HELOC on hold. Refinance here I come.

refinance

Last Friday I shared my grandiose plans to take out a home equity line of credit (HELOC) in an attempt to diversify the liquidity available to me.

That HELOC stuff is soooooooooo 1995 last week.

I’m on to bigger and better things now. And by “bigger and better” I mean, it’s time for me to play the refinance game.

 

Some Background

We put in our offer on our house in June 2013. It was accepted the day Ben Bernanke spoke publicly, for the first time, about the reserves plan to slow down Quantitative Easing. Which, in turn, resulted in mortgage interest rates taking a dramatic turn for the more expensive.

May 2013 rates were around 3.5%. By June they had jumped half a percent to 4.07%. And by July 2013 (the month we closed on our home) they were at 4.37%.

We quite literally missed some of the best interest rates in history by 24 hours, locking in at 4.125% instead of 3.5%.

Rates hadn’t moved much over the course of 2014 so refinancing was never really an option, but after my post about taking out a HELOC, some of you suggested I look in to it.

 

So I did.

 

I called a handful of banks to get an idea of what rates they were offering on a 30-year fixed refinance. Most of the large institutions (Chase, Wells, Citibank, etc) came back with a rate somewhere around 3.85% and closing costs of about $4,000 to $6,000.

I then used Zillow’s handy dandy refinance calculator to see what the break-even was on that deal. Here’s the graph…

refinance

As you can see, I would save $44 per month by taking advantage of one of the big banks rates.

But that’s only half the story.

The break-even point was really what I was concerned with. Remember, I’d have to pay about $5,000 in closing costs to get that new rate. That makes saving $44 per month significantly less exciting. According to math, it would take me 9.5 years to earn that $5,000 back. I was hoping for a break-even somewhere around 2 years or less.

Bah humbug. 

Big banks were out of the question.

 

Next up, online lenders. 

After doing some research I stumbled upon, AmeriSave, a direct lender out of Atlanta.

For my situation (credit score, loan balance, etc) they offered the most competitive rate I could find. In fact, AmeriSave blew the big banks out of the water.

They were offering a rate of 3.75% and THEY would cover all of the closing costs. Ummm excuse me?

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Do you want to know what the break even is on the loan AmeriSave was offering? Check out the graph…

 

Screen Shot 2015-01-26 at Jan 26, 2015, 11.10.25 PM

 

That’s right. The break even point starts the day I get my new loan. I get to save $60 per month at no cost to me.

 

Is this too good to be true? 

Maybe. I read some online reviews. Some positive. Some negative.

Fortunately, Girl Ninja and I have excellent credit, all of our financials easily at hand (W2’s, pay stubs, account balances, etc), and a favorable debt to income ratio. I’m hopeful this will help our new loan close with few (if any) hiccups.

I spent quite a bit of time on Friday talking on the phone, and emailing, with my AmeriSave loan officer and so far everything has been running smooth.

side note: I may or may not have mentioned to him that I am a Personal Finance blogger who will be writing about my experience. Thinking that might scare him in to taking good care of me.

The only real risk for Girl Ninja and I is having the deal fall apart, but since we have no out-of-pocket expenses associated with the loan, if things go south we will just walk away and go find a new lender.

I’ve never gone through the refinance process before, but so far it’s been pretty painless.

Here’s to hoping it stays that way for the next 45 or so days.

Standby for more.

31 thoughts on “HELOC on hold. Refinance here I come.

  1. I don’t agree with this calculator and here’s why… It’s only looking at how long it’ll take to pay back the closing costs based on how much you save in payments each month. It’s not taking into account the interest you’re saving on the loan by having a lower rate which is the biggest reason to refinance. I’m refinancing now… Paying slightly more per month to decrease the loan years and I’ll end up saving $65k in interest in total but because of a higher monthly payment, the calculator says I never break even.

    • Yeah, I’m pretty sure at lower rates your loan is going to be amortized such that a greater amount of your principle is getting front-loaded than otherwise. This comes in handy if, for instance, you don’t see yourself staying in your house 30 years and instead want to cash out at 10 since you’ll have more of your loan technically paid off.

  2. Can’t wait to hear about your experience! I was just looking into refinancing the other day and my bank does what they call a “streamlined refinance” and I pay no closing costs. (at least that is what it says on-line, but its one of the “big” banks, so I feel like there must be a catch!) I’m not sure what kind of rate it’ll end up being, of course anything is better than my current 5%! I’ll probably call a rep later this week and discuss it further. Would be nice to save some more money each month! (of course I’d probably just roll it into the loan to try to pay it off faster!)

  3. Why wouldn’t you be more concerned with the lifetime savings? It seems to me that double the savings by taking the traditional loan would be better. Unless you’re planning on paying it off early anyway.

    • You’re reading the lifetime savings section wrong. With the first loan option id lose $20k by taking it (that’s why it’s a negative number).

      With the second loan, I’ll lose $10k over the life of the loan.

      Basically from now until 28.5 years from now this loan is favorable for me because of the saved interest. But after that point it quickly becomes less favorable.

      Why? Because I’m 1.5 years in to my current 30yr loan. I’ll be taking out a new 30 year loan which virtually resets the clock. I lose the 1.5 years I’ve already paid, but not until the back end of the loan.

      Long story short my current loan is best if I plan to keep this house for 29 years or longer. The new loan is best if I sell at any point between now and then. .

      • There’s a very easy fix for this “problem”. 🙂

        Just use a loan calculator, such as the one on bankrate.com, to determine how much you need to pay to keep your existing payoff schedule. That number will be a bit higher than your new scheduled payment, and a bit less than your current one.

  4. I have done the re-fi a couple times on my original home. I used my local credit union 2 of the 3 times. Credit Unions had the best rates and the least amount of closing costs.

    The third re-fi was more interesting. I did a cash out re-fi. I kept my payment the same and used the extra cash with the new interest rate to pay off a car and install dual zoned AC in my house. That had closing costs associated with it – about 6k. I used the cash out portion to fund that as well.

    I should mentioned I modified that mortgage a 4 time. A friend of mine works for a bank and she knows I follow rates and such. Shame on me for forgetting the actual name of the program, but I basically paid !% of the balance of my loan and lowered the rate to 2.875 (previous was at 3.5 or 3.75)

  5. OHHHH BOY! Interesting stuff. We bought our house exactly 5 years ago at 5% interest (which felt like an AMAZING rate at the time!). We refinanced a few years ago, primarily to rid ourselves of PMI, and in so doing, only dropped a quarter point off our loan. So we’re still sitting at 4.75%, and me thinks its time to look into refinancing again in an effort to bring our interest rate down even further. My hesitation to do so is that I want a 100% “free” re-fi, where we bring absolutely nothing to the table. I wasn’t sure that was possible…until now. Definitely going to look into AmeriSave, Ninja!

    • Yeah I would definitely give them a look. They offer multiple rates and closing cost variations. I took a higher rate to have no closing costs because this had the shortest break even period. This way if rates are even lower 6months from now I can refinance again without losing any money (if you refinance a second time before the break even point of your first refi you actually end up forfeiting some or all of the closing costs you paid on the original refi).

      Like I said I read some negative reviews about them online but that was pretty much true of any lender. Hoping my experience is all smooth sailing.

      • I think reviews should be considered, but taken with a grain of salt.

        When we refinanced a few years ago, we did so with a very large, well-known, national lender. Reviews were mixed, and the bad reviews were really, REALLY bad. But our experience could not have been more positive. We had NONE of the headaches other people experienced and walked away feeling like we’d been very well taken care of. So much so that we turned around and recommended the broker we worked with to several friends, who ultimately used the same company.

        I’m going to start there and see what they might be able to do for us, but I’ll have no hesitation whatsoever to use a different lender for a substantially better deal.

      • Ah, so you’re getting a rebate in exchange for taking the higher rate, that’s what’s covering the closing costs? Is the rebate also enough to cover the third party fees, like appraisal, title insurance, recording fees, etc?

        • Exactly. The rebate was for $2,900, our closing costs come out to $4,000 (title, appraisal, fees, etc). So I’d be coming out of pocket about $1,100.

          BUT…

          That $4k quote includes 12 months of prepaid property tax and 12 months of prepaid home owners insurance for our new escrow account.

          So although we have to pay $1,100 for the loan to close, we are going to get $1,800 back from my current escrow account as that is how much property tax and homeowners insurance is sitting there.

          Long story short. We are essentially getting paid $700 to take advantage of this lower rate.

          We could have selected a lower interest rate (like 3.5%), but our closing costs in that situation would have been about $3,500 and the break even would have been a couple years. We decided to go with the 1 month break even loan, that way if rates continue to drop, we can refi 4 months from now without losing out on any money.

  6. 30year mortgages are such a ripoff.

    I would just refi to a 15yr loan, as they tend to have better rates. You might pay $100-200 more per month, but you’ll be done sooner. If you’re currently paying PMI, that would also go away. So instead of a portion of your payment going to PMI, it will go to the principal.

    We bought in 2009 at a rate of 5.5%(we thought it was good at the time) for 30yrs. We did a refi towards the end of last year to a 3.375% 15-year. Our payment ended up increasing by $80, and at the same time eliminated the PMI.

    • I disagree. 30 years is ideal for us. We will be at 3.75% on our 30 year note.

      If we went 15 years our rate would be 3.125% which is not much different.

      Our payment, however, would be $587 more per month on the 15 year note.

      Yuck.

      I’d much rather free up my cash flow and invest it in the market broadly via index funds, then in one single/highly illiquid asset (our home).

      Your payment only increased by $80 because your rate dropped 2% which is significant. Our is barely dropping half a percent.

      • It’s almost a wash.

        If you go with a 30yr, you’ll pay much more in interest over the life of the loan. However, the invested $587/month can grow to quite a bit over 30yrs.

        If you go with a 15yr, you’ll pay less interest over the life of the loan. However, after 15yrs you’ll be able to start investing $2000+/month for 15yrs, since you won’t have a mortgage.

        Either way, that “extra money” is working for you, so you can’t lose.

        • Don’t forget inflation though. Every year I have the loan is another year inflation will benefit me. 20years from now I’ll have the same house payment but be paying it with much cheaper dollars.

          Not to mention with a 30 year loan, you could still pay it off in 15 years if you’d like. The reverse is not true with a 15 year note.

          • I see what you mean, but there’s something about paying a mortgage off in 15yrs or less that appeals to me. I just want to Punch that Debt in the Face so Hard.

            I actually did a refi to 15yr loan, knowing that I would send in more principal each month- Essentially making it, at the very most, a 10yr mortgage. I didn’t want to commit to an actual 10yr mortgage, so I went with the 15 for more flexibility.
            Since I want to eventually rent out this place once it’s paid off, it will help pay off the next house by allowing me to make double payments(Rent from first house as principal + regular mortgage). Once the second house is paid off, the third house will receive triple payments, which will allow it to be paid off really fast, etc.

            It’s just a slightly different approach from what you’re doing, but I’m also trying to somewhat balance it all out by also sending some to savings & investing in the market(primarily in 401k and taxable account).

    • That’s dope. This is really the first chance we’ve had to capitalize on a better deal, but if rates keep dropping like they have the last couple months I might be doing this all over again in Spring or Summer 🙂

  7. We have refinanced twice. The original mortgage was a FHA 30-year 5.5% rate with 3% down back in ’09. We then streamlined refinanced to a FHA 4.5% 30-year before finally settling on our current 2.5% 15-year conventional mortgage. All have been very painless and very quick. The reason we switched to a conventional 15-year was to maintain the same payment we had with the 30-year but save 11 years of payments from the original mortgage.
    We also wanted to handle the property taxes and homeowners insurance ourselves which you couldn’t do with the FHA.

  8. Ninja, gotta say huge thanks to you for the heads up on this, as it looks like we’ll be able to knock $200 of our PITI payment and bring only $450 to the table (to cover the appraisal fee). That said…I’m still feeling a little gun shy.

    I know you’re doing a completely no-cost refi, but I’m curious as to whether you had to go ahead and pay upfront for the appraisal when you submitted your application?

    We had to put down $500 when we did our first refi a few years back, so I’m not unfamiliar with this part of the process, but I’m a little worried about losing that $450 if the deal falls apart for some reason. Thoughts?

    • We literally just had the appraiser out. It’s true we had to pay the $475 up front for the service but we will be comped that back as part of the closing cost rebate later on. This seems to be the norm for online lenders so I’m not too concerned by the fee. And so far I’ve gotten super prompt responses back from my loan officer every time I ask a question so I have no complaints.

      As with any business deal there is always potential for things to go south but thus far haven’t had to worry about it. And I assume my loan officer wants his commission which he will obviously only get if the loan closes

  9. I bought my home with a 30 year mortgage at 4.65% in 2010 and refinanced to a 15 year mortgage at 2.5% in 2013. My local bank (with multiple branches in two states) had the best rates and very minimal closing costs. It was the easiest experience ever! I hope your refinance goes just as smoothly!

  10. We’ve used Ameriprise twice with no issues. One time the loan was transferred to BofA which was fine with me, but the second time it was transferred to some bank I had never heard of which had a website that was terrible and not very good customer service. I know any bank can sell your mortgage but this was bad. The first chance I got, I refied back to Wells Fargo with a 15 year loan and couldn’t be happier. I love seeing how little interest I’m paying now. Run an amortization chart yourself to see the difference in interest paid each month and you will be amazed

  11. Now you need to go back to your original lender when they try to close out your loan. It’s almost like a bidding war where you get to negotiate the best terms for your refi. I ended up taking my original lender because he was able to drop the 3.25% on my original refi quote to 2.75% and credit back almost all my closing costs.

  12. Smart move to refinance. Once that is done, are you going to get the investment bug again? Have you considered real estate? Not houses and/or rental units, which seem like a big headache, but instead buying land? I’m no expert, but God isn’t make more land so there is a limited supply.

    Just a thought….

  13. The Wall Street Journal reported today that the Fed will keep short term interest rates at near zero.

    Several websites indicate no change in mortgage rates following the Fed’s lack of action and lack of plans to hike rates.

    -Jon

  14. The rate you are getting isn’t that great. You could get as low as 3.5% and rates are expected to drop more. You would be better off getting a rock bottom rate than a higher rate without closing costs. Look at doing it for 3.5% with a reputable lender with low fees and compare the APR.

    • Did you read the post?

      Of course I could get a lower rate. 3.325% if I wanted, but the closing costs for such a deal is astronomical and totally cost prohibitive.

      You are hung on the rate, but I’m not sure you understand the math behind a refinance.

      The lower the rate you secure, the higher the fees you pay for that rate.

      I’ve ran the numbers and taking the 3.75% rate has a break even point of 0 months because there are no closing costs. Which means I’m profiting from the new deal on day one.

      The 3.5% rate you suggest comes with $3,000 in closing costs, and I don’t come out ahead until 2.5 years from now.

      3.25% comes with $7,000 in fees and a break even point of over four years.

      No thanks, I’ll take my 0 month break even, and if rates continue to drop I’ll either renegotiate my rate or I’ll simply refinance again.

  15. Very interesting – I’ll look forward to a follow up post to see how it all turned out.
    I have only done one re-finance in my 11 years of home ownership and we did it in 2011 when interest rates were oh so low. We’re paying 2.35% currently, although it’s up for renewal in 2016 so I’ll have to start shopping soon and see what the lenders can offer me to hopefully keep the rates low.

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