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:
- Shorter term – We refinanced from a 30 year fixed (with 27 years remaining) into a 20 year fixed.
- Lower interest rate – Our rate before refinancing was 5.875% and our new rate is 5.5%
- 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.
- 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.
- 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.
- 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.
- 1-800-7FANNIE (8am to 8pm EST)
- 1-800-FREDDIE (8am to 8pm EST)
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!