Refinancing Made Easy: Our Story
Published on - February 3rd, 2009 (Modified on - October 28th, 2010) (by J.D. Roth) I recently had lunch with Winston, the Get Rich Slowly intern. We talked about our families, our finances, and our plans for this site. Winston mentioned that, at my prompting, he and his wife were refinancing their home. “The local credit union was able to give us a deal,” he said. “We got a 15-year loan at 4.625% for just 1/3 of a point.”
“I’m embarrassed to admit that I haven’t done anything about my mortgage,” I said over my plate of General Tso’s chicken. “I wrote that article, and meant to refinance, but then I got sidetracked. I should do this tomorrow.”
I paused for a moment and then added, “Actually, I guess I have done something. I filled out the information for Lending Tree, but I’ve decided not to have anything to do with them. They send me email every frickin’ day. I hate that. I finally wrote them a nasty note telling them to go away.”
Winston laughed. “That’s why we went with the credit union. We were going to use another guy in town who had a slightly better rate, but he was a jerk. He wouldn’t leave us alone. We used the credit union instead.”
Heeding my own advice
The next morning, I called two places: my credit union, and the company that currently carries our mortgage. The credit union never got back to me, and I had to wait on hold for about half an hour with our mortgage company, but eventually I did get to speak to somebody. “I apologize for the delay,” he said. “We’re swamped.”
Because we were dealing with our existing mortgage company, and because Kris and I have made huge strides in our finances during the five years since we bought this house, qualifying for a refinance was easy. “This is going to be a breeze,” the mortgage guy told me after he saw our credit scores (J.D.: 792, Kris: 809). “Other than your mortgage, you don’t have any debt!”
As a reminder, our current mortgage balance is $207,000 at 6.25% with 25 years remaining on the loan. Our monthly payment (including taxes and insurance) is $1671, but we pay $2000 every month in an effort to eliminate the debt sooner.
The mortgage guy quoted me two options:
- A 30-year fixed rate at 4.96% with no points and closing costs of $2556. Our monthly payment (including taxes and insurance) would be $1409.
- A 15-year fixed rate of 4.625% with no points and closing costs of $2556. Our monthly payment (including taxes and insurance) would be $1909.
I completed the refinance application over the phone. The next morning, UPS delivered the documents for us to sign. It wasn’t until last weekend that I had time to read the paperwork, though. I called back with several questions, gathered the required documentation, and yesterday I sent the forms back to Maryland.
Assuming no hitches, we should have a shiny new lower mortgage rate in about a month!
A difficult decision
To this point, refinancing has been simple. The most difficult part of the process is choosing which term we want: 15 years or 30 years. It’s true that we’ve been paying $2000 per month toward the mortgage, so we know that we could manage the $1909 payments for the shorter term. On the other hand, dropping our required payment to $1409 gives us a great deal of flexibility should something go wrong.
Kris, the Excel-master, created a financial spreadsheet to play with various repayment plans:
You can also find a loan calculator to test out different scenarios.
Ultimately, we chose the 30-year mortgage. It’s worth it to have the increased flexibility. Since we hope to continue accelerating this loan, our final payment is projected to be around 2023, only fourteen years away. We made extra sure that this new loan agreement had no penalty for early payoff.
Stephen Popick, the administrator for the GRS discussion forums, also refinanced recently. He managed to pick up a 4.375% rate for 15 years, freeing an additional $300 of cash flow each month. Stephen, an economist, writes: “Inflation right now is at an annual rate close to 4%, and the five-year average is 3.2%. So when you’re refinancing at rates around 4% you’re paying close to inflation, which essentially means that you’re paying little to nothing in net present value with your loan.”
That’s what makes an economist happy, apparently. Me? I’m just glad to trim $262 off of our required monthly payments so that even more of our extra money goes directly to paying down the principal each month!
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We refinanced after your article about it right before Christmas. We got 4.825% on a 15 year with right around $1600 in closing cost (no points or origination fees). We only had 8 years left on our existing 15 year loan but we refinanced to another 15 year mortgage. It lowered our payment by almost $400. Our plan is to pay at the same rate we have been paying and still pay it off in about 8 years. But, this gives us the flexibility of a lower payment should a job loss or other financial crisis occur.
And, like you, the whole process was quite easy.
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JD
I even ran that mortgage by my fellow economists. They’re also refinancing I think.
JH, aka Stephen
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I called my mortgage company right after I saw your article in Dec. of 2008. My wife and I bought our first home in earlier that year so I wasn’t sure how we would make out refinancing that early. We got a new rate of 5%, down from 6%, and we would be saving a little over $150 on our monthly payment.
Since it was an FHA loan he was able to “streamline” the mortgage which saved us a considerable amount on the closing costs. It ended up costing us about half of what we were paying for a monthly mortgage payment.
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Refinancing was dead simple through my credit union, and my previous mortgage lender called me *yesterday* a week after I finished refinancing to reply to the emails I sent *weeks ago* through their web site asking for my options. He didn’t seem to be aware that I’d already left his institution.
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We are also in the middle of a REFI, we went with a 25 year loan (we are 4 years into a 30 year term at present). We could have gone with a 20, 25 or 30 year at our locked in rate 4.78 (no points). We decided to go with 25 year term because while we would like to pay off the mortgage earlier, and we plan to, we want to have some flexibility if and when we have kiddos. But we didn’t go with 30 years because we didn’t want to add more time onto our current loan.
Now we just have to get past the appraisal, cross your fingers for us its tough in So. Fla., and we’ll be ready to go. Our appraisal was more in depth than the last time around. http://adventures-of-sam.blogspot.com/
I watched the rates from November into January and locked in mid-Jan. I missed the bottom by one day with my bank. Are rates going to go lower, some say yes and some say no, so we went with a known rate. Since then the rates have come back up with my bank.
If we get past the appraisal, we’ll save about $200 a month on our mortgage and $80,000 in interest over the course of the loan. We plan to keep paying our current mortgage payment so we’ll be prepaying $200 a month.
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JD,
Thanks for using numbers and showing us exactly what your situation is in regards to what most people consider a very personal topic. A real-world example is really invaluable.
Also, I agree with your decision. The flexibility of the 30-year is a huge factor in case of any emergencies.
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We looked into refinancing right after your last article on the topic. I called my current lender and couldn’t get through. I used their online form, which indicated I’d receive a call back within 15 minutes; it took them two days to get to me. They, too, said they were swamped. While the rates they provided were good, the closing costs were extremely high. Also, the woman I was working with kept sending these horribly written emails with loads of typos and nearly incoherent sentences. There were emoticons scattered throughout each of the emails. As a result of the high closing costs and the chatroom style of the person we were working with, we decided to abandon it. I couldn’t help but wonder in what other areas this company is unprofessional if they allow their employees to be so lax with basic communication. We may hold out now to see what Congress does. Our current rate is 5.5%, so we’re not in bad shape for now.
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I tried the Lending Tree route as well and was mildly disappointed in the rates I was quoted. Anywhere from 4.5% to 5.5% but all had points and/or fees that made me say “wait a minute.” Not only that but I get 12 phone calls and 5 emails each week. Looking at these rates against the backdrop of a local bank with 4.25% rates (no points) and our nanny state Federal government attempting to offer 4% fixed 30 year loans and I’m glad I waited.
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While it’s true that a 15-year loan always pays off in 15 years, I agree with J.D. that opting for the 30-year mortgage provides a little more flexibility month to month. In a pinch I would rather owe $1400 per month than $2500 per month. In good months it might make sense to throw $2500 at the mortgage, but it is nice to have that as an option, rather than a requirement.
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Suze Orman gives the following advice re refinancing — if you’ve paid off say 5 years on your current mortgage, then you should refinance into a new 25 year loan. Please don’t make the mistake of refinancing into a 30 yr. loan, for that extends your total mortgage term to 35 years.
This really makes sense to those who do not intend to do any prepaying once they refinance.
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Does anyone know if you can refinance student loans?
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I think JD made the right choice as well on the 30-year. Since you would be on schedule to pay it off in 14 years on a 30, it made perfect sense to go ahead and give yourself that cushion should you need it.
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I think you should write some articles for those that want to take advantage of these rates and have great credit, but are having trouble getting financing because we don’t have enough equity in our home because our value has dropped so much. It’s a bit frustrating because every loan officer says we are perfect to work with its just we don’t live in the best of places and our value has dropped considerably in the past 5 years. Yuck!
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@ Kim – sure you can…if you can find someone willing to do so. When you consolidate you are essentially refinancing several small loans into one big one. The big one pays off all the small ones and you have a new rate based on market conditions and your specific risk profile. It’ll be harder to find someone to refinance these than a mortgage, but it’s definitely possible. If you have a home, you could even refinance extra out of it and use the money to pay off your student loans if they’re at a higher rate than current rates.
We are thinking of refinancing a rental property we own but want to wait to see what happens with the stimulus package…it’s looking more and more like there is going to be something in there concerning rates. Our home-home is paid off.
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I’m actually holding off. Some Senators are trying to add a 4% interest rate into the stimulus bill for those who want to refinance or buy. I’m going to wait to see whether it flies. Because then that could be a really sweet deal.
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Since you didn’t go with the 15 year (that would be my advice), do this. Pay the 15 year mortgage’s payment. Just set that amount up for your automatic payment on the 1st of every month and let ‘r rip.
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We decided to refinance after my credit union sent us an email a few weeks ago promoting 4.99%, 15 years with NO points, NO prepayment penalties and NO costs. I immediately applied online and was approved that same day. We only have 10.5 years left on our existing mortgage that has a rate of 5.74%. But when I apply our current payment to the new mortgage we will pay off our new mortgage in less than 8 years and save over $9000. We are going for it!
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I have been meaning to call about my refi with my credit union ever since I read your first post.
I rent out my home and live in an apartment- so it is an investment property now (it wasn’t when I first bought it) and so I was wondering if anyone else has had success refinancing their rental properties…
I have good credit- the house is in a market that has held up pretty well and actually appreciated over the three years I’ve owned it (in SLC near the Univ. of Utah)
Anyways, would love to hear from folks who have successfully done this. I am waiting to hear back from my mortgage counselor at my credit union. Thanks for all the great posts on here everyone…!
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I have a question with regards to refinancing, not sure anyone will know the answer. We have an 80/20 loan. The 80 is fixed at 6 and the 20 is variable. Is there a way to refinance in to ONE fixed rate mortgage now that we are in a better position financially, or does that even make sense to do.
Also, if you are not sure you are in your “forever” house and you may sell in 3 – 5 years, does it make sense to refi still?
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JD: Great for you!
And Nicole: if you originally financed with an owner occupied you probably already have the best rate you will get. Rental properties are going to finance for 1-2% higher than owner occupied. They are significantly more risky and the prices reflect that. And if you don’t have at least 20% equity in it most banks won’t even talk to you. 10% was the minimum four years ago when the market was hot, and they have really backed off over the past couple years after getting burned.
Other than that, I’m not reading comments today because reading the deals everyone got that are better than mine will make me cry. But I wanted to say that I find it interesting how much we are willing to pay on a mortgage for good customer service. I was looking at Amerisave and my local broker. The local broker was a little more expensive when I was looking so I decided to go with Amerisave, but that broker wouldn’t call me back and just blew off my concerns about locking when things were looking really good. He wound up losing me as a customer and I went back to my broker I had faith in who has always been spot on.
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I’m trying to convince my friends to refinance. They got an 80-20 piggy back loan that they really can’t afford, and the piggy back has an adjustable rate that is going to reset to 25 percent!!!! It’s also Interest Only. I know, awful. But they are resisting because they can’t afford to pay any more than they already are. They are going to have to because they are going to pay more either way, and if they don’t refinance, they will likely lose their house. Ugh.
As for us, we did a 15 year fixed rate on our current house. We’ve lived here 3 years and we’ve paid it off already. We used the money from the sale of our last house to pay half of it, then sold some stocks right before the big market drop to pay some more, then just worked like hell to make extra payments.
We lived through a lot of uncertainty with our mortgage and our house due to Hurricane Katrina, so owning our house outright because No.1 priority for us.
JD You made a good choice, and the rates are unbeatable. If you can keep making extra payments, you’ll have that house paid off in no time.
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It would be a horrible decision to mandate 4% mortgage rates across the board. The 4% rate will likely only apply to a small subset with the most pristine credit.
Further, it would be very difficult to find buyers who would want to invest in 4% loans.
http://blogs.wsj.com/economics/2009/02/02/lower-mortgage-rates-hard-to-achieve/?mod=googlenews_wsj
Further, the main thrust of the 4% mortgages would NOT APPLY TO REFINANCES. They’re almost strictly being spoken off as new home loans. This is an important point.
http://www.msnbc.msn.com/id/28165488/
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Shara you are great. Thanks for the info!
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I have thought about refinancing but I have an 80/20 loan and everything I hear is that I will have to pickup PMI because noone is willing to mess with those second loans anymore. Also at what point is it worth while, I currently have a 5.65 on my primary mortgage, is less than 1% worth it?
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We went with what Suze Orman recommends, according to Sandy E, we are 4 years into a 30 year mortgage so we are refinancing into a 25 year mortgage so we don’t add any more time to our loan. We will continue to pay at our current rate so we will cut more time off our loan.
We would also like to refi two of our investment properties but we are focusing our efforts on getting our primary home taken care of and then we will look at our investment properties. One was a primary home (Mr. Sam’s) when he bought it so its doubtful that we will get much of a better rate now if we refi as a secondary home and the other was an investment property that we’d like to look at refinancing but we doubt that we would get a good enough appraisal (we bought it in 2005) and right now we don’t have PMI as we put down 20% but the value has likely dipped.
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Where are you all finding such good rates? We live in metro Detroit so it must be our area, the rates are still to high. We have 2 mortgages (one was for a remodel a few years ago) and we’ve been paying both down early. One is 5 7/8% and one is 6 1/4% – we paid the first down early and when we added the 2nd with the higher rate we now pay that one down. Our credit scores are both in the 800′s and although home values have gone down we have enough equity in ours to not worry. Even through the credit union, the lowest rate without points is 5.5%, with .5 point is 5%.
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We had a similar experience as far as credit scores and bankers surprise that you did. Our banker said we had the highest score he’d seen all year and that the loan (we were moving so we were taking out a loan instead of refi) would be a breeze. Funny thing is my credit score was 5 points higher than my husband’s and I don’t even have an income!
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I went with a mortgage broker, who found a lower rate than I could have on my own. I agree with the person who warns you that you are extending the life of your loan, JD. You should see if you can get a 15-year loan through a mortgage broker at a low enough rate that you have the smaller-size payment AND a short loan term. I got 10 years at 4.5% — it was a smaller loan amount, but the monthly payment is $673. I’m overpaying each month and you can imagine how fast this mortgage is disappearing. Also, inflation is coming up on 4% per year — the $1909 won’t seem like a very big payment in a few years’ time.
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I don’t think much about how much I’m “saving” each month in payments — my concern is the interest rate. Given that I’d want to be out of debt as fast as possible, I don’t aim for lower monthly payments on anything. Rather, the thought of paying interest to the bank drives me crazy. For that reason, I would have chosen the lower 15 year interest rate. Given that you and Kris already pay more than $1900 per month and given that you are both responsible with your money and are unlikely to find yourselves in a dire financial situation, it seems like it might have been wise to choose the loan with the lower rate.
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I would love to refinance to take advantage of lower interest rates and lower my payments. At this point, any breathing room in my budget would be a blessing. However, since I purchased in mid-2006, my equity has gone down the toilet and I’d end up paying PMI—decreasing any savings I’d see in my monthly payment. Add this to the fact that I’m staying put—for the short term—but when the market improves, I want to sell my house and get into something cheaper. So refinancing now (unless it was completely free) wouldn’t make much sense. . . .
I like the idea, though, of taking out a 30-year mortgage and then setting up your payments to match the 15-year mortgage payment. Although the interest rate on the 30-year is a bit higher, you’ll still end up saving literally thousands in interest payments.
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I should note that although Kris and I have opted for the 30-year loan, we have until a few days before closing to switch to a 15-year loan instead. We’re not locked into the longer term yet.
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J.D. you can always get a 20 yr. loan too — that’s what I did once when I refinanced my house some time ago. Run the numbers to see if you’d be more comfortable w/a 20 yr. than with the 15 yr., and you can always prepay too.
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JD: Have you heard of the Total Money Makeover by Dave Ramsey? I don’t have the book to reference right now, but I think he gives specifics as to why people shouldn’t refinance and/or taking the 15 year fixed mortgage over 30. Additionally, I wanted to know if you or anyone had an opinion on his book.
Thanks!
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Can you explain what you mean by “accelerating” the loan by $100 a year? (and what’s your starting point).
Thanks!
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I got our mortgage through a broker locally five years ago and I also got quotes from Lending Tree. When I quoted the lower closing costs from some of the LT people to the local broker, he matched them — no problem. Now I just went the LT route last week for a refi. My FICOs are all over 800, so I’m telling all of the lenders they have to be extra competitive to get me. We’ve also called our credit union and I intend to contact our local guy again. Congrats on your rate and 15 years — woohoo!
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PS — Is Winston willing/able to name the company he used?
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If you have great credit, can one refinance if you have less than 20% equity in the home? When researching, I get conflicting information.
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Hi J.D.,
My two cents: I’d go with the 15-year loan. Getting the 30-year loan is a decision based in fear (“I might not have enough money to pay this in the future.”) The 15-year loan is a decision based in abundance (“We’re already paying that much every month and have a substantial cushion.”) You are responsible, have a safety net, and have no other debt. In addition, your blog income is going up over time. Make the abundant decision instead of the fearful one…and reap the rewards of paying your house off early.
-Erica
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@Gary LaPointe wrote: Can you explain what you mean by “accelerating” the loan by $100 a year? (and what’s your starting point).
About this time last year, I wrote about our mortgage prepayment plan. Our monthly mortgage payment (including taxes and insurance) is about $1670 per month. Our goal was to pay $2000 a month, effectively contributing another $330 to the principal.
When Kris wrote the thing about “accelerating the loan by $100/year” that’s shorthand for a plan we keep talking about. We’re paying $2000 a month now. But what if we pay an additional $100 monthly every year? So, in other words, what if we paid $2100/month in 2010 and $2200/month in 2011 and $2300/month in 2012?
We haven’t actually implemented this yet, but it’s something we’ve considered.
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Also J.D., as I mentioned we are going with a 25 year REFI and my bank offers 15, 20, 25 and 30 year fixed rate mortgage products. You might want to see if you can go with something in between 30 and 15.
And for those who are interested in managing their own escrow payments (i.e. saving and earning interest on monies that are used to pay taxes and insurance) REFI is a great time to opt out of bank escrow payments.
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Interesting post about usda home loans in rural areas. Apparently, the qualifying is pretty straight forward, with better interest rates.
http://www.ireport.com/docs/DOC-206524
http://www.rurdev.usda.gov/rhs/common/indiv_intro.htm
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We’re British immigrants and moved to the US 4yrs ago. Although we were debt-free when we arrived (and put down 20%), with no credit rating here we couldn’t get a fixed rate loan (very unfair!)All we were offered was a 5/1 ARM at 5.25%. This is due to adjust in Jan 2010 and could go as high as 8.5%.
For the past year we have been talking about refinancing into a 30yr fixed. We have 3 kids, the eldest starts college in Fall 2010, so we will need flexibility for several years ahead. We have a small car loan which we hope to pay off by this summer and will then be debt-free again. Our credit scores are as good as they can be when you only have 4yrs of history (unfair again!)
So far we’ve been offered 5.25% at our local credit union, but the closing costs, prepaids and reserves are horrifying (they want $8000). We have nearly 40% equity so no PMI, but I hate to lose those 4yrs that we’ve already paid when the ARM was not our choice in the first place. Our present bank will continue our amoratization schedule if we continue with them though. We plan to call this week and see what they’ll offer. In November it was 6.25% so I don’t hold out much hope for anything under 5%.
This is a totally new game for us and we already feel scammed by the system. Any advice would be gratefully received.
Thanks to you too J.D. for your posts on this subject. They’ve really helped us to understand the mortgage system here.
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Refinancing rental properties is going to be tough right now. Most rates for rentals are 1-2% higher than owner occupied housing and banks are requiring 20% down. I checked into refinancing my rentals when the 30 yr rate was around 5%. The best I could do was 6.75% and I have 20% equity.
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As a person who’s never had a mortgage, can someone explain to me what the heck a “point” is, why it matters, and how to translate it into a unit I might care about, like dollars?
I’ll gladly trade you some “points” for better interest rates. We can go play some one-on-one basketball, and we’ll start the score at two-nothing, your favor. Now can I have my 4% mortgage rate?
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I tried calling my lender to refinance, but I bought in 2005 and the LA market has been hit hard. Based on their required 20% equity and their online home price evaluator, I’d have to come to closing with $153,000! I owe $325,000 so I would have to pay off half of my mortgage to refi. There are a lot of people like me who bought in the last 7 years and can’t refinance because we’re upside down.
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You’re now self-employed, right? Did you find it any harder to obtain refinancing as a result?
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@Tyler
Good point!
A “point” in mortgage parlance is 1% of the loan. So, in Winston’s case, one-third of a point is one-third of 1% of his loan amount.
Points are paid to buy down the interest rate. In 1998, for example, when Kris and refinanced our house, we paid some amount (one point? half a point?) to buy the interest rate down from 6-1/8% to 5-7/8%. This can be a fantastic deal if you plan to be in your home for a while. It can be lousy deal if you sell before recovering the costs of the points.
It’s difficult to compare mortgages without knowing if points were paid. A mortgage at 5% and no points is much better than another at 5% and one point.
Ultimately, however, the important thing is to look at the total cost of the loan (including points, interest, and closing costs) in relation to how long you expect to be in the house.
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Instead of paying the 15 year amount into the 30 year mortgage, why not pay the minimum to the 30, and pay the extra $600 into an external investment?
When the external investment equals what you still owe on the mortgage, pay the house off outright.
This works on the theory that the stock market (or wherever you invest the difference) will do better than 5% over the next 15 years or however long it would take you to pay it off.
I think that’s likely.
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Mike wrote: You’re now self-employed, right? Did you find it any harder to obtain refinancing as a result?
Very astute question. Very astute.
My answer is: I’m fortunate not to have to find out. We were going to have to do some sort of rigamarole to verify my income (which I’m sure would have been a nightmare to complete), but the mortgage guy ran the numbers just on Kris’ income alone. She just barely managed to qualify for the mortgage herself, meaning that the application is based on her income alone. (If she made $100 less per month, we’d have to go through the process of verifying my income.)
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So it’s sort of like a “down payment” on the loan, except that it doesn’t actually go toward paying the loan off? A $100,000 loan with a 5% rate and 1 point would have a $1000 fee paid at closing, with the loan still having a balance of $100,000, correct?
Just want to make sure I understand that correctly.
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