Getting on the Refinance Bandwagon
Lesson one of home refinancing: Trust no one.
My husband and I purchased a historic, red-brick townhouse on Capitol Hill last fall. We had spent months looking for the perfect house, so we moved quickly once we found it. We rushed to closing in three weeks, securing our loan just before the temporary increase in the limits of what Fannie and Freddie will back expired.
We felt lucky that we got in just under the wire. Then interest rates started dropping, and our friends started refinancing and saved hundreds of dollars a month. Congress extended the loan limit increases. Suddenly, our 6.25 percent interest rate -- which we once thought was a deal -- felt so 2008.
I jumped in quickly, already dreaming of extra zeros in our bank account. I began e-mailing lenders recommended by friends and colleagues. I was ready to roll with the first person who got back to me with a good rate.
He told me that I had to get an appraisal before I could lock in a rate of 5 percent on a 30-year fixed. It felt a little suspicious to me -- what if he later hiked the rate up? I would still be on the hook for the $425 cost of the appraisal. But that was just the process, I told myself. I could save so much more in the end!
Then, as we were waiting for the appraiser's report several days later, I got an e-mail from another lender. She could offer me 5.25 percent and lock me in that very day -- no appraisal required.
What? I hadn't realized the process was negotiable, sort of like buying a car. So this time, I got smart. I told her the offer sounded great, but I was talking to another lender who could give us 5 percent. Within minutes, she matched the rate. I scoured her good faith estimate and found an erroneous $1,000 charge. She also knocked off a few hundred from the title insurance cost to make up for the appraisal we had already done.
We locked in the rate a few days ago, and it's good for two months. Now we're sorting through an endless mound of paperwork and hoping to close asap. Our total closing costs will be about $4,000 (not including our taxes and insurance in escrow). Our new monthly savings: About $500. According to the refinance calculator on The Mortgage Professor, the refinance will pay off within nine months in our home.
(Also: The first lender is still waiting in the wings in case something falls through or he can beat the 5 percent rate. So we know we have a backup plan, just in case.)
If you are thinking of making the plunge as well, I recommend you do a better job of boning up at the outset than I did. The Finance Buff has a good analysis of the pros and cons of refinancing, with updates on the actual process once he locked in a worthwhile rate. Bottom line: Don't focus just on your monthly savings. Closing costs can be high and could negate the monthly benefit. In addition, if you are close to paying off your loan, it might not make sense to change your terms now.
The federal government has also tried to make refinancing easier with a new program called Making Home Affordable. The site has a handy tool for figuring out whether you are eligible for the program, with links for you to look up whether your loan is backed by Fannie or Freddie. For quick breakdown of how Making Home Affordable works, The Mortgage Professor outlined the highlights in a recent column. He also walks you through the steps of refinancing in a recession.
Posted by: hourlyadvisorguy | May 6, 2009 10:32 AM | Report abuse
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