Refinance or Line of Credit?

[freemonkey]

I'm not very informed about money and there's so much information out there that I get a little confused about what makes the most sense. I'm hoping someone here can give me a little insight on what's best for me.

We need to do a few home repairs and need to borrow the money to do it. I don't have the official estimates yet, but I'm guessing $20-25K oughta do it (barring any unforeseen catastrophes).

Our original home loan is at about 6.5% interest and is through one of the big mortgage companies. While we'd like to sell and move into a different house in the near future, the reality is that we're probably here for at least 2-5 years more.

Based on what I think I know about this stuff.... what I like about refinancing is that we'd still have only one payment, and possibly not too much more than we pay now. And... what I like about a home equity line of credit, we only borrow what we actually need. Oh, also, we'd probably like to go through our local credit union for whatever we choose to do.

I'm looking for someone more knowledgeable to give me a better pro/con list. :tmcnfusd:

[LadyShea]

We chose refinancing, I would suggest it to you, especially as wacky as the real estate market is currently. You can get a good interest rate right now, and as you said you just have the one payment and because it's 30 years your monthly payment is rarely much higher. Also, it's a done deal, you don't have to worry about making the second loan payments should something unforeseen happen. Lines of credit are usually at a higher interest rate than your mortgage as well.

You can take out only enough cash as you need, and if you overestimate, simply pay the difference back to your mortgage as an extra principle payment.

[freemonkey]

You can take out only enough cash as you need, and if you overestimate, simply pay the difference back to your mortgage as an extra principle payment.

What if we underestimate? Is it better to go for more, just in case?

[LadyShea]

If you have enough equity, I would take out as much as you can that keeps you within 80/20 loan to value and keeps your mortgage payments within an affordable range.

Have your mortgage person work out several scenarios for you, as the amount of cash you take out, and how it's used, can affect the interest rate and total new mortgage payment. We found that if we took a little more cash than we actually needed, we got a better interest rate and lower monthly payment.

Also, you are really borrowing from yourself (your future profit from selling). If you plan to sell within 5 years, don't overimprove the house...you want it clean and all appliances in working order, but you don't need higher end materials than would be found in your neighborhood. If everyone has laminate kitchen counters, you shouldn't splurge on granite. If everyone has carpet/vinyl floors, don't go for expensive hardwood and marble. Don't gut the bathroom and put in all new cabinets and fixtures when a coat of paint will do the trick...that kind of thing.

[freemonkey]

Gotcha. Neighborhoods here are funny. Our particular road has many million dollar + homes, low to medium value homes (like ours), low rent cottages, plus a nasty old trailer park. When we realized we needed new bathroom, we had visions of what we'd like but know that its just a plain little old house and needs a bathroom that fits it.

Our problem is that we think we were bamboozled with this house on things we could not easily check.... like the septic system and the plumbing. Not including other errors in judgment on our parts.

Thing is, we don't even like this house.

Lucky for us, we have friends, and friends who have friends, so we don't expect to be gouged, will be able to do some of the work ourselves and will get some nice fixtures for cheap. :vibes:

[seebs]

Good news is, rates are low. Bad news is, housing values are down, so you may not be ABLE to refinance and get much money out. Depends a lot on when you got the house and what you owe on it now.

[Chris Porter]

(snip)

Also, you are really borrowing from yourself (your future profit from selling). If you plan to sell within 5 years, don't overimprove the house...you want it clean and all appliances in working order, but you don't need higher end materials than would be found in your neighborhood. If everyone has laminate kitchen counters, you shouldn't splurge on granite. If everyone has carpet/vinyl floors, don't go for expensive hardwood and marble. Don't gut the bathroom and put in all new cabinets and fixtures when a coat of paint will do the trick...that kind of thing.

Reminds me of a term I recently ran across; pergraniteel (http://patrick.net/wp/?p=63):· Pergo fake wood floors, granite countertops, and steel appliances. It is an amalgamation of flipper’s most popular home improvements when improvements were made at all.

(been reading housing blogs)

[Plant Woman]

Just think , in about 15 years time or less all that perganiteel will be considered old and flipper's will be ripping it out and replacing with who knows what. But if someone is going to be selling the house in 5 years time it will be suitable.

Freemonkey,

I think since this is a transition house that not overdoing remodel is a very wise decision. I feel for you about the septic system problems--expensive to fix, especially in our county who seem fixated on putting humps on everybody's property.

We refinanced for 40,000 a few years back and it only made between 100-200 dollars difference in our monthly payments. Can't remember exactly.

[freemonkey]

I feel for you about the septic system problems--expensive to fix, especially in our county who seem fixated on putting humps on everybody's property.

Well, I'm glad that they are finally dealing with the bad way they did things years ago. I understand, for instance, that raw sewage was just dumped into the bays and the Hood Canal, etc. But I can't believe how costly it is to make fixes. Fortunately, not being anywhere near the water, our fix is not so drastic.

Another Dumb Question: Is it possible to go to another lender and refinance through them? What I mean is, can I take my loan from lender A to lender B and have them buy the original mortgage? What is that called?

[seebs]

Yes. It's just a refinance. Any lender can do it.

[Pinecone]

Switching lenders 'can' cost more $$. The current one might wave all that extra inspection and title search stuff.

[seebs]

Switching lenders 'can' cost more $$. The current one might wave all that extra inspection and title search stuff.

Good point.

Also, be wary; there are a lot of scammers out there.

Do NOT get your refi from any company that advertises via junk faxes.

[freemonkey]

Oh no, would never do that. We're simply thinking switching from Countrywide to the local credit union.

I can see why the old company would probably waive the fees and inspections/appraisals. a. to keep the loan, and b. they should already have all that.

[LadyShea]

You can shop around a bit, see who makes you the best deal. You are under no obligation to stay with the current lender. You don't have to commit to get some quotes...you are the customer and are free to kick the tires and "think about it". Your regular banking institution is a good place to approach, as well as your current lender or anyone you know in the biz.

[Sauron]

Oh no, would never do that. We're simply thinking switching from Countrywide to the local credit union.

I can see why the old company would probably waive the fees and inspections/appraisals. a. to keep the loan, and b. they should already have all that.

(putting on my MBA hat)

You're talking about doing home improvement in:

a. an overall down economy;
b. with multiple major lenders failing;
c. in a bad real estate market;
d. during a recession and widespread unemployment having arrived;
e. for a house you don't even like

You didn't cause these circumstances, but you're nevertheless stuck with them.

I don't know your situation, but I would strongly advise you to go back to your list of home improvements and cut it back to ONLY those things that you must have to make the house liveable for the next 2 to 5 years. No enhancements. No creature comforts. Just the bare minimum. Get the cost of those improvements down, any way you can do it.

Also, is this rural property?

I have my dad's house financed through Countrywide. If they follow the same pattern with you that they did with me, then they will probably make you do a re-appraisal as part of the refinance process. If so, that could potentially lower the overall value of your house - and also cut back the amount of money you'd get through either a line of credit or a refinancing.

What's worse, if the property is rural, then their new standard is 70/30 LTV ratio, not the old 80/20. This is partially a reflection of the current bad housing market, and partially a reflection of Countrywide's gross mismanagement of home loans.

[Sauron]

Speaking of Countrywide:
U.S. Said to Open Criminal Inquiry of Countrywide - New York Times (http://www.nytimes.com/2008/03/09/business/09lend.html?_r=1&oref=login)


U.S. Said to Open Criminal Inquiry of Countrywide

By RAYMOND HERNANDEZ
Published: March 9, 2008

WASHINGTON — Federal agencies have opened a criminal inquiry into Countrywide Financial for suspected securities fraud as part of the continuing fallout over the mortgage crisis, government officials with knowledge of the case said on Saturday.

The Justice Department and the Federal Bureau of Investigation are looking at whether officials at Countrywide, the nation’s largest mortgage lender, misrepresented its financial condition and the soundness of its loans in security filings, the officials said.

The investigation — first reported on Saturday in The Wall Street Journal — is at an early stage, said the officials, who spoke on the condition of anonymity because they were not authorized to discuss ongoing criminal matters. It is unclear whether anyone will ultimately be charged with a crime.

[LadyShea]

They can't legally do 70/30 LTV for PMI can they?

[Sauron]

They can't legally do 70/30 LTV for PMI can they?

I'm pretty sure the 80/20 is an industry standard that they're free to bend. Moreover, their board of governors is being extra stringent about the LTV requirements, in the light of:

a. many inflated appraisals;
b. houses losing value faster than the new appraisal can compensate for;
c. extra scrutiny by federal and state regulators;
d. the characteristics of Countrywide's target audience - i.e., their business is giving loans to subprimes and people who've gotten turned down by other lenders - that's how they got started years ago, and it has remained their bread-and-butter market segment;
e. more price variability in rural properties - remember, the 70/30 ratio only applies to rural properties, at least as far as I know

In all, the 70/30 LTV is probably a *good* thing for Countrywide to do. Only they should have done it three years ago when they started pitching refinancing at every possible chance.

It just might suck for freemonkey right now. :-(

[freemonkey]

Thanks for the info, Sauron. Its not a rural property (I don't think, its right outside city limits in Kitsap County), its actually in a desirable location and we didn't pay an overly inflated amount for it. Unfortunately the home improvements we need to make are absolutely necessary.

From the looks of things, maybe we're better off shopping around.

[LadyShea]

Also, some markets have been far less affected by the ridiculously overinflated appraisals and values and the current subprime fiasco. My friend is a mortgage broker in Tulsa, and their market appears to have remained relatively stable throughout. Shop around, definitely though, probably local lenders would be better than a big nationwide company under the current circumstances.

[Kyuss Apollo]

A colleague of mine from work had a line of credit through Countrywide based on his equity. Had is the operative word here--he got a letter just this week telling him his line of credit is closed due to the possibility his home is no longer worth what it had been appraised for when they gave it to him.

So be careful if you go for the LOC option--you don't want to be halfway through your renovations and have the well dry up so to speak.

State of things in this neighborhood's, not good. Nearly all the houses that went up for sale last summer never sold...those that are still on the market or back on have big "price reduced" signs now. This whole neighborhood was jumping, new developments going in...all that's stopped.

Three houses down from me...they boarded the place up about a month and half ago, foreclosure. I been talking to folks walking around it kicking the tires, just to make sure its not someone over there trying to steal the copper pipes out of the place. The people that just left were supposedly contractors, but they left a totally botched half-finished addition on the rear of the house and there's other damage too...according to the lookers, the bank isn't saying much about the place. They're going to have practically give that thing away to unload it.

Meanwhile I was going to refi back in the fall from the 7 year arm we have to a 30 year fixed--Countrywide called and tried to set something up, and the house across the street had sold just last May for 60K more than we paid for this place, so we would have comped decently high then. At the time, we just didn't have the money for the appraisal, figured we'd do it now using some of the income tax refund. But given the current market and the foreclosure three numbers down, I am not thinking we'd do so hot on a refi right this very moment. I figure our place is still worth what we paid for it, but not much more.

And we still have another 4 1/2 years before our current mortgage adjusts, so there's still time to get into something else.

[Qingdai]

Credit unions generally are pretty reasonable and have lower rates of interest.
Local banks may also be a good place to check because they have an idea about what is going on in your market. With the market being the way it is I'd stick to local lenders.

[Sauron]

If this is Kitsap, is your credit union Navy Federal? Or Boeing?

[Sauron]

Oh, and in case anyone cares - my prediction is that this housing market has another year of bad news before the bottom hits and things start turning around again. I had to do a detailed examination of the American economy, and conclude it with a national economic forecast.

This is from a year ago, before most of the fallout from the mortgage sector had occurred. I got most of it right, except for the part about the Fed adjusting rates. Red = got it right, blue = got it wrong.


Part 2: National Economic Forecast, 2007-2008

Forecasting is an inexact science, and is fraught with uncertainties. However, business cannot proceed without doing at least a little prognostication. So the effort must be made, even considering the limitations. I will first list out my Assumptions, and then follow with a Forecast. Given the usefulness of the Beige Book, I will borrow from that same format.

Assumptions

1. US foreign policy in the Mideast will continue to be frustrated in Iraq and Afghanistan, and confrontational vis-à-vis Iran and North Korea. The US will remain in Iraq and not be able to withdraw before the 2008 elections. However, no significant expansion of military action will occur. If this assumption is wrong, then an expansion of the war could have substantial negative impacts on national consumer sentiment, increase deficit spending, create further volatility in the world oil market (with negative impacts to our trade deficit), and depress economic activity at home. If the Bush administration were to suddenly make tremendous progress in the region, then the opposite series of events would likely occur. In addition, large numbers of returning National Guard forces from the Mideast could provide a sudden influx into the labor force, holding down wages.

2. The US Senate remains in Democratic hands until the 2008 national election. No defections from the existing Democratic majority (i.e., Joe Lieberman) will occur, and Senator Tim Johnson (D – South Dakota) will retain his seat. If this assumption is wrong, then either a defection or a gubernatorial appointment in SD would put the Senate into Republican hands. That would return key committee chairmanships back to the Republicans, with implications for foreign policy, fiscal policy, and business/trade policy.

3. Monetary policy remains stable for 2007, with no more than one adjustment (up or down) in the target for the federal funds rate. This also implies that the Federal Reserve will deem inflation to be under control.

Forecast

Fiscal and Monetary Policy
Given the financial costs associated with the continued foreign policy problems that the Bush administration is having in Afghanistan and Iraq, the possibility of military action against Iran, and the impending 2008 national elections, it seems unlikely that US budgetary policy is going to chart of course towards total fiscal restraint in the next year or two. However, the Democrats will use the impending 2008 elections to force some small improvements in balancing government spending with compensatory budget cuts and/or tax increases. The budget deficit will improve, but only slightly. Monetary policy will remain stable for 2007, with no more than one Fed adjustment. For 2008, however, further adjustments will likely be needed.

Construction and Real Estate
With notable regional exceptions such as the Pacific Northwest, the domestic housing sector will continue to show softness during this period. Sales will be slower than in 2006, and final sale prices will be substantially off their highs in 2005 and early 2006. This will have impacts on related industries, such as home lending and refinancing, home repair, demand for freight, and consumer spending on household items. The domestic rental market will improve, as tightened credit standards catch up with would-be mortgage borrowers. Commercial real estate will remain stronger than its single-family counterpart.

Manufacturing
Manufacturing will continue to improve, especially in precision instruments, high technology and heavy machinery. However, Big 3 automakers will not recover this year, and will instead continue to suffer through 2007 and 2008. Affiliated industries and suppliers will likewise be hurt. In fact, we are already seeing this, parts maker Delphi recently reported huge losses, due to a slowdown in the industry and a buyout/early retirement offer to employees. The outlook for aircraft manufacturers, primarily Boeing, remains good.

Banking and Finance
Credit will tighten over the 2007-2008 timeframe. Consumer spending financed by credit – either in the form of credit cards of home equity lines of credit (HELOCs) – will be substantially cut back.
The mortgage banking sector will encounter several shocks as a result of higher than expected default rates in the sub-prime lending arena. In point of fact, this has already started; the share values of several sub-prime lenders has dropped substantially, while Freddie Mac has just tightened its rules to avoid buying loans linked to high delinquencies and defaults. Commercial credit will remain generally good.


Agriculture and Natural Resources
Natural resources – extraction of minerals and mining - will remain strong, due to high oil prices and continued strong international demand for resources, especially steel. The agricultural sector will see some tightening due to corn output being siphoned off to become an input for alternative biofuel. Cycles of adverse weather will continue to play a role in making this sector unpredictable.

Services
The service sector, especially the professional and high-tech service sector, will remain strong. Growth in demand for retail services will slow, as consumer spending slacks off. Housing-related services will remain negatively impacted.

International Trade and Investment
Driven by Mideast instability and the continued US regional presence, energy prices will resume their upward climb. Combined with a taste for imports, global energy prices will worsen the US position on its Balance of Goods and Services. Improvements in exports will continue but will not be sufficient to offset US spending on imports. Continued deficit spending, combined with a slowing economy, will keep the dollar weak vs. other major currencies.

Consumer Spending and Tourism
Consumer spending will slow, as a result of tightening credit as well as weakness in housing-related job sector. The growth in retail spending, while still positive, will slow compared to 2006. Retail sales of certain items such as domestically produced low-MPG trucks and vehicles, will decline. Tourism will remain a bright spot in the economy.

Employment, Wages and Prices
Employment in high tech, skilled trades and services will continue to be strong. Wages will steadily rise for selected job areas, especially in the Northeast. Employers will continue to report shortages in certain occupations. Housing related employment will suffer throughout the period. Energy costs will continue to climb, the recent retreat being only a temporary reprieve. Trickle-down effects on related areas – cost of freight, commercial airlines, etc. will negatively affect those industries. Prices for other items, including food, will be moderate. Inflation will remain within manageable limits. Increases in wages and higher fuel costs will be offset by weakness in the housing industry, increased globalization and the prevalence of world wage rates for certain labor categories.

[LadyShea]

I just saw a little banner ad at the bottom of a news story. Countrywide offering no fee-no points-no credit report-refinance. WTF?? Is it just a bullshit way to try to get new customers? Doesn't seem like sound business practice under the circumstances.

[freemonkey]

Sounds like Countrywide is up to their old shenanigans, doesn't it? Its probably a bait & switch of some kind.

Sauron, we're thinking of Kitsap Credit. But do I understand anyone can join BECU?

[Sauron]

Sounds like Countrywide is up to their old shenanigans, doesn't it? Its probably a bait & switch of some kind.

Sauron, we're thinking of Kitsap Credit. But do I understand anyone can join BECU?

As long as you're a WA state resident, you can join BECU. It might be worth looking online to see what their rates are.
BECU (https://www.becu.org/)

If I wasn't already in USAA, I'd switch to BECU.

[Sauron]

I just saw a little banner ad at the bottom of a news story. Countrywide offering no fee-no points-no credit report-refinance. WTF?? Is it just a bullshit way to try to get new customers? Doesn't seem like sound business practice under the circumstances.

Countrywide never learns. Even when I was calling them to get the private mortgage insurance removed, they were still trying to pitch me a cash-out refi.