Need advice on refinance strategy

[phxphun]

I have a goal of going for a construction loan late this year.  I'm trying to decide whether or not I should refinance my existing loan now?  Here's my situation;

I currently have a $233K loan on my existing home at 6.125% ARM that adjusts Nov 2011. My home is probably worth $240K (was $320K 2 years ago). 

My plan is to apply for a construction loan in Dec '09 to build a $500K home on land I own in full (land valued at $200K). My credit scores are 780+ and I have $100K cash to put down. I hope to have the new house finished in mid-2011.

I don't want to sell my existing home now if possible because of its lost equity. If I had to sell now, I could, but I'd rather wait until the market rebounds. But I'd also like to move forward with the new home construction.

All things considered, would now be a good time to refi the existing home to bring my payment down? I'm seeing rates of around 4.4% to 5.2%, which would lower my payment considerably and help with cash flow during my construction period. But are there any implications on my construction loan if I refi now?

What about an 'interest only' loan... would that be good in this case? Any advice is appreciated!

[ShanetheMortgageMan]

It'd come down to when you are going to sell that home.  If you are going to "ride it out" then figure you'll have the loan for longer, so the longer you have it, the more you would have saved be refinancing earlier.  However if you are going to try and sell this home as soon as you complete the new home (later this year) you likely won't have saved enough money during that time period in order to recoup the closing costs you paid for the refinance.  If I had an ARM adjusting in 2 years, on a home that is losing value, at an interest rate over 1% higher than current market rates on a significant ($150k+) loan amount... I'd look into the refinance option because you never know what your options are going to be later.  Once you know the refinance option then you can determine if it fits your plans.  No complications on your construction loan unless you've already started it.

[phxphun]

Thanks ShanetheMortgageMan! for the very good information.

Just one clarification...  I'm actually not going to complete the new home late this year as you thought.   Late this year is when I'm going to apply for the new home construction loan.  I don't expect to finish the new home until late 2010 to mid-2011.  I probably won't try to sell my current home until then.  So with that in mind, and considering what you've explained, I'll probably have plenty of time to recoup the closing costs.  I'll look at it this way and do the calculation once I get some exact numbers.

When I asked about how the refinance might possibly complicate the consrutction loan process later this year, I was wondering about how it might impact my credit scores and therefore possibly impact my construction loan interest rate.  Is there still no issue there?

[ShanetheMortgageMan]

Ah I gotcha, yeah well if your plans are to start later this year, then the chances that a refinance now will help you are pretty good.  Given your equity position it looks like you'll either have to pay down your balance to go with conventional financing or go for an FHA refinance.

Well anytime you get a new trade line you are going to change your credit scores somewhat, figure they could be impaired a little bit for the next 4 months or so after the refinance is completed. 

[phxphun]

Thanks again!  That's good news.  If I'm careful with timing, I should be able to make it all work.

Just one correction to something I stated earlier; I thought I was about $10-15k above water on my current home loan.  Looking at some data this morning, I may actually be $20k upside-down.    So I guess the only way I can refi would be to pay-down my loan some, as you stated. 

One last thing (really ), in general, what are the pros/cons of conventional compared to FHA?

Message Edited by phxphun on 03-28-2009 08:36 AM

[ShanetheMortgageMan]

Pro's for FHA are lower equity requirement, rates are better for lower scores, monthly MI is often cheaper.  Cons are you have to get an FHA appraisal.

Pro's for conventional are slightly lower rates than FHA if you have the best (740+) score, no upfront mortgage insurance premium, and no monthly mortgage insurance at 80% or below.  Cons are you have to deal with PMI requirements if you do not have 20% equity.

[phxphun]

Excellent info...  Thanks much!

[ShanetheMortgageMan]

Welcome!

[Anonymous]

Hello,

My current rate is 6.75.  I desperately need to refi.  I just found out today my fico score is 770, great... but I think I have a bad debt to income ratio.  My mortgage balance is about 350K.  I had refi'd with cash back, which is why it's more than what I should actually owe for the house.

My home is worth about $450K, down from about $500K.  a couple of lenders, including wachovia my current lender said I can't be eligible because of my debt to income ratio.

If I am able to pay my current mortgage on time no problem forever, why are they preventing me from possible lowering my monthly payment due to the lowe interest rates?

How do I beat this thing and get a refi loan?  What is wrong with my situation?  Help.  Is there anyone out there that I can talk to who is not out to make money from me so that's why they hide from giving me good advice?

Desperate.

Thanks.

[Anonymous]

Why are you trying to build a dream house this time? Just to let you know from my experience. I build my dream house for over 10 months cost about 950K for land, construction of new house and landscape. I was know very in construction bussiness and to manage contractors. Now I look back and think I never do it again because of with that amount of money in this market I can buy a BETTER house and don't need to spend 10 monhts of part time job to oversee the construction. Please think twice and think again before sign a contract if you didn't sign yet.