proper sequence of events?
Thor, you're acting a bit crazy . I only have a few minutes so I won't go into all the details, but here's basically what happens.

1. A "current value" is determined for your home. You might want to wait until this other place (like yours) is truly sold - that is, new people have moved in, settlement occured, etc.
2. The bank compares the amount of your current loans ($270,000 + a few thousand for fees) versus the "current value" of your home. If your home is now worth $330,000, you're sitting at an LTV (loan-to-value) ratio of between 80% and 85%. At that point you can qualify for very good rates assuming there's no issues with credit or income (you will probably need at least 2 years at your current job - i.e. your own business).
3. The bank pays off your old two loans and you get a new one.

CAVEATS
-- It is supremely important to consider how long you are going to stay in the property.
-- If you will be there another 5-6 years, you might as well get a 5-year ARM and you might consider getting an interest only loan.
-- If you are going to be there for ten years or more, then feel free to get a 30-year loan, BUT get one WITH points so you have a lower rate, and feel free to get PMI, don't get suckered into "Lender Paid MI" or any sort of "piggyback" loans. (This is if you stay there for a long time).
-- Contact three places: One, your current lender. Two, your local bank. Three, a broker that a friend or family has recommended. Let them all pull your credit (it will NOT affect your score) and get back with you on your "best" option considering how long you plan to own the property (be that 5 or 7 or 15 or 60 years). Have them send you a Good Faith Estimate and a TIL.


I have no problem helping you out with this in more detail, so email me if you want. There's some steps you can take that may backfire and cost you a whole lot more.

It's not a difficult process but you want to make sure you are getting the right loan for YOU, not just based on what some schmo at a bank says.

Last edited by The Bus; 10-09-05 at 09:21 AM.
Old 10-09-05, 11:18 AM
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Originally Posted by 4KRG
No matter how you turn it, the costs come out of your pocket. Either now or later

My only point in picking on this statement is that many people feel a refi is free if their monthly payment drops. Thor needs to be aware, that is not the case. You pay for it one way or another and the cost of the loan changes with time. It is not hard math, but it needs to be worked. Usually the deciding factor is how long you plan to stay in the house (which for most folks is a moving target)

this is true in almost all cases, but there is one exception.. the no cost refi.. nothing out of pocket and nothing added to the balance.. you may get a slightly higher rate than a refi with costs (with costs all sorts of breakeven recapture calculations come into play).. but if it is less than your prior loan and the term is equal to or shorter you save $$.
Old 10-09-05, 11:22 AM
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Originally Posted by 4KRG
That is the exact math he needs to work. I never said it was bad to refi, I just said you need to do the math and figure it out.

A guy I work with needs to pay $3000 as a penalty to pay his old loan off early. Plus he has to pay $3000 in costs on the new loan he wants to get. he will end up saving $100 in his monthly payment. Since he is in a 1 bedroom condo, he plans on moving in 2 years. When I work the same math for him, he ends up losing

He doesn't get it because his payment is lower.

Explain it to him this way... to save 100/month (of which his real savings might be only 70 bucks due to tax effect) , he will have 6,000 less whenever he sells his place.. takes well over 5 yrs without tax adjustment to break even.
Old 10-09-05, 12:37 PM
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Originally Posted by matchpenalty
Explain it to him this way... to save 100/month (of which his real savings might be only 70 bucks due to tax effect) , he will have 6,000 less whenever he sells his place.. takes well over 5 yrs without tax adjustment to break even.

Yeah I wrote it out on the white board and left the number at $100 trying to make it simple for him to understand.

His problem is that he needs the $100 per month NOW and doen't really care to look any deeper into the math. Nice guy, short sighted, lives paycheck to paycheck, poor with money management.

You can lead a horse to water.....


As for the "no cost refi" that has a "slightly higher rate", you are still paying for it, you just pay with the increase in rate.

I am *NOT* saying this is bad, I am simply saying, you are still paying something for the priveledge of the refi.

Chances are if you came out of pocket and lived in the house for 5 years, you would be better off with the lower rate.

**BUT** you have to work the math, there is no magic one size fits all solution.

Many people get confused with all the numbers involved to the point that they think they are not paying ANYTHING for the refi (I mean not one dime). That loan just doesn't exist.

There are many cases where it is wise to pay for the refi, you just need to figure it out. I refi'ed, I broke even in 15 months, I have lived in the house well past the 15 months, so now I am ahead. You have to shop it like anything else to get the best deal.
Old 10-09-05, 08:27 PM
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Thanks for all the help everyone... It's good to hear that my thoughts were pretty much in line with what we can do. Sorry if I sounded "a bit crazy" ... I'm pretty new to loans in general.

I'll keep all your suggestions in mind when we look to do this. We will definately wait for the house 2 doors down to close, and are most likely looking to refinance in 2-3 months (Being self-employed, I need to get some more liquid funds in the bank regardless of what the fees will be). We are probably going to be in the house another 3-5 years, so I'll be sure I do the math and make sure we come out alright in the long run. Another ARM is definately an option... but I hate to be tied in to it in the event we end up staying more than 5 years, or facing another refinance when rates are potentially much higher. Interest rates in 5 years could be a very different picture than we are looking at today, and I don't think anyone would suggest that they would be lower. On the other hand... no sense in throwing money away if we're going to move in 3 years. So... I guess we have some talking to do about our timeframe as that could greatly affect our loan selection.

Thanks again.

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