When I bought my house in 1999, I got a 30 year fixed rate mortgage at 7.75%. A few weeks ago, I refinanced at 3.75%. For a $200,000 loan for 30 years fixed, the savings between those rates is over $500/month. Sweet corn! Scroll to the bottom of this post to play around with my mortgage calculator. See what kind of savings you might grab.
I Ran into a Scumbag on My First Refi
When you need a plumber, painter or electrician, you probably ask your friends if there is someone they can happily recommend. I suggest doing the same with your mortgage lender search.
I didn’t do that with my first refi. Rookie mistake. I called the company that already had my mortgage. The week I was supposed to sign my loan documents, the guy told me he had to raise my rate 1/8 of a point. Nah, baby nah. I refused, telling him to cancel my refi. Suddenly, he magically was able to keep it at the rate we agreed upon earlier.
This shyster didn’t give up. When I was asked to sign the loan documents, I noticed that he added $2,700 in fees that weren’t supposed to be there. He said that was a simple mix-up because things were so busy and they’re getting slammed and blah, blah, blah… He sent me new documents the next day. This time, he deleted the $2,700 charge and the category it was under, and created three new categories spreading the $2,700 over those. I called him on it, he removed all traces of those charges, and I signed.
Had I not looked at the numbers, that thief would have taken me for $2,700!
Compare Apples to Apples
Refinancing can be confusing because there are so many different offers. Generally speaking, you don’t really care if it is a “no cost” loan or loan in which you pay all the Title, Escrow and miscellaneous Origination and Closing costs. The bottom line is that you want to know how much your monthly mortgage payment will be for a fixed rate loan. With fixed rates at historic lows, I am not interested in discussing variable rate loans.
Think of it this way: When you were looking to rent your current housing, let’s say you knew you wanted to have DirecTV so you could watch everything Kardashian. You knew DirecTV would cost you $50 per month. Apartment A is $875 per month and Apartment B is $900 per month. Other than the price they are equal in every way, except that Apartment B included DirecTV worth $50 in the $900 rent price.
Apartment A is $875 + $50 (for DirecTV) = $925 monthly housing and TV payment
Apartment B is $900 (DirecTV included) = $900 monthly housing and TV payment
Apartment B is the better deal. They “rolled-in” the cost of something that you were going to pay for anyway, into your $900 monthly housing payment.
Mortgage folks don’t work for free. Sometimes they roll in the costs. Sometimes they don’t. If you are going to shop for a loan, ask them to roll everything into the loan so you are not paying anything out of pocket. What would be the monthly payment? This way you will be able to compare loans on equal terms.
Resetting the Clock
When people talk about refinancing, they are excited to say how low their new rate is and how much money they are saving on their mortgage payment each month. Heck, even I led off this post with that! What they don’t say is, “We paid some money to reset our mortgage clock. Now we are further from paying off this house than we were before we refinanced! And… we are slightly deeper in debt!!”
I realize that some people need to refinance and reset the clock because they can no longer afford the monthly payments. Yes, this extends your payoff date to a brand new 15, 20, 30 or 40 year term – but hopefully this will keep you from losing your house to foreclosure.
If you aren’t worried about losing your home and just like that lower rate, I suggest that you refi and keep paying the same amount you had been paying all along. That extra money will go toward the principle, which will pay off your house sooner.
15, 20 or 30
Rates are so cheap these days that you might skip the 30 year fixed rate and look at the 15 or 20 year rates – if you are confident you can swing it. A few years ago, when I thought the rates could not go any lower, I refinanced. At the time, the 15 and 30 year rates were virtually the same. There was only .25% difference. I decided to get the 30 year loan but make payments as if it were a 15 year loan. This gave me flexibility to not pay as much in case times got tough. Otherwise I’d pay it down much faster.
Your mortgage payment is mostly interest at the beginning. It goes on a sliding scale so that by the end you are mostly paying principle. You can only write off mortgage interest in the year it happened. So make sure you make enough money that year to take that deduction. Otherwise, you will be leaving money on the table.
If you wanna go old school and put Herald Square #2 pencil to paper, here is the monthly mortgage payment formula. Otherwise, use my mortgage calculator below to see what I mean about the interest getting front-loaded.
Which Credit Score Do They Use For a Refi?
My mortgage guy told me that they run my credit at Equifax, Experian and TransUnion credit bureaus. They get three scores that are usually different because they each have different factors. Just like in the Olympics, they throw out the low and the high scores and keep the one that was ju-u-u-st right.