This post was authored by a friend of mine, Melissa, who just recently went through the process of refinancing her adjustable rate mortgage loan. I asked her to write about it since I know a lot of people are probably going through this process as well (and I won’t be going through this myself) and she was kind enough to oblige.
When I bought my house back in 2004 I didn’t have a lot of options for loans. I had no money to put down on the house and a fairly limited credit history – I was happy just to be able to buy a house so long as I could get approved of a loan. Of the limited selection of loans available, I chose a 3/1 ARM program with an interest rate of 6.625%. While I wasn’t crazy about an ARM, I told myself that if I decided to stay in this house for longer than 3 years then I would just refinance. Additionally, my loan had a 2 year soft prepayment penalty, so I had to reach the 2 year mark before I could even think about refinancing or else I would face a ridiculous penalty payment.
One of the first rules that I have heard with respect to refinancing is that it’s generally not worthwhile unless you can drop at least 1% on your interest rate. Having an ARM that was going to readjust to over 8% by the fall and potentially higher after that, I knew that I was going to refinance regardless of what rate I could get. As luck would have it, however, the timing on my refinancing has worked out reasonably well. At the start of December, interest rates were at a 10 month low and I was able to get a rate of 5.75% with only half a point on the loan (a standard 30 year fixed rate loan). However, the lower interest rate comes with the cost of refinancing, which for me included around $1100 in fees to my lender ($1000 of which was for the 0.5 point rate buy down), $400 for the appraisal and $1200 in fees to the title company. Also included in the refinancing costs were payments for the escrow account to be set up with my new lender for taxes and hazard insurance. I don’t really count these in closing costs because that’s not really money “lost” like all the fees that are charged and shortly after refinancing, I received my old escrow balance from my previous lender anyhow. So all in all, I spent approximately $2700 to refinance to a point where I’m now saving $100/month over my previous mortgage payment. Since I plan on owning the house for at least two more years, this expense was worthwhile.
Looking back on the refinancing experience there are a few things that I learned along the way that are worth noting:
- In the state of Maryland (not sure about other states) you have 3 days after your settlement during which you can change your mind completely about refinancing. If you go through the whole refinance process on Monday you could change your mind Thursday afternoon and go right back to the refinancing drawing board.
- When you refinance your home your original title insurance policy does not cover your refinanced loan. In most cases you can get a reissue rate for your title insurance (roughly $200 savings for me) rather than have to pay the full initial price, but this still wound up being the most significant expense I had with the title company
- I mentioned this above, but it’s worth noting again that your new lender will in most cases require you to pay money towards a new escrow account with them. In my situation, the lender escrowed 8 months worth of hazard insurance and 3 months worth of taxes (the number of months here depends on when your taxes and hazard insurance were last paid) at settlement. I was rolling all of my settlement costs into the cost of my loan, so this wasn’t a huge concern to me, but for anyone wishing to pay closing costs up front, this is something to consider.
- Your previous lender is required to submit to you the money in your old escrow account within 30 days. Between this check and the fact that you skip a month of mortgage payments, this can be a nice boost to your bank account.
- There are different types of loans for refinancing. I won’t pretend to know them all, but I went with a “rate and term” refinance where I’m simply shopping for a new rate and not looking to get a lot of cash back. With a rate and term refinance, you can still get a small percentage of your total loan back in cash (I think around 1%) which I elected to do. If you’re looking for more cash back you would have a different style of loan and would have different interest rates to go along with it.
- Because I was on the edge of needing to pay PMI, I wound up getting my house appraised early in the process. The first lender that I talked to ordered the appraisal and had I gone with his loan the appraisal would have been free. However, in the next week I changed my mind and was able to pay for the cost of the appraisal directly and then have it reassigned to a different lender. Some lenders do not allow their appraisals to be reassigned and I was fortunate to be able to do this. In hindsight, I may have been better off waiting on the appraisal until I was 100% sure that I had the best loan out there.
- I wound up refinancing with Wells Fargo and initially locked in at 5.875%. After I locked in the interest rate dropped slightly and I was able to utilize Wells Fargo’s one time float down policy to the current rate of 5.75%. If you refinance with a broker, they can most likely just find a new loan if rates drop after you lock in, but if you like knowing exactly what fees you’re going to pay before refinancing (i.e. a bank, not a broker) then finding one with a policy like this can be helpful.