Bills Logo

Advice on When to Refinance a Mortgage

Mark Cappel
UpdatedJun 23, 2008

I received a good offer to refinance my 1st Mortgage but the loan amount will go up. Is this a good idea?

Home value = $200,000; Current 1st Mortg Balance = $155,978 @ 6.75% APR, Current 2nd Mortg Balance = $39,408 @ 7.99% APR; I received an offer to refinance my 1st Mortg 30-Yr Fixed @ 5.75% but the loan amount will go up to 164,000 with all the fees and points. Is this a good idea. I'd save $98.70/mo on the 1st mortg; money which I could pay toward the 2nd mortgage. IS THIS A GOOD IDEA (increase my 1st Mortg loan amount to pay extra towards the 2nd Mortg).

no, this is not a good idea. consider this; with the new loan your total outstanding would be greater than the current value of your home, which would put you in a negative equity situation. moreover, the reduction in monthly payments, i feel, does not justify the steep increase in the amount of your loan (by way of points and fees). a refinance only makes sense if the reduction in your interest rates works out to 2 percentage points or more.

one potential problem encountered by many borrowers trying to refinance their home loans are early refinance penalties charged by their current lenders. many loan agreements, especially "sub-prime" loans designed for borrowers with credit problems, state that borrowers must pay a penalty to their current lender if they wish to refinance their loan before the expiration of a certain period defined by the loan agreement. these "penalty periods" vary from loan to loan, but are frequently between two to five years from the date of the original mortgage. before you attempt to refinance your current mortgage, you should contact your current lender to discuss whether or not your current loan agreement includes a prepayment penalty, and if so, its amount and when you can refinance without penalty. prepay penalties can be so costly that they can easily make a refinance loan too expensive to save you money.

my suggestion is that if you get an offer to refinance both of your loans into one fixed loan, at a good interest rate, then go ahead and do it. i also suggest that you compare rates and offers from multiple lenders. you can apply with bills approved lender network here: mortgage refinance quote

i hope this information helps you find. learn. save.