Wednesday, October 6, 2010

Refi Teasers, part 3 & Review

(Hopefully, my experience will give you some ideas when doing your own mortgage refinance.)

Though Lender 2 was offering a higher interest rate, the true closing costs were $1250 cheaper.

In addition, I had just figured out using online calculators, that Lender 1's loan would only give us a monthly payment that was $20 less than Lender 2's loan. Weird, huh? I mentioned this to Lender 1, and he was surprised when his calculations confirmed my findings.

"Yeah, Adhis, but $20 is $20!"

Was it worth paying an extra $1250 up front to pay $20 less a month?

$1250 ÷ $20 per month = 62.50 months

62.50 ÷ 12 months = 5.2 years

If I took the 3.75% loan, it would take just over 5 years for the $20 monthly "savings" to make up for the difference in closing costs. Only THEN, could I get the warm fuzzy about saving $20 a month compared to the 4% loan. What was the likelihood I would be in the house another 5 years? Not very high. We'd basically be paying an extra $1250 now just to have bragging rights to a 3.75% interest rate.

Turned out even if I stayed in the house another 15 years making minimum payments, the 3.75% loan would only save me $2400 in the long run. It didn't seem worth all that extra payment in the front to possibly stay in the house that long and get such a negligible saving (not even taking into consideration the even smaller savings difference if we paid off our mortgage early).

Another way to decide if refinancing is a good idea is to find the "break even point."

Let's say you were faced with the scenario Lender 1 provides, a 3.75% loan that would save you $220 a month. Divide the closing cost by 220.

$4141.30 ÷ 220 = 18.8 months is the "break even point"

That's how long it would take to recoup your closing cost investment. Will you live in the house that long?

Or say you are considering a situation like we had with Lender 2. Divide the closing cost by 200.

$2891.85 ÷ 200 = 14.5 months is the "break even point"

During the refi process, we found out the worst case scenario for the appraisal was we possibly would have to pay PMI of $67 a month (for us) for two years before we could have our home re-assessed. That would still leave us with payments $133 cheaper per month than our original loan. Why had we stressed out so much about the appraisal??? Knowledge sure saves on unnecessary stress!

Guess what? Our appraisal came in EXACTLY where we needed it to come! Exactly. PMI became a non-issue.

We chose Lender 2 with the 4% rate, which also let us find our own title company, saving us another $300 off the closing costs. Ch-ching!

In the end, we saved just over $200 a month in mortgage payments with a break-even point of 13 months! Ms. Cautious' underwriters even ended up getting us money back at closing equaling more than two months' worth of principal. Silly underwriters! We put that money right back toward the principal.

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  1. Call around for quotes on interest rates and closing costs.
  2. Choose 2 or 3 lenders to compare in detail.
  3. Ask for Good Faith Estimates to be sent to you. (By law, these must be as accurate an estimate as possible on your loan costs.)
  4. Adjust the estimates to reflect similar number of days in the "Daily Interest Charges" line to truly be able to compare the lenders' offerings.
  5. Make sure the Good Faith Estimates are comparing the same things. (In my case, only one had an escrow estimate, the other had $0 in place. I made both estimates "quote" zero, so I could compare apples to apples.)
  6. Take the amount of money your new payment will save you each month, divide the closing costs by that number to get your break-even point. The shorter the break-even point, the better.

What other tips would you suggest?

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