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.
- 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:
- 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.
- I put a buffer of one month’s regular payment into that online savings account.
- 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.
- Once my RSU vests settle, I will transfer the money I plan on using to pre-pay the mortgage to the online savings account.
- 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.
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?