Mortgage Interest Rates dropping over the last year to historic lows have presented a unique opportunity to consider a Mortgage Refinance. Knowing we could potentially save thousands of dollars on one of our biggest expenses, I finally decided to get my act together.
Our Current Mortgage
We were on the unlucky side when we locked in on our last mortgage, hitting a mini peak in rates between two valleys. Currently, we are in year 2 of a 30 year fixed mortgage with a 4.25% interest rate.
I hate to admit this, but want to be fully transparent. We only put 10% down on our property so we do have to pay monthly Mortgage Insurance of $89. From a purely financial move, this is a mistake and I knew better as we did it. We were both against renting, we wanted to own our house and sacrificed some Financial Principles to do so.
Our first house was bought FHA at 3.5% down….. but we walked with 25K in profit after a little over two years thanks to a hot housing market. The profit combined with equity we built rolled into the down payment for our current home.
Using Lending Tree
After reading some great reviews on Lending Tree I started there, thinking it would be a one stop shop for the lowest interest rates. We both have credit scores around 750, I was surprised to see the best available rates were close to 3.75% for a 30 year fixed loan. The 7/1 ARM rates were on the high side as well, they came back with 3.375% as the best available option.
I did some spot checking and found out major banks were publishing lower rates and decided to continue my search.
One thing that I was not impressed with was the amount of phone calls I received from mortgage companies after using Lending Tree. 5 calls a day for 2 weeks followed the application. Its possible I missed the opportunity to block calls, or agreed to it as part of the process. But I thought the point was to keep the entire process online without having to give my information out to multiple companies.
Mortgage Refinance: Broker
I was talking about my experience with Lending Tree and was recommended a Broker be a co-worker. Having never used a broker there was some hesitation in trying it out. I figured their fees would be on the high side.
The broker was great at his job and provided very prompt, direct feedback to all the questions I had. Moving forward I will reach out to him again to see what he is able to track down.
- 30 year fixed was 3.375%, 7/1 ARM was 3.25%
- Closing costs were $4,412
- New Payment would be $1,713/Month
The new monthly payment for the 30 Year Fixed would be $196 cheaper/month. Break Even Point* would be just over 22 months.
The new interest rate would save us $47,192 in interest over the full 30 years.
I almost quit searching and locked in this rate at 4:40 PM last Wednesday but decided to sleep on it and check out 1 more option before making the decision.
*Calculating where drop in monthly payments would cover the cost of the refinance
Mortgage Refinance: Credit Union
The last option I checked out was a Credit Union I have been a member of since I was 16. I have kept a savings account open with $15 in it just to retain my membership.
- 7/1 ARM at 2.75%
- Closing Costs are $3,492
- New Payment would be $1,571
The new monthly payment for the 7/1 ARM is $338 cheaper/month. Break Even Point would be 10.3 months. A 1.5% interest rate drop is huge and will save us $26,684 over the next 7 Years*. Since I wont know what the rate is beyond the first 7 years I can’t calculate the total savings of the re-finance.
We have already accepted this quote and moved into the full underwriting process. It is to good of a deal to pass up. Since we don’t think we will be in this house over 7 years, we felt it was better to lock in the lower interest rate.
A little patience paid of in a big way, just goes to show that you should investigate multiple companies before making a decision.
*Actual savings will be lower since we wont be able to deduct as much interest from our tax returns
Our current loan servicer randomly called on Saturday and asked if we were interested in re-financing. I told him we were currently evaluating our options and since they already had all of our information it only took five minutes to get a quote.
They offered a 7/1 ARM at 3.25%, I explained right away that a better offer was already on the table and would call back if it fell through.
- Be honest with the refinance companies – If you find a better offer, tell the people you have been working with. I was thanked by both of the companies we didn’t choose for being upfront and honest. I get the feeling a lot of people waste their time and don’t follow up.
- Willing to give out cash – Every person I worked with asked if we were planning on pulling cash out with the refinance. Must be done a lot and I think there are very few situations that this would make sense (Paying off high interest debt comes to mind).
- Lot of moving parts – The finances behind a refinance can be a little tricky when comparing multiple loan types. I looked at the drop in monthly payments to calculate the Break Even Point of the refinance combined with the interest savings over the relevant period to make a decision.
- Rolling Closing Costs into Mortgage – We are currently debating on if we will roll the costs into our mortgage or just pay cash up front. We may take a loan from our Emergency Fund and pay the monthly payment savings back to ourselves.
Would you make the same decision? Would yo pay the closing costs up front or roll them into the mortgage?
Some products that can help you:
Personal Capital: Personal Capital has a ton of great Free features, you can track your spending, net worth and even analyze your portfolio. It has top notch security and I am able to connect all of my accounts. Saves a ton of time!
Sofi – I saved a ton of money using SoFI for a Student Loan Refinance. They were great to work with, the process was super easy (compared to my previous refi) and I got a great rate. If you have student loans be sure to check them out.