I need $55,000 for home improvement. My home’s estimated market value is $230,000. Currently, my mortgage balance is $65,000 at 6.00%. The remaining term is 130 months. Should I refinance my existing mortgage, or take out a $55,000 home equity loan?

Generally speaking, if your existing mortgage interest rate is lower than the current market rates, you’ll be better off with a second mortgage such as a home equity loan than a cash-out refinance.

However, to be sure, you must work out some numbers and compare the cash flows of the cash-out refinance option and the home equity loan option. Such analyses are simple to carry out. Let me illustrate with some examples.

(1) The current information of your home and loan

Estimated market value of your property:	$230,000
Existing mortgage balance:	$65,000
Remaining term of your existing mortgage:	130 months
Interest rate of your existing mortgage:	6.00%
Amount of cash you would like to take out:	$55,000
Monthly mortgage payment:	$681.19
Total mortgage payment for 130 months:	$88,554

(2) I’ve received some free quotes from a lender (let’s call this lender ‘lender x‘).

Here’s the best quote for a 15-year $55,000 home equity loan from lender x:

Rate	Lender fees & points	Other costs
8.950%	$749	$487

Assuming you’ll have the lender fees and other costs financed, you’ll borrow $55,000 + $749 + $487 = $56,236 at 8.950% fixed for 15 years.

Your monthly payment = $568.71 (you can easily get this figure from a mortgage calculator).

Therefore total payment for the home equity loan for 180 months (ie 15 years) = $568.71 x 180 = $102,368

Therefore if you take out a home equity loan, your monthly loan payment = existing mortgage monthly payment ($681.19) + new home equity loan monthly payment ($568.71).
Your total loan payment for the 15-year period = total mortgae payment ($88,554) + total home equity loan payment ($102,368) = $190,922.

(3) Here’s the best quote from lender x for a 15-year fixed-rate cash-out refinance mortgage:

Rate	Lender fees & points	Other costs
5.000%	$5,055	$1,789

Assuming you’ll have the lender fees and other closing costs financed by the lender, your refinance amount will be $126,844 so that after paying off the existing mortgage of $65,000, the lender fees of $5,055 and the other closing costs of $1,789, you’ll be left with $55,000 cash for your home improvement, ie $126,844 - $65,000 - $5,055 - $1,789 = $55,000.

Using a mortgage calculator, you’ll find out that your monthly payment = $1,003.07.

The total payment over the 15-year period for your refinance mortgage = $1,003.07 x 180 = $180,553.

Compare the two total payments:

New cash-out refinance	Existing mortgage + home equity loan
$180,553	$190,922

It’s clear that taking a new cash-out refinance mortgage will ‘cost’ you less cash.

(4) Taking out a new cash-out refinance mortgage is not always cheaper. If you refinance at a higher rate, say 6.25%, you may be worse off compared with taking out the new home equity loan at 8.95% stated in paragraph (2) above, depending on the lender fees, points and other closing costs, and your income tax rate.

What you have to bear in mind is that by merely comparing interest rates you cannot be sure of making the right decision. You must work out and compare the cash flows of your various options.

Tags: cash-flows, cashout-mortgage-refinance, home-improvement-loan, mortgage-rate-free-quotes

With a credit score of 550, I probably won’t be able to get a mortgage to buy a second house costing $20,000. My existing house that I paid for with cash in full has an estimated market value of $25,000. I’m contemplating taking out a home equity loan on my existing house to pay for the second house. Any suggestions? My monthly income is $1,200.




Since your credit score is 550, you fall in the “sub-prime” category. Being in the sub-prime category, you’ll have a hard time with getting a favorable interest rate. (By the way, I presume you’ve already checked your credit score and you’re satisfied that your credit history is correct).

As of November 9, 2007 the national average APR (annual percentage rate) for borrowers with FICO score 620-639 is 13.207% for 15-year fixed rate home equity loan, and 14.294% for HELOC. Since your credit score is below 620, you’d probably have to pay at least these rates.

If you take out a 15-year home equity loan of $20,000 at the fixed rate of 13.207%, your monthly payment will be about $256, or close to 21% of your montly income. You will not have to pay PMI (private mortgage insurance) since your LTV (loan-to-value) ratio is exactly 80%, ie 80% x $25,000 (market value) = $20,000. Your home equity loan interest is tax deductible.

It’s generally not advisable to use HELOC as a long term loan because HELOC is on adjustable rates that fluctuate from time to time according to market conditions, and so is more risky, and makes your monthly payment planning uncertain.

Instead of using your existing home to take out a home equity loan, you may consider taking out a mortgage on the second home you want to buy. For credit scores 500-579, the national average APR for a 15-year fixed-rate mortgage is 10.994% as of November 9, 2007. This is cheaper than taking out a home equity loan on your existing home. For a 15-year fixed-rate mortage of $20,000 at 10.994%, your monthly payment will be about $227, or about 19% of your monthly income. But your maximum loan amount will be $16,000 (= 80% x $20,000) only, if you want to avoid PMI. The lender’s fees and other closing costs will further reduce the net amount of loan you’ll receive. Your mortgage interest will be tax deductible.

You’ll have to shop around to find the financing option that suits you best.

Credit score is not the only criterion

Although credit scores are important, they are not the only deciding factor that lenders use when approving a mortgage. The FICO is one of the factors, not the only one.

Your low credit score can be balanced by other “offsetting factors”, eg an overall low debt-to-income ratio, large cash reserves, or large down payment. Your low credit score is not an insurmountable obstacle. Therefore it’s important that you don’t assume your low credit score will prevent you from getting a mortgage. Don’t prejudge your situation.

Tags: credit-score, heloc, home-equity-loan, sub-prime

Currently I have a 30-year fixed-rate mortgage of $148,000 at 6.75%. My monthly payment inclusive of property tax and home insurance premium is $1,276. I’m also paying $122 each month for PMI. My home’s appraised value is $183,600. When my loan is no longer subjected to PMI, I want to refinance my mortgage to take out $10,000 to $15,000. What will my monthly payment be like?

To get your answer, you need to first get some realistic data such as interest rates, points and closing costs. The following link gives you an excellent source of free quotes from established lenders, and you are not obligated to take out any loans from them:

Get Free Quotes for your analysis

(1) Your existing monthly loan payment
————————————————————

Although you are paying 1,276 a month, your monthly loan payment is actually 960. The balance of 316 (= 1,276 less 960) comprises your property tax and home insurance premium.

(2) Your loan-to-value ratio
——————————————-

Right now your loan-to-value is 80.6% (= 148,000 / 183,600 x 100%).

In 12 months’ time, your loan will be reduced by 11,519, ie 960 x 12, to 136,480 (= 148,000 less 11,519). Your then loan-to-value will be about 74% (= 136,480 / 183,600 x 100%), assuming your home’s appraised value will remain unchanged.

(3) How much cash will you be able to take out
————————————————————————-

If you don’t want to pay PMI, your refinanced mortgage cannot exceed 80% of your appraised value, ie 80% x 183,600 = 146,880.

Let’s assume that you’ll refinance your mortgage one year later when your loan is reduced to 136,480, as shown in paragraph (2) above. The maximum amount of cash you can take out will be your refinanced mortgage (ie 146,880) less your loan balance in 12 months’ time (ie 136,480):

146,880 - 136,480 = 10,400.

(4) What will your new monthly payment be
——————————————————————–

Set out below are some of free quotes I receive from a lender:

Rate	Payment	APR	Lender fees & points	Other closing costs	Govt taxes & fees	Total costs
5.500%	$834	5.895%	$6,203	$1,260	$597	$8,060
5.625%	$846	5.966%	$5,335	$1,260	$597	$7,192
5.750%	$857	6.043%	$4,573	$1,260	$597	$6,430
6.250%	$904	6.367%	$1,789	$1,260	$597	$3,646
6.500%	$928	6.539%	$594	$1,260	$597	$2,451
6.750%	$953	6.750%	$-415	$1,260	$597	$1,442

Note:

(i) Other closing costs include fees of closing attorney/agent, appraiser, title insurance, and credit reporting.

(ii) Total costs = Lender fees & points + Other closing costs + Govt taxes & fees

(iii) Homeowner’s insurance and property taxes are omitted

Assumption

The above free quotes are given based on the following assumptions:

(a) Loan amount = $146,880

(b) Property value =$183,600

(c) Propery type = single

(d) Product = 30 year fixed

(e) Property state = Georgia

(f) Loan purpose = Refinance with cashout

(g) You have no second mortgage/home equity lines

(h) Your current credit rating = excellent

Any of the 6 options in the table above will give you a monthly payment less than your current monthly payment of 960 (see paragraph 1 above).

The 5.500% option gives you the largest cash savings because the monthly payment is the lowest, ie 834. But this option requires the largest cash outlay — the total costs is 8,060. This will reduce your intended cash takeout of 10,400 (see paragraph 3 above) to only 2,340 (= 10,400 less 8,060). This option will thus defeat your purpose.

If you want to maximize your cash takeout, the 6.750% is your option. Your monthly payment savings will be minimal because your new monthly payment (953) is almost equal to your current monthly payment (960) , but your cash takeout will be maximized at 8,543 (= 10,400 - 1,260 - 597). Will this be acceptable to you, since your objective is to take between 10,000 and 15,000 cash out?

Summary

There is no general answer as to what your revised monthly payment will be after you refinance your mortgage. Your lender’s offers will determine your monthly payment, and also whether or not you’ll be able to meet your objective of taking out 10,000 - 15,000 cash.

You must never make your decision based on only qualitative considerations. You must always work out the numbers and analyze them. To get reliable results, you should use realistic data. You should get free quotes from lenders. There are many lenders who are keen to provide you with the relevant information. Try this good resource:

Get Free Low quotes for your analysis

Be sure that these lenders tell you their fees, points, other third parties’ fees, and all other attendant costs. Ask them for their APR (annual percentage rate) because this is the real cost of your loan. Look at the APRs in the table above. Each APR is higher than the corresponding interest rate because APRs take into account your interest costs, the lender’s fees and points. Thus APRs are more accurate measures of your overall loan cost.

Using the data in the table above, it’s clear that you can:

(a) take cash out from refinancing your mortgage, and

(b) keep the monthly payment the same as, or less than, your current monthly payment, and

(c) avoid paying PMI.

The only question remaining is: are you satisfied with less than 10,000 cash takeout?

Tags: apr, cashout-mortgage-refinance, interest-rate-free-quotes, mortgage-payment, PMI