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Thread: another refinance question

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    Default another refinance question

    I bought my condo about 5-6 years ago, and I had no idea what I was doing when I bought it. I am amazed I got a mortgage. Anyway, Wells Fargo has sent me a notice in the mail stating that it is time to refinance. The statement spells out the difference between my loan (20 years at 7.85%) or refinance at 10 yrs for 5.85%. I would love to refinance. I want to pay this thing off faster, and I am sure if I prepay, I could pay it off in 5 yrs.

    So my question is-

    1. When I refinance, do they scrutinize me as hard as they did to originally get the mortgage. I have tax returns, but not a stable job history (self-employed )for the past two years and my credit has slipped while opening my business. However, I have never had a late mortgage payment.

    2. Wells Fargo mentions a $1700 financing fee, and I believe this is on top of closing costs. Is that normal?

    3. Should I call the mortgage broker who got me the mortgage in the first place and see what he suggests?

    Any info would be greatly appreciated. It would be worth more than you know to me.

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    Banned Melonie's Avatar
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    Default Re: another refinance question

    When I refinance, do they scrutinize me as hard as they did to originally get the mortgage
    As mortgage defaults and bankruptcies have increased big time in the last year, most mortgage lenders are probably going to take a closer look now than 2-3 years ago. When the new banking regulations go into effect, mortgage lenders by law may be required to dig much deeper i.e. verifying your income via an IRS check of tax returns for the past 3-4 years. Re-fi'ing with the same lender that holds your current mortgage (I assume that this is Wells Fargo ?) will bypass a lot of this.

    Wells Fargo mentions a $1700 financing fee, and I believe this is on top of closing costs. Is that normal?
    this is the functional equivalent of a 'buy down' of your interest rate. It relates to the 'time value of money' and can be thought of as 'prepayment' of future mortgage interest for comparison purposes. $1700 sitting in a CD would collect say 5% interest or $7 per month forever. Paying Wells Fargo the $1700 instead essentially costs you $7 per month in 'lost opportunity cost'. You can compare your current monthly payment at X% interest versus their proposed monthly payment at Y% interest to figure out what additional (but hidden) interest percentage an extra $7 per month actually represents. On a 20 year mortgage the extra $7 probably represents somewhere around an extra 1/4% interest rate.

    Similarly the closing costs on a re-fi can also be equated to an additional (but hidden) interest percentage based on the 'lost opportunity costs' on the closing money.

    There is a free calculator that can help you guesstimate your actual financial impact of a re-fi at However, other factors also come into play that the calculator program doesn't cover.

    Another joker in the deck is that reducing your mortgage interest rate through a re-fi also raises your income taxes on the same amount of money earned, due to a reduction in the amount of paid mortgage interest you can deduct. Depending on your own effective tax rate, the additional income taxes on the same amount of money earned can wind up cancelling out 25-35% of the money that you thought you saved on re-fi'd monthly mortgage payments.

    3. Should I call the mortgage broker who got me the mortgage in the first place and see what he suggests?
    not a bad idea - however mortgage brokers do take an additional 'cut' which costs you extra money in one form or another.


    Also, think long and hard about committing to a 10 year mortgage with a monthly payment that is much greater than you presently pay. While you are obviously able to handle those payments today, doing a re-fi with a 10 year term would commit you to making those larger payments for the next 10 years. If the economic picture at your club, or in your state, or your personal ability to keep up your present pace changes, these monthly payments will not change. As long as there isn't an early repayment penalty written into the terms of your re-fi, you are free to pay down the principal on a 10 year schedule if you want to - but you aren't forced to pay an amount higher than the 'normal' mortgage payment if future cash flow should take a turn for the worse.

    Also, be sure to read the re-fi mortgage contract with a fine tooth comb. You need to pay particular attention to any early sale penalties, any re-fi penalties, any 'delinquency' fees or possible changes in interest rate etc.

    Lastly, one possible big 'legal' difference is that re-fi loans do not necessarily get state bankruptcy exemptions the way that original mortgages do - depending on how the re-fi loan is categorized. Thus it's possible that if you were to fall on hard times in the future but had not re-fi'd that you'd be able to keep your condo while making small court mandated payments to your creditors - however if you re-fi and the loan is categorized as consumer credit you may be evicted from your condo so that it can be sold at auction to satisfy your creditors immediately. This varies from state to state but is a 'must' to check out.
    ~
    Last edited by Melonie; 10-05-2006 at 03:51 PM.

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    Default Re: another refinance question

    I am only paying down a $37,000 condo. It is a meager one bedroom. I use it as rental property. The mortgage was for $35,000 and is currently paid down to $28,000. I can see what you are saying about the worry of getting higher payments, but with this small of a mortgage, my payments are still far cheaper than rent and remain so even after the refi. Texas is a homestead state, so I think that means they would not evict me in bankruptcy. But I would have to check on that, like you said.

    So with the $1700 finance charge and the closing costs, would that mean that I would need to bring several thousand dollars to the closing table?

    Also, I know you said a mortgage broker takes a cut, but do you think it would be worthwhile to have him/her help guide me through this since I am mortgage/refinance illiterate? Or do you think that they could cause more harm than good?

    I know a girl who is a dancer/mortgage broker. I think she would understand my position better. I am thinking of giving her a call, as well as the guy that originally got me the mortgage.

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    Default Re: another refinance question

    God. I miss $37k condo prices. Even if only for a 1BR.

    Perhaps with the market stall and probable crash in AZ prices will come back down to normal for a while

    Quote Originally Posted by pheno View Post
    When you lead a nontraditional life don't try to measure it with traditional milestones.

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    Default Re: another refinance question

    I would say go for it if you can afford the higher payment . I had a 10 yr and I had to switch back up to a 15 yr but that was caused by my change in my income . But on the other hand I can pay more on my mortage now and it can get paid off quicker ( as I can afford to throw more money into the payment ) . Just make sure you have no early pay-off penalties . My house will be paid for when I'm 52 yrs old I'm 41 now and I am pretty certain it will be worth a bit over 1 mill , then its time to sell and downsize !

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    Default Re: another refinance question

    I say that you get a good faith estimate from Wells Fargo and one from your broker. Compare the numbers. A GFE is a guesstimate...but usually you can by-pass the bullshit of other banks by refi'ing with your current lender.

    Keep in mind that by refi'ing, you are going to restart the clock on paying "interest". Where for the first 5 years, the vast majority of your payment goes to interest payments...after that, the money will go to off-set the principal. If you do not have an ARM (you didn't mention anything about that), I would say it may be cheaper and easier in the long run to keep what you currently have. But, I also do not know exactly what your rate/term/etc is...or what the proposed rate/term/etc is.

    Yeah, get it all in writing first and compare what you get. Go with the better deal...or none at all.

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    Default Re: another refinance question

    ^^^ just my own opinion, but on a $28k outstanding balance a $1,700 'buy-down' is going to represent about 1/2% in (hidden) equivalent interest and a minimal $1,500 in closing costs (if you can get out of it that cheaply) is going to represent nearly another 1/2% in (hidden) equivalent interest. Thus at least one half of the supposed 2% interest rate 'savings' from your re-fi doesn't really exist. Throw in the fact that the 'buy-down' money and closing money aren't tax deductible, as well as the fact that an early payoff of a re-fi'd 10 year mortgage will cost you more in effective interest charges than an early payoff of your original mortgage (because the interest rate 'curve' will reset), and this re-fi definitely begins to look more and more like it's more trouble than it's worth - as Venus points out.

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    Default Re: another refinance question

    That's what I was afraid of. So perhaps I should just keep adding those extra payments in and pay it down myself. I was skeptical as to why Wells Fargo was trying to be so "helpful" to me. It doesn't make sense for them to make me an offer that will put less interest in their pockets. Thanks guys, your info is greatly appreciated.

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    Default Re: another refinance question

    ^ But, it DOESN'T put less interest in their pockets. It puts MORE. See, right now, you've had your loan for 5 years, so if your payments haven't yet kicked into paying for your priniciple more now, then it will soon. Then the vast majority of your payments will go 90% to principle and 10% to interest. Whereas, if you refi, then you will go BACK to paying 90% Interest and 10% principle (or thereabouts).

    I think, in this case, if you are able to afford to put MORE money towards your principle, then do it. Putting just a few hundred every month towards principle will pay off your mortgage a few years in advance. Also, just because you have a 5.85% interest rate, doesn't necessarily mean that you will save money. You are decreasing your loan term by 1/2...which would make your payments about the same. Most people jump on this because they see a 2 point difference...and don't stop to think about the long term.

    Hope that sheds some light on it.

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    Default Re: another refinance question

    Definitely, thanks for your help!

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    Default Re: another refinance question

    Mel, what makes you think that the $1700 is a buydown? It sounds like junk fee's to me.

    What she needs to do is keep her fixed mortgage and pay bi-weekly. For example, if her monthly payment is $500, then instead of paying the full amount on the first of the month, she will pay $250 on the first, and $250 on the 15th. This will accelerate the payoff by about half.

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    Default Re: another refinance question

    I have heard of that Scorpio.

    So if this is true, my mortgage payment that is due each month on the first is $361.02. So if I pay $180.51 on the first and then again 15th, I will pay down the mortgage faster? I didn't know if that was true.

    And if I add the extra $100 - $200 a month to my payment, then I should be doing much better than the refinance.

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    Default Re: another refinance question

    ^ Yes, but make sure that your company accepts bi-weekly payments. Some companies have a "plan" that you can buy into for $500-$1000 to pay bi-weekly...some don't care. But, make sure before you go doing that.

    If they do not allow that, then you can pay the $300 at the due date and then tack in the other $100-200 to go towards principle. Most banks allow you to tell them where the money goes...make sure you state that it goes towards the principle.

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    Default Re: another refinance question

    Mel, what makes you think that the $1700 is a buydown? It sounds like junk fee's to me
    You're right that officially it probably is just a 'junk fee'. I tried to use the term 'buy-down' (in quotes) to illustrate the basic concept that paying cash up front can be equated to a differential in interest rates that would otherwise have to exist over the term of the loan to total up to the 'buy-down' amount if that cash wasn't paid up front instead. But yes there is such a thing as an official 'buy-down' (typically involving 3rd parties, often gov't agencies) which uses exactly the same sort of equation, and that's not what's being officially offered in Wells Fargo's re-fi proposal.

    I was skeptical as to why Wells Fargo was trying to be so "helpful" to me. It doesn't make sense for them to make me an offer that will put less interest in their pockets
    Wells Fargo's offer puts $1,700 in their pockets immediately, and also resets the interest vs principal paydown curve such that maybe 50% of your mortgage payments over the next couple of years goes towards interest not principal ! On an equity basis, you won't actually be 'ahead of the game' with a re-fi until probably 5 years down the road.

    In other words, Wells Fargo is willing to trade a bit lower interest earnings (from your current mortgage) between 5 and 10 years from now in exchange for quick cash from the 'buy-down' fee plus higher interest earnings (from the re-fi'd mortgage) between now and 5 years from now. Now what might prompt a mortgage lender to want to trade higher interest earnings 5-10 years from now for an immediate cash injection (from your 'buy-down fee) plus front loaded interest payments on a re-fi'd mortgage ??? How about a scenario where that mortgage lender is being heavily hit with defaults and bankruptcies on other mortgages it has written (after all Wells Fargo generally caters to subprime borrowers), and is trying to drum up cash earnings in a hurry to avoid showing a 'loss' for the fiscal year (which would tank its stock share price and reduce / eliminate year end bonuses to corporate execs !).

    Wells Fargo
    Subprime Mortgage Originations
    year --- ($MM) - Market Share - Industry Rank
    1997 --- $ 230 --- 0.2% --- N/A
    1998 --- $ 884 --- 0.6% --- 29
    1999 --- $ 1,480 --- 0.9% --- 22
    2000 --- $ 1,184 --- 0.9% --- 21
    2001 --- $ 3,679 --- 2.1% --- 12
    2002 --- $ 7,547 --- 3.5% --- 10
    2003 --- $16,485 --- 5.0% --- 8

    from
    ~
    Last edited by Melonie; 10-06-2006 at 02:52 PM.

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    Default Re: another refinance question

    Quote Originally Posted by VenusGoddess
    ^ Yes, but make sure that your company accepts bi-weekly payments. Some companies have a "plan" that you can buy into for $500-$1000 to pay bi-weekly...some don't care. But, make sure before you go doing that.

    If they do not allow that, then you can pay the $300 at the due date and then tack in the other $100-200 to go towards principle. Most banks allow you to tell them where the money goes...make sure you state that it goes towards the principle.
    I'm confused. Does it matter where the payments go?

    If I get a loan for $1000 with 10% interest each month (for simplicity's sake), I would owe the lender $1100 after the first month. My hypothetical monthly payment would be $100.

    If 90% of my payment went to interest, then I would owe $990 plus $10 interest after month 1. At month 2, I would owe ?

    Does interest accumulate on the prinicple or on both the principle and the interest?

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    Default Re: another refinance question

    If you borrowed $1000 with 10% interest for 2 years, and your payments were $100 (the agreed payment, not one you choose to send in), then you would owe $990 the first month, $980 the second month, etc. So, you essentially made a payment of $10 on your principle. The $90 went towards interest. The second year, you'll see your principle drop more quickly since your interest payments have been satisfied.

    No matter what kind of loan you have, the general rule of thumb is that the first 1/4 - 1/2 of the loan term is spent paying off the vast majority of the interest. If you look at your mortgage statement (and it is a new mortgage) you'll find that in most cases, you'll have say $86 go towards principle and $1200 go towards interest. After the vast majority of the interest has been paid down, then your payments will go to satisfy the principle.

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    Default Re: another refinance question

    Wow, I have learned quite a bit!

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    Default Re: another refinance question

    using a mortgage calculator with amortization table generator ( at ) on a $37,000 loan for 20 years at 7.85%, the first month's payment consists of $242 in interest and $64 in principle. Ten years into the loan, the monthly payment consists of $166 in interest and $140 in principle.

    In contrast, using the same mortgage calculator on a re-fi'd $28,000 loan for 10 years at 5.85%, the first month's payment consists of $137 in interest and $172 in principle. Thus were it not for the $1,700 in up front cash fee plus probably $1,500+ in closing costs, this re-fi would be a 'winner'. However, in the very oversimplified case of ignoring time value of money, the $1,700 + 1,500 = $3,200 in up front costs is equivalent to 120 monthly payments of $27 each. $137 + $27 = $164 which is almost exactly equivalent to the interest portion of her existing mortgage payment. With the time value of money on the $3,200 thrown in (another $7 per month or so) , the re-fi turns into a clear 'loser'.
    ~
    Last edited by Melonie; 10-06-2006 at 08:42 PM.

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    Default Re: another refinance question

    Quote Originally Posted by Scout
    I'm confused. Does it matter where the payments go?

    If I get a loan for $1000 with 10% interest each month (for simplicity's sake), I would owe the lender $1100 after the first month. My hypothetical monthly payment would be $100.

    If 90% of my payment went to interest, then I would owe $990 plus $10 interest after month 1. At month 2, I would owe ?

    Does interest accumulate on the prinicple or on both the principle and the interest?
    You'll know the difference when your "pay off" amount is calculated. Look at your car loan - for the first couple of years your "pay off" amount doesn't go down worth a damn. Once they have their interest off ya - then the pay off amount starts decreasing.

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