We Refinanced Our Mortgage

With mortgage rates are record lows, did you refinance your loan recently?

We did.

We started the refinancing process in late August, when the rate of 15-year fixed mortgage dropped to as low as 3.75% APR. At that time, we were only a few months into our original 15-year loan, which carried an interest rate of 4.25% APR. The main reason for doing a refi so soon was to take advantage of the record low rate to reduce our monthly mortgage bill. And because of the small amount of money we could save from going to the process again (we save less than $80 a month by going from 4.25% to 3.875%), we determined that we will only do a fee-free refinance. When we got our original loan, the closing cost was more than $12,000. If we have to pay the same amount again for the refi, then the money saved will be cut significantly to close to none.

After a few phone calls and emails, we selected a mortgage broker in late August, who happens to work for the same company which arranged our original loan, from the same lender. Talking about coincidence. Initially we thought that since it has been only a few months since we got our original loan from them, the refi should be much easier because they had all our information and we had already went through their verification process. For us nothing changed in terms of employments and incomes. But that was only our wishful thinking. It turned out that not only we had to provide the same documents again that we provided in the original loan application, such as 1040s, pay stubs and bank statements, but also a few more that weren’t requested before. For example, we were also asked to turn in, among others:

  • HUD-1 from selling our house in NJ
  • Verification of Rent (VOR) from the landlord for our time in the apartment before moving to the house
  • Verification of Employment
  • NOTE from the last settlement

When I got the request, I was surprised that they needed the HUD-1 from selling our house in New Jersey last year because I could hardly make a connection between the NJ NUD-1 and the refi we were doing. I mean I understand the reason for asking for the HUD-1 was for the lender to be sure that we don’t have other obligations than the current mortgage, but wasn’t this supposed to be done before approving the original loan? The same for the VOR which, in my opinion, should also be checked before, but wasn’t. And for the NOTE, which was part of the settlement package, the lender wants it to make sure that the refinance is solely for the purpose of reducing monthly payment with a lower rate, not any other benefit.

It seemed to me that the same lender was much stricter in the refi than in the original loan application. So I asked our loan broker for the reason behind the request for extra documents. The answer I got was also quite surprising: It’s up to the underwriter at the mortgage company to decide what documents are needed when reviewing the application, like a personal preference. You would expect the lender have some sort of standard procedures in place before issuing a loan after the huge mess created by subprime loans. But if it’s up to the underwriter to determine what kind of supporting documents are needed, then I would say that the chance of missing some critical information is pretty high. For example, we were not asked for the NJ HUD-1 in our original loan application. It’s not that we would be denied the loan had we still owned the house in NJ, but the risk would certainly be different, wouldn’t it?

Anyway, except these additional documents, the whole refinancing process went rather smoothly.And since it was a refi, there was no the anxiety that we experienced during the original loan application. The loan was closed a couple of weeks ago and we did come out ahead: It was a no cost refinance (the only money came out of our pocket went to the escrow account, our loan broker paid everything else including appraisal and credit report fee) and the monthly payment was reduced (though only a small amount). But we also took a step backward after refinancing. Our original loan was $410K and at the time of closing, the balance was at about $403K. The new loan, however, went back to $410K because we felt that, with such a low rate, it is a good move to get some extra cash for some upgrades in the house later.

With the lowered monthly payment, I am still going to pay the same amount every month as I did before, which means that the $80 saved from interest will be put back as additional principal. So even we borrowed more than the original loan balance, the time to pay off the loan won’t be extended too much because of the additional payment.

BTW, the same lender sold our original loan to Wells Fargo after only one month. I expect them to do the same for the new loan.

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5 Responses to “We Refinanced Our Mortgage”

  1. Veritroth |  Oct 06, 2010 at 10:16 am

    Where did you move to? Are you still in New Jersey or are you somewhere else?

    The reason I ask is because you went through a significant amount of trouble to save $80 a month on your payment. But, if what you say is true and there really is no downside to the refi, then good for you.

    However, I feel like there is a bigger picture you might be missing. You just purchased a new house when rates were at an all time low. That is a bad thing, especially if you bought the new house in a bubble state. Why? Well because housing prices have an inverse relationship with mortgage rates. So when rates are at an all time low, prices are high. And since rates have nowhere to go but up, when they do the value of your house drops potentially leaving you underwater.

    So congratulations on saving that extra money on interest! I just hope for you sake that you don’t lose more value on your house than you saved on interest. My two cents.

    • Sun |  Oct 06, 2010 at 10:25 pm

      I have to disagree with your statement that “housing prices have an inverse relationship with mortgage rates”. The rates are at all time low right now, but in many places, home prices keep dropping. Otherwise, we probably are out of the recession already. At the peak of the housing bubble, the prices were unreasonably high, yet the rates were much higher than what we have now.

      • Veritroth |  Oct 08, 2010 at 11:00 am

        “The rates are at all time low right now, but in many places, home prices keep dropping.”

        Exactly! If housing prices are dropping *in spite* of record low rates, what do you think that means when interest rates go up?

        “Otherwise, we probably are out of the recession already.”

        The NBER may say we are out of the recession, but it sure doesn’t feel like it. With 40+ million on food stamps and 14+ million unemployed, people are struggling to stay afloat.

        As for my statement about housing prices having an inverse relationship with mortgage rates, you don’t have to agree with me because it’s just simple math/logic. When rates are low a person’s paycheck can afford to buy more house because less of it is going to interest. When rates are high, more of that fixed payment has to go toward interest meaning that people can afford less house. One of my favorite sites is patrick.net where he touches on this issue. Please check it out, it’s very interesting.

        Cheers!

  2. Diana |  Oct 06, 2010 at 12:23 pm

    Do you mind sharing how to find a lender doing refi with no closing cost? I’m very interested in doing that, but don’t seem to see any lenders around here advertised that.

  3. John Browne |  Oct 28, 2010 at 8:55 am

    Here in the UK, we’ve had experts pointing out that mortgage borrowers shouldn’t assume there is no savings that can be made on mortgages or remortgages even. Tough market conditions also means fiercer competition hey.
    I saw a blog yesterday which stated, “…Sunday Telegraph reported that competition is in fact returning to the market for the first time since the credit crunch.”