question about refinancing before loan is 1 year old
Question: My large loan (7/1 ARM) is at 5.375% and my small loan (I say small, but its over 60K) is adjustable and is up to about 7.75%–it started off at 6%. And these are interest only loans.
Answer: Boy you’re in for an uphill battle then cus your first mortage is at a great rate compared to the 15 month highs we’re seeing right now.
If you found a lender willing to do the loan essentially for free today (i.e these are wholesale rates I’m talking), a traditional 7/1 ARM is going for 5.875 at one major lender plus the .25 adder for interest only brings you to 6.125% on that rate. So instead of paying just 5.375% on 80% of your home’s value you’ll be paying almost .75% more on all that just to save 1.625% on the 15%. If you weigh those out 80 * -.75 = -60 (fuzzy units of savings) 15 * +1.625 = +24.375 (fuzzy units of savings)
you end up negative o nthis one. That means you’ll be paying MORE interest (and hence having higher payments) if you refi’d today than you are presently paying. As it turns out, you’ll be giving up your good rate on the big loan to save a little on the little one.
So, to me that rules out a full “consolidate both loans” refi.
About your only option I see is to go shopping for a better home equity rate on that small loan, and refi just that loan. You should be able to do a little better than 7.75%. You should be able to find a “prime” or a “prime mine .25%” home equity loan out there if your credit is good. But then again, with over 80% LTV on your house, I’m not sure. Because for LTV’s over 80%, you do tend to get hit with higher rates as the bank is assuming more risk. I know my HELOC rate is currently 6.75% at my credit union, but I think that’s about due to bump up at least a quarter point.
The other thing you’ll want to verify if you pursue this: check your home equity loan for an early payment penalty. Many of these products come with minimums of 1yr or 2yrs to have the account open in order to avoid a termination fee (ranges from $100-$500). Don’t be scared off by the fee though if you can achieve a rate that will make that fee pay back in a year or so.
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Filed under: Home Equity Loan
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