Does anybody have any idea how mortgages work, especially in California?
My dad got a $120,000 mortgage on a 2nd house 5 years ago. Now he has an offer of a $200,000 mortgage at a lower interest rate.
He still owes $112,000 of the principal of the other mortgage. He wants to pay it off with the 2nd, so he'd be getting an extra $80,0000.
But can you do that or is there some penalty? Will he actually be able to pay off only the principal, or will he have to pay the 30 years of interest on the first mortgage anyway?
*from the accountant*
Why wouldn't he just get a mortgage for the amount he owes? Looks like they're trying to stiff him on interest for another 80 grand.
Why would you pay off one mortgage with another if your adding on extra interest for 80,000 dollars? There have to be other places that can give him something closer to what he owes.
Yes, there generally is an early payoff fee.
No, he wouldn't have to pay ALL the interest, just the interest to the point of payoff.
*end accountant*
Does that help any?
~Rico
So the reason he's received an offer for a mortgage of a higher value is that property prices have risen. This is a way to cash in on that without actually having to sell the property.
So yes he can do that, but he'll have eaten several months (years?) of interest costs of the first mortgage already. Btw this paying off of old mortgages with a new mortgage is known as refinancing. But your father'll essentially have to start paying off a $200000 mortgage from scratch - although the rate is lower, it's possible that the monthly payments will be just the same since the principal amount is greater.
Personally, i'd just pay off the first mortgage and look towards selling the property some time in the future. There's no reason to stick yourself with the added interest/handling fees of a new mortgage unless you need the $80000 right now.
I am a Finance undergrad, not a professional. Take this advice with several bags of salt.
EDIT: Oops, kinda got beat to it. Eh, this is just my rambling based on what I know from past experience with what my parents have done or thought about doing.
I'm no financial expert, but I thought the reason for doing a mortgage like that is so you can end up with a lower payment, and a wad of cash to spend ($80,000 in that case). You'd be making payments longer with the new mortgage, but you'd be making smaller payments (that's usually the case I think, as there isn't much point to doing this if your payment is the same) and you have some cash for repairs/improvements to the house (something one may consider if they plan to stay in that house for a long time), or whatever you feel like spending it on.
This kind of explains what I'm getting at:
