All of my favorite bloggers have been doing it lately, so I just had to see what all the hype was about. I am talking about refinancing, of course. We have all see the headlines about record breaking low interest rates, and although I thought we did pretty well when we got our home loan a little under a year ago, I had to satisfy my curiosity. I also really was not sure whether or not we could refinance after living in the house such a short time.
The first place I looked was our current lender. I sent in a request online, but after I had not heard from them in a week I got impatient and called. The man I spoke to said that we could get a better interest rate, but our PMI would go up and overall, our payment would only decrease around $20 a month. At least I think that is what he said. He was very difficult to understand. I was discouraged to say the least, and almost ready to throw in the towel. Instead, I turned to the trusty Internet.
I headed on over to bankrate.com, which is a resource to let you know what banks have the best interest rate on all kinds of products, from mortgages to savings accounts to credit cards. They also rate banks on how well they are doing, which is important lately with all the bank failures. I checked out a few websites of banks that I found on bankrate. One had an instant online quote, one had a chart online that gave you some idea of interest rates and payments, and one asked me to give my info so they could give me a call. I ran some numbers and determined that these banks could save me at least $100 a month. Now that might be worth looking into.
Early the next morning (Staurday morning) an “executive banker” (ooh. ahh.) called me. He said that he could get me a good interest rate, ok a great interest rate. 1.5% lower than my current interest rate to be exact. They could roll the closing costs into the refi and it would pay for inself within 3-4 years. Now thats a deal I can live with.
What you need to know – If you are thinking of refinancing, you are definitely better off if you are not in one of the areas where property values have not sharply declined lately. To the best of my knowledge, an appraisal will always be required for a refi. You will also be better off if your loan-to-value ratio is less than 90%. This means that the loan amount is less than 90% of what your house is worth. Unfortunately, we do not fall into this category, which means that in addition to having to pay PMI, our closing costs are greater. The longer you are planning on staying in your house, the more you can potentially save with a lower interest rate, and therefore the more refinancing makes sense for you. You should only refinance if you are going to stay in the house long enough for the refinance to pay for itself. Therefore, if the refinance saves you $100 a month, and the closing costs are $4000, $4000/$100 = 40 months or 3.33 years, which means that it will take the refinance 3.33 years to pay for itself. If you roll the closing costs into the mortgage then you are paying interest on them, and that makes the math too complicated for me but you get the idea. Also, I understand that some part of the closing costs can be tax deductible which could make them pay for themselves more quickly, but I am not an authority on that so I won’t pretend.
What you will need – Initially, you will need to know the approximate payoff amount of your current mortgage and the approximate value of your home. It may also be helpful to pull out your most recent mortgage statement to see what part of your payment goes to principle and interest, escrow, and PMI. This will help you calculate how much you will be saving, since the discount will be off of the principle and interest payment, and the rest should stay essentially the same. You should also know generally where your credit score falls (i.e. fair, good, excellent). This should be enough information to give you an idea of what kind of interest rate you can get and whether or not refinancing makes sense for you.
When you get started with the actual refinance, you will probably need one month’s worth of pay stubs and two months worth of asset statements (i.e. savings, money markets, mutual funds). In addition you will need contact info for your homeowners insurance agent. My bank is handling getting the exact payoff amount from my current bank for me. That is all the info my bank has asked for from me, and as far as I remember that was all we had to supply when we obtained our first mortgage. Of course, there are special circumtances such as when you are unable to document your income, so that may make things different.
Next, you will have an appraisal, title search, and survey. The title search and survey are the kind of things that I really wish I did not have to spend so much money on, but alas, what can you do. In this process I learned that title searches and title insurance in Texas are pretty much the most expensive in the country. Yay. My appraisal is tomorrow. This is a real nailbiter for me, because if it comes in greater than then amount I estimated then it might put us under the 90% loan-to-value mark and it will reduce our closing costs, and increase our equity. I wonder if the appraiser likes cookies?
So I hope this was informative! Please let me know if I can clear anything up or if I said anything erroneous.
(Disclaimer – I am not a professional mortgage-girl or banker! This is intended to discuss my exeperience with refinancing only.)