Author Topic: Can someone explain this for me please?  (Read 2851 times)

ducky19

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Can someone explain this for me please?
« on: November 06, 2019, 01:58:15 PM »
I was reading this article titled "5 things I've learned from refinancing my mortgage", when I came across #4:

"Your loan amount can actually go up

Another thing I didn't know: I assumed the only way to save money on a refinance would be with a smaller loan, but there are a lot of other factors at play.

In our case, since our appraisal value increased, our loan amount did, too. But we're ultimately saving money every month because our interest and PMI decreased so much. The situation will vary for every homeowner."

Wait, what? Why would your loan amount go up just because your appraisal value increased? Am I missing something?

https://www.businessinsider.com/things-ive-learned-from-refinancing-my-mortgage

solon

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Re: Can someone explain this for me please?
« Reply #1 on: November 06, 2019, 02:01:19 PM »
Just an ignorant journalist. The only way the principle could go up is if you financed closing costs, or took cash out. Appraisal value has nothing to do with it.

Laura33

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Re: Can someone explain this for me please?
« Reply #2 on: November 06, 2019, 02:14:38 PM »
I'm assuming they took cash out, i.e., the lender let them take out a larger mortgage because the appraised value was higher, so they could take out more money and still be within 80% LTV.

But, yeah, it's horribly written.  And just think of how much more money they'd actually be saving if they'd limited the refi to the same size mortgage they had before!

TheGrimSqueaker

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Re: Can someone explain this for me please?
« Reply #3 on: November 06, 2019, 02:57:38 PM »
Well, if the interest rate goes up there are two ways to deal with it. The amount of the monthly payment *could* change, extending the repayment term and thus increasing the amount repaid for the loan. Or, the size of the monthly payments *could* go up. Or there could be some combination of the two. No matter what, if the interest rates go up on an adjustable rate mortgage it costs more to borrow the same amount of money.

Now, if the size of the monthly payments remains constant and the interest rate increases a *lot*, such as if someone takes out an ARM at a low interest rate and the rates skyrocket, eventually it could mathematically reach a point where the payments may not be sufficient to cover the interest on the loan. If that were the case, it seems reasonable to me that the additional interest would have to be added to the principal. Where else could it go?

FireHiker

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Re: Can someone explain this for me please?
« Reply #4 on: November 06, 2019, 03:00:32 PM »
If an appraisal resulted in higher property taxes and they have an impound account then I suppose it could look like their mortgage went up? I think that sort of thing varies state to state.

trollwithamustache

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Re: Can someone explain this for me please?
« Reply #5 on: November 06, 2019, 04:02:55 PM »
They will roll a mess of fees into your new principal so it will indeed go up, I am guessing by only a few k. But, like you said, if the rate comes down enough its still worth it.

ender

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Re: Can someone explain this for me please?
« Reply #6 on: November 06, 2019, 04:19:33 PM »
You mean people refinance mortgages to do something other than cash out their equity!?!?!?!?

Goldielocks

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Re: Can someone explain this for me please?
« Reply #7 on: November 06, 2019, 04:26:26 PM »
I assume they did this:

1)  Home value increased (greatly)
2) Refinance for a much lower rate (e.g., 3% instead of 6%),
3)  Remove the PMI payment cost (which is fairly significant insurance cost)
4)  Increased the total amount borrowed, but kept within 80% LTV
5)  Increased the number of years remaining on the loan. e.g. they had 22 years remaining on a 30 year loan and bumped it back up to 30 years. (I did not include this in my example below, but it will also lower monthly payment while extending the loan)

So, the monthly payment could now be lower through a combination of longer time to pay off and lower interest and PMI.  Even if the loan amount increased.  BUT  you end up with more payments (years more). 

Let's say it was a $200k value home that has increased to $250k in value.

OLD MORTGAGE
Orginal mortgage was 90%, or 180k.  30 year, 6% rate (because they did not have a very long credit history or had a single bad mark).  $1079 monthly payment plus PMI (1% assumed) of approx. $150/month = $1229/mo payment
Total to be repaid in remaining 26 years = $295k

Now, 4 years later, their credit history is great.  They cleared up the old issue and have more than 2 years of excellent payments plus now a mortgage being paid promptly on their report.

NEW MORTGAGE

New Value x 80% LTV = $200k able to be borrowed, at 3%, 26 yrs.*  No PMI. 
PMT = $924/mo. 
Total to be repaid over 26 years = $288,300

*NOTE -- could increase the payments out to another 30 years and pay even less per month, for more years., and a bit MORE overall to be repaid


In this example, the monthly payment went down by $155/mo and the number of years of payments stayed the same, and the total to be repaid over the life of the loan decreased by $6,700.

They also ended up borrowing an extra $30k  (as they had paid off $10k of it, leaving $170k remaining over 4 years and refinanced it at $200k) That $30k went to the new loan origination fees... and they pocketed some, too.  Newer car or kitchen upgrade or CC repayments, perhaps.

The main cause of the better numbers was the dramatic drop in interest rates and the removal of PMI.  PMI is exceptionally expensive, IMO.

partgypsy

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Re: Can someone explain this for me please?
« Reply #8 on: November 08, 2019, 08:10:25 AM »
I didn't see that in the article. It does have this sentence though:

"In our case, since we decided to roll our closing costs into our loan, the loan amount went up. We'd paid the original loan down to about $250,000, but after the refinance, it went up to around $256,000 including closing costs. "

Laura33

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Re: Can someone explain this for me please?
« Reply #9 on: November 08, 2019, 10:11:02 AM »
I didn't see that in the article. It does have this sentence though:

"In our case, since we decided to roll our closing costs into our loan, the loan amount went up. We'd paid the original loan down to about $250,000, but after the refinance, it went up to around $256,000 including closing costs. "

Wait -- so when they say the payments went down even though the loan went up, they're comparing their new payments based on $256K against their old payments based on their original loan value?  That's just stupid -- the amount of their monthly payments isn't based on how much they still owe on the loan, it's based on the original amount they borrowed.  Do they say what they originally borrowed?  I couldn't find it anywhere.  But if it was more than $256K, their payments went down in part because the overall amount they borrowed now was less than they originally borrowed, not more!  (Not to mention that they extended their repayment obligations for another couple of years, i.e., they traded more leeway in their current budget for two more years of mortgage payments.)

ducky19

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Re: Can someone explain this for me please?
« Reply #10 on: November 08, 2019, 01:55:38 PM »
I didn't see that in the article. It does have this sentence though:

"In our case, since we decided to roll our closing costs into our loan, the loan amount went up. We'd paid the original loan down to about $250,000, but after the refinance, it went up to around $256,000 including closing costs. "

Wait -- so when they say the payments went down even though the loan went up, they're comparing their new payments based on $256K against their old payments based on their original loan value?  That's just stupid -- the amount of their monthly payments isn't based on how much they still owe on the loan, it's based on the original amount they borrowed.  Do they say what they originally borrowed?  I couldn't find it anywhere.  But if it was more than $256K, their payments went down in part because the overall amount they borrowed now was less than they originally borrowed, not more!  (Not to mention that they extended their repayment obligations for another couple of years, i.e., they traded more leeway in their current budget for two more years of mortgage payments.)

OK, this is making more sense now. When I first read the article, the verbiage that I quoted was in the same spot as what partgypsy quoted, so they obviously went back and edited the article since it didn't make sense the way it was written.

The way I read it now, their original loan was some unknown amount higher than $250k. They had paid it down to $250k, but their loan amount went up because they rolled in closing costs.

partgypsy

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Re: Can someone explain this for me please?
« Reply #11 on: November 08, 2019, 02:10:25 PM »
I didn't see that in the article. It does have this sentence though:

"In our case, since we decided to roll our closing costs into our loan, the loan amount went up. We'd paid the original loan down to about $250,000, but after the refinance, it went up to around $256,000 including closing costs. "

Wait -- so when they say the payments went down even though the loan went up, they're comparing their new payments based on $256K against their old payments based on their original loan value?  That's just stupid -- the amount of their monthly payments isn't based on how much they still owe on the loan, it's based on the original amount they borrowed.  Do they say what they originally borrowed?  I couldn't find it anywhere.  But if it was more than $256K, their payments went down in part because the overall amount they borrowed now was less than they originally borrowed, not more!  (Not to mention that they extended their repayment obligations for another couple of years, i.e., they traded more leeway in their current budget for two more years of mortgage payments.)

OK, this is making more sense now. When I first read the article, the verbiage that I quoted was in the same spot as what partgypsy quoted, so they obviously went back and edited the article since it didn't make sense the way it was written.

The way I read it now, their original loan was some unknown amount higher than $250k. They had paid it down to $250k, but their loan amount went up because they rolled in closing costs.

Yep. They do say the house cost 265K, but they don't say what they put down, whether closing costs were rolled in. But probably somewhere around 265K original mortgage. Which was paid down to 250, but with closing costs was 255K.

When I did my refinance I was refinancing from 30 year (with 20 years left to go) to 15 years. We also took out 24K so the amount and the monthly payment increased (but the number of payments went down).