Buy the Same House Twice for Less Than Buying It Once
Earlier this year, my husband and I refinanced our house. The entire process took just a shade more than six weeks. It was our first-ever refinance, on our first-ever mortgage. While nothing totally unexpected happened, the experience was instructive. (See also: Will 4.5% Mortgage Rates Jumpstart the Housing Market?)
If you are preparing to refinance, here are some of the basics you should know.
A Refinance Is Another Loan
The first thing to understand is that a refinance is actually another loan.
When you refinance, you are getting a new mortgage to pay off your old mortgage. The new loan, though, has (or should have!) a lower interest rate. And, if you get a 30-year loan, you end up starting over again. Generally, your refinance is only for the amount you still owe on the house, so the loan amount is smaller than your original mortgage amount.
So, since the interest rate is lower, you have another 30 years to pay off the loan, and the mortgage is for a smaller amount than your original loan, you usually end up with a lower payment. This can help with your cash flow now, and if the interest rate is low enough, you often pay less over the life of the mortgage, even though it's stretched out to another 30 years.
Because a refinance is a new home loan, you need to jump through a lot of the same hoops you cleared to get your mortgage in the first place.
Required Documents and Info
Since you are getting a loan — and a pretty big one at that — you need many of the same things required for your original mortgage.
- If you want access to the best rates, you need to have good credit. The lender will check your credit score and offer you an appropriate rate. You're not in the clear after the initial pull, either. The lender will check your credit again before the loan closes, so don't rack up additional debt on your credit cards or open new lines of credit.
- You will also need to provide proof of income (tax returns, pay stubs), as well as copies of your bank statements for the last two months and statements for other asset accounts (such as a retirement or savings) you own. Because most of my family's income comes from my business, I also sent PayPal statements, since the lender wanted to see where the large, periodic deposits on sometimes odd days were coming from.
The lender will have a lot of paperwork for you to sign at the outset, including the Good Faith Estimate, which outlines the terms of your loan and the out-of-pocket expenses you can expect to pay. Make sure you read everything carefully before you sign.
Patience and More Documentation May Be Required
Once you get the ball rolling, you will be presented with the opportunity to "lock in" your interest rate. If you are concerned that mortgage rates will rise before your loan closes, locking your rate is a good idea. Things can change quite a bit in the four to eight weeks that it can take for your refinance to close, and you want to make sure that you still have access to the good rate you were quoted.
Throughout the process, you will be presented with updated Good Faith Estimates, and requests for documentation. At one point during my refinance, I was shocked to see that my out of pocket expenses rose dramatically partway through. I was concerned, but my loan team assured me that the final numbers would be closer to what I was originally quoted (and they were).
One of the issues is that your final numbers depend, in part, on how quickly your new lender can get a payoff amount from your current lender. Additionally, when the closing happens matters as well. Normally, your lender will give you a target closing date so that you can prepare. If you want to hit that closing date, it's vital that you respond to requests from your lender immediately.
My refinance was handled by Quicken Loans, and it took place entirely over the Internet. It was fairly easy to scan and upload all of my documents, and the online interface was easy to manage. If your refinance takes place locally, find out how the lender prefers to receive your paperwork (you might have to take it to the branch). Since the huge stack of papers does need to be signed in person, Quicken sent a notary to our house, and he took care of everything. You might have to go into the bank, or receive the packet in the mail and find your own notary to witness your signature.
One of the scariest things about a refinance is that, once you get things moving and the initial steps are taken, it can be two or three weeks before you hear anything from a lender. The underwriting process can take a while, so be prepared. If you are concerned, you can always contact your lender and get an update on your status.
Fees and Rights
As with other loans, you normally have fees to pay with a refinance. Our fees amounted to a little more than $1,700. With our savings of more than $300 a month, we've already almost broken even on the fees. Fees that you might have to pay with a refinance include an appraisal fee, inspection fee, attorney fee, and title search fee. Your old mortgage might also have a prepayment penalty, or you might want to pay points in order to reduce your interest rate.
Depending on the refinance you are eligible for, however, you might not have to worry about some of those fees. My refinance was done through HARP (which is scheduled to end December 31, 2013), and I wasn't required to have an appraisal or an inspection. This made the process a little easier.
Before you get too far in, make sure that you understand exactly what fees you will pay and when they need to be paid. Also, realize that a "no cost" refinance might actually involve rolling your fees into the mortgage. There's no cost to you up front, but you pay over time. Find out if you are paying the fees that way, or if the lender is truly covering your costs. And, finally, know your rights. You usually have three days to change your mind on a refinance after you close.
Have you refinanced recently? What was the process like for you?
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You might not need to do a 30-year new mortgage. You can set it for; say 25 years or whatever you had on your original loan. Lower-term mortgages carry lower interest rates; so that's something else to consider. In some cases it makes sense reducing even further the number of years left on the mortgage; you'll get less years to pay it off; less total amount paid on interest and it might cost about the same as the current mortgage at a higher interest rate.
The article mentions that "you have another 30 years to pay off the loan". That's actually one of the biggest risks with refinancing.
Say you live in the house for a long time - 20 years and refinance every 5 years. If you just take the 30 year loan each time - guess what. You're not really buying a house. You're renting. That's because at the end of the 20 years you still have a 30 year loan - just like you did on day 1.
Sure there can be these clever analyses showing that if you take the money you save from the lower payments, invest it wisely then you can come out ahead (esp after the tax break).
But with all due respect, that's probably a good plan for about 1% of real people. In the real world, if you have lower payments on your house, you most likely will just increase your spending on other things. So a lower house payment often translates into just higher spending. While a higher house payment (which will happen if you decide to refinance keeping the *original* end date - e.g. after 5 years getting a 25 year mortgage) most likely results in higher savings. That's because you're buying your house faster - so you're saving the money in your house.
Personally every time we've refinanced we've gone a step further. We've kept the same end date and used the lower interest rate (since rates have been falling steadily) to increase payments against the loan principle. So we've kept the same house payment for years, but each refinance means we're buying the house faster - with ultimately less total interest paid. So after starting with a 30 year loan and 3 refis we look like we'll pay it off after about 20 calendar years from the day we moved in.
You should never buy a house if you can't afford it. My last house loan was for a mortgage to pay off our construction loan. The house was paid for in full twelve years ago . . . three years ahead of the scheduled 15 year pay-off. The sanest approach to home ownership is to buy what you can reasonably afford, not what you want. If this means you don't get your dream house right off the bat . . . too bad. Since paying off our mortgage, we have saved enough money to remodel both bathrooms, replace all the original appliances with EnergyStar, replace all windows and doors for more energy efficiency and we are now saving to update the kitchen cabinets and counters. Could we take out a loan to do this? Yes, we could as we have an excellent credit rating. However, since paying off our house, we much prefer to "pay as we go." That applies to cars too. My husband recently paid cash for his new 2013 vehicle. It pays to save instead of paying interest, even low percentage interest.
The best is to try and keep making the old payment after you have refinanced. That way you are taking advantage of the lower rate. Although by keeping the higher payment you are not helping your cash flow, you are going to pay off your mortgage faster because less will go towards interest and more will go towards principal. It requires some fiscal discipline though ;)
The Harp Program is extended again .. december 2015!