Posted: November 2nd, 2009 | Author: Joe | Filed under: Debt | Tags: mortgage, Refinancing | 3 Comments »
I got a call from a local bank offering to refinance my mortgage for 5.25%. On the surface this sounds like a great deal, since I’m currently paying 6.125% on my mortgage. But here’s why I’m not taking the offer, and some of these reasons may be things to consider if you too are faced with a similar option.
Checking the math.
My first question about the potential refinance was, “how much money will refinancing save me?” There are two answers to this question: 1. the amount of money I would save in monthly payments, 2. the amount of interest I will save over the total life of the loan, should I stay in the house until the mortgage is paid off.
I do plan on staying in the house until the mortgage is paid off, and this plays a big role in my decision not to refinance. Here’s why.
Refinancing a 30 year mortgage for a new 30 year mortgage is simply resetting the clock on when the house becomes yours. Yes, the total interest payment would be less, but that turns out not to be true in my case. More on that later, for now let’s go back to the math.
I used BankRate.com’s mortgage refinance calculator and enter the terms of the deal. Here’s the result:
| New monthly payment: |
$ 1369.47 |
| Monthly savings: |
$ 80.53 |
| Difference in interest: |
$ 11592.53 |
| Total cost: |
$ 3850.00 |
| Months to recoup costs: |
47 months |
So, as you can see, my monthly payment will be $80 less and I’ll save over $11,000 in total interest. It would take me slightly less than 4 years to recoup the cost of the refinance. But still, I’m not taking the offer.
More than just math.
There are some additional factors that make the refinance offer less appealing for me. For one, my mortgage is currently held through another local bank – a competitor to the one offering this new mortgage. While the interest of my current mortgage is not as low as the offer, there are other terms that are more favorable. For example, my current mortgage payments are set up as bi-weekly mortgage, for no additional fee. The new bank doesn’t offer that option. This will save me far more interest over the life of the loan than the refinance will.
Also, my mortgage payments are deducted automatically from my bank account. I like the convenience and peace of mind knowing that as long as I keep my paycheck, I won’t miss a mortgage payment.
My own mortgage refinance plan.
One of the main reasons I don’t want to take this refinance offer goes back to something I said at the beginning of this post:
Refinancing a 30 year mortgage for a new 30 year mortgage is simply resetting the clock on when the house becomes yours.
I look forward to the day when I have no more mortgage payments, and I don’t want to prolong the arrival of that date. To that end, I fully intend on refinancing to a 15 year mortgage in the next 5-7 years, preferably with bi-weekly payments. I will have shaved about 12 years off the 30 year term of the original loan.
Obviously, it’s better to take the 15 year mortgage but our current cash flow does not allow for those kinds of payments. But within 5-7 years, the kids will all be in school and my wife can re-enter the workforce and we should have a better financial picture and be able to afford the higher 15 year mortgage payments.
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Posted: October 6th, 2009 | Author: Joe | Filed under: Debt | Tags: buying a home, mortgage, mortgage costs, refinance | No Comments »
Closing costs for a home range from 3-6% on average, and most lenders require at least and additional 5% down payment.
My wife and I have bought two houses, sold one house and refinanced once. Here’s how we’ve saved on our closing costs, mortgage and more – and you can too!
Have the seller pay the closing costs
Ask the seller to pay some or even all of your closing costs. You can even roll the cost into the selling price, and have it included in your mortgage. That way the seller isn’t really paying for it. This is helpful if you’re short on cash for the closing, but you do end up borrowing more in the long run. Also, Freddie Mac and Fannie Mae limit the amount you can roll into the mortgage to 6% of the purchase price, and only if you’re putting at least 10% down. Similarly, FHA allows up op 6% and the VA allows up to 4%.
Shop mortgage terms.
Don’t just accept a mortgage from the bank you keep your savings or checking account with. Shop around. Get quotes from at least 3 or 4 lenders, or 2 lenders and a mortgage broker. You’ll want to get at least 2 lender quotes on your own to verify that the mortgage broker isn’t piling on excessive fees. In fact, if you just get 2 quotes from local banks you should almost certainly get a better deal through the broker, otherwise the broker isn’t really getting you anything. After all, the whole point of a broker is that he has the connections and does the leg work to get you a better deal than you could on your own.
When you get quotes from lenders on your own, be sure to get a copy of the
Good Faith Estimate, or if you’re refinancing, a copy of the HUD-1 form.
Eliminate the PMI.
Personal mortgage insurance is usually required if you have less than a 20%down payment, but not always. I shopped about 4 lenders when we bought our last house, and I ended up going with a local bank (that I was not yet a member of) because they had no PMI requirement, offered a quarter percent of my rate if I opened an account and signed up with direct deposit. The interest rate is horrible, of course, but I use ING and HSBC online for savings anyway. Alternatively, if you’re in a high tax bracket, ask the lender if you can pay a single PMI premium up-front, and roll that into the loan. You’ll be borrowing more money over all, but you’ll get to deduct more on your taxes, so it may offset the PMI premium.
Shop around for title insurance.
Many lenders will try to automatically direct you to their affiliated title insurance provider, but you can often times shop around for a cheaper one on your own. According to a recent Kiplinger article, as much as 80% of your title insurance fee goes to the commission of the title insurance agent. That’s a hefty discount if you go it alone!
Pay more (often).
Go with a Bi-Weekly Mortgage Payment Plan if you can – and if there’s no additional fee. Another reason I went with my local bank is that they offered a Bi-Weekly mortgage payment plan for free as a perk to get my business! This saves me years off my time to pay off my mortgage and thousands in interest. I can even make extra payments above that, if I want.
If the lender wants a fee – any fee – to enroll you in a Bi-Weekly Mortgage Payment Plan, opt out. As long as there are no pre-payment penalties, you can still make an extra payment every year on your own, it just takes a little extra discipline.
There are a host of other tips out there, and I’m sure some readers have a few of their own. Maybe if we’re lucky, they’ll leave a comment about one. 
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