Two weeks and six emails later, I saved $60,000!
Here’s why you need shop around for a mortgage.
Disclosure: This post has a slant towards my refinance experience, but there are plenty of helpful tips if you’re thinking about buying a house in the future, too!
For those who haven’t been following my Instagram feed, (@ManVsCash), I have been posting our home refinance for the last few weeks. And it’s official… our old mortgage is paid off and our new mortgage is funded! Yay!
There are many reasons that it’s smart, but when somebody considers refinancing their property, there are usually three potential motives:
- Lower the payment: I’m 4 years into a 30 year mortgage. If I refinanced my mortgage back to a 30 year term, my payment would go down about $60 per month. I’d also get a lower interest rate, too!
- Shorten the term: If I refinanced my mortgage to 15 years, my monthly payment would go up a little, but I would shave years off of how many payments I have left.
- Use your home’s equity: If I wanted, I could tap into the value of our home to consolidate debt, do improvements, etc.
My Rules to Refi.
Here’s the realities about our financial situation:
- Our income has increased about 70% from when we bought the house. Since we’ve managed to avoid becoming victim of lifestyle inflation (read the Beyonce inspired truth about lifestyle inflation and pay raises HERE), we can afford a higher payment.
- Our credit has improved quite a bit from when we first bought the place. Now, we can qualify for the best rates offered by lenders (reserved for people with scores 720’ish or higher).
- We are 42 payments into our 360 loan term (that’s 3.5 years into a 30 year mortgage), so we’ve built in some equity.
GOALS: We have no interest in using the equity from our house, and we didn’t need a lower monthly payment for any mature reason. My end game was to secure a lower interest rate, and remove PMI.
What is PMI? Private Mortgage Insurance is a monthly premium that you pay to insure the lender (not you) from taking a loss in the event that you foreclose or default on the loan. The only way to avoid PMI is to get some ‘skin in the game’ by putting up 20% or more of the loan amount as a down payment. Most mortgages where you are financing over 80% of the house’s value (putting less than 20% down) will have PMI assessed, so be sure you’re aware of this cost if you’re planning to get a mortgage in the future with little to no money down.
We originally bought the house with 100% financing. So, we had PMI on our loan. In my case, I was throwing away over $500 every single year to pay for it, too! Ain’t nobody got time for that!
Before we ever crunched a number or spoke to a mortgage officer, I did two things:
- My husband and I spent months getting our credit scores up by paying off debts, clearing and incorrect information, and making sure our credit cards weren’t maxed out. (HERE is my article on how to boost your credit score!)
- We consulted one of my best friends, the real estate agent. She compared ours to homes that have recently sold and concluded that my place was worth about $21,000 more than I paid. That meant we had enough equity to get away from PMI. Score.
If you are the kind of person who shops around for the lowest gas price, grocery costs, or cell phone plan (or even if you’re not that kind of person)… you need to shop around for the cheapest lending products. Point, blank, period.
Because I don’t have money to burn, it was officially time to shop around for a great mortgage.
Did you know if you apply for a loan, all credit inquiries in a 30 day period count as one “hit” on your credit, so long as you actually secure the loan somewhere? The bureaus know you’re shopping around for the best rate and term, so if you’re seriously shopping… pull that report! (More info on credit reports HERE.)
We compared rates of a few different institutions, negotiated fees, talked terms, and eventually picked a local credit union that had a great offer.
To be honest, I was genuinely surprised at how quickly things flew!
In the course of a week, the loan application was approved, disclosures went out, documents were signed, the home appraisal was scheduled, paid, and the credit union began securing their lien on our deed. Boom!
Buying a house? Check out my insider secrets!
Appraisal Prep Tips.
In the years we have lived here, we’ve done some updates to the place… but now it was crunch time. We had to put-in-work to show off exactly how perfect my home is before the appraiser came by.
Because i’m frugal, I wasn’t going to shell out hundreds of dollars to clean things up. You shouldn’t do that, either, because almost every home-update doesn’t return a dollar-of-dollar return… so don’t spend $500 to make your house prettier if you’re expecting to get $500+ in return for your effort.
Here’s what we did, and what it cost:
-Curb appeal: I pressure washed the house, patio, and driveway so they would sparkle. We replaced our tattered flag with a brand new one, and bought some accessories for the porch to brighten up the first impressions. You only have one chance to make a first impression, you know!
$25 for the flag & pillows, and $60 for a busted copper pipe that I found when I finished pressure washing. #HomeownerProbs.
-Landscaping: We removed all the weeds, mowed and fertilized the grass, trimmed the trees, pruned the plants, and edged the walkways. It took a few hours, but i’m thankful we did this in early May and not the middle of summer.
-Paint: Dingy spots on our ceilings, walls, doors, trim, and cabinets all got refreshments. Lucky for me, I had leftover paint from a few projects laying around.
-Staging: Every corner of the house got a deep cleaning, staging, de-cluttering, and freshening up. I placed a few light air deodorizers around, and made sure the house was in pristine condition to maximize the appraiser’s overall impression. On appraisal day, we cooled the house to a comfortable temperature, opened every curtain, and turned on every lamp so the house was brightly lit, comfortable, and inviting.
$6 for air fresheners, and I earned $40 by selling something I had laying around that I didn’t need. Yay!
-Homework: I made a list of every update we had made to the house in the last five years, from new light switches to our kitchen remodel, and printed it out for the appraiser. I wanted to make sure they knew this home was well cared-for, updated, and was constantly receiving preventative maintenance.
Total Appraisal-Prep Cost: $53
The appraiser came and left, and three days later we got our figures back. Due to our neighborhood, and updates, the home increased by $24,000 over what we paid for it three and a half years ago!
Icing on the cake? We only spent about $5,000 in updates over the few years we’ve lived here! #Ballin
We paid: $129,000
Just as quickly as the appraisal was completed… the loan was ready to close!
If you’re afraid to refinance because it’s a lot of work… take it from me, it’s not. The only intense part is keeping your house clean until the appraiser shows up. When we originally bought the house, it took tons of paperwork to make the deal final due to the transfer of ownership, registering deeds, proving identity, etc. With the refinance, it was more like 7 pages to to move the loan over. Easy!
Out with the old. In with the new.
Here’s how the new mortgage breaks down.
|Term:||42 of 360
|0 of 180
|138 payments less.
|Amount to principle each month:||$167*||$531||$364 more.|
|PMI:||$530+||$0||$530+ less annually.|
|After taxes/ins, we actually pay out-of-pocket:||$935||$1020||$85 more.|
*Mortgages are front-loaded, meaning that the lion’s share of your early payment goes to interest, first. With each payment, a little less goes towards interest and more towards the principle balance. As of May 2017, we pay about $198 towards principle plus $73 in extra payments on the old mortgage.
Our closing costs were $2,900 and the appraisal cost $350. It won’t take long at all for the interest that we’re saving with our new mortgage to be greater than our refinance costs.
In a summary, we cut 11 years off our mortgage and increased our principle balance penetration by 69%… for the affordable cost of $2.83 per day. We are still aiming on paying off the mortgage in 2023, but if we decided to keep the mortgage through the end, we will save $60k in interest alone with the new mortgage!
Before you refinance.
We aren’t planning to move for a few years, so if you’re considering refinancing…you will need to ask yourself how long you think you’ll be sticking around. You don’t want to pay the costs of a refinance only to put the home up for sale before you can recoup the difference.
When you refinance, you may be able to roll the closing costs back into your loan rather than paying them out-of-pocket. However, nearly every lenders will require that you pay for the appraiser out-of-pocket. Be prepared to cover this expense even if you’re financing your closing costs back into the loan.
Be prepared and ask questions before proceeding with the loan. You’re never under an obligation to turn an application into a signed loan. Homes are the most expensive purchase we often make, and it’s easy to feel overwhelmed or have emotion take over. Stay excited, but stay proactive in protecting your money.
Likewise, there are many reasons consider refinancing, but not every reason will be a good fit for you. Your mortgage officer can help you decide if you should refinance, obtain a home equity loan, or explore another financial tool to meet your goals.
Refinancing was the RIGHT move for us on our debt free journey. As a small “win”, every single one of our loans now have interest rates under 4%!
I can’t wait until they are all paid off!