I recently had the pleasure of receiving an email from Debrajoy in which she shared a very positive mortgage related story I felt was worth posting because it hit on a lot of excellent points. Essentially the story is about how she lowered her mortgage rate and used other clever techniques to help ease the loan.

However, I think the most important lesson in this note has nothing to do with money. I’ll touch on that after you’ve had a chance to read the note.

Here is something I did to get the best locked rate on our 30 year mortgage:
US Bank offers “No Closing Costs” here where I live in Fort Collins Colorado. So about a year and a half ago, I began hearing stuff on my local NPR radio station that suggests that the interest rates might be going up again. I told my husband that I think we should lock on our interest only loan that we had for about 5 months.

US Bank was offering 5.75% locked-30 year. I contacted another bank and a couple brokers and got them to e-mail me ‘good faith estimates’ on a 30 year refinance at 5.50%. I took it (hard copy) to my banker and asked him if he could match it. (Mind you these estimates had closing costs up the wazoo written into it.) But without even blinking an eye he ‘bested it’ and offered me 5.49%. I came home and told my husband, Bob, “that was too easy”, I’m going to see if I can get better.

So I went thru the process of contacting 2 more (different) brokers and got them to e-mail me good faith estimates giving me a 5.25% interest rate. Now one of these brokers told me “you can get whatever rate you want, you will just pay higher closing costs for it”. I took those “offers” with their closing costs to over $3000.00 (hardcopy, in hand) back to my bank. My husband was embarrassed and said, “I’m not going to go over there with you while you beat those people up”. That is not how I see it, I am not embarrassed to save my husbands hard earned money. I said to him, “the bank isn’t embarrassed to take my money and I have no hesitancy in keeping my money!”

The next morning I approached my favorite banker (who offered me the 5.49%) with papers in hand and said, “Mason, you’re gonna kill me, but I have a better offer and want to know if you’ll match it.” and showed him my 5.25% write up for 30 year fixed.

He was hesitant this time, and said he’d have to ask his manager.

He called me back, at home later that afternoon and was sincerely excited sounding and said that they would give me 5.24%. Needless to say, we locked and have been happy ever since.

Recently I took $15,000.00 of our home loan and put it into another US Bank offer of 1.99% for the LIFE OF THE LOAN with a 3% fee.($450.00) And then I pay it down monthly on autopay, paying $200.00 a month, more than the minimum requirement AND put some money down on the principal of both loans as much as possible (sometimes twice a month). We now have $119,000.00 left on our original $172,500.00 home loan.

And the real kicker here is I learn all this stuff because I’m a news junkie –Love my National Public Radio and read the newspaper and a “professional” saver. I moved into a Christian commune in Chicago (1977) and lived there for 23 years from the age of 19 — never had a bank account, had no credit card — BUT I sure knew how to stretch a dollar. I loved shopping the thrift store and was very good at finding very quality stuff for my family. Our family moved out in 2000 and our credit history must have looked like we just came in from the planet Jupiter. At least we did not have BAD credit.

If there is a bargain out there to be found — I will find it. My Mom tells me that I get more for my money than anyone she knows. And now I found your site and am so happy to have company in the “Festival of Frugality”.

[... some really kind compliments about BFP, etc. ... ]

Please keep up the good work!!

Debrajoy

Lessons:

1. When Debrajoy got 5.49% right off the bat, her first thought wasn’t “Wow! That’s great where do I sign?” but instead “That was too easy, I’m going to see if I can get better.” That’s a great mindset whenever you’re buying anything, let alone a loan for the next thirty years. You had to work hard for your money, make the other person work harder for your money.
2. “I’m not going to go over there with you while you beat those people up”. That is not how I see it, I am not embarrassed to save my husbands hard earned money. If you had to boil the entire story down to just one poignant line, that’s the one I’d pick. I know sometimes I’ve been too embarrassed to ask for something because I thought I might look cheap or greedy; but that’s not the point. Why do people do all this work shifting around funds in an online savings account over half a percent of interest and then overspend on something by at least that margin? It’s hard to do and easy to say, but don’t be embarrassed about it. The more you save, the more food you can put on the table.
3. If there is a bargain out there to be found — I will find it. I was once told of a psychology experiment where individuals were given a ring of one hundred keys and a locked door. Some were told that the key to door was in the ring, others were told the key to the door might be in the ring. In both cases the key was in the ring but the ones that were told the key was in the ring had a much higher probability of actually opening the door before giving up. There is always a bargain out there, you just have work hard enough to find it.

Thanks Debrajoy for sharing that story! If you have a story or a tip or just want to say hello, you can use the contact form or email me directly at the address in the upper right hand corner.

Earlier last week we finally had our roof replaced to the tune of $4,450, which included replacing all the plywood, shingles, installing a ridge vent (all standard stuff), and replacing the facia board on the front of the house. The replacement was absolutely necessary right now, and probably overdue for quite some time, because there was a leak. A couple months ago we had to tear down some drywall in my office, I’m staring at the gaping hole right now, and toss out the waterlogged insulation too (we waited this long because of weather and the wedding).

One of the unfortunate parts about replacing your roof is that you can only passive enjoy it. It’s not like granite counter tops that you see every day, it’s not like carpeting that you can feel under your toes, and it’s not like windows you open with ease. It just sits atop your house, protecting you from the elements, and the only time you remember it if it leaks and hopefully it won’t do that for quite some time.

Spending $4,450 on something, anything, is always difficult and here are some lessons I learned in the process.

Importance of 3+ Quotes

When I started, I didn’t know how much the job should cost. If I accepted the first quote I received, $5,750, I would’ve easily overpaid by $1,300 for the same exact product (minus differences in labor installation). I’ve always made it a point to get at least three quotes for anything I get and I usually try to get five. On this project, I only received three quotes ($4500, $4750, $5750) but I felt comfortable enough with the contractors to move on from here. (I bolded the initial quote of the company I worked with, A-1 Roofing KangaRoof).

Three quotes will give you a good idea of how much the job should cost, which created a range of $1,250 from $4750 to $5750. In an ideal situation, I would’ve gotten five but I wanted to get a roof installed as soon as possible (Lesson here: Try not to put pressure on yourself, but don’t be too relaxed about it).

Negotiating Price

Of the three contractors, I felt that Maurice of A-1 Roofing KangaRoof had the best mixture of personality and professionalism of the three. He wasn’t a polished salesmen, which I thought was a plus, but he gave me all the information I needed to make an informed decision that his company was the best of the three (and he didn’t insult me with a “special offer today of $X, have to sign today!” type of offer). Since I decided I was going to work with him, my next step was to make it a financially smart move. I called him up and told him that the next competitor, a firm recommended to me by someone I knew, had given me a quote of $4500 for the job and asked him to beat it. I actually asked him for $4400 and we met halfway. Once the numbers were right, I signed.

I’m hardly a seasoned negotiator but I don’t think price is the only important factor in a contracting job. I decided I wanted to use Maurice and A-1 Roofing KangaRoof if the numbers made sense, which they did, but I also know that in home improvement contracting there is a bit (or a lot) of wiggle room available.

Here are some other lessons regarding price:

• If it’s a larger company, they have more freedom in the price because they perform more jobs. There’s also less downside risk that the firm will do a poor job to cut corners because referrals are very important to contractors.
• Don’t go with a small company unless it has very strong referrals and growing. On a roof with long warranties, we have a 10 year labor warranty, it doesn’t help if the business stop operating in three years.
• Don’t be afraid to negotiate the price and use every tactic you can think of. Clearly the best one is to use other quotes against the one you want, but you can also use delaying tactics (”Oh, I’m not sure I’m ready yet…”). They want your business, they are willing to take a little off the price to do the job now (hence those “special” offers).

Referrals Are King

I don’t know how the commission structure of those companies work but when I looked up whether I should tip the contractor, I was surprised at what I found. On one contractor forum, everyone (after joking you should tip 15-20%) said that tips aren’t necessary and aren’t expected, but to refer more business to them if the job was well done.

Here’s my referral for Maurice of A-1 Roofing KangaRoof: This guy went above and beyond for me. I mentioned to him that I had squirrels running up the side of the house and into the attic before the roof was replaced. I asked if his guys could screw in some wood in there to close off the hole (I realized the squirrels would eat through it but I wanted a temporary solution) and he recommended I get some quick setting mortar instead. It turned out that his crew was one shingle square short and had to return the next day, so he showed up the next morning with quick setting mortar to plug up the hole for me. I can’t speak highly enough of him and if you’re in the Baltimore-Washington DC area, make sure you give them a call as one of your three-plus. Maurice’s number is 410-746-4227, tell him Jim from Columbia sent you and he’ll give you a good deal (I don’t get anything for referring people and I have no idea if you’ll get a good deal but it’ll be fair).

Summary

We’re very pleased with how the roof turned out and it came in at a reasonable price. It was one of the things we knew we had to replace in the near term (5 years) when we bought the house three years ago and one of the last things on our list of needs. I think we’ve moved onto our wants now, which might include a kitchen remodel in a few years or something else. As my friend Fred at One Project Closer has always told me, you’re never done, you’re just one project closer.

A reader recently sent an email asking about a program United First Financial runs called a Money Merge Account and whether it was legitimate. United First Financial promises that the program, which costs $3500, would have you pay off the mortgage in one-third to one-half the time it normally would take. Knowing nothing about money merge accounts and knowing a little bit more about simple math, I smelled a fat $3500 scam brewing. The only scenario in which I could see $3500 cutting your mortgage in half is if you had a $7000 mortgage. But, setting my mental scam alerts aside, I did some more research about the plan.

Apparently it’s a fancy name for an accelerated mortgage repayment scheme. The first step in the money merge account is to take out a second mortgage on your home, a home equity line of credit. Then, what you do pay your entire paycheck towards the first mortgage and withdraw money from the HELOC to cover your expenses. You save a little money because the interest on a HELOC is calculated based on average daily balance rather than the final monthly balance. This lets you pay off more of the mortgage at the beginning of the month and then be charged less interest on the HELOC. (this assumes the same interest rate, which is a big flaw)

However, the plan also has a lot of other assumptions and flaws.

1. It assumes that your HELOC interest rate will be the same as your first mortgage interest rate - very unlikely. The bigger the HELOC rate, the less you save on that difference.
2. It assumes a single monthly paycheck so it’s a plan that loses some of its power if you are paid irregularly or every two weeks.
3. One big flaw is that there is never discussion of HELOC fees. I’ve never opened a HELOC but I imagine it’s not free.
4. This plan requires that you don’t save at all for anything else. Since your entire paycheck goes towards the mortgage and you withdraw expenses, it penalizes you drawing on the HELOC for non-essentials. Why pay $100 towards a 6-7% mortgage and then borrow $100 from a 10% HELOC?
5. Finally, as if all those weren’t enough, you have to pay $3,500 for a program to help you do this!?

In researching this article I researched a lot of sites and they were nearly unanimous in their opinion that these types of programs are not worth the money (not surprisingly). They’re not scams in the sense that you pay your $3500 and they disappear into the night but it’s something you can do yourself.

This begs the question, should you use it to force discipline? I could justify paying $100 to enforce discipline because it can save you quite a bit in the long run, if you can overcome the failings, but $3500 is ridiculous. If you have $3500 and you want to pay off your mortgage sooner, send a $3500 check to your mortgage company. (if you want a legitimate and easy way to pay off a mortgage faster, consider making mortgage payments every two weeks)

A lot of my friends are thinking about buying, or have already bought, a home this summer. If you’re planning on buying a house in the next year, check your credit history right now for inaccuracies (it’s free!). According to Consumer Reports, about 13 million inaccuracies are discovered each year, which means there’s a uncomfortable chance your credit report will have something wrong on it. Hopefully it’s something harmless, but if it isn’t then you’ll want to correct it asap.

Not buying a house for several months? This is actually the perfect time to check because it can take as many as 90 days to correct error (yeah, ninety days) because the bureaus need to research your claim.

Check your credit history for free at the government mandated AnnualCreditReport website. You can get a copy of your report once every year from each of the three bureaus. If you’re buying a house, I’d get all three at the same time to verify accuracy. If you aren’t and just want to use it, I’d stagger them out a few months so you can get a rolling 3-month old view of your credit history.

Happy house hunting!

It’s not very often you get an unexpected check but this week I received one from my title company in the amount of $202.00. Apparently there were outstanding stale dated checks that weren’t cashed and, as required by law, were returned to me from the escrow account.

Thank you for choosing [Title Company] to handle your previous real estate transaction. During a routine audit of our files, we found funds from outstanding stale dated checks that remain uncashed past the statutory time.

Accordingly, we are refunding the excess amount that remains in the escrow account. Please check with your lender to be sure these funds are not required for your escrow account.

Again, thank you for choosing [Title Company] and … [blah blah blah]

Hooray for free found money! I thought it was particularly honest of the title company since I would have no way to confirm this.

Looks like it’s time to get a Wii Fit (I realize that’s not the responsible thing to do, but it’s for our health!), if only I could find it somewhere.

That One Caveman recently took on the task of managing his home mortgage’s tax and insurance payments, essentially replicated the services of his lender’s escrow account, because of a very favorable appraisal. The appraisal raised the listed value of his home by $15,000, lowered his debt to value ratio to 80.4%, and thus enabled him to manage the funds himself (80% appears to be the sweet spot for this).

I thought about doing this myself but scrapped the idea for two big reasons. The first, the profits are small. I do the math for Caveman’s situation, a max $5500 escrow, but my escrow is lower at around $3500; so I would’ve earned even less than the analysis below. Secondly, while I trust my diligence, stuff happens and the risks are too great.

Profits Are Small

Caveman said his escrow maxes out at around $5500. If we assume monthly payments of $458.33 and a single $5500 payout at the end of the twelve months, 3% interest (or 0.25% each month, if compounded monthly) earns you $76.26 total. That $76.26 will appear on your 1099-INT and taxed at your marginal tax rate. If you are in the 25% tax bracket, that’s $57.19 in your pocket. If your escrow pays out twice a year, your earnings are even less ($57.61 pre-tax, 43.20 after taxes in the 25% bracket).

In return for $57.19, you have to send out payments to the county or state for property taxes and make payments to your homeowner’s insurance provider. That’s a lot of headache for a relatively small payoff.

Mistakes Are Costly

If you miss your tax payments, you start accruing penalties that eat into that small gain you would otherwise pocketing. In the worst possible case, the county puts a tax lien on your home, someone purchases it, and you fail to respond to the mailings for the entire tax lien holding period. Then you lose the house. The odds of losing your home are pretty slim, but they are greater than zero. Perhaps you move out in 5 years, start renting out your home, and forget to change addresses on record. Perhaps you go on vacation and forget to schedule a payment.

I’m always a fan of optimizing your personal finances. This is a case of where you can definitely squeeze a little more out of your money if you are diligent and put safeguards in place, but it simply wasn’t one I was willing to try given the small upside (recall, our escrow is max at around $3500, so we would’ve earned far less).

Do you manage your own escrow?

Don’t buy a home to make money because you won’t.

At the end of May, my wife and I will have owned our home for three years. It was a home that we purchased six months behind the burst of the housing boom and one that has still appreciated in the time since, a testament to the strength of the housing market in the area between Baltimore and Washington D.C. In our little development, similarly designed homes have been selling in the $310k-$320k, or about $15k-$25k more than what we paid for our home. Some of those don’t have the full basement renovation ours has, some don’t have new windows (which means they’re 25 years old), and so one might be tempted to say that those homes would sell for a couple thousand more if they did have some of those amenities. Even so, does that mean we “made” $15k-$25k on paper on our home investment?

Nope. We’ve spent $7,000 on new windows and sliding doors (a great deal I think), about $900 to carpet the basement, and will soon spend approximately $5,000 on a new roof. Total those up and you have yourself ~$14k of expenses. Okay, so deduct that from the $15k-$25k and you have an appreciation of $1k-$11k, not bad right? Then consider that we’ve paid nearly $35k in interest payments to the bank (of which a third is returned at tax time) and you see how this “investment” has actually lost us money.

Homeownership isn’t a short-term investment. Not only isn’t it a short-term investment, the majority of the “reward” derived from homeownership has more to do with living a better life than having more zeros in your bank account. Even though we have “lost” money (granted, we would’ve “lost” more had we been renting), we’ve made lots of great memories in the short time we’ve been in this house and had the pride of homeownership.

Life isn’t always about $$$.

My friend recently purchased a home and had to go through the rigamarole of apply and then re-apply for a mortgage. As it turns out, in the time between his first check and his second check, he had one hard pull on his report (the first check) and his score had fallen approximately 6 points. His girlfriend had the same first check plus an additional credit card inquiry, so two hard requests, and her score fell approximately 11 points. This is pretty consistent with the numbers I’d read online.

Here it is in his words:

If you are interested, [redacted] and I had to have our score[s] re-checked for our mortgage because it had been more than 120 days for us. According to our loan guy, mine [credit score] dropped ~6 points and [redacted]’s dropped ~11 points. This is consistent with numbers I’ve heard in the past about hard check[s] since I had one more hard check on my record (the previous mortgage credit check) and [redacted] had two (the previous mortgage check and one credit card check). So, roughly each check is ~6 points.

I’ve also heard that all mortgage related inquiries in a 30 day period are lumped together as one check, since everyone assumes you will be requesting quotes from multiple sources. These figures are consistent with that.