Help Me With My Mortgage Refi

September 8, 2010

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I’m deviating from the politics just for today. There is plenty to write about, but I’ve been pondering refinancing our home mortgage a lot and maybe someone can counsel me.

First of all, we refinanced our home in December 2009 and have an incredible rate of 4.75% for a 30 year fixed mortgage. I was happy with that and never intended to touch our mortgage again. However, that changed last week when I received a call on my cell phone.

A representative from called and began talking to me about refinancing. Apparently, they still had my information from two or three years ago when I was interested in a refinancing our mortgage. Todd (the rep) told me that rates were even lower now and sent me a “personalized quote”. I looked at my Droid and found it in my Gmail spam folder. I clicked on the link and I am able to obtain a 30 year fixed mortgage with around $1800 in credits. If I were willing to pay for closing costs, I could have an even lower rate.

The questions that I continue to run through my head are: How much will the closing really cost? Will that $1800 in credits cover it? How much deviation could there be from those estimated costs that they provide on the website? I understand that escrows are in addition to the closing costs, but those should pretty well wash when we get our escrow back from our current mortgage company.

Does anyone have any feedback of suggestions? Are the specific questions that I need to ask that will help me catch any shell games that may be happening? I know this is a high pressure industry and they’re pushed to sell. However, if I can get a “no cost” refi am I truly getting a no cost refi?

5 Comments (+add yours?)

  1. kosmo
    Sep 08, 2010 @ 08:35:08

    OK, I’ll preface this by saying that I am NOT a mortgage specialist. I do have a degree in accounting, though, which helps with the tasks of deciphering the forms and cutting through financial BS in general.

    You definitely should get the lender to break down the estimated costs for you. If they want your business, this should not be a problem. I doubt it’s the first time they have been asked, so they really should have a canned response ready.

    I try to break things down into “added costs” and “non-added costs”. As you mentioned, the escrow costs should be a wash. Another non-added cost is pre-paid interest. A lot of times, you’re going to have 45ish days before you make your first mortgage payment. The interest pre-payment just covers the interest that accrues during this time (there will also be escrow costs for this period of time). Whether you keep your old loan or refi, you’re going to be paying interest (and escrowing insruance, property taxes, etc) during this span. However, double check the calculations to make sure there is not a goof.

    The added costs are going to be things like the appraisal, title search, origination fees, and points (this isn’t an all-inclusive list). If you’re not sure what a fee is, ask. Again, if they are hesitant to answer your questions, they might not be a company you want to partner with for the next 15-30 years.

    Paying for points can be tricky. Let’s say you can buy down the mortgage rate by 1/8 point by paying a point up front. On a $100,000 house, the 1/8 will save you $125 the first year and slightly less each additional year (as you pay down the principal). The point is going to cost you $1000 up front (a point is just 1% of the loan, pre-paid). At first glance, it seems that it would take 8 years to break even on the point, but it will actually take a bit longer, since you save $125 in year one, maybe $120 in year two, etc. Essentially, divide the point by the buy-down it garners and then fudge the number upward a bit to get a rough idea of the break-even on the point.

    I’m not a huge fan of paying for points, but it can make sense, esp if you don’t plan to refi again for a long time. If you plan to refi a few years down the road, you’re probably better off taking the higher rate not incurring the cost of the points, because you won’t get to the break-even point.

    I’m not sure where you stand in terms of PMI. If you have below 20% equity, you’ll either need to do PMI or something like a piggyback mortgage (80-10). We initially had an 80-10 on our home. We had a slightly higher rate on the smaller mortgage (1/8, I think). I’ll throw out the hypothetical 100,000 again. A piggyback (80K, 10K) that costs you an extra 1/8 on the second mortgage would result in additional interest of $125/year. It’s important to only calculate the cost of the rate differential, rather than the entire rate on the second mortgage. When we got our mortgage, PMI would have been insanely more than the extra interest we ended up paying with the 80-10 – I’m thinking it was roughly 3-4 times the cost. It was a complete no-brainer of a decision. I imagine that this isn’t always the case.

    I’m not overly familiar with the no-cost refis, but the gist of the concept seems to be that the lender picks up those cost and rolls it into the rate they give you. Understandably, this is going to be a higher rate that they’d give you otherwise. Compare the rate of the no-cost refi to the best quotes you’re getting on standard refi to figure out how much extra interest you’ll be paying.

    Basically, this is the reverse of paying for points – you’re getting cash (by means of avoiding out of pocket costs) in exchange for a HIGHER rate. Whereas paying for points made more sense if you didn’t plan to refi for a while, the complete opposite is true with no-cost refis. The longer you’re paying on that loan, the longer you’ll be paying extra interest (assuming that you had a lower rate available via a standard refi). One you hit the “break even point” with the no cost refi, you’re losing money every month. However, check to see if there are any penalties for paying off the loan early. Obviously, the lender does have to be able to recoup their costs from you, and they can’t do this if you’re refinancing every 3 months.

    Hope this helps.


  2. Squeaky
    Sep 08, 2010 @ 15:42:07

    Thanks for all the skinny Kos.

    I have been weaving my through this process and have an appraiser at my home right now. I received a number of documents from the mortgage company last night including the good faith estimate. From what I can see so far, there aren’t any hidden fees. The items you pointed out are now there—the escrows and the prepaid interest. Everything else looks very standard.

    30 year fixed rate mortgage, 4.375% with roughly 1 1/8 points back to us which will cover the closing costs minus interest/escrows.

    I was shocked that after all of the banking reform there are still fairly streamlined mortgages to be had today. I was under the impression that I’d be giving up all sorts of personal data and at least one of my kids. The only required items were 30 days of paystubs, insurance dec page, statement with my intended use of the equity being pulled, w2 for the last two years and a few signatures on required forms (disclosure this, disclosure that).

    If anyone is considering a refinance, the rates are awesome. Just since December, we’re lowering our rates by 1/2% and didn’t spend a dime on closing costs. Had I wanted to pay for closing costs, I could have even gone lower.

    Thank you


  3. Kim
    Oct 07, 2010 @ 15:43:36

    Amerisave is a scam


  4. Squeaky
    Oct 07, 2010 @ 16:06:56

    Kim, don’t leave me hanging! I’m 1/2 way through my refi and already given $360. Am I going to lose big or are they going to bait and switch me? Please explain, if it’s that bad it may be time to run.




  5. Johnny G
    Oct 31, 2010 @ 11:43:58

    I too was at 4.5% interest rate.

    I am with Wells Fargo, they have a special deal to re-fi with no closing costs…it is all through the mail for the cost of a notary fee and whatever overnight package will run (maybe $40 total)

    We got our 15 refinanced to a whopping 3.625…..Tasteeeeeee


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