While refinancing can be a daunting process, it isn’t any harder than getting a mortgage in the first place. And with the potential savings to be had with the current low interest rates available, it can be quite rewarding as well. How rewarding? I saved 15% off my monthly principal and interest payment. In addition, because I was able to use the appraisal from the refinance to request a reduction in my real estate taxes, I’m saving on the escrowed portion of my local, county and school real-estate based taxes as well.
In 2009, I decided I wanted to move from my home in Delaware County, Pennsylvania. I’d been there since 1985, but it was time for a change. My home was meant to be a starter home, with one small bathroom and two bedrooms (one of which was quite small). The next door neighbor behind me was so close that I could hear their telephone conversations when I had my windows opened.
My tiny fenced-in backyard was only seven feet wide, running the length of the back of the house. I wanted to get back into gardening and more importantly, I wanted my dogs to have more space to play and have fun being dogs. I wasn’t permitted to fence the side yards due to fencing limitations imposed on corner lots in my township. I was on a small corner lot in a congested area – sometimes, traffic was backed up so much that complete strangers, stuck in traffic right outside my house, would start up conversations with me if I was in my yard. My “backyard patio” was a tiny concrete abuttment just three feet by five feet – barely enough for a tiny bistro table and stools for two.
So I took time in 2009 to really hunt down a new home, one more suited to my needs and wishes. I settled on a modest home in a middle-class suburban neighborhood in West Chester, Pennsylvania. It had taken me nearly a year to find what I felt was the perfect house and in my target price range. I went from a 1,200 square foot house to 2,400 square feet with three good-sized bedrooms and two-and-a-half baths; from one-sixth of an acre to four-tenths of an acre of land. Instead of strangers in cars striking up conversations with me, my guests were rabbits, deer and foxes. My backyard patio could easily handle two family picnic tables and a grill. This was what I had wanted all along.
In early 2010, I purchased the house; two weeks later, I was looking for new employment, caught in a corporate downsizing along with several hundred of my coworkers. It was the first of two layoffs I would be hit with that year. Suddenly, my affordable new home wasn’t quite so affordable, but with having two major employment changes in less than a year, I needed to wait until I’d been in the same position for a year before any lender would touch me. I cut expenses where I could.
A year passed and it was time for me to get busy on a refinance. This was late March of 2011. I started by getting ready. Here’s how.
First, get a sheet of paper and write down the terms of your current mortgage. You should include the original mortgage amount, how many years (or payments) you have left, your interest rate, your current balance, and the portion of your monthly payment that is your principal and interest payment (often referred to as “P&I”). Record the escrowed amount for taxes and insurance separately; those costs will still remain. My P&I was just shy of $1,400 a month; my rate was 5.5%. Then begin rounding up all the documents that a lender is likely to require: two (or even three) years of tax returns, two months worth of paystubs, credit card statements, bank statements, 401K and IRA statements. If you haven’t done a monthly budget, now is a good time to do it.
Consider Mortgage Types
With interest rates this low, there’s very little reason to consider an adjustable rate mortgage. There is only so much lower rates can drop down – but rates can certainly increase quite a bit in the future, so an adjustable mortgage is really quite risky at this time. Chances are that most lenders will suggest a fixed rate.
You’ll need to decide on the length, depending on your own personal goals. By taking a loan period longer than what you have left on your current loan, you will be extending how much longer you need to pay – but your monthly loan payments are likely to be much lower. Ideal if you are younger, cash-strapped and likely to be able to continue earning for the life of the new loan.
If you are looking to shorten the loan, perhaps hoping to retire in 10-15-20 years, you may find the actual monthly payment being more than what you are paying now – but if your goal is to pay off the mortgage sooner and your monthly cash-flow is fine, that’s a good way to go too.
In my case, since my current loan hadn’t even been around for two years, the principal balance hadn’t come down much – the early payments are almost all interest. I decided to give my monthly cash-flow some breathing space and went for a full 30 year term, with no prepayment penalty.
Consider Mortgage Terms
Beyond interest rates, look at the terms the lender is offering you. What are the lender’s fees and how do they compare to similar offers from other lenders? Are you paying the fees yourself, is the lender paying some of the fees (which typically increases your interest rate slightly), or some combination? What fees are negotiable?
Select a Lender
In my case, I chose a lender who was offering a zero-cost refinance; the only item I had to pay for was the application fee, which would be refunded after settlement. In my case, with on-hand cash being low from two periods of unemployment in 2010, I opted for the no-cost refinance, with a locked-rate of 4.25%. While it wasn’t quite the lowest rate available, it achieved my goals without reducing my already depleted on-hand cash funds.
The appraisal came in lower than I expected, which caused a secondary review by the lender’s underwriting team. Later in the year, I used the appraisal to challenge the county’s valuation of my house. My home was being taxed as if it was valued at $335,000 but the appraisal clearly showed that value was at $300,000. By successfully challenging the tax assessment on the house, I was able to reduce my tax assessment and my annual taxes by just over 8 percent going forward from what they had originally been set at. In the pursuit of reducing monthly housing costs, with so many areas of the country having devalued markets, this is an area that homeowners should remember to check for savings too. I was also able to use the appraisal to counter what the homeowner’s insurance claimed my house should be insured for; the renewal had come in nearly 30% higher than the previous year. With my appraisal in hand, I shopped and found an insurer for about $500/year less.
The lender’s underwriter dragged on the approval, so my 4.25% rate lock expired. I ended up with 4.75%, settling just before the Memorial Day holiday. The refinance loan was still worth doing, since I wasn’t paying anything out of pocket and I was still achieving a rate reduction.
I watched rates in 2011 continue to edge down. At the same time, my cash-flow improved and I began to slowly rebuild some of my cash-on-hand safety net. Barely three months after completing the refinance and with a letter indicating my future real estate taxes would be reduced, I went for a second refinance.
I shopped my loan, just as I had before. This time, I chose a different lender offering the best combination fees and a low rate, with the assumption that I might not ever need to refinance again. The second refinance went flawlessly; I ended up with a 4% fixed-rate mortgage. The lender sent a notary to my office to conduct settlement; in twenty minutes, we were done.
My Principal and Interest payment dropped 15%, going from nearly $1,400 a month to $1,165 a month, saving me $220 a month on the principal and interest portion alone. With the real estate tax reduction and homeowners’ insurance changes, I saved even more.
What I Did With the Money
I shopped and purchased a new laptop computer for myself; my old laptop had finally kicked the proverbial bucket, being nearly five years old and much-used. I also was better positioned to handle an entirely unexpected expense: my dog tore her ACL and required expensive surgery. With the room in my monthly budget from the refinancing, I was able to open a zero-interest credit line for her surgery and physical therapy sessions. In March of this year, as I continue to save money, I was able to fly across the country with my dog to meet with Cesar Millan, The Dog Whisperer, as I had been invited to his Dog Psychology Center. I have a garden, including dwarf plum and peach trees, and a patio that I can actually entertain at with privacy.
Am I happy I refinanced? Oh, my, with a resounding yes. If I pay the mortgage out according to schedule, I’ll save nearly $74,000 over the life of the loan, just on interest alone. I’m saving on my taxes and my insurance too.
I’m watching the rates… and if they slip down to about 3% with little to no fees, I may just go ahead and refinance again. The best advice I can offer is to know why you want to refinance (lower payments or shorter term), have your information available, shop around – consider mortgage lenders, mortgage brokers, banks and credit unions – and make your deal.