Refinance Confusion

by Kim from Norwalk, CT, USA

Ask Kate: Refinance Confusion - I had no intention to increase my mortgage balance by $11,000! Hi Kate, I currently have a $158,500 mortgage balance at 6.5%. I am in the process of refinancing at 4.875% with no points.

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My final good faith estimate shoots up my balance to $168,800 consisting of nearly $5800 in prepaids (insurance and taxes) and $2200 in closing costs. Savings per month will be about $255.00 in the payment.

I just can't wrap my head around the numbers. My current mortgage is a 30 year term and I'm 8 years into it. But I had no intention to increase the mortgage balance by $11,000!

Yes, I will skip one house payment and get the current escrowed taxes and insurance back of $3700. Should I put these right back into this new mortgage? I probably won't be in my house for more than a five years, if that.

Or should I pay extra toward the principal each month?

I also have a 50K HELOC for emergency purposes, currently at 3% but it is a variable. Help! I don't know what to do and can't get a clear answer. Closing is supposed to be next week. Many thanks.

Kate Answers: Refinance Confusion - I had no intention to increase the mortgage balance by $11,000!

Hi Kim,

Because you plan to keep your home for only another 5 years, your refinance deserves careful consideration. When you asked for a no points loan, I can imagine you did not expect to add $11,000 onto your current mortgage balance. Talk about refinance confusion!

You have done a good job to break down the 2 major categories of refinancing expenses -- recurring and non-recurring mortgage closing costs. Being armed with this information is half the battle.

I'm asked questions similar to yours often. Take for instance Laurie who asked me if there really are any loans that would make the cost of refinancing worthwhile. Or my answers to Kevin's 7 mortgage refi questions and KS from Tampa who wondered if I would throw some light on mortgage refinance.

It is quite obvious that refinance confusion abounds!

But let's get back to the fact that you will own your house for less than another five years. If you save $255 a month x 60 payments (5 years), that equals $15,300. But considering the refinance will decrease your equity by $11,000, you probably aren't jumping up and down with joy.

But what if you were to put the $255 monthly savings into a dedicated savings account along with the tax and insurance refund of $3700 and the one payment you'll skip? By the end of 5 years, you could add this amount to the profit you'll receive from selling your home.

This simple technique eliminates monitoring that a lender is correctly applying your extra payments to your principal balance for the next 5 years which everyone knows can get dicey if your mortgage is sold.

Now let's get even more into the nuts and bolts of refinancing. Follow the links down below leading to a unique look at refinance.

In addition, by visiting Answers by Kate about Refinancing, you'll discover what other Readers ask along with my solutions to clear up refinance confusion.

Take a moment to bookmark Refinance Confusion to your favorites so you can easily return in the future.

Kim, please come back and visit often. Help me spread the word by sharing my website with your friends. Remember, all of my information is free!

Best Wishes,

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P.S. Is your mortgage refi worth the cost? Here's how to figure a break even point.

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You can also ask Kate about your mortgage at Refinancing Advice The Nuts and Bolts.

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