- Bargaineering - http://www.bargaineering.com/articles -

Lessons Learned from a Refinancing Experience

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: