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Refinance Home Loans – How One Call Saved Us $41,123.16

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I refinanced our first mortgage

It all started when someone on Twitter mentioned the possibility of refinancing home mortgages using the making home affordable program.  I had always assumed because we are upside on our home that it wasn’t possible… well I was wrong.  From start to finish I was able to successfully refinance our 1st home mortgage with little more than a few hours of research and a simple phone call.

This article summarizes the simple steps I took and aims to outline a mortgage refinance strategy you can use.

Our first and second mortgages

To give you an idea of where we are in comparison to where you are, here is our mortgage and home value information.

  • 1st mortgage = $119,000 at 5.875% interest rate
  • 2nd mortgage = $39,700 at 8.8% interest rate
  • Total owed = $158,700
  • Total borrowed = $165,000 three years ago
  • Appraised value at purchase = $175,000
  • Appraised value at present = $120,000 (according to our 1st mortgage lender)

As you can see, according to the present value of our home, we are upside down by nearly $40,000!  The good news is that our first mortgage lender sees the value of our home as enough to repay the amount we owe them.  Therefore our 2nd mortgage lender has much more risk than our 1st mortgage lender.

Refinance the 1st or 2nd mortgage?

Although refinancing our 2nd mortgage was most attractive to me (because of the higher rate,) I knew our lack of equity would make this option impossible… so I didn’t even try.  Why impossible?  Our home is currently valued at just enough to cover the 1st mortgage.  In the event that we could no longer make our mortgage payments, our 2nd mortgage lender would not be able to recoup any of their investment.  This essentially makes our 2nd mortgage an unsecured loan that cannot be refinanced because no lender in their right mind would touch it.  Even if a lender would, they could not offer us a rate lower than our current 8.8%, so we were better off focusing on refinancing our 1st mortgage.

How did refinancing benefit our home loan?

I’m glad you asked… this if my favorite part to talk about!  Here are the ways refinancing benefited our 1st mortgage situation:

  1. Shorter term – We refinanced from a 30 year fixed (with 27 years remaining) into a 20 year fixed.
  2. Lower interest rate – Our rate before refinancing was 5.875% and our new rate is 5.5%
  3. Zero closing costs, zero points, zero fees – It did not cost us a penny to refinance.  I explored other options with our lender that offered better rates with closing costs, but the option we chose was best for our situation.
  4. Greater principal reduction – Before refinancing we were only reducing mortgage principal by $150 each month.  After refinancing we will be putting $275 toward principal each month which will greatly reduce the interest we pay over the life of the loan.
  5. Interest savings of $41,123.16 – By refinancing into a shorter term and increasing our monthly principal paid we have set ourselves up for massive savings in interest paid over the life of the mortgage.  For those interested, check out our amortization schedules before refinancing and then after refinancing.
  6. Minimal monthly payment increase – Even though refinancing will save us more than $41,000 our monthly mortgage payments only increased by $92, which is a virtually unnoticeable change in our budget.

My wife and I are crazy excited about how much our refinance is saving us… and REALLY want to help you move yourself in the same direction.  It is much easier than you might think, here are the simple steps we took that resulted in such an enormous savings.

CapWest Mortgage refinancing

Right now CapWest Mortgage has excellent deals on refinancing… I highly recommend you check them out.

Simple Steps to Refinance Mortgages

Step 1:  Does Fannie Mae or Freddie Mac own your loan?

Only loans owned or guaranteed by Fannie Mae or Freddie Mac are eligible for refinancing according to the Making Home Affordable government program.

Use these resources to decipher if Frannie Mae or Freddie Mac own your loan… or you can call and ask your current mortgage lender.

Fannie Mae

Freddie Mac

If either Fannie or Freddie own  your loan then your current mortgage lender most likely has a program set up related to the Making Home Affordable government program.  Make sure you mention this program when you call your lender.

Step 2:  Gather your mortgage information

Here is a list of the information you’ll want to collect before calling your bank:

  • Information about your mortgage, such as your monthly mortgage statements
  • Information about the monthly gross (before tax) income of your household, including recent pay stubs if you receive them or documentation of income you receive from other sources.
  • Your most recent income tax return.
  • Information about any second mortgage or home equity line of credit on the house.
  • Account balances and minimum monthly payments due on all of your credit cards.
  • Account balances and monthly payments on all of your other debts such as student loans and car loans

Step 3:  Make the call to the mortgage lender

This is the most critical step because this is where you will make or break your deal.  You can secure a “good” refinance, or you can secure a “better” refinance… it is all up to how you handle this call.

Use these tips when talking to the mortgage lender agent:

Call your existing lender first

By all accounts, you should start with your current lender first because they will be able to give you the best bang for your buck.  To find the contact information for your lender, look on your mortgage statement.

I actually called Capital One first because I would have preferred to move my 1st mortgage to them.  The Capital One 360 rep told me they could only offer me a refinance if I had at least 25% equity in the home, and suggested I contact my current lender… which I did.

Your lenders phone menu will probably have an option for refinancing under the Making Home Affordable program so just follow the prompts.  If they do not then just keep going through the menu until you get a rep on the line.

Do not settle for their first few refinance offers

Know what type of refinance will satisfy you before you call.

You have to remember that the better deal your mortgage lender gives you on a refinance, the more they stand to lose in interest income over the life of the mortgage.  Because of this they will offer you the least attractive options first to try and appease you without giving you the best deal.  Don’t fall for this trick.  Keep chipping away at their offers until you get something that makes sense.

Befriend the mortgage rep

You catch more flies with honey than with vinegar.  Period.  When you talk with the rep make sure you separate the agent from the lending company itself by never referring to them as one in the same.  If you separate them from the company, it is MUCH easier to get them on your side.  Once you have them on your side they will be much more willing to help you find a solution most beneficial to you.

Be willing to walk away

Depending on the lender and the rep you talk to, you may have to be prepared to walk away.  Many times they will not offer you the best deal until you are ready to hang up.  While offering you a decent refinance can hurt their bottom line, having you refinance with a different lender would hurt them even more… and they know this.

Step 4:  Follow through with the paper work

Once you secure the deal with the mortgage lender agent the process is mostly over.  Now you just have to wait for the paper work to get to you.  Keep in mind that they may make the process a little more difficult than necessary… this is possibly another effort to keep you in your current mortgage that will pay them more interest.  Do not become frustrated, just wait patiently and take care of the paper work as it comes.

If you start to loose motivation or you become angry and annoyed with the process, just focus on the amount of money this paper work will save you in the end!

In my case, I was able to save over $41,000 by doing just a few hours of leg work.  I don’t know about you, but I can convince myself to jump through a lot of hoops and maneuver through a lot of red tape for $41,000!

Leave us a comment with your mortgage refinance story

Your story will help others just as mine helped you so be sure to let us know how your experience went by leaving a comment.  Was it easy?  Was it hard?  Do you have any tips for others that I may have glossed over?  Let us know, and Godspeed on your mortgage refinancing efforts!

Is It Better to Buy or Rent?

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Over the last few weeks we have had some good discussions regarding the buy vs. rent debate.  Robert gave us a few solid articles and many of you chimed in with great thought provoking comments.

But who is right? Does the fact that 30 year mortgages double home prices really make renting a better option than buying?

Is It Better to Buy or Rent?

The question is anything but simple, so it’s only logical to assume we’ll wind up with guys-n-dolls going to bat for both teams.

What are others saying? Thanks to help from a couple dinosaur comics and several atrocious years in the housing market, Get Rich Slowly founder JD had a change of heart on the matter.  In his own words,

“One of my beliefs that’s been set on its head is that Americans are better off buying their own homes. I don’t believe that’s necessarily the case anymore.”

A few years back he felt home ownership was always the way of the dragon but now perceives the best reasons to buy are actually non-financial and/or personal, since the numbers often favor renting.  I agree.

If you’re interested in reading more of JD’s take on this topic and many others be sure to grab a copy of his soon to be released book, Your Money:  The Missing Manual.

Aside from JD’s point of view I also checked out several other takes on this topic.  The wise consensus seems to be… neither option is best for everyone.  I agree.

Buy or rent – crunching the numbers…

We’ll start by shooting a hole in the argument that “homes appreciate over the long term.”  The truth of the matter is that home prices over the last 80+ years beat the inflation rate by a mere one percent.  Sheesh, I get better rates in my Capital One 360 Savings account.

Laying aside emotional factors, let’s see if we can help you determine which option is best for your unique situation according to the numbers. After all… numbers don’t lie right?

This is where the bottomless pockets of big companies come in handy.  They pay really smart programmers to dev really cool calculators that make really complicated formulas look really sexy.  Check it out…

Is It Better to Buy or Rent Calculator

I used this awesome WSJ calculator to discover if it would be better for us to rent or buy (for the record, we bought nearly 3 years ago.)  Here are the details of my calculation, complete with a screenshot:

  • Monthly rent = $800 – this would be the maximum amount we would ever spend on an apartment in Lansing, MI.
  • Home price = $165,000 – this was the cost of our home.
  • Down payment = $0 – yeah I know… real smart eh?  😉
  • Mortgage rate = 6% – the combination of our 1st and 2nd mortgage rates would actually be a bit higher.
  • Annual property taxes = $3,200 – which is about 2% of the cost of our property each year.
  • Annual home appreciation = 1% – despite our currently depreciated asset, I chose to go with the long term trend here.
  • Annual rent increase = 3% – to factor in increasing yearly rent costs.

We have owned our home for only 3 years so we are still on the really expensive end of our mortgages, which made my self-audit especially hard to swallow… but I knew that going in.

Renting an $800 apartment for the last three years instead of purchasing our home would have saved my wife and I approximately $24,000.

Another factor worth mentioning, but not covered by the calculator, is the current value of our home.  We’re upside down on our home by an approximate measure of $20,000 which leaves us unable to sell until that deficit is wiped out (either by us or by the markets, but likely by us.) Adding in the cost of our depreciated asset, home ownership, over the course of the last 3 years has cost us approximately $44,000 more than renting.

*sigh* Oh well… this just stokes my motivation to soldier on in passionate debt-slayer mode!

Try placing your numbers into the calculator to audit your own housing situation.

So… is it better to buy or rent?

Does the joy of home ownership outweigh the higher cost?  Is sacrificing home ownership more than you can stand to do, or are you one of the few who have chosen sacrifice immediate wants choosing instead to rent, save up, and pay cash for your a home?

Ultimately, you are the only one who can answer that question… according to your unique situation.

If you are currently contemplating home ownership, I recommend being careful not to make partially educated decisions based mostly on emotion.  Instead, run the numbers for yourself and be sure you have a full understanding of both the short and long term financial ramifications before making your move.

Powerful Advantages of Renting a Home Before Buying

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Powerful Advantages of Renting a Home Before BuyingThis is a guest post by Kevin Mercadante at OutOfYourRut.com.

It’s almost hard to go a day without hearing how lousy the housing market is but if you’re looking to buy you may be able to find an unexpected advantage in all the bad news.

Though not many people do it intentionally, renting a house before buying would provide a number of incredible benefits if you’re willing to do some digging in the market. It’s kind of like test driving a car before you buy—same principal. I’m not talking about a lease purchase, or rent-to-own arrangement either, but a traditional rent-to-rent-and-maybe-buy-at-a-later-date kind of deal.

Think of it as a “Try Before You Buy” philosophy to buying a home.

Lease Purchase

Lease purchases are generally formal arrangements which spell out the terms of final sale in the agreement, and typically require a non-refundable deposit which will be credited toward the eventual down payment. The written agreement is actually a contract of sale with a temporary lease provision included. As neat and tidy as this seems, there are a couple of major negatives in there from the tenant/buyer angle.

First, if you fail to complete the sale, you’ll forfeit your deposit, and that deposit can be considerably more than a typical rental deposit. Second, you are locked into the agreed upon sale price. That would be an advantage if house prices were rising, but at the present time they’re going the other way. Imagine this scenario: you’re locked into a contract at a price of X when the market value suddenly falls to X minus 10% by the agreed-upon sale date. Now you’re faced with a choice of either paying too much for the house or losing your upfront money for failing to do so. Heads you lose, tails you lose.

Rent-to-Rent (Then Own)

On a straight rental arrangement you preserve all of your options, which can be a huge advantage, especially in the current market. Some of the benefits include:

  • Negotiate a lower sale price. Not only will you get the lower future price if values continue to drop, but it is also likely your landlord will not have to pay a real estate commission & therefore will be more flexible in negotiating final price! It’s no secret that many homes are offered for rent in the hopes of securing tenants who might become a buyer, thus eliminating the need for an agent. You may also be able to gain a price advantage by the fact that you’re a buyer in hand, freeing your landlord from the responsibility of marketing the house or performing routine maintenance upon your departure.
  • No moving or moving costs – you’re already there. One of the great financial stresses involved in buying a house is that you’re besieged by costs from every angle—down payment, closing costs, escrows, inspections, new furniture. True, you will have already paid for the cost of the move when you first moved into the house, but one major expense is removed since you aren’t paying it at the same time as all the other costs. It’s spacing out your expenses, which can be a blessing at the closing table. Plus the stress of a major financial transaction is reduced by eliminating the need to combine it with a complete uprooting of your life.
  • No guess work on repairs, condition and flaws. As an existing occupant, you’ll know the real condition of the house as well as any issues that may not come up on a home inspection or appraisal, or that a real estate agent may fail to disclose. For example, an inspection conducted in the summer won’t disclose that a house is drafty in the wintertime. There are flaws and other serious issues that are only visible to a person living in the house.
  • No guess work on the neighbors, the neighborhood or the school system. In the real world, you can fall in love with a house, but find the neighbors or even the entire neighborhood to be intolerable. This is especially true now that so many homes are located in homeowners association controlled neighborhoods (HOA’s). Some HOA’s are overzealous in their enforcement of certain provisions and in others the provisions themselves are close to ridiculous. A friend of mine and her husband recently sold a house in an HOA neighborhood that prohibited overnight parking—in their driveway!  This isn’t something a seller or real estate agent would be particularly fond of telling you prior to closing, but as an existing occupant, you’d already know about it and whether or not you’d be willing to accept it.

Here is an excellent example of one couple who chose to Rent Vs. Buy and how they are putting the savings aside for a down payment on their future home!  They are being very choosy and waiting until they can get exactly what they want!  I think this is a very wise choice, especially considering today’s housing market.

Finding Acceptable Rentals

The good news in this market is that many of the houses that are offered for sale are also potential rentals. In many markets around the country, expected market times to sell a house are running close to year, and often more. A tenant may not be a seller’s perfect prospect, but eventually circumstances may force him to consider it. In short, view any property as a potential rental.

In most areas the number of homes marketed as rentals is small compared to the number that are for sale, so you can expand the number of rental prospects by investigating those listed for sale. Properties listed for sale by owner (FSBO’s) can be an obvious source, but houses listed by real estate agents can be investigated as well. In fact, consider making a rental offer on any house that you would consider as a suitable home for you and your family.

If the property is a FSBO, you can contact the owner directly with an offer to rent. Most will likely turn down your offer up front; that’s fine, leave them your name & phone number in case they consider the option in the future and move on to the next property. It is a good idea to target a specific neighborhood of your liking and employ this strategy.

It gets more complicated with a realtor listed property, but it’s still doable. Typically, when a seller lists his home with an agency, he is not allowed to accept offers outside the agent’s knowledge. But that exclusivity may not extend to rentals, as the seller has signed an agreement to sell, not rent, the home (check the laws in your state). However listings can and do expire without ever producing a sale (more so lately) and a seller is free to do what ever he chooses once it does. Same plan here, approach the owner, not the agent, with an offer to rent, leaving your name and phone number. You will most likely need to knock on the door to speak directly with the owner as all contact information on yard signs and marketing material will be directed toward the agent. In the likely event the owner isn’t home, leave a note on the door apprising him or her of your offer.

Tying it all Together

This will be a bit of a numbers game, and will be more effective if you can make offers on houses that have been on the market for six months or more, but approach enough sellers, and you may get a surprising number of parties interested in your offer, enough at least to provide a decent choice of homes.

It probably will be better if you don’t suggest any intention to purchase the home at some point in the future, leaving that proposal to the sellers. Whoever asks for the sale first is in the weaker position. No seller ever wants to rent his home as this will rarely solve all of his problems. But rest assured that even if he agrees to a rental, he will do so with the hope that you will be the eventual buyer. It is unlikely the seller will want to put it back on the market especially after being unable to sell on the first go round. You will be his first best choice as buyer by default.

If you find a home you like and the owner is willing to accept your rental offer, you can move in, “test drive” the house, the neighborhood (and the neighbors), as well as the school system.

What do you do if it all checks out? Wait for the owner to offer to sell the house to you; that will most likely happen sometime before your initial lease expires. When it does, you can move forward with 100% confidence that the home you’re buying is the right one for you. And you won’t even need to pack up your furniture!