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Old 05-25-2010, 03:00 PM
 
1 posts, read 1,336 times
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Hi! I'm looking for advice from someone who understands mortgages better than I do.

We have 17 years remaining on a 30-year mortgage, at 6.75% with a balance of about $55K. We live in a smaller house with assessed value (per the tax man) of $117K, so we've got a fair bit of equity. The market in our area has not suffered as much as some others, but it's still pretty soft.

We've put off refinancing because we would like to move to a larger home, and didn't think that we would recover the cost of the refi. (We bought this house before our first child was born; we now have 4 kids, and it is simply too small for our needs.) We should be able to qualify for a decent rate because we have good FICO scores (high 700s), our income is about $80K, and we owe nothing except our mortgage so our current debt-to-income ratio is below 10% ... but the bulk of our "assets" are in 1) the equity in our current home, and 2) retirement savings.

I'm seeing 15-year rates in the low-to-mid 4s these days. It seems like it should be a no-brainer, but does it actually make sense to refinance to a lower-rate mortgage now? After 13 years of amortized payments, haven't we already PAID the bulk of the interest on our mortgage at the higher rate?

One option we're considering is using a HELOC to tap the equity in this home for a down-payment on a new one, then keeping this house as an investment/rental property. Does refinancing make sense in that scenario? Will we run into problems with our lender if we refinance and then convert the property to a rental within a few months?

I'm sure there is something that I'm just not seeing, so I'd appreciate any insight from those with a better understanding of these things.
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Old 05-25-2010, 04:54 PM
 
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Yes.

Suppose the 15-yr FRM rate is 4.25%. Then you would be saving $55,000 * (6.75% - 4.25%) = $1,375 the first year. The annual saving will gradually decrease over time.

You need to estimate what the net closing cost is. If it's $2k, then you will need about 1.5 years to recover the initial cost. This method of evaluating refi project is called "payback period." It's one of the common methods for refi purpose.
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