Loan Refinance Options Limited On A Low Balance Loan

Q: My house is worth about $130,000 and I owe $48,000 on my home loan. I have a balloon payment coming due in February. I don’t have the cash, so I’ll have to refinance.

I have been approved for a rate of 4.3 percent, but I will have closing costs of $2,800. I do not plan to sell my house. My credit score is above 700. What are my options?

A: I’m confused by your question. Are you asking why your closing costs are so high relative to the amount you’re borrowing? That could be a function of the state in which you live or the fact that you are borrowing so little money. Loans under $50,000 are just as expensive for lenders to do as loans that are for $100,000 or more.

Or, if you don’t have a high credit score, you might have to pay more in fees in order to keep the interest rate low.

I think your rate is very good. But is it for a 15-year loan or a 30-year loan? If that’s the rate for a 30-year loan, you might be paying to buy down the interest rate. If it’s for a 15-year loan, can you pay off the loan even faster, say in 8 years? The faster you pay down the loan, the more you’ll save.

You need to have an understanding of the fees involved in refinancing a loan. Some of your closing fees will be paid to the lender; other fees will be paid to the settlement agent, while other fees will be paid for the appraisal and credit report for your property. Once you understand the fees and who gets paid for what, you can shop around to determine which lender can give you the loan for the lowest cost.

There are lenders in some states that will roll the closing costs into the loan. You will pay a higher interest rate on the loan, but some or most of the closing fees will be paid by the lender. You, in turn, will pay more on a monthly basis as a result of having a higher interest rate on your loan.

To find out if you’re overpaying for your loan, shop around. You should speak with several different types of lenders, including a credit union (if you belong to one or can join one), a local bank, a big national bank, and perhaps an online lender. Compare the rates and fees with each one to figure out if you’re getting a fair deal.