Refinance Process, December 2012

You can apparently refinance your mortgage loan at any time you choose. This process essentially pays off the old loan and opens a new loan. Reasons for doing this include: changing from an ARM to a fixed rate mortgage, changing from a fixed rate mortgage to an ARM, changing the length of time on the ARM (e.g. 10 years, 7 years, 5 years, 3 years, 1 year), lowering your rate, lowering your amortization (e.g. 30 years, 20 years, 15 years, 10 years, 5 years), or increasing your amortization to spread out the payments better. If you’ve made extra payments, you may have paid down the loan-to-value (LTV) to a point where you qualify for a better rate than you had qualified for with your last loan. It’s even possible to do this at no cost to you, by getting credits from the lender for taking a higher than posted rate. You have to go through the documentation and appraisal process again, but that’s a pretty good return on your time when you could save several thousand dollars by refinancing.

I told you guys that I was considering refinancing the mortgage on my condo. I was a bit confused about the process when I first started, so I thought I would talk about it for you guys here now that the refinance loan has closed. It still seems a bit crazy to me that it made sense to refinance within six months of my purchase loan origination. I ended up going with Lender #3, a 5/1 ARM at 2.5% and no cost to me.

My Refinance by Day

Day 1: Started doing some research more extensively than my prior haphazard searching for fun. Lender #2’s rates I saw online were good enough that I talked to them on the phone and got more detailed quotes. Late in the evening, I found Lender #3’s rates to look quite competitive online.

Day 2: Called Lender #3 in the morning.

Day 3: Talked to Lender #3 and started the process. Began uploading my documentation. I needed a lot less documentation for the refinance loan than what I had needed for the originally loan. I only needed one year of W-2s, not two. I only needed one month’s worth of pay stubs, not two, and they didn’t want updated ones through closing like I had needed with the purchase loan. I only needed statements covering one month’s reserves and the estimated amount for closing since the loan balance on my credit report was far higher than what it actually was.

Day 6: Uploaded the last of the initial documentation the lender asked for.

Day 9: Appraiser called me to schedule the appraisal.

Days 10-14: I cleaned and tidied the condo to the point that it could probably pass as staged! Refinancing requiring an appraisal was a great excuse to vacuum up the dust accumulating in corners and tidy up some of the stuff I hadn’t gotten around to unpacking yet. (Don’t worry, there’s still plenty of stuff in funny corners. I just hid stuff better less visibly for the appraiser.)

Day 14: Appraiser came by and took a look at the place.

Day 27: I got the result of the appraisal. It came in out a small amount above my purchase price, so I don’t need to bring any cash to closing to go through with the refi. I had decided I was comfortable with bringing about $6,000 to closing to pay down the balance since my real goal is to keep paying down the mortgage, not to worry about the amount of equity that I have.

Day 44: I signed closing documents! The new mortgage loan was funded and the old one closed a few days later.

Post-Closing

  • The refinance closed in December, so I don’t need to make a regular payment January 1st. This meant a tiny bit extra in savings from my December paycheck than there would have otherwise been.
  • I’m estimating that the refinance will save me about $3,000 in interest costs over the projected life of my loan.

Final stats on the old loan:

  • $4 less of December’s mortgage payment went to interest than November’s did! (With no pre-payments, normal drop-offs are about $1-2 per month.)
  • The balance was about $260,000 before it was paid off at the closing of the refinance.
  • Its amortization was down from 30 years to 26 years, 4 months.
  • With no further extra payments, it would have been paid off with the regular payment on November 1st, 2038.

Stats on the new loan:

  • Its balance started at ~$260,000, ~$26,000 less than the starting balance on the original loan.
  • It is a 5/1 ARM (same as before) at 2.5%.
  • My required mortgage payment is now only $1,027, compared to the $1,206 that it was with the original loan, lowering the required payment by about $180.
  • Its amortization started at 30 years.
  • I will pay about $120 less in interest with my February 1st payment on the new loan than I did on my December 1st payment on the old loan.

Revised mortgage pay-off plan

On the old loan, I would make principal only payments every month on pay day and immediately when I got a bonus. With the new loan, the only way to make extra payments is through a regular payment. This means that I need to shift how I make payments somewhat:

  1. I’ve split my paycheck direct deposit to put enough to cover the non-mortgage expenses, rounded up to the nearest $100 into my regular checking account and the rest into an online savings account.
  2. I put a buffer of one month’s regular payment into that online savings account.
  3. I set up recurring payments on the mortgage loan servicing website for the last possible day they would let me (the 16th) out of the online savings account for the original loan’s regular payment. If I don’t make any further payments, this would pay off the loan with the regular payment on November 1st, 2036, two years ahead of the amortization on the old loan.
  4. Once my RSU vests settle, I will transfer the money I plan on using to pre-pay the mortgage to the online savings account.
  5. On the first Monday of the month, I will make a one-time payment from the online savings account for the balance that has accumulated since the last payment less the buffer. That should hopefully push back the recurring payment until the next month.

Again, I want to make sure that the mortgage is paid off before the rate resets. I have about 5-6 more months to do this than before, which gives me a bit more buffer room, time-wise.

Conclusion

All in all, refinancing was pretty simple and other than cleaning my place up before the appraiser came, didn’t require that much time on my part. The notary even came to my home for me to sign the documents! The most complicated part really was figuring out how to pay the new mortgage. The most time consuming part was probably researching lenders. I looked at quite a few – the internet is pretty awesome :) I was hesitant that the appraisal wouldn’t come in high enough, but then when I learned it had come in higher than my purchase price, I knew the refinance loan would close. I like that, unlike buying, refinancing was purely a math decision. Math decisions are far easier than life decisions.

When I was putting in an offer on my condo, I looked around at other lenders a bit and eventually (well, very quickly) ended up going with the lender I had worked with originally. The lender I’m now with had some appealing rates on their website, but since I couldn’t do an application online and I was crunched for time at work, I just went with the old lender. Funnily enough, I’m now with them! I’ve set a reminder to investigate refinancing in another 6 months.

Readers, when was the last time you refinanced?

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11 thoughts on “Refinance Process, December 2012

  1. We just closed on our place in July, but I know rates are already a little bit lower, but not much. I’ve been keeping an eye on things in case it makes sense to refinance. Now that we’ve paid down a big chunk, I’m somewhat tempted to look into a 15 year which would really save us a lot on interest.

    Do you know why you can only make prepayments with your regular payment?

    • I love your idea to refinance into a 15 year now that you’ve paid down a big chunk. I thought about that, but the best rate I could find was with a 5/1 ARM, so I stuck with that idea. Rates were only a little bit lower from when I bought as well (my original lender would have only been 0.125% lower than what I bought at), but what made it make sense was having 25% in equity instead of 20%. So a 15 year could make sense for you guys when refinancing into a new 30 year wouldn’t.

      I’m not sure and I haven’t fully investigated it yet. I might be able to make a pre-payment by calling them or sending in a check, but I can’t find a way to do it online other than with my regular payment or a one-time payment. That’s why my solution was to collect the payment money in a savings account. I’m pretty sure the interest only compounds monthly anyway with mortgages, right?

    • I figured it out after calling the lender. It was not obvious at all, but I’m happy to know that I can in fact make extra principal payments online at any time! Looking forward to making one with my bonus in a couple weeks! :)

  2. Re-financing is addicting! Haha I’ve convinced a few to refi with Amerisave but I haven’t seen any no cost rates in a while for my condo. I think what makes it easy for us younger people is all the documents they ask for are available online. Being able to quickly find all the info they ask for, having access to a scanner, etc makes applying so easy and after that like you say, the notary will come to you. All you have to do is be patient :)

    • People complain about documentation, but all of my documentation is on my computer / online! And what isn’t, I can scan easily into a PDF and email. The lender offered the option to FAX documents, which I thought was crazy! So unreliable! Haha, us crazy young people :) I looked at Amerisave, but it didn’t make sense for me.

  3. Wow, refinancing after 6 months sounds crazy! but the numbers speak for themselves. Since I’m not a property owner I appreciate the insight into refinancing appraisals. I guess I never realized that they’d actually have to come to your condo and assess it!

    • I know, I was super surprised it made sense already! It was really the fact that I paid down the balance to the point that I had 25% in equity, not the 20% I started with, and was eligible for better rates. I was surprised they came to my place too, though it was a good excuse to clean everything and dust around the corners, lol. Are you considering purchasing property?

      • Oh ok, that makes sense. I don’t plan on purchasing for a while (I’d like to relocate in the next 4 years or so), but I like to learn as much as I can about it just in case my plans change.

  4. Grats on the refinancing, good stuff to read about. Im a new homeowner, never considered an ARM. My rate was still pretty low, so no complaints there. I have talked to some friends of mine at work who have had scads of trouble trying to refinance for whatever reason. If I had to guess I would say they probably over bought. Several of them have lost their homes over the last year or two.

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