Refinancing made easy: Our story

While surfing around this evening, I found a story at USA Today about how mortgages are at a 37-year low. A 30-year fixed-rate mortgage averages about 5.28% right now.

I don't usually pay much attention to these stories. We refinanced our first house (from a 9% 30-year loan to a 5.75% 15-year loan), but our current mortgage is in a kind of phantom zone: We have a $207,000 balance at 6.25%, with about 25 years remaining. We think our home is worth about $350,000 ($333,500 according to Zillow), even after the wild swings in housing prices over the past few years.

The USA Today article piqued my curiosity, so I jumped over to Bankrate to see what sorts of loans were available. The site gave me three options:

The best option would give us a 5.00% rate and a monthly payment of $1111. (Our current monthly payment — principal and interest only — is $1386.60.) We could conceivably save $275 per month by re-financing.

But then I noticed an ad for a company called AmeriSave. It touted rates as low as 4.25%. A 4.25% 30-year mortgage? My jaw dropped. Literally. Could this be real? I clicked over, filled out the initial form, and took a gander at the rates they offered:

A payment of $1018 per month? That's $378 less than we're paying now! Yes, I do see the $6634 in fees and points. Yes, I understand that it will take us 18 months to recover these costs. That's fine. We still plan to live in this house forever (or until we can afford to relocate to Wells, England).

As a reminder, Kris and I have a mortgage prepayment plan in place. For the past year, we've paid $2000 every month, knocking off a a few hundred dollars in principal each time. We would continue to pay $2000 every month even with a new loan, so we're looking for a low interest rate and low fees.

So, my book proposal is on hold for a day. I'm spending my Friday digging into mortgages. I have several tasks on my agenda:

  • I'm going to call AmeriSave to find out more about their rates.
  • I'm going to call my current mortgage company to see what sort of rate they can offer.
  • I'll go through the process at MoneyRates.
  • I've e-mailed my mortgage broker to see what he can do for me. (And he replied almost immediately — at 10pm on a Thursday!)

It seems strange to be devoting a day to this when it hadn't even been on my radar until an hour ago. But it's moves like this that can save big bucks in the long run. In All Your Worth, Elizabeth Warren encourages readers to “count the dollars, not the pennies”. When you make smart choices on the big expenses, you have more freedom to spend what you want on the small expenses. By refinancing, I'm trying to count the dollars. (When we refinanced our first house, we were able to keep the same payment, but cut the term from 26 years to 15 years.)

Meanwhile, Jason B. wrote in yesterday with a story about his efforts to refinance in this crazy market:

I'm refinancing my mortgage from 6.375% to something lower. I originally locked in my rate at 5.25% just in case it went higher. But the rate dropped to 5.0%.

I realized my $300 application fee was less than what I'd save in just 9 months of interest at the lower rate, so I called up and they agreed to keep my application open, charge an extra application fee (instead of starting over with all the paperwork) and lower my rate. But now the rate has dropped to 4.875% and could go even lower! I guess I'll just keep paying the $300 until the rate still drops. But it feels wasteful.

Next Steps to Refinance Our Mortgage

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:

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.

Note: There's talk in Congress of driving mortgage rates down to 4%. If you think this is likely to happen, then it makes sense to wait before refinancing. Kris and I decided we'd rather take advantage of a good rate now than wait for a great rate in the murky future. Do what works for you.

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!

Mission Accomplished: Our Shiny New Mortgage

We did it! After two months of hemming and hawing, Kris and I finally closed on our mortgage refinance, dropping our rate from 6.25% to 4.96%. Bright and early yesterday morning, we made a trip to the title company, and we signed all of the documents. We were out of there in only half an hour.

How'd we do it so fast? Don't I advocate reading all contracts before you sign them? Absolutely. So when then the title officer called on Friday, I let her know in advance that I needed to read everything first.

“Thank you for telling me,” she said. “I'll give you your copy of the documents so that you can read them at home over the weekend.”

And that's just what I did. It took several hours, but I leafed through all 107 pages, looking for anything alarming. I can't claim to have understood all of the arcane legalese, but I gave it my best shot (with Google's help), and I didn't find anything that raised a red flag.

Because I'd read everything in advance, closing was a breeze. The title officer was amused when she noticed I was making tick marks on a piece of scratch paper. “Are you counting how many times you sign your name?” she asked. I sheepishly admitted that I was. (Over the course of 107 pages, Kris and I signed our names 29 times. We initialed 21 items.)

Now we're done, however, and we have a new mortgage. Our payments (for principal and interest) have dropped from $1386.60 to $1137.70 — a savings of $248.90 per month. It will take about a year to repay the closing costs, but then the new loan will save us money over the next 29 years. (Well, not actually 29 years. We'll continue to accelerate our mortgage payments.)

Remember: Saving money on the little things every day is great, but saving money on the big things can make an awesome difference to your budget. You'd have to wash a lot of baggies to save $250 a month!

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