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Homeowner doesn't see benefits of new 30-year loan

Ilyce Glink
Inman News

Q: After listening to your radio show this past Sunday, you referred a caller to his existing mortgage company for a "streamline loan modification," and stated that the last time you did this, it cost you only a few hundred dollars and immediately lowered the monthly payment.

That sounded like a good plan to me, so I contacted my current mortgage lender about this. I wanted to compare the costs and monthly payment of the streamline option with a refinance to a 15-year fixed-rate mortgage.

From my brief conversation with a broker, he gave me a rate of 5 percent on the streamline loan modification (I'm currently at 6.625 percent) and 4.87 percent on the 15-year mortgage.

It doesn't seem to matter to them what my credit rating is, and getting a lower interest rate doesn't seem like a possibility without buying points.

But my main question is with the streamline loan modification and is about the length of the loan. The mortgage term would readjust to 30 years. I've been in my house for 10 years so I was hoping that with this new plan I would have a lower payment for the last 20 years of the mortgage.

By adding back 10 years to my mortgage term, what do I really gain? Obviously I will lower my monthly payment by about $300 per month, but will I be paying more over all by adding back 10 years? The 15-year mortgage would raise my monthly payment by about $60/month, but I'd cut five years off the remaining term of the loan. Closing costs on both options were about the same, about $1,880.

A: I'm in the process of talking to the major mortgage lenders about their streamline modification and streamline refinance policies. As you can imagine, they are in flux at the moment. We will provide everyone with more information as we get it (you can look at www.thinkglink.com/blog for details as they become available).

To your question, yes, your mortgage will apparently reset for 30 years -- but at a much lower balance. You are, in effect, taking out a new loan with your existing lender. After 10 years of paying down your loan, you have maybe paid off about 15 percent of the amount you borrowed. I don't know how much you borrowed, but let's assume you borrowed $200,000 at 6.625 percent for 30 years. Your monthly payment of principal and interest would be $1,280, and after 10 years your loan balance would be about $170,000.

If you now refinance the $170,000 at 5 percent for 30 years, your monthly mortgage payment drops to $912, a savings of about $368 per month. If you apply the savings each month toward prepaying your mortgage, you'll pay off the loan is 17 years, saving 3 years of interest. If you choose the 15-year option, your monthly payment will be about $1,333.

The benefit to choosing a 15-year amortization schedule over a 30-year amortization schedule is that the overall interest rate on the loan will be slightly lower. So not only do you save two more years' worth of interest, but the overall interest rate is lower, so you'll save even more money.

I have heard that the costs for streamline refinance loans is higher than it used to be. It has been a couple of years since I last did this and while some lenders had told me that the costs were reasonable, they have clearly gone up. That's why we're talking to the major lenders to try to get some answers.

For you to make an informed decision, you should consider what your lender wants to charge you to refinance your loan and what any other lender would charge you. You may find a lender willing to refinance your loan at the same rate, but the fees might be less.

Your closing costs of $1,880 probably are in the ballpark of what other lenders would charge for a refinance of your loan. The other issue for you would be whether your current lender is making the refinance process easier for you with less documentation and less hassle. If you have to do everything over again, you might as well get the lowest-priced loan at the lowest possible cost.

But you're right. For some people, refinancing isn't going to help them all that much. At 6.625 percent, you're already in a loan with an extremely low (historically speaking) interest rate. With either of these moves, however, you can do a bit better.

I hope this helps clarify things for you.

Q: I bought a second home to fix up and sell. I paid $46,000 and put $30,000 into it. Then, I decided not to sell the home but to rent it instead to my daughter and son-in-law. The house is worth $150,000 and I'm thinking of either selling or gifting it to them. For tax purposes, which is the best way to do this?

A: The best thing to do is to give them the house to them over time. You can gift each of them $13,000 per year, or $26,000 per year total. You put $76,000 into the property, so that's roughly one-third of the value per year that you'd be giving them. If you have to give it to them at the current market value, you can give them one-sixth of the value each year for six years.

This way, you and they avoid gift taxes or creating a taxable event. Be sure to have a knowledgeable estate attorney or real estate attorney draft up the paperwork so you do it correctly and don't run afoul of IRS regulations.

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