MONEY mortgages

The Best Loan You’ve Never Heard Of—And How You Can Get One

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charles taylor—iStock

Does a home loan with no down payment and decent rates sound too good to be true? It isn't.

No money down, better rates than an FHA loan, and the ability to finance closing costs. It may sound too good to be true, but in fact it’s a U.S. Department of Agriculture guaranteed rural development loan, and now is your best chance to get one.

Before we get into the details, a bit of background. The USDA provides extremely attractive loans to people in certain rural locations, as an enticement to settle down and develop new areas of the country. The Department of Agriculture uses population data from the US Census and other factors to determine which areas of the country count as “rural,” and then allows buyers in these areas (who meet a few other requirements) to get a USDA-backed loan from an approved lender.

If you’re a candidate for one of these loans, there’s no time like the present to apply. Here’s what you need to know.

What Makes USDA Loans Special?

Ag Department-backed financing is so attractive because it requires no money down but still has rates competitive with other government mortgage products. FHA loans, the most common type of government loan, require a 3.5% down payment at minimum, and saddle low-credit buyers with costly mortgage insurance premiums. USDA mortgages only require a small annual fee (a fraction of the FHA’s rates) and an upfront premium of 2% of the loan amount. However, that premium can be rolled into the mortgage, giving buyers the option of getting financed with a 0% down payment.

What’s The Catch?

The catch is the Department of Agriculture limits who can get one of these loans. If you make more than 115% of your area’s median income or already have “adequate housing,” you’re not eligible for USDA financing. You’re also required to purchase housing that is “modest in size, design, and cost” and meets various building codes.

Then there’s the matter of credit. Technically, the USDA doesn’t have a strict credit minimum, but most lenders are reluctant to sign off on anyone with a score south of 620. That’s more than 100 points higher than credit limits for FHA loans, which require a minimum FICO score of 500 for buyers willing to put down 10% up front. The good news is buyers can offset poor credit by showing mitigating factors like a healthy bank balance or a monthly rent bill higher than the home’s future mortgage payments. You can read the details of buyer and property requirements on the USDA’s website.

Most important, you must live in a specific area defined by the USDA as rural. The department provides a map showing which regions are eligible here.

Why Is Now The Best Time To Get One?

Remember how the USDA decides which areas are eligible for these loans based on census data? Well, the Department of Agriculture hasn’t actually updated its map since 2000, and a lot has happened in the last 14 years. Many areas that were previously considered rural, and therefore eligible for USDA financing, have become regular suburbs. According to a 2011 study by Housing Assistance Council, 97% of the country’s land mass, an area that includes 109 million people, is eligible for a USDA loan. That means about one in three people lived in regions that were USDA eligible when the report was published.

Unfortunately, the ride is almost over. The USDA plans to update the eligibility map with 2010 census figures this October. The Housing Assistance Council estimated that the new information will make 7.8 million people ineligible for USDA financing unless they move to areas within the new eligibility zone.

In reality, the change is going to effect significantly fewer people than that, thanks to congressional action that grandfathered in many areas. However, the USDA told Money.com they don’t yet have exact numbers on how many Americans will no longer live in rural areas after the update, so if you’re eligible now and looking for a loan, it’s better to be safe than sorry. At least some at the department anticipate a rush to get financing before the old rules expire. “We’re going to get inundated,” predicts Neal Hayes, Housing Programs Director for the New Jersey USDA state office.

How Do I Get One Before My Area Is Made Ineligible?

The current map expires on September 30th. That means a USDA-approved lender needs to have submitted a complete, fully underwritten application package to the department’s relevant state office by no later than close of business September 30, 2014, or the application will be considered under new, less favorable requirements.

What If I Already Have a USDA Loan? Can I Still Refinance If My Area Loses Eligibility?

Don’t worry. If you’ve already got a USDA mortgage, you’re done worrying about regional eligibility requirements. As long as you still meet other requirements, you should be able to refinance.

MONEY Debt

Have You Conquered Debt? Tell Us Your Story

Have you gotten rid of a big IOU on your balance sheet, or at least made significant progress toward that end? MONEY wants to hear your digging-out-of-debt stories, to share with and inspire our readers who might be in similar situations.

Use the confidential form below to tell us about it. What kind of debt did you have, and how much? How did you erase it—or what are you currently doing? What advice do you have for other people in your situation? We’re interested in stories about all kinds of debt, from student loans to credit cards to car loans to mortgages.

Please also let us know where you’re from, what you do for a living, and how old you are. We won’t use your story unless we speak with you first.

MONEY Citigroup

Here’s Why Citigroup Is Shelling Out $7 Billion

It wasn't just investors who were hurt when banks turned lousy mortgages into toxic bonds

+ READ ARTICLE

You could be forgiven for not caring — or perhaps not even noticing — that Citigroup agreed yesterday to pony up $7 billion to settle a Justice department inquiry into its mortgage business. More than five years after the financial crisis, the legal process of holding banks accountable can feel about as urgent as a rerun of Law & Order.

But it’s worth spending a few minutes remembering what actually happened — and who got hurt.

The government’s case against Citigroup is about harms to investors who bought pieces of mortgage “pools” that Citi created. But since investors who buy mortgage securities aren’t exactly Joe and Jane Mainstreet, the whole thing can seem almost victimless. The financial press also tends to overlook the human costs and focus on the money: What does the $7 billion hit mean for Citigroup’s share price? (So far, investors seem happy to at least know the bill.) Who gets the money? (Mostly the government, but $2.5 billion will go to consumer relief, like mortgage modifications.) And who is paying? (Shareholders, basically. No individuals from the banks are paying up—at least in this settlement.)

So it’s easy to forget that actual homeowners were hurt, too. Citigroup was one link in a chain that turned home loans into investment products. At one end, there were the original mortgage lenders (including such fine operation as Countrywide). Citigroup would buy mortgages from the originators and then pool the loans together to create securities that other investors could buy. One of the bank’s jobs was to make sure that the mortgages in the pool were up to snuff.

Citigroup hired outside companies to check on this. The companies would look at a sample of the loans and see if any of them didn’t fit guidelines, or if valuations of the homes the mortgages backed looked squishy. The news Citigroup got back wasn’t pretty. One Citigroup trader looked at the reports produced and wrote in an email (one for the ages) that “we should start praying… I would not be surprised if half of these loans went down.” Nevertheless, Citigroup went ahead and created securities out of the loans. These securities went south, touching off the Great Recession.

But things didn’t work out terribly well for the individual borrowers, either. Citigroup and institutions like it helped stoke mortgage originators’ appetite to lend to just about anybody and everybody, in many cases based on unrealistic valuations. The damage from this includes borrowers who ended up overstretched and put on the road to foreclosure, and more broadly any home buyer who bought into a increasingly inflated market.

Let’s not forget that part.

TIME Companies

Citigroup Settles Subprime Mortgage Case for $7B

WASHINGTON (AP) — Citigroup will pay roughly $7 billion to settle an investigation into risky subprime mortgages, the type that helped fuel the financial crisis.

The agreement announced Monday comes weeks after talks between the two sides broke down, prompting the Justice Department to warn that it would sue one of the nation’s biggest banks.

The settlement stems from the sale of securities made up of subprime mortgages which fueled the boom and bust that triggered the Great Recession in 2007.

Citigroup, among other banks, downplayed the risks of subprime mortgages when packaging them selling them to mutual funds, investment trusts, pensions, as well as other banks and investors.

J.P. Morgan is the only other major U.S. bank to settle so far, though Bank of America is reportedly in talks to do so.

MONEY mortgages

30-year Mortgage Rates Edge Down For Second Straight Week

Mortgage rates declined slightly over the past week.

Average rates notched down slightly to 4.14% with an average of 0.5 points, down from last week’s 4.17%, according to Freddie Mac. A year ago, rates on 30-year mortgages were 4.46%.

The rate on an average 15-year mortgage was 3.22% with 0.5 points, down from 3.50% a year ago. For adjustable rate mortgages, a five-year ARM this week averaged 2.98% with 0.3 points and a one-year ARM averaged 2.40% with 0.4 points.

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Source: Freddie Mac survey.

 

MONEY buying a home

Single and Thinking of Buying a Home? Here’s Some Advice

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Shutterstock

Fewer singles are buying, thanks to crimped finances and tougher lending standards. Before you take the plunge, consider whether you'll be able to handle the costs on your own.

The transition from renter to homeowner proved more complicated than expected for 26-year-old Kimberly Watson. As a single buyer with imperfect credit and without a long job history, she faced several hurdles throughout the lending process before eventually finding and closing on a condo in Hollywood, Fla.

Buying a home is hardly simple for anyone, but navigating the process can be particularly challenging for single buyers, who have only their own income to rely on to pay the bills. Tightened lending standards help explain why the percentage of single buyers declined slightly between 2010 and 2013: 16% of homebuyers were single females and 9% were single males in 2013, according to the National Association of Realtors, compared to 20% and 12% respectively in 2010. A weak job market and debt burdens also explain why singles have stayed away from the housing market, says NAR economist Ken Fears.

Banks are not allowed to discriminate based on marital status, but tighter lending standards can potentially pose a challenge to single buyers because they only have their own income to qualify for a loan.

Some of the tips below can make the process more manageable:

Ask, can you really afford to buy?
Scrutinize your finances carefully and evaluate whether buying a home is even feasible. You won’t have help from a partner to pay the bills, and you don’t want to be “house poor.” Review your credit record, clean up any mistakes, and pay down debt.

Money 101: Get Your Finances In Order Before Buying a Home

Be sure to consider all the recurring expenses associated with homeownership beyond the purchase price and mortgage closing costs. From association fees and property taxes to utilities and lawn care, the bills add up. Take into account maintenance and insurance when setting a budget.

“You’ve got a nice house, but now you’re eaten alive in expenses,” says Doug Lebda, CEO of LendingTree. “Factor in the total cost of homeownership.”

Think long term, says Emma Johnson, creator of WealthySingleMommy.com. You want to be able to afford and keep your home — so it’s wise to have a bigger savings account than you would if you were buying as a couple.

Watson found that to be true after moving in to her condo. She discovered a bad case of mold in her bathroom, and had to spend $10,000 on a gut remodel.

“I thought I would move in, and everything would be as is, and it would be fine,” she says. “Definitely have some extra money on hand.” Our advice: Total the estimated monthly household costs and set aside the difference between that amount and your current rent, or payment. If you’re struggling to make budget, you probably need to wait longer before buying.

Money 101: Should I Rent or Buy a Home?

Save on mortgage costs with special programs
Singles getting a mortgage with only one income should look at FHA loans, which offer lower interest rates and require lower credit scores to qualify. First-time buyers, which includes those who haven’t owned a home for three years, can make a down payment as low as 3.5% of the purchase price. FHA loans require more underwriting and more documentation, Lebda says, so lenders may not offer the program at first; be sure to ask.

If you do go the FHA route, the Homeowners Armed with Knowledge (HAWK) program will cut you a break on mortgage insurance costs if you go through housing counseling.

Not a first-time buyer? You may still be able to save even with conventional loans. TD Bank’s Right Step program, for example, offers a 3% down-payment option without private mortgage insurance (PMI), which is usually required for loans with less than 20% down, says Malcolm Hollensteiner, the bank’s director of retail lending products & services. The program also requires a housing education class.

On any loan, compare costs carefully, and not just rates. A lower rate may mean a higher lender’s fee, said Dean Vlamis, vice president of mortgage lending at Guaranteed Rate.

Money 101: How Much Will Closing Costs Be?

Don’t house hunt alone
Buying a home is an exciting milestone. It’s also a major investment, so don’t let emotions cloud your decisions.

Keep one or two trustworthy people involved in the process as a sounding board. “It’s important to have some sort of voice of reason,” says Jessica Edwards, a Coldwell Banker agent based in North Carolina.

Plan for the future
As you search for homes, consider what happens if you find a partner, or have to relocate for a job. Edwards says she’s seen many singles have to move sooner than they expected because their life circumstances changed. Think about that possibility as you’re searching: “There are a lot more single buyers that are looking at it as a primary residence that they can later turn into an investment,” she said.

Homeownership is a big investment and a lifestyle change — so it’s crucial to make sure you’re financially prepared and have done your homework. It’s better to wait than to find yourself over-stretched after committing to the major purchase. “We’re so inundated with the message that we need to own a house,” says Johnson. “It’s a wonderful thing, but it’s not right for everyone at every point in their life.”

MONEY mortgages

Behind on Your Mortgage? You May Be Eligible For Some Help

A new settlement with one of the nation's largest lenders may provide you with some much needed help on your mortgage.

The $540 million SunTrust Mortgage agreed to pay last week in relief to distressed homeowners is the latest in a series of settlements authorities have reached with major banks over their role in the financial crisis since 2012. Is it too late to claim any of that money? Here’s what you need to know.

Who is eligible for a loan modification?

If you’re underwater, or struggling to make your payments, two lenders have relief funds remaining under their settlement agreements. Ocwen Financial agreed in December to spend $2 billion to slash mortgage balances for underwater homeowners. If you have an Ocwen loan, or one from subsidiaries Homeward Residential Holdings and Litton Loan Servicing, call Ocwen at 800-337-6695 or email ConsumerRelief@Ocwen.com.

SunTrust Mortgage will provide $500 million in relief to underwater homeowners. Call SunTrust (800-634-7928) or email through the SunTrustMortgage.com support page.

What if I’ve already lost my home?

Ocwen and SunTrust are paying $125 million and $40 million, respectively, to customers who already have lost their homes to foreclosure.

Eligible Ocwen customers lost their home between Jan. 1, 2009 and Dec. 31, 2012; SunTrust borrowers lost their homes between Jan. 1, 2008 to Dec. 31, 2013. A settlement administrator will contact you, according to the Consumer Financial Protection Bureau. If you have changed your contact information since your foreclosure, the CFPB advises you to update your information with your state attorney general.

I’m not a SunTrust or Ocwen customer. Can I get any help?

The five major banks that were part of the 2012 National Mortgage Settlement already have given away their settlement money. But you still may qualify for other assistance. Contact a credit counseling agency approved by the Office of Housing and Urban Development (HUD), says Melinda Opperman of Springboard Credit Management. (Find one near you at HUD’s official website.) Approved agencies, like Springboard, can put you in touch with relief programs in your area—their counseling is free.

Additional information

CFPB’s Ocwen fact sheet and common questions.

CFPB’s press release on the SunTrust settlement.

MONEY Housing Market

How to Stop the Next Housing Bubble

Housing development under construction on farmland, aerial view.
Housing development under construction on farmland, aerial view. Ryan McVay—Getty Images

The financial system is still too risky. Step one toward fixing that: Rethink mortgages.

More than five years after the Lehman Brothers collapse, America still has a bubble problem.

The economy is improving, but the country is still poorer and less busy than it should be this long after the official end of the Great Recession. Here’s where actual GDP lines up against where it might be if the economy had returned to its normal path:

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SOURCE: St. Louis Fed, Congressional Budget Office

Despite this gap, the Fed last week announced it was continuing to slow down its massive program of bond buying known as “quantitative easing,” which was designed to ease lending and goose the economy. The central bank is keeping short-term interest rates near zero, but many economists and economic pundits still think the Fed should be even more aggressive, rather than slightly less so. The Fed holds back mostly out of fear of inflation (which remains low) but another worry has emerged: Investors are getting cocky. Stocks are way up, bond investors are buying riskier stuff in a “reach for yield,” and yet a gauge of market mood called the “fear” index is registering an unusual lack of anxiety.

The Fed has expressed concern, at least in a keeping-it-on-our-radar way. “There is some evidence of reach-for-yield behavior,” said Janet Yellen on Wednesday in a press conference.

That doesn’t mean we’re in bubble territory. Even if a market drop is coming, there’s a difference between that and a systemic crisis like 2008’s; Yellen said she isn’t seeing a rise in dangerous financial leverage. But that we’re even having this conversation is a sign that there is a lot of unfinished business left over from the crisis. There’s still too much risk built into the financial system.

This story is the first in a series I’ll be writing for Money.com about ways to prevent future bubbles—or at least to limit the damage when they pop. There are numerous pieces to this puzzle. Banking regulations, consumer protections, Fed policies, and broad-based economic growth are all important for a healthy financial system.

But the most obvious place to start is literally close to home: Mortgages. The 2000s saw an enormous build up in household debt, largely driven by home loans.

SOURCE: Federal Reserve

A lot of attention has been paid to how crazy a lot of those mortgages were. There were “NINJA” loans (no income, no job or assets), no- or low-downpayment mortgages, and exploding ARMs that started with low teaser payments. Such loans are impossible or at least very hard to get now. But a pair of fascinating new books make the case that there’s still a basic flaw in how mortgages work, one that Washington had a golden opportunity to fix but failed to. Put simply, home loans are far too difficult to renegotiate when things go badly wrong.

Over the years I’ve read a tall stack of books about the financial crisis. Other People’s Houses, by Vermont Law School professor Jennifer Taub, provides the clearest, beginning-to-end explanation I’ve seen of what went wrong. And Taub’s beginning is a surprise: A 1993 Supreme Court decision about how bankruptcy law applies to mortgages.

A mortgage on your primary residence is different from other kinds of loans–and not in a good way. When a borrower is buried in bills, the bankruptcy process can help discharge many kinds of debt. In the early 1990s, Harriet and Leonard Nobelman found themselves underwater on a condo in Dallas—they owed more than $65,000, but the current market value had fallen to $23,500. As part of a bankruptcy plan, they proposed that the balance of their mortgage be reduced to that $23,500. The bank fought this in court. Ultimately, the Supreme Court decided that the principal value of a mortgage can’t be modified by a judge in the bankruptcy process.

Fast forward to 2008 and the housing crisis, and this technical-sounding decision suddenly mattered a lot. Candidate Barack Obama endorsed changing the bankruptcy law, but ultimately nothing ever came of it. And the administration resisted other proposals—coming from political conservatives as well as liberals—to encourage or push lenders toward principal reductions. (A program to subsidize some principal mods began in 2010.)

“Hang on,” you may be saying, “forcing people into bankruptcy doesn’t sound like much a solution. I know lots of people who went underwater on their home, and they never would have declared bankruptcy.”

That’s true. But Taub tells me that that this law matters even for those who never go to court. “It would have shifted the bargaining power,” she says. “Knowing that would be an option would have brought the lender to the table more quickly and more willingly.”

Of course, many underwater homeowners ultimately did get out from under their debts—by letting the bank take the house, or agreeing to a short sale and moving out. But could a more orderly, less painful principal reduction process have made the housing crisis less damaging?

Economists Atif Mian of Princeton and Amir Sufi of the University of Chicago say yes. Their book House of Debt argues that the Washington’s failure to help more homeowners renegotiate their debt needlessly prolonged the economic slowdown.

When households are weighed down by debt they can’t pay, they spend less, and the effect can spread throughout the entire economy. This seems intuitive, but most economists have preferred to focus on fixing broken banks. Mian and Sufi have found compelling evidence that homeowners’ woes were the real main event. For example, in U.S. counties with the sharpest declines in net worth during the crash, spending fell almost 20%.

Much of this is water under the bridge now. But not all of it. Taub points out that foreclosures are up over last year in some states. In any case, she argues that resetting the rules for how mortgages work could help to prevent the next bubble. “Hopefully, lenders, if they are disciplined by having to take losses, won’t engage in these no-money-down and no-doc mortgages and so on,” she says.

Letting off the hook people who borrowed too much is touchy stuff. (See Rick Santelli’s famous CNBC rant.) But if borrowers should be more cautious, so too should lenders. Although putting more risk on lenders might raise the cost of mortgages somewhat, Taub argues “that’s reasonable insurance to pay to avoid massive foreclosures and abandoned houses and the whole downward spiral.” You didn’t need to have an option ARM on an oversized house to feel the pain of the foreclosure crisis.

Mian and Sufi have another proposal for future mortgages that bypasses these hot-button fairness questions. A new kind of loan, called the “shared responsibility mortgage” could link mortgage payments to an index of local housing prices. If local prices fall, a borrower’s monthly nut would drop too. In return, the bank would get 5% of any capital gains on sale. The idea is both to ease the economic damage housing declines cause, and to give lenders an extra incentive to be careful about lending into frothy markets. (The tax code would likely have to be changed to make such loans popular.)

As Mian and Sufi point out, mortgages looked like a pretty safe investment from the point of view of lenders. That was a big part of the problem. Even if housing prices fell, lenders assumed homeowners would be obligated to make their full payments. But the economy as whole would have been safer if more of the risk was shared.

MONEY First-Time Dad

Why I’ll Send My Infant Son to College Before I Buy a House

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Luke Tepper Taylor Tepper

With housing so expensive, I figure my young family will be renting for foreseeable future. The latest on being a new dad, a Millennial, and (pretty) broke.

Mrs. Tepper and I are 28 years old, and our son is four months. Over the past year, Luke has acquired an $800 stroller, a $250 crib, and a $50 humidifier. (Before you make fun, understand that he constantly bore a stuffy morning nose, and what kind of monster wouldn’t spend a measly $50 to help his only son sleep soundly?!)

We’ve begun funding Luke’s New York 529 college savings account in order to spot his entire higher education bill (provided he goes to a state school), and we, of course, will pay his medical expenses for the next 26 years.

But there is one thing that we will not buy him—a house. In all likelihood (which means unless we win the lottery, or someone gives us a hundred thousand dollars), we will put our son through college before we buy our family a home.

Which, when you think about it, is strange. Last year we earned almost $110,000 and that will (hopefully) increase rapidly as we enter our career primes. We hardly travel (much to our chagrin) and have a reasonable $300 monthly car payment. Mrs. Tepper really only shops for (baby) clothes on sale, online, or both, and my main indulgence is a bimonthly $45 bottle of Templeton rye whiskey.

Why then will we be renters, at least until we’re in our fifties?

Reason #1: It’s (Really) Hard to Save

We live in a two-bedroom apartment in Brooklyn with cheap wood cabinets and a kind of white plaster countertop that stains as easily as a peach bruises. In the afternoon it often takes five minutes for the water to go from warm to hot. We don’t have a washing machine—neither does our building, which was built during the Hoover administration—and I do our dishes by hand because we don’t have a dishwasher.

Next year our rent will be $2,020 (and that doesn’t include gas, electricity, cable, Internet, or whiskey).

Eventually we’ll decamp for the ‘burbs for the sake of space and sanity, but with that move comes higher mass transit costs (an $1,800 yearly increase) and more house to heat and furnish and maintain.

The Dave Ramsey in me says I should find more ways to cut spending: no more occasional brunches or flights to Florida. (Luke can meet his grandparents on Skype!) But those hypothetical savings are peanuts in the grand scheme of things, and the me that wants to stay married shuts Dave Ramsey up.

Read: Half of Millennials Will Ask Mom and Dad to Help Them Buy a Home

Reason #2: Student Loans

In order to gain our cushy, 50-hour-a-week jobs, both Mrs. Tepper and I attended (public) graduate school. That came on top of studying at New York University for four years and (seemingly) $550,000,000.

So we have loans. Lots of them. (I alone owe almost $60,000.) Obviously we are not the only ones tied up in the web of student loan bills. People like me now owe almost $1.1 trillion, according to the Federal Reserve Bank of New York, or about twice as much as in 2008, when my wife and I graduated college.

I’m now paying $350 a month—and that’s mostly interest.

Reason #3: Houses Are Expensive

In New York City, the median home price is $369,000, and that comes with a median down payment of $74,000, per a recent Redfin report. In Nassau County, which is out on Long Island, you need to put $88,000 down.

Needless to say, we don’t have that kind of money, nor will we anytime soon.

And that–expensive rent, student loans, and homes—doesn’t even take into account the $1,500 a month gorilla in the room (child care) or, you know, Christmas presents.

Look, there are worse things than not buying a house (like not having a job or being a Dallas Cowboys fan.) We have a happy, healthy family, with sunny days ahead, and maybe we’ll find a way to save a buck or two over the years.

But not that long ago, it took only one middle class job in the family to afford a home. Now, according to the Redfin report and my life, two doesn’t cut it. When the prospect of owning the roof over your family’s head is so far gone, is it really that crazy to buy a $50 humidifier for your son?

MORE: Why Does My One Baby Need Two of Everything?

MORE: How Can Child Care Cost as Much as Rent?

 

MONEY Ask the Expert

How Do I Get Rid of My High-Interest Second Mortgage?

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Robert A. Di Ieso, Jr.

Q: I have a $23,000 second mortgage with a high interest rate—8.25%. Should I refinance both my mortgages into one to save money, and at what term? — Jim Davis, Weymouth, MA

A: One of the most important factors in deciding whether to refinance is how long you plan to stay in the home, says Shant Banosian, an executive at lender Guaranteed Rate. The longer you stay, the more you will benefit from any savings from a lower rate. You told us that you are hoping to sell your two-bedroom townhouse in about 18 months so you can move your family of four into a larger home.

You’d like to boost your home equity so you can walk away from your sale with enough money for a nice down payment. Given your time frame, Banosian says it would be a mistake to refinance into a shorter-term mortgage that would significantly raise the monthly payment. Instead, he says, open a home equity line of credit and use that to pay off the second mortgage. HELOC rates average 4.63%, according to Bankrate, and it costs very little to open one, Banosian says. “They’d cut their payment in half.” You could then apply those savings (about $130, you said) to your principal balance.

Related: Should I Refinance So I Can Stop Paying Mortgage Insurance?

 

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