Adjustable Rate Mortgages with lots of payment options have fallen out of favor, and banks are falling over themselves to help their customers refinance into more stable notes. But if you already have a stable 30 year fixed mortgage, should you consider refinancing it now?
Here are some examples of how costs might differ if you refinanced your home mortgage loan.
Case 1: California
600,000 home, purchased in 2004, with a 450,000 mortgage at 5.625
Currently paying: $2,590.45/month.
Principal: $599.34
Interest: $1,991.11
Current Loan Balance: $424,171.84
What’s left: 424,000 plus 383,000 in interest over 26 years.
If you Refinance for 30 years at 5.30, here’s what you would face:
Monthly Payment: $2,354.49
Monthly Principal: $481.82
Monthly Interest: $1,872.67
What’s left: 424,000 plus 424,000 in interest over 30 years.
You get to drop your monthly payments, but because the loan is stretching out over an extra four years, you end up paying an extra 41000 in interest over the life of the loan. Plus you have any additional closing costs and refinancing costs to put the new loan in place.
If you instead continued to make your payments at 2590 per month, at the new interest rates, you would pay of the loan in 292 months, about 24 years and spend a total of 424000 plus 331,000 in interest. a net savings of over 50,000 from the original loan and almost 100000 over the new loan.
Here’s a page with some mortgage calculators from Homecomings.Com. As part of GMAC they just got bailed out and have plenty of money to spend.
Get Your Liar’s Loan Done before 2010
In the recent mortgage and housing boom, significant percentages of home loans were originated by independent brokers. As salespeople their interests didn’t always align with the interest of the lender or the borrower. In many cases the drive to “get the loan done”, and the multithousand dollar commissions for doing so influenced brokers and their clients to stretch the truth to qualify. Lenders were just as anxious to create loans they could package and sell. Since the loan was being sold off to an invisible investor, the risk would soon leave the lenders books. Overall it created a tremendous incentive to cheat in ways large and small to get the loans written and placed.
Unfortunately, it is very difficult to underwrite for fraud. The rating agencies judging the quality of the bonds based on these mortgages could easily understand the likelihood of default in a standard marketplace, they didn’t account for the weakness and deceptiveness of the underlying data. Unfortunately there has been no easy way to easily identify trends of loan failures and tie them back to individual participants in the system. Next year that will change. Starting in January 2010 the Office of Federal Housing Enterprise is requiring a system where every participant in the loan origination process will be assigned an id number, and those numbers will be attached to the loan. Once in place the system will allow regulators to look at the aggregate loan performance of any appraiser, broker, banker and identify those whose loans are statistically bad, fraudulent or under-performing.
When combined with more stringent standards for borrowers to prove their actual incomes, the new standards should grind much of the fraud out of the origination process. So if you are gonna cheat, get it over with now.