Refinance or Second Mortgage?
Lynda Nelms has been writing real estate and home refinance articles for over a decade now. She is the editor of a popular home finance blog and she publishes articles online for companies like Nationwide and Citi Home Services. In addition to writing, Lynda continues to originate home loans and she specializes in debt consolidation and government refinancing with VA and FHA. In the article below, she take a real testimonial and using the story behind one of her thousands of closed loans to compare mortgage refinancing with a 2nd mortgage refinance that is no longer available due to the current lending crisis. Lynda works with the nation's leading lenders and will help you uncovers relevant mortgage refinance rates for your qualifications and considers both sides of refinancing in 1st or 2nd mortgage loans together.
Refinance or Second Mortgage Refinancing?
Rolling 1st & 2nd Mortgages Together By Lynda Nelms
Lynda Nelms Brings Her Refinancing Experience Right to Your Home Loans
I had a recent conversation with one of my favorite clients, Mr. Johnson, who is a finance savvy homeowner from Annapolis, Maryland. I have helped him and his family with several home refinance loans years ago and a few years ago he took out a second mortgage to finance some home improvements. He remodeled his kitchen and landscaped his back yard while adding a new deck.
Mr. Johnson asked me an interesting question that I wanted to share with my readers and fellow bloggers, because it seems to be a common dilemma for homeowners across the country.
After getting caught up on our personal lives, he asked me "Should I refinance my 2nd mortgage or refinance my current first and second mortgage into one mortgage? After looking up his file, I asked him a few more questions.
1. Question - Lynda Nelms: Has anything changed regarding your intention to stay in the home at least until retirement and your children go to college?
Answer - Borrower: No we are not moving anytime soon.
2. Question - Lynda Nelms: Are you planning to use the remaining $20,000 you still have available on this home equity line of credit?
Answer - Borrower: No renovated our home and do not want to pay interest on additional funds. We do not need the cash for anything else and the interest rate has risen quite a bit since it's a variable rate.
3. Question - Lynda Nelms: Has your credit or income changes significantly since your last refinance loan closed two years ago?
Answer - Borrower: Our credit is still pretty good. We had a late payment on a couple credit cards a few years ago, but we have never been late on our mortgage or car loan payments. Our income has risen about 5% since we last refinanced two years ago.
The rate is 7 on your 1st mortgage with a balance of $280,000 and your 2nd mortgage of $100,000 has an adjustable interest rate at nearly 13%. So if we combine the mortgages together and you finance your closing cost your new loan amount would be about $385,000.
According to my automated appraisal, your home is worth about $400,000, so you would be over 90% loan to value which is difficult to refinance with your 600 credit score. We do have a FHA loan that will enable you to roll the mortgages together into one mortgage as long as we stay below 95% loan to value. There is (see lender) mortgage insurance premium charged in the loan, but my calculations show that this FHA refinance will reduce your monthly payments over $800 a month. My recommended loan offers an interest rate of 6.5% and its fixed for thirty years with no penalty for early pay-off.
The other important detail to note is that refinancing the variable rate credit line into a low fixed rate 2nd mortgage may have been my recommendation in 2005 or 2006, but in 2008 refinancing the second mortgage on its own is not an option. The 2nd mortgage market has tightened to levels I haven't seen since the 1980's. 600 fico borrowers do not have access to 80% let alone 90 or 95% loan to value. In 2006 a 600 fico could refinance a 2nd mortgage up to 100%, but today it's a mortgage refinance in first position or nothing at all.
This is a great example how homeowners with fair credit can save a worthy amount of money by bring your 1st and 2nd mortgages into one loan with better rates and superior terms for repayment. FHA recently announced several new refinance loans that provide a great opportunity for homeowners to save money and protect their real estate investment.
According to Dan Mudd, chief executive officer of Fannie Mae, nearly a trillion dollars' worth of mortgages will have their rates reset. "Those resets are going to have some very interesting and difficult-to-predict impacts on consumers," Mudd said, noting that many consumers will have trouble keeping up with payments. Many are scrambling to refinance their troubled mortgages into fixed rate loans, and here are 10 reasons why:
- Adjustable mortgage rates are sensitive to short-term interest rates, says Keith Gumbinger, vice president of HSH Associates, a mortgage consulting firm. And with all the recent hikes in short-term interest rates, fixed rates are currently the same as adjustable rates for conforming and prime "A" paper home loans.
- With fixed rate mortgages come fixed monthly payments. By choosing a loan with a fixed interest rate, you can be certain that your interest rate and monthly payments will stay the same for the life of your loan.
- There are no surprises with a fixed rate mortgage. While the major financial indexes will continue to fluctuate from month to month, your rate and payment will remain locked in.
- Fixed rate mortgages in most cases, provide the largest tax savings compared to other mortgage options.
- Home loans with fixed interest rates are not as inflexible anymore. There are now are flexible, interest only options with fixed rates. These generally work by providing the option of either making the regular principal and interest mortgage payments or paying only the interest for the first 5 or 10 years of the loan. This can be really helpful for times money is tight.
- Fixed rate loans are good refinance options, especially when interest rates are low. And, rates have dipped for the 4th time in a row, so refinancing to a fixed rate loan could save you a lot of money especially if your ARM is about to adjust.
- Adjustable rate mortgages are risky. When the loan adjusts, you could end up paying hundreds of dollars more per month. Fixed rate loans offer the security of interest rates that never change through the life of the loan.
- Fixed rate mortgages are simple to understand, making them appealing and good for the average consumer.
- Fixed rate mortgages provide inflation protection. The mortgage rates you pay are not going to soar even if your taxes and insurance costs do.
- Financial planning over the long term is easier with fixed rate mortgages. Because your monthly mortgage payment stays the same through the life of the loan, it's easier to plan for other expenses, including property taxes and insurance, and set financial goals for yourself and your family in the future.
Even if you aren't in the refinance market, cash out refinancing can be great for consolidating debt. Take advantage of today's low rates to get out from under burdensome credit card debt. And, remember, interest you pay on a mortgage is up to 100% tax-deductible, and the rates are significantly lower than credit card rates.