I'm a 70 yr old retired female with limited funds. I have a home mortgage with Chase Bank (into the 8th yr of a 3 yr loan) - interest rate is 6% fixed; balance $200,000, principal & interest $1340/mo.. My house is valued at approx. $375,000. I live in Oxnard, CA (southern Calif). A rep from Chase called me last week & offered a Streamline loan - 5-3/8% fixed, 30 yrs, with fees rolled into the payment; and my mortgage balance increasing $4,500. The mortgage payment would be $1146/mo. (savings almost $200/mo.) I don't know if I should agree to this -- as $200/mo. less may not be enough in a few years. Question: Do you recommend I take this refinance & in a few years do a Reverse Mortgage? Or - should I just wait a few years and do a Reverse Mortgage. I hate touching my present loan - but need more money. Banks charge exorbitant fees & I feel nervous dealing with them as I don't want to be scammed. Thanks
This is an excellent question. Borrowers have to make this decision every day when deciding whether or not to refinance a loan and you really need to consider all of the pros and cons to determine which is the right path for you. If you refinance, you will save $200 per month, but then you will raise your mortgage balance and begin payment on a new 30 year loan. If you look at just the hard numbers, it will take over 22 months at $200 just to recoup your initial $4,500 investment. That does not take into consideration the additional interest that you would be paying on the higher loan balance (not a lot, but an additional $240 or so in the first year).
Since you pay the most interest on a 30 year loan in the first years, after 8 years more money is going toward your principal reduction now that it would if you refinanced at this time. In other words, not only will your balance be higher, but it will remain higher longer. If you plan to get a reverse mortgage in the next 3 years anyway, you probably would never even recoup the cost of the refinance.
Having said that, what will $200 less payment now do for your quality of life? Only you can quantify if the lowered payment is worth it to you and your daily living situation. The numbers say don't do it for a loan you think you might keep for only 3 years or less, but numbers can't determine your living situation and whether or not $200 a month would really make a difference that is bigger to you than the bare numbers show.
One last thing I would caution. I don't know what kind of loan you currently have, but 5.375% AND $4,500 added to the principal balance sounds extremely high in today's market! If you determine that the lower payment in the short run is the way to go, I would really suggest that you shop around and compare rates. If you have the income to support a conventional loan at less than $417,000 loan amount, I cannot see any reason why you could not get a loan under 5% at that same fee structure in today's market.