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WASHINGTON - Senator John Kerry yesterday proposed $10 billion in special tax-exempt bonds to help troubled families refinance subprime loans, as both Democrats and Republicans in Congress grapple with the national mortgage crisis.
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Kerry, Democrat of Massachusetts, and Senator Gordon Smith, Republican of Oregon, had offered a similar provision in January as an amendment to President Bush’s economic stimulus package. Now, as the housing crisis and grim economic news have dominated the headlines, Kerry and Smith reintroduced the plan as part of the Senate’s housing relief bill. Along with mortgage refinancing bonds, the Kerry-Smith plan would also offer financial aid to first-time home buyers.
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Kerry and Smith had asked for $15 billion.
You might have seen ads lately for a “no-cost refinance” mortgage loan. This appears to be a mortgage program that promises no fees or out-of-pocket expenses when you refinance your existing home mortgage. As a mortgage lender, I’m always suspicious when someone offers a mortgage loan for nothing.
A no-cost refinance is a loan transaction without any upfront fees, including the typical costs such as an appraisal fee, title/escrow fees, loan origination points, lender’s fees and so on. You are a borrower, and your credit profile allows you to qualify for a mortgage at an interest rate of 6 percent on a $500,000 loan, paying one point to the lender and an additional $2,500 in closing costs for a total of $7,500. While these costs might seem like a large investment upfront, your trade-off is a lower interest rate.
With the no-cost refinances programs I’ve reviewed, you’ll complete the mortgage transaction without paying a penny, but you might end up with an interest rate of 6.75 percent or even higher on the same $500,000 transaction. So you’ll end up paying an additional $245 a month or $2,940 annually if you’ve selected the no-cost refinance at an interest rate of just 6.75 percent. If you’re planning on upgrading to a more expensive home in just a few years or if you’re someone that refinances every few years, then paying those larger upfront fees ($7500) for a lower interest rate (6 percent) doesn’t seem to be your best option. That $245 savings each month might ease your budgeting woes in the future and amount to some serious savings if you stick with the mortgage for the long term.
With the no-cost refinances programs I’ve reviewed, you’ll complete the mortgage transaction without paying a penny, but you might end up with an interest rate of 6.75 percent or even higher on the same $500,000 transaction. If we go further, your monthly payment at 6 percent is $2,998, compared to your monthly payment of $3,243 at 6.75 percent. So you’ll end up paying an additional $245 a month or $2,940 annually if you’ve selected the no-cost refinance at an interest rate of just 6.75 percent. You quickly can do the math: $2,940 per year and three years into the mortgage, and you’ve spent $8,820.
This is the point where you should ask yourself what your plans for the future are. What are you going to do with your home and this new mortgage? If you’re planning on upgrading to a more expensive home in just a few years or if you’re someone that refinances every few years, then paying those larger upfront fees ($7500) for a lower interest rate (6 percent) doesn’t seem to be your best option. If your answer is you plan to stay in the home for five or more years, it seems to make more sense to pay the fees upfront for future savings. That $245 savings each month might ease your budgeting woes in the future and amount to some serious savings if you stick with the mortgage for the long term.
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