Will a refi rescue you?

Make sure doing so won't increase borrowing costs

President Barack Obama has unveiled new rules aimed at making refinancing possible for homeowners who owe more on their mortgages than their homes are worth. These "underwater" borrowers can get some added breathing room in their budgets by refinancing to the ultra-low mortgage rates available today. But if they're not careful, refinancing could sink them even deeper in debt on those money-losing properties.
More than 10 million homeowners in the U.S. are estimated to owe more on their mortgages than the properties are worth, making it impossible to qualify for a traditional mortgage, especially under the tighter lending rules that have emerged since the mortgage bubble burst in 2007. An earlier version of the president's Home Affordable Refinancing Program allowed some borrowers to refinance, even though they owed up to 125 percent of the home's value on the mortgage. The new version of the program, known as HARP, for short, removes that cap and is expected to help 1.5 million to 2 million homeowners move to lower rates.
The revamped HARP also streamlines the process, reduces or eliminates some fees and makes other changes to the program. But don't call your lender right now: The final rules won't be issued until Nov. 15, and it could take longer for lenders to decide how they'll operate under the revised program. Chase, for example, says it won't remove the 125percent cap on its refinancings until early next year.
So while you're waiting, take the time to do a little math and make sure a refinance will work for you.
The first question is whether you should refinance at all. If you're struggling to stay in the home, will knocking a few hundred dollars off your monthly payment be enough to help you keep the place? If not, you should consider a short sale, contact a certified housing counselor (try Greenpath.com or 800-550-1961) or a bankruptcy attorney.
The second question is whether you'll stay in the house long enough to recoup the cost of refinancing. Even with a streamlined and discounted refi where you don't need to pay for an appraisal, survey or other expenses can still cost a few thousand dollars for title insurance, application and processing fees, and other charges. If you roll those costs into your new loan, you've added more debt, which is the last thing you need. Look at how long it takes for the savings on your monthly payment to make up for the cost of the new loan, ideally in about two years. If you're moving before the payback period ends, skip the refi.
Another mistake would be replacing your mortgage with a 30-year loan. If you're several years into paying off at least some of the principal on your mortgage, starting all over again with another 360 payments means your total interest on the loan could increase.
Example: Let's say you bought a place for $160,000 10 years ago. You've made 120 payments of $1,011.31, paying nearly $97,000 in interest on a 30-year, 6.5percent loan. You owe more than $135,000, but the house is worth $80,000.
Just to get your balance down to what the house is worth, you'd have to make another 137 payments, including nearly $83,000 in additional interest.
If you refinance to a new 30-year loan at 5 percent, it lowers your monthly payment to $728.16, a savings of $283 a month. But now it'll take 213 payments until your balance is down to your home's $80,000 value, and it will cost $16,500 more in interest just to get there.
But if you keep your loan term the same, 20 years, and refinance to 5 percent, you'll still save $116 a month on the payment, plus get your loan balance down to $80,000 in 128 months, and save nearly $24,000 in interest compared with your existing loan.
The key is to make sure you don't focus just on a lower monthly payment if it's going to increase your total cost of borrowing and take you longer to pay off the home, or at least build some equity. A good mortgage broker ought to be happy to run the numbers for you, or you can crunch them yourself with the handy mortgage amortization calculator at bankrate.com.
Another option homeowners might want to consider with a refinancing is whether they should raisetheir monthly payment by shortening the term of their loan, to a 15- or even a 10-year note.
The reduced interest rate — which is even lower on shorter-term mortgages compared with 30-year loans — offsets some of the cost of the higher monthly payment. You'll pay off the home sooner — or at least get to the point where you've got some equity — and pay far less interest.
A 30-year loan at the current average of 4.25 percent brings a monthly payment of $738, while a 15-year loan at 3.5percent retires the mortgage in half the time with a payment of $1,072, or another $334 per month.
Seeing that this is a government-sponsored program that involves private mortgage lenders, there is plenty of room for mistakes, delays and frustrations, so if you do pursue a refinance when the new HARP is in place, be patient. But first, make sure any new home loan won't be an expensive way to put you right back into the same old problems.
boconnor@detnews.com
(313) 222-2145
Source www.detnews.com/