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Refinancing Multiple Loans

Refinancing more than a mortgage can be a good idea because rates for the subordinated loans will always be higher than the mortgage. Say you buy a townhouse at 10 percent down. To avoid paying mortgage insurance you gets two loans, the first at 80 percent of the value of the property and the second at io percent of the value — an ^°/I0/i0 loan.

A typical scenario would be:

Sales Price $200,000

Down Payment $20,000

First Mortgage $160,000 at 6.50%, 30 years, and $1,011 per month

Second Mortgage $20,000 at 7.50%, 20 years, and $161 per month

Three years later, the economy begins to slow and mortgage rates start to fall with a 30-year mortgage rate dropping all the way down to 5.50 percent. You see that you can now combine the two notes into one 30-year loan. And because the value of the townhouse has gone up to $225,000, you can not only refinance to lower rates, but also avoid mortgage insurance because your loan will be at 80 percent of the new appraised value. Now it looks like this:

New First Mortgage $180,000 at 5.50 percent, 30 years, and $1,022 per month

That's a savings of $150 per month. By dividing that into the closing costs of $2,500, the recovery period is $2,500 / $150 = 16.7 months, well within acceptable recovery range.

One can also refinance an old first mortgage with an adjustable home equity line.

ARM to Fixed Rate

When rates are at relative highs, some people elect to choose an ARM or a hybrid for the lower initial rates. But when rates fall, if s a good idea to consider getting out of an ARM or a hybrid and lock in rates for the long term when they're at relative lows. This is especially true if you plan to keep the property long term. If you're not keeping the property long term and expect to sell or otherwise dispose of it, then keep your ARM or hybrid.

This is something that should be considered well before a hybrid's reset date. For instance, you have a 5/1 hybrid at 5 percent and current 30-year fixed rates are at 6 percent. Should you wait until just before the hybrid resets and then refinance? Maybe not. Although there may be general rate trends, there is no way to predict what interest rates will be in the future.

So, the prudent approach would be to go ahead and refinance out of the hybrid and into a fixed rate if you're satisfied with the current rate.

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