Mortgage refinancing

I must be good people.  Or at least people with good credit.

Tonight I received an letter, via UPS Next Day Air Saver from Detroit, from CitiMortgage.   I have my primary mortgage and a second mortgage in the form of a home equity loan through CitiMortage.  So they know my payment history, and I am sure checked my credit score.

Now this offer is not that great.  First thing that they do to mislead you is at no point do they talk about the size of the loan, other than with this footnote, “Your new loan and payment is based on an estimated loan balance, including interest.”  While the size of a loan should be a minimum piece of information provided, although ideally the total cost of principal and interest would be included, I can’t find it on this piece of paper.  This matters because who is paying the closing costs, how much will the starting principal be.  I can grab my most recent statement and see exactly how much principal left to pay on my primary mortgage.  I will come back to this issue later.

What I get is pressure, because if I respond within 3 days, by February 28, 2008, I get a $500 credit.

I also get a grid that compares the current and the refinanced loan.  This shows both programs are 30 year fixed, that my current rate is 0.625% higher than the new one, that the principal and interest (what the mortgage company gets) of my monthly payments would go down 11.75, and what I see as very strange is that the tax and insurance amount goes up 15.78%.   The total monthly payment would go down 4.28%.

Second problem and it is huge, is why are they showing the tax and insurance as to different amounts.  The movement up or down (you never see down) in this component of the payment will be the same whether I stay with my current mortgage or refinance it.  So to use two different amounts is so bizarre.  In fact using the higher tax and insurance rate for the refinanced mortgage hurts the case for refinancing as the difference in the total payment would have been a reduction of 8.57% (if both had the same tax and insurance amount) rather than the posted 4.28%.

Now back to the issue of not knowing the amount of this new mortage, how much principal I would owe the mortgage company.  This matters a lot especially in a market with falling housing prices.  If I were to refinance and the amount of principal owed went up significantly and the value of the home went down significantly, I could owe more for my house than I could sell it for.  This leads to three options.

  1. Stay in the home and pay down the principal and eventually have some equity built up.
  2. Walk away, take the black mark on the credit score with the bankruptcy, and let the mortgage company eat the loss.
  3. If move before I start to have equity again, then pay to sell my house.

Now since they are unwilling to disclose the amount of the loan, I took a lazy approach to see if this is a good deal for me, with the signs pointing to no.  I bought the house in May 2000, and refinanced in September 2001.  So I have about 283 months of payments left.  I took that amount and multiplied it by the current amount of principal and interest I pay to calculate the total amount left.  Then I took 360 months (3o years) and multiplied it by the refinanced principal and interest amount.  What I learned from this is that I would pay in principal and interest 12.27% more with the refinanced loan over the whole length of the two loans.  That is not a good deal for me in my current financial status, plus I would rather pay off my house if I stay here at 60, not 67.

I have no fancy economic degree or background.  I was and am very good at math, and understanding information or the lack of it.

-Josh

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2 Comments

  1. Jason Elder said,

    February 25, 2008 at 7:00 pm

    I found your site on google blog search and read a few of your other posts. Keep up the good work. Just added your RSS feed to my feed reader. Look forward to reading more from you.

    – Jason.

  2. Edwin said,

    November 22, 2008 at 8:43 am

    Thank you very much for your post. Absolutely excellent information and very useful for me. Great done and keep posted. Looking forward to reading more from you.


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