# Refinancing Mortgage At Lower Rate



## FinancialJungle (Apr 22, 2009)

I offered the following solution to help my brother refinance his existing fixed term mortgage at a lower rate. Can you tell me if this will work?

Background:
* His 5-year fixed is locked in @ 5.3% with 2 years remaining.
* Balance of $90k.
* Lender allows him to make extra payments of $40k each year with no penalties.

Proposed solution to refinance:
1) I lend him $80k just before the anniversary date (late November.)
2) He pays down $40k just before the anniversary date, and another $40k just after.
3) Leaves the remaining $10k at the old rate, and refinance $80k at the current rate (2.9% on 2-year fixed.)
4) Pay me back the $80k.

Thanks for your comments/suggestions.


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## Shayne (Apr 3, 2009)

FinancialJungle said:


> I offered the following solution to help my brother refinance his existing fixed term mortgage at a lower rate. Can you tell me if this will work?
> 
> Background:
> * His 5-year fixed is locked in @ 5.3% with 2 years remaining.
> ...


Sounds solid, you will likely have to include the 10K in the refinance to get a decent rate.


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## BigPom (Apr 6, 2009)

If it's a short term loan and you are confident there wont' be any problems, then it sounds like an excellent idea.


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## OhGreatGuru (May 24, 2009)

Wouldn't the "refinanced" $80K be a second mortgage, and therefore not available at 2.9%? If it's with a separate institution it would definitely be a second morgage, with the first having priority claim. If it's with the same institution, are they willing or even able to help you get around their own penalty clauses this way?


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## FinancialJungle (Apr 22, 2009)

Thank you for all the reponses! The first vs second mortgage problem also crossed my mind. Rule is the rule, but it's kind of silly for the bank to offer a higher rate on the second mortgage if the first has only $10k left. 

My brother would have to check his contract, but one possible solution is for him to pay off the balance of the mortgage, but of course that'd incur some penalty fees. Hopefully not too much though.


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## OhGreatGuru (May 24, 2009)

I know it seems silly when you consider it's over a mere $10K. But there is a significant legal difference between 1st & 2nd mortgages, which is why their actuarial rates are set higher. In case of default the 1st mortgage has the priority claim on the property, which makes a difference to the risk of second mortgages. The rates are set on the basis of the class of mortgage, not your individual circumstances. With only 10K left, they might give him a break on re-financing in order to keep his business. Bu I don't know. If the bank figures out this scheme they may play hardball just to discourage other people from trying the same trick.

If you don't need the 80K for 2-3 years, maybe you should lend him the money at 2.9% until the 1st mortgage is paid off. But then you would have large unsecured loan to a family member, which can lead to all kinds of problems.


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## OhGreatGuru (May 24, 2009)

"2) He pays down $40k just before the anniversary date, and another $40k just after."

Are you sure he can do this? I thought prepayments usually had to be made "on" the anniversary date, ie. at 1-year intervals.


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## FinancialJungle (Apr 22, 2009)

His anniversary is in late Nov. I'll let you know how this turns out.

Yeah, he's been prepaying his mortgage for maybe the past 3 or 4 years, and he didn't have to wait until the anniversary. This is consistent with my experience with ING Direct.

Edit: Yeah, I'm not interested in earning (pre-tax) 2.9% for 2 years.


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## cannon_fodder (Apr 3, 2009)

Instead of a 2nd mortgage, could he simply ask for a home equity line of credit and tap into that? I'd imagine it would be around P+1% now (last year before the meltdown most people could get HELOC's at Prime) but it may be another option.


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## HaroldCrump (Jun 10, 2009)

Elmira Nancy said:


> I am considering refinancing, but I am not really too sure yet. Is there any way that I could call my current lender and just negotiate a lower interest rate with them? This way I could possibly avoid all of the closing costs, etc that are associated with refinancing. Has anyone had any luck with this?


Yes, I tried it earlier this year and didn't work.
If you are already in a fixed term, fixed rate mortgage, the lender has absolutely no reason to grant your request.
They don't care if you walk away and refinance - they'll recover their money via the IRD.
You have to offer them something - maybe increase your loan amount, purchase another property, something to make it worth their while to do this for you.
They are in the business of making money, not in the business of doing favors.


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## Shayne (Apr 3, 2009)

Elmira Nancy said:


> I am considering refinancing, but I am not really too sure yet. Is there any way that I could call my current lender and just negotiate a lower interest rate with them? This way I could possibly avoid all of the closing costs, etc that are associated with refinancing. Has anyone had any luck with this?


Generally if you are refinancing to consolidate any high interest debt it will be worth your time and money.

If you are just refinancing your mortgage the IRD penalty will likely take away any savings you will have. The only way I would suggest this is if you need to increase your monthly cash flow for whatever reason. 

If you are interested in me working the numbers for you just send me your email address in a PM.

Good luck!


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## Smac20 (Sep 7, 2009)

You need to find out if there are any penalties for paying off early or above and beyond a stated amount.


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## Sampson (Apr 3, 2009)

HaroldCrump said:


> You have to offer them something - maybe increase your loan amount, purchase another property, something to make it worth their while to do this for you.


Blend and extend is the best one can do under most circumstances. However, depending the the rate they use for the IRD calculations, and whether you can get a greater discount and perks elsewhere, it can be fruitful.

Have to do some math though.


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## Shayne (Apr 3, 2009)

Sampson said:


> Blend and extend is the best one can do under most circumstances. However, depending the the rate they use for the IRD calculations, and whether you can get a greater discount and perks elsewhere, it can be fruitful.
> 
> Have to do some math though.


Definitely do the math. Blend and extend is the almost the same as paying the penalty, they just spread the penalty amount over the new term. It does hurt less upfront, but may hurt the same over the term.


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## Sampson (Apr 3, 2009)

Shayne said:


> Blend and extend is the almost the same as paying the penalty, they just spread the penalty amount over the new term.


Learn something new everyday. I don't actually think I've every suggested the blend and extend and wouldn't do it myself, but I was always told there would be no penalty (since they are securing your business for an even longer period).

Man I hate banks!

I guess it still can make sense for those with cash flow problems. Better to pay the penalty and keep the house than go bankrupt.


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## Shayne (Apr 3, 2009)

Sampson said:


> Man I hate banks!
> 
> I guess it still can make sense for those with cash flow problems. Better to pay the penalty and keep the house than go bankrupt.


Absolutely, it is important for people to properly calculate the difference in rolling penalty into the new mortgage or taking a blend and extend. Take that information and your current cash flow needs into account and take it from there.

I find most people only look at the short term gains. Anyone can take your current 20 year amortization, roll in some other debts and reamortize it to 35 years and save you $1,000 a month in payments, but over the long run you may be doing more damage than good. 

Most people should get someone with mortgage expertise to look at the math. Look at your current situation, your short and long term needs/goals and then make your decision.


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