To Refi or Not to Refi?

[Ashweekins]

My husband and I bought our home in October 2007 with a 30 year 100% finance fixed rate mortgage at 6.85% interest. We owe 189k, and our house is worth 230-240k. We started snowballing our credit card and car loan debt in September 2010, and plan to finish paying everything off in September 2012. We are planning on using our tax return to help our debt snowball along.

 

I recently called our mortgage company with a question about our escrow account, and the woman would not let me hang up without agreeing to let someone call us about refinancing. We called them back, and found that we could refinance for 20 years at 5.35% fixed interest, with $5-6k in closing costs rolled into the loan. The payments would be $22/month more than what we pay now. If we wanted to, we could pay $3500 for a point to lower the interest rate from 5.35% to 5.00%, and they would roll the extra $3500 into closing, and our payments would be the exact same as what we pay now. We are also starting the quote process with our credit union, who mentioned that if we pay for points we could get down in the 4.something percent range, but we don't have all the details yet.

 

We have previously kicked around the idea of refinancing while rates are low, but I want to pay off credit card and auto loan debt first, then save up the closing costs. But, by that time the rates may have gone up. My qualm is rolling the closing costs into the loan. I feel like that is taking a step backward. We could use our tax return to pay the closing costs, but that would set us back in paying off our credit card and auto loan debt. We can write the $3500 we pay for points off on our taxes next year, so that is something to take into consideration.

 

What do you think? I posted this in the Mortgage forum but I thought I would get opinions from this forum.

[texastech97]

My husband and I bought our home in October 2007 with a 30 year 100% finance fixed rate mortgage at 6.85% interest. We owe 189k, and our house is worth 230-240k. We started snowballing our credit card and car loan debt in September 2010, and plan to finish paying everything off in September 2012. We are planning on using our tax return to help our debt snowball along.

 

I recently called our mortgage company with a question about our escrow account, and the woman would not let me hang up without agreeing to let someone call us about refinancing. We called them back, and found that we could refinance for 20 years at 5.35% fixed interest, with $5-6k in closing costs rolled into the loan. The payments would be $22/month more than what we pay now. If we wanted to, we could pay $3500 for a point to lower the interest rate from 5.35% to 5.00%, and they would roll the extra $3500 into closing, and our payments would be the exact same as what we pay now. We are also starting the quote process with our credit union, who mentioned that if we pay for points we could get down in the 4.something percent range, but we don't have all the details yet.

 

We have previously kicked around the idea of refinancing while rates are low, but I want to pay off credit card and auto loan debt first, then save up the closing costs. But, by that time the rates may have gone up. My qualm is rolling the closing costs into the loan. I feel like that is taking a step backward. We could use our tax return to pay the closing costs, but that would set us back in paying off our credit card and auto loan debt. We can write the $3500 we pay for points off on our taxes next year, so that is something to take into consideration.

 

What do you think? I posted this in the Mortgage forum but I thought I would get opinions from this forum.

 

 

"Points paid for refinancing generally can only be deducted over the life of the new mortgage."

http://www.irs.gov/taxtopics/tc504.html

 

I found this out when I did our taxes last year. We only paid 0.125 in points for our refinance though.

 

I would run your numbers through a break even refinancing calculator with and without the points. If you know you will stay in the house pass those break even points, then it should be worth it. Paying points will push the break even point further out, but it will make a bigger impact on your savings in the long run.

[texastech97]

I forgot to add I would use the tax return on which ever "debt" has the highest interest rate first. Don't use that money towards the closing cost or points, if the credit or car loan have a higher interest rate.

Edited January 30, 2011 by texastech97

[hegemony]

I forgot to add I would use the tax return on which ever "debt" has the highest interest rate first.

also, change your W-4 so that you do not get a tax refund in the future.

[Ashweekins]

Thanks TexasTech97 for the info about the points and claiming them on your taxes.

 

I must claim ignorance that we don't know how to adjust our W-4s so that we don't end up owing taxes. We claim mortage interest, school expenses, charity donations, etc. I don't have the slightest idea how to go about doing that. We just don't want to owe anything.

 

My husband spoke to the loan agent on Friday, and our mortgage is under Fannie Mae, and this is apparently at Fannie Mae DU RefiPlus. For a 15 year fixed rate loan, he sent us a "GFE" for 4.375%, and we would not have to pay for points. The closing costs would be rolled into the loan. This would raise our payment $172/month. We could make the payment work, but it would cut in to our credit card and auto loan debt snowball. The good thing is that if we don't appraise at 21% LTV, that we will have it in 12 months or less anyway, and can drop the $100/month PMI, which would help.

 

The credit union called and said that there isn't anything they can do for us because all 3 of his scores are not above 650, and they do not own the loan.

Edited January 30, 2011 by Ashweekins

[hegemony]

the IRS has an online tool where you can estimate the best W-4 info for your situation.

[Ashweekins]

Thanks, Heg!

[Legaldiva]

What did you decide to do?