Mortgage Refinance Strategies And Points You Should Understand
Alas, after 8 weeks my primary residence mortgage refinance is now done! It took so long that I actually forgot I was refinancing my mortgage until the bank called to ask when I could meet the notary to sign all the documents.
The process was pretty painless since I refinanced with the same bank. I sent them the general paper work such as my W2, bank asset statements, and pay stubs. They did one appraisal which took all of 20 minutes and all I had to do was wait four more weeks to get it done! The refinance this year was much easier than the refinance in 2010, boding well for the thousands of others out there who are also looking to refinance their mortgages.
I learned some new things beyond the basics which you might find useful in your mortgage refinancing or initial mortgage application process.
MORTGAGE REFINANCE TIPS TO THINK ABOUT
* Try and refinance with the same bank. If you go through the same bank, you might get some extra discounts given you are an existing customer and they want to keep your business. In my case, they gave me an extra 3/8 credit and waved the $750 home appraisal fee so that there were no out of pocket expenses. Furthermore, they had all the basic paperwork already and just needed some updated forms. Staying with my existing bank made things much easier.
* You have one free pass. Even after you “lock” in your mortgage, once your application gets approved you are able to ask for a lower rate if rates decline in the application approval process. When I locked my 3.25% 5/1 ARM rate, the 10-year yield was at 2.1%. Not bad I thought. In the next two weeks, the 10-year yield plummeted to as low as 1.75%, or a full 35 bps lower. Rates were very volatile and settled somewhere around 1.88% when I asked if they could lower my rate further. They said yes, and lowered my rate to 3.125%.
* ARM loans are assumable. Let’s say I want to sell my primary place in two years and 5/1 ARM rates rise to 8.125% due to inflation and a recovery in the economy. If the buyer qualifies, s/he can assume my 5/1 ARM at 3.125%, thereby saving 5% in interest expense! A lower mortgage rate is a huge benefit to the buyer because it allows the buyer to pay more or get more home. In effect, you have shorted a bond in the amount of your mortgage and will capitalize on the gain.
* Title insurance is extremely important. In fact, title insurance is like the bible for your property. A title insurance policy is a contract of indemnification for loss by encumbrance, effects in the title, or invalidity, or adverse claim to the title to the real property that may occur prior to the effective date of the policy. In other words, the title company guarantees the veracity of the property you are purchasing or selling. If there are any discrepancies or disputes, the title insurance company will fight for you. Make sure you keep a copy! You never know who will try and make an adverse claim on your property 30 years from now.
* Leverage the internet. The internet has made finding the best home mortgage rates easier than ever. It’s like going to Best Buy and checking out the products but buying them online for cheaper. Online mortgage firms like Quicken Loans have much smaller overhead costs compared to bricks and mortar banks. As a result, they can pass on their savings to their consumers.
CONCLUSION
If you haven’t considered refinancing and can, please do so. Rates from all along the curve are down by at least half a percent since 2010, which is the minimum spread you should consider before refinancing. You must take advantage of the Federal Reserve’s policy of pushing rates lower. Improving your cash flow is what it’s all about in personal finance!
Recommendation: Some of the lowest mortgage rates I’ve seen are by Quicken Loan. I’ve know at least 30 people in 2012 through Quicken Loan and with some incredible rates of below 4% for a 30-year fixed and below 2.875% for a 5/1 ARM. I’ve applied before and got matched 2.625% for my 5/1 jumbo ARM. It’s worth applying today to see if they can at least beat your existing mortgage rate since Quicken Loans is entirely online and there’s no obligation. Less overhead costs means more savings to you! Thank you QE3 and Ben Bernanke!
Regards,
Sam
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I got a 5.25% 15 year mortgage in April 2008. I refinanced into a 4.00% 10 year loan in September 2009. I refinanced into a 3.50% 10 year loan in October 2011.
I paid no points and no closing costs in any of the 3 mortagages.
I did not know about asking for a lower rate – I locked in early September at what I thought was a great rate. However, as you stated, rates went down from there. I did not know to ask for a lower rate – thanks for informing me of this.
If rates go down again – I will refinance again – that is the beauty of a no point no closing loan!
Maybe I will take out some additional money and/or extend the length of my loan the next time I refinance?
David
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Financial Samurai Reply:
October 27th, 2011 at 2:07 pm
I’m shocked that in 2 weeks, we’ve gone from a low of 1.78% back up to 2.4%. For anybody wanting to refinance now (10/27/11), I’d wait for rates to get back down.
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We just finished our re-fi on Friday, which was five weeks to the day that I called and locked in my rate. That was quick, for sure. We had a 5.875% 30-year loan from 2007 that we re-financed to a 3.375% 15-year loan. That would make the total term around twenty years.
The re-fi will save us roughly $80k in interest over the remaining time.
After we locked, the rates went down a tad (to 3.25%) for a couple of days. I called about getting that rate but they said they would only adjust at closing, which by last Friday had gone back up to around 3.625%.
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YFS @ Yourfinancessimplified Reply:
October 24th, 2011 at 5:16 pm
We did the same exact thing for my primary residence. We just closed on our 15 year loan on 10/10/11. We are saving roughly 270k in interest by switching to the 15 year from the 5.25% 30 year loan
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Financial Samurai Reply:
October 25th, 2011 at 5:22 am
Still not bad at all! I think there is more wiggle room with a bigger mortgage given they make a percent on an absolute amount.
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Your point about an ARM being transferable is a really big benefit to going to an ARM. If you plan to live in your home for a short period of time, you should use an ARM to finance your home anyway, but having that ARM in place does create a lot of NPV to a future buyer.
Sam, you’re starting to change my mind on real estate. A reader sent me a real estate valuation spreadsheet (I posted it on the blog) and my mind was boggled with some of the IRR numbers I’ve calculated from it. With rates so low, a DCF analysis of real estate says prices are very, very below what they should be. While I’m so-so on investment real estate, I’m definitely looking toward purchasing a home ASAP. My future rent payments are far more than what I’d pay on a mortgage for a better quality property. And I build equity. What’s better than that?
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Financial Samurai Reply:
October 25th, 2011 at 4:02 am
Real estate is a no brainer now IMO. It just takes conservative forecasting and knowledge to make it work.
It is ridiculous how much cash-flow one generates 3, 5, 10 years later.
Good luck! Just make sure you really want to live where you buy for 5 years.
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I looked into the 5/1 ARM at 3.1% and it did not make sense considering my balance. For me, the better choice would be to add principal payments. I save the closing costs and fees.
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agreed that one should refi with the existing lender if possible. i am in the process of refinancing at 4.25 30 year. also read today about potential moves to make refinancing easier on upside downs and no / low equity homes. interested in what the rates would be for investments / rentals.
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I’ll check with my lender if I can refi. Our primary home is probably close to underwater at this point though so it might be tough.
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Robin Reply:
October 24th, 2011 at 3:31 pm
as long as you are current on your mortgage and it is a fannie mae conforming loan you should be able to refinance under the new guidelines
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Financial Samurai Reply:
October 25th, 2011 at 3:55 am
Consider a cash in refi. The return is your cash outlay divided by your interest savings. It’s probably well over 10%.
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This is my dillemma: if we want to sell our primary home in two years, is it really worth to pay refi costs of about $5000? I’ve been contemplating it for months.
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David M Reply:
October 25th, 2011 at 1:53 am
Look for a mortgage broker that will give you a no point no closing mortgage and thus any decrease in interest rate is worth it since you paid no upfront costs.
Yes the interest rate will be higher than a loan with points and closing costs but you will not have paid anything to get the loan.
I have obtained 3 no point no closing cost loans in the last 4 years with the last being in October. If the rates go down or if I want to extend the life of the loan or borrow more money – I can do this again next year, since I did not and will not pay any out of pocket costs.
Hope this help,
Davied M
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Financial Samurai Reply:
October 25th, 2011 at 3:54 am
My preliminary answer is no way in hell, unless your mortgage is over a million bucks.
If you can save $5,000 in interest expense ie $410/month, you break even in 13 months, and that might be worth the hassle.
Just do the math. It’s pretty straightforward.
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Aloysa Reply:
October 25th, 2011 at 8:42 am
Interesting… so if we have other expenses that require 5K, then it is not worth it. Am I correct? For some reason this refinancing stuff is confusing to me. :)
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David M Reply:
October 25th, 2011 at 10:19 am
Look at Sam response above and run the numbers. If you put in your balance and your current interest rate and the new refinanced rate you will calculate your monthly savings. Then do as Sam did divide the total cost by the montly amount saved to determine how many months it would take to recoup your fees.
As I stated above, if you get a no point no closing cost mortgage – your fees will be zero but your interest rate will be higher than a mortgage with points and closing costs. However, if the new rate on the no points and no closing cost mortgage is below the rate your currently have then it is a “no brainer” that you should refinance.
Very timely post Sam since my hubby and I were just talking about this yesterday. There are some low rates right now in Canada so we have been discussing renewing early and one of the options we talked about was renewing with the same place. I am not sure if we are going to do it yet but if we do, these tips will be very handy.
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Financial Samurai Reply:
October 27th, 2011 at 7:23 am
Might as well do it. It’s always nice to get free money!
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We’ve been mortgage free since 1993 so no refi possible or needed….unless I take the plunge and buy a rental property and take out a loan on it. It’s great to see eveyone keeping up with the latest on the regs on this though.
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Financial Samurai Reply:
October 27th, 2011 at 7:24 am
Definitely no need to change what you’ve got! I’m considering a cashout refi given the rates are so low, and I’m eyeing some potential new deals. Is TBD though until end of November.
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This is my dilemma. I am actually contemplating whether to refinance our home or not. I guess I need to start looking for a better deal.
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