This is the advice that I just gave one my clients who closed a loan with me in 2005 with (gasp) New Century Mortgage. She was going through a transition in her life and she is not a "subprime" borrower, but a divorce can create subprime situation. What was her nasty rate that I provided her via New Century? Here is her scenario:
- 100% LTV using two mortgages (80/20).
- 1st Mortgage is a 3 year fixed 5 year interest only with a rate in the mid 5% range with a three year prepayment penalty (not optional to waive).
- 2nd Mortgage is a 30/15 in the mid 9% range.
Yesterday I sent out an email to my entire database of clients to provide information about the subprime mortgage industry. Since her mortgage is with New Century, she was naturally concerned and called me. While talking to her, she told me that she is in the process of refinancing her second mortgage to a 10 year fixed rate mortgage. She just wants to lower the rate and pay it off–great intentions!
Here’s the possible problem. When you refinance two mortgages, if the second mortgage is not a "purchase money second mortgage" (the original mortgages from purchasing your home) it is then priced as a "cash out refinance" even if at that transaction, no cash is received by the borrower. This can really impact pricing on the first mortgage when it’s time to refinance.
"Loan to value " is just one of the factors in pricing a rate for a mortgage. With a cash out refinance, if your loan to value (new loan amount/value of home) is:
70-80% LTV may equal 0.50% to fee (or approx. 0.125 – 0.250% to rate)
80-90% LTV may equal 0.75% to fee (or approx. 0.325 – 0.625% to rate)
Here’s my advise for this client:
Her prepayment penalty will be over next summer and since she does want to stay in her home, I advised not refinance the second mortgage. The refinance proposal from the credit union does provide a better interest rate and would shorten the term of her second mortgage to a 10 year over a 30 year amortized with a 15 year balloon, and it would increase her mortgage payment over $100 per month. I suggested that she keep the current second mortgage and apply the $100 extra she’s willing to pay towards the principle of her existing second mortgage.
Then, next year when her prepayment penalty is over, refinance both mortgages at that time and receive the best rate possible (non-cash out) for her new mortgage. And reduces her closing costs to one mortgage next year instead of closing a refi for the second mortgage this year and again for refinancing the two mortgages next year.
Alas…something good to come out of contacting my clients about the current subprime scenario!