No Cost Mortgage Refinance Diary
I last refinanced my mortgage in July 2010. Back then I was trying to reduce my rate from 5% AND get out of escrow. I was extremely successful and garnered a nice 4.375% 30 year fixed mortgage. I thought I was done, but rates continued to fall. I started playing with a mortgage calculator and realized I could probably save another $25k over the life of the loan if I refinanced. That kind of money is worth a shot.
Like a lot of people right now, I don't consider myself cash rich right now so I don't want to have to bring money to another closing. Thus, I decided to go the route of a no cost mortgage refinance. Now, if it were truly no cost, everyone would do it. In a no cost refinance you end up sacrificing a little bit on the interest rate side to avoid having to pay anything at closing. If you can pay the closing costs, you probably should because your rate will be better, and you'll end paying far less over the life of the loan. You can use the exact same process described here. The only difference is you will be paying ~1-2% of the cost of the loan at the closing.
Warning: Long post follows
I kept the following diary as I went through the process for my new mortgage:
- Monday morning, 1/9 – Emailed mortgage broker (the same mortgage broker I've used in the past) to see what rate I could get if I wanted to refinance at no cost. He said the best that he could see was 4.125%. I said I was hoping for 4%, and that I would just wait and see over the next few weeks or months if it would drop since my rate was already good.
- Monday afternoon 1/9 – Broker calls me. Rates fell during the day. 4% is available. Serendipity? I run upstairs for a short conference with DW and then call the broker back. We talk about recent sales in my neighborhood likely to bring down my home's appraisal which could put the 80% LTV in jeopardy in spite of my diligent overpaying of my mortgage to get my equity higher. If I don't get the 80% LTV, I would either have to bring money to the closing to make up the difference or walk away and lose the money I spent on the appraisal. It's a risk I'm willing to take. I pay $375 at that point for a new appraisal. This is the only sunk cost in this investment strategy aside from my time. I tell my broker I want the same deal as last time with all costs wrapped into the mortgage and no escrow or pre-payment penalties. He takes this information and begins arranging for an appraisal.
- Tuesday afternoon 1/10 – Mark, an appraiser calls me to schedule the appraisal for Friday 1/13 at noon. I dig through emails and come up with my old appraisal from a year and a half ago to hand to Mark when he comes. This will make his job easier because it is a recent appraisal, and more importantly the previous valuation will psychologically serve as an anchor for his thinking. This is important because it is $408,000. If you read my net worth posts, you know this is not even close to what sites like Zillow think about my house. I detailed this Zillow effect last May, and it continues.
- Wednesday afternoon 1/11 – The broker's assistant sent me all the loan documents to review and sign as well as a list of the needed materials to complete the application (copy of driver's license, 2 most recent paystubs, W2, 2 most recent bank statements, and some clarifications around recent credit inquiries). This is by far the most tedious part, but if you already have your personal financial life organized, it's not too much of a pain.
- Friday 12pm 1/13 – Mark, the appraiser, showed up on-time. The weather was cold, and he was outside trying to do the external measurements on my house. I walked out with a copy of my 2010 appraisal in hand and gave it to him. You could see the delight in his eyes and his effusive thanks told me were headed in the right direction. I showed him around the interior and emphasized all the positive changes we'd made in the home. Luckily I had scheduled our maid service for that morning so the house was spotless. I really hate how much appearances matter, but I know they do. Note, I was explicit with him about what I thought were good comps for my home AND I told him I needed to come in at $375,000 or above to get my refinance to work properly. I think a lot of people don't bother to do this or feel uncomfortable, but these guys have lots of wiggle room and it helps if you can guide them to the number that will make you a satisfied (and possibly repeat) customer.
- Monday 1/16 – DW and I get all the paperwork together, sign all the documents, and fax it to my mortgage broker. We receive confirmation of receipt and that we'll be using a local real estate attorney for the closing – meeting him at my broker's office.
- Thursday 1/19 – My broker sent over a copy of my appraisal. I opened it with fingers crossed. Well, wadda ya know? It's $375,000. The exact number I told the appraiser I needed. Either I am shockingly prescient with my ability to forecast real estate values or I lead him down a path. I'll let you decide. Make the system work for you. As a result of this good news my broker sent the loan off for underwriting. This typically takes a few days. Also, the insurer for our home owner's policy called to make sure it was OK to give information to our broker.
- Friday 1/20 – I called US Bank, the holder of my current mortgage, this morning because I saw an article on Yahoo saying rates had fallen again. I told them explicitly that I was in the process of refinancing, and that they were likely going to lose my business, but this was their chance to keep me. Honestly, I should have done this from the start probably. I just didn't even think of it because I'm so used to going through my broker. I learned from the nice CSR that although I had just done an appraisal, they would have to order another one no matter what. Ridiculous, right? That's another $400 in costs that would have to be offset by the rate. However, the best no cost option she could offer was at 4.125%. I thanked her for her time and finally started to relax into the idea that 4% is a good rate and just maybe I can stop angling for something better.
- Tuesday 1/24 – I was notified by email from my mortgage broker that we have initial approval from the underwriters and that there is no additional information necessary from me. A very positive sign and great that I don't have to any more legwork.
- Tuesday 1/31 – We've reached the stage where we need to schedule the closing. We're trying to land on a date about 3 weeks out to insure all the i's are dotted and t's are crossed.
- Tuesday 2/7 – We're all set. I confirmed the closing for 3pm on 2/24 working with the lawyer and my broker. Closing will be at the broker's office to facilitate any last minute clarifications.
- Friday 2/10 – I was instructed by my mortgage broker to go to RBC (now PNC) to close my HELOC. The last time we re-financed, my broker set this up for me as safety net of sorts. In uncertain times when DW was really sick and my job felt in jeopardy due to the merger, this served as insurance. I was really happy with it until this year they charged a $50 fee for having the account. I of course fought them on it, but the fee was buried in the paperwork details. I didn't like it, but I paid it because I liked the security it gave me. I ended up never needing a penny of it which was a blessing. Fast forward to Friday and when I go to close it (and my checking and my safety deposit box), RBC wants to CHARGE ANOTHER FEE OF $250 because I was closing it within 3 years. Are you kidding me? Russell, who was helping me, understood the absurdity. He said he would work with my broker to subordinate the HELOC until year 3 when it could be closed at no cost. However, wouldn't that still leave me with a $50 annual fee? Again, Russell said he would work it out with my broker because he had to do this sort of thing all the time to get around RBC's ridiculous fee structure. I liked Russell. he was competent and I kind of felt bad for him taking all of my money out, but there's no way I will ever do business with them again. I gave him my broker's info and left.
- Wednesday 2/15 – I got an email from my broker. It turns out if we subordinate the HELOC then my rate would go up and RBC won't budge on the fee so my broker is going to cover the $250. Now, I know mortgage brokers are not able to actually "eat costs" without breaking RESPA rules so I'll be curious to see where my $250 'discount' comes into the equation. He's a nice guy, and it really is the right thing to do since he set me up at that bank in the first place, but I think the really interesting part here is the short-sightedness of RBC. Here you have a mortgage broker who can push his clients to get their HELOC's virtually anywhere he likes, and RBC is going to nickel and dime him over one fee for one client. That is stupid beyond belief but so typical of many big banks today. I'm so glad to be completely done with RBC.
- Friday 2/24 – Apparently I should be allowed to arrange everything for a mortgage refinance except for figuring out the directions on how to get to closing since I managed to mess that up twice. We eventually made it to my broker's office and sat down with the attorney. We went over the most relevant details, fixed the misspelling of DW's name, and signed our names dozens of times. We were done in under an hour, and it was great to have both our broker and our attorney in the room to answer questions. Definitely try to work it that way if you can. Our new lender is Freddie Mac unless they decide to sell it another bank to service the loan which is quite common. We are going to end up getting about $800 back which will just about cover the last bit I need to fully fund the 2011 Roth IRA's. Also, we'll end up skipping our March payment due to the timing of everything so it will feel like we have even more money. I'm debating whether to throw that at the mortgage right away or use it for the 2012 Roth's. Once the dust settles I'll be opening a new HELOC (one with no fees!) at First National Bank. It's already all arranged.
So about 1.5 months and few hours of legwork and paperwork later, I'm the proud owner of the exact same home I already live in! Only now I'm going to save about $38,739 more dollars on the cost of that home over the mortgage period (assuming no pre-payment). It will actually be more since I can pre-pay even more principle. However, with an effective tax rate of 2.88%, I may forego pre-payment for other investments. Lots of decisions, but what's not to like!
I'm happy to take any questions.