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Refinance 2nd mortgage

14 years ago

Would appreciate advice about a possible refinance of our 2nd mortgage. The 1st is paid off and we have a $90,000 balance on the 2nd with a interest rate of 6%. We have 10 years left on the mortgage. I have contacted our lender and we could get a 3.40% with a 10 year mortgage. Closings costs would be $2500. I am wondering if we should add $500 a month to existing mortgage payment and pay off mortgage in a little over 6 years or do the refinance and also add $500 per month?

Thank you.

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Comments (3)

mike_kaiser_gw
14 years ago
Your best bet is to create couple of amortization schedules, one based on the your existing mortgage and one for the proposed mortgage. Assuming you're going to pay the closing costs out of pocket, you'd apply that to your existing mortgage.

You want to be doubly sure as to the entire cost of your refinance, getting everything in writing. If you have very good credit to excellent credit, you shouldn't have any problems getting a new mortgage and finding lenders that are willing to waive or reduce fees to get your business.
weedyacres
14 years ago
Actually the two scenarios aren't the ones to compare, because if you keep the existing mortgage (~$1000/mo payment) and add $500, you'll be paying $1500/month. If you refi, your payment will drop to $886/mo, and adding $500 to that gets you just under $1400/mo.

To equalize out these two scenarios, I'd instead compare paying $1500/mo on both options, since you can presumably afford that. So it would be $500/mo extra on the existing or $613/mo extra on the refi.

Running an amortization on both, you'd pay off the loan about 5 1/2 months faster with the refi, saving around $8000 in interest. Given that it'll cost you $2500 to do this, you end up winning if you refi.

Have you looked into getting a HELOC instead, assuming this is a low percentage of your home's value? Closing costs are lower on a LOC, and if you are going to be paying it off in 4-5 years, there's minimal interest rate risk. How do the rates on a 5/1 ARM compare? That would be something else to consider, since you'd have it paid off by the time the rate resets.
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Billl
14 years ago
If these are the only 2 options, then refinancing is a no-brainer. On a 90k balance, a 2.6% drop in interest saves 2k in the first year. That means you break even with closing costs in just over a year and then save for the rest of the life of the loan.

Before you refi though, shop some rates. You can get a 5/1 arm in the low 2's right now. You can run the numbers in any of the online calculators, but if you pay your current amount + $500, you are going to pay that off really quickly.

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