A beginner's guide to refinancing your home

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A beginner's guide to refinancing your home

You should look into refinancing your home. It's not going to hurt to investigate. If you've got ten minutes, call a bank or mortgage broker and find out your options.

Especially look into it if you pay private mortgage insurance (PMI) and/or have a high interest rate.

We closed on a home refinance about three weeks ago. We've owned our home for almost three years. The APR on our first loan was pretty good but we were still paying about $200 a month in PMI. So $2,400 a year was going to essentially nothing, because we weren't planning on defaulting on our loan.

First we investigated just getting rid of the PMI by going through an appraisal process with the bank that held our mortgage. We would have to have 25% equity (aka a loan to value ratio of 75%). This process would cost us $400 for the appraisal and it would be at the bank's discretion if they dissolved the PMI or not.

We've liked the bank that holds our mortgage, perhaps because they're not one of the bigger banks. We've had good customer service and no problems so we had good reason to believe that they would drop the PMI if our house appraised high enough.

But we thought it would be worth investigating a refinance. As it turned out, we could lower our APR slightly (even small percentage points can add up to a lot of money over time) and get rid of our PMI if we refinanced. So we did and we're saving $350 a month ($4,200) a year.

That may seem like a no brainer, but we had to consider the downside to refinancing:

  1. We had to pay close to $5,000 in closing costs (which could be rolled into the loan) in addition to the $400 appraisal.

  2. We started all over with payment one on our amortization table. So we're back to paying far, far more interest than principal every month.

  3. It's just as much paperwork as buying a house.

  4. We're adding three years back onto the life of the loan.

  5. Over the 30 year life of the new loan, we will pay more than if we had continued with our previous loan (excluding the PMI which we likely could have eliminated without a refinance).

But here's the upside to refinancing:

  1. We got a one-month reprieve on a mortgage payment. So that helps with immediate finances or some of the closing costs.

  2. We now have $350 extra a month (in theory) that could go directly to our principal.

  3. It was a lot of paperwork but we knew what to expect because we'd bought a house before.

  4. We don't think we'll own the house for 30 years anyway.

  5. The immediate monthly relief is worth it because, again, we don't plan to own the house for 30 years.

Here's how we investigated our refinance options.

We applied for a loan refinance at two places. The first was a credit union that offered us a slightly higher rate and lower closing costs. The second was the bank that held our current loan (the first bank we had a mortgage with) offered us a slightly lower rate with higher closing costs.

That's right. That's what I'm saying. We called the bank that held our mortgage and said we wanted to refinance. I was nervous because I thought they would think I was crazy. But I guess refinancing with your own bank is a thing, because we refinanced our home loan with our own bank.

In some ways refinancing with the same bank that already held our mortgage made things easier (i.e. they could look up our old application for information and they already had all of our escrow information and payment history, etc.)

In some ways it made it harder because it was a little more confusing to understand the transferring of money and escrow. Essentially, it was as if we were working with two different banks. Our first loan had to be paid off entirely, and the old escrow account had to be emptied and begun anew.

To be honest, I still don't entirely understand how they reworked the escrow and how that factored into our closing costs. Even our loan officer couldn't really explain it.

Here's what I learned about refinancing (and what you should ask about if it's not offered):

1. Refinancing is a whole lot like buying a house except you're already living in the house you want to buy. It takes all the same paperwork.

A. Two years of W2s and 1099s

B. Two months of paystubs

C. Three months of bank statements

D. Your credit score

E. Etc.

2. Call to get current rates and don't be deterred by online calculators. The rates banks advertise online aren't necessarily current or applicable to your situation.

We almost didn't inquire about refinancing because all the online calculators I tried, gave me estimates that wouldn't make a refinance worth the effort. But when I called and actually spoke to a mortgage broker and a loan officer, I got very different numbers than the auto calculators gave me.

3. You don't have to have an escrow account if you refinance. You can choose to pay your property taxes and insurance on your own. We chose to go with an escrow account again because I don't totally trust myself to put thousands of dollars aside for biannual payments.

I believe our closing costs would have been significantly less if we had not opted to do an escrow account so that's something to keep in mind. Also, call the new escrow company if you have questions about how the escrow is being transferred from one loan to another.

4. Ask about a float down rate. When you lock a rate (APR), the bank can't raise that rate even if your loan hasn't closed, but with a float down rate the bank can lower your rate if it goes below a certain percentage.

5. You absolutely should not go with any bank or mortgage company that insists you need an appraisal as the first step (this is advice from a mortgage broker). First, they need to see all of your paperwork and approve you for a loan. Then they can charge you $400 for an appraisal.

Appraisals hold no value across financial institutions. If BOA charges you for an appraisal and sends out "their guy" to appraise your house, Chase isn't going to accept that appraisal.

That's why it's best to apply for a refinance a couple places and choose the best offer before you move to the appraisal phase.

If your mortgage payment is one of your biggest bills every month, then a refinance is one of your best chances of saving a lot of money. It can't hurt to ask.

Photo: Jeff