We weren’t in the market to refinance our home, but when your friends/coworkers mention a new hour or interest rates, I like to ask my mortgage broker what the current rates are. We were on a 30 year fixed at 3.75% that we refinanced just last year and was quoted 3.625% for a new 30 year refinance with no closing costs. While the rule of thumb essentially is – if you can lower your monthly payments, even a quarter point drop may make sense to refi, but for me, a 1/8 drop just wasn’t worth the time and effort (which realistically is minimal if you think about it.) Anyway, if I had done it at 3.625%, I would have saved about $35 per month x 29 years = $12,170 savings over the life of loan. So in theory, I should/would have done it at 3.625%.
I then replied back to my broker, “Any way we can get it down to 3.5% if we added some more money down?” Remember – she is a broker and not a bank, so she can shop around. After a day, she did eventually find a bank at 3.5% but “is slow.” I didn’t care about speed of my refi, so I told her to lock it in.
30 year or 15 year
After talking to some people, one person recommended I go for the 15 year loan. I then asked my broker if I could change it to 15 years and she said that rate would be 3.125%. I told her that’s what I want and she was able to change it even after locking in 3.5% for 30 years. By switching to the 15 year, I’ll pay less in interest over the life of the loan and my monthly payments rose 33%. We had the means to cover the increased payment, and that’s what ultimately led me to the decision to do the 15 year.
However, days later, I had second thoughts about doing the 15 year. In a previous post, I had mentioned that I love mortgages. Where else can you borrow hundreds of thousands of dollars for 3.5% over 30 years? If someone ever gives you that option, you should take it! Because if you take that cash and can invest it [in the market, a business venture, etc] and earn 5%, then you are essentially making 1.5% on that loan. So by me switching to a 15 year loan, I’m forgoing more upfront capital. See this article and quote:
Imagine, then, a $300,000 loan, available at 4% for 30 years or at 3.25% for 15 years. The combined effect of the faster amortization and the lower interest rate means that borrowing the money for just 15 years would cost $79,441, compared to $215,609 over 30 years, or nearly two-thirds less.
For example, in the previous example a 15-year loan monthly payment was $2,108 and the 30-year loan monthly payment was $1,432. A borrower could invest the $676 difference elsewhere.
The back-of-the-envelope calculation is how much (or whether) the return on the outside investment, less the capital gains tax you owe on it, exceeds the interest rate on the mortgage, after accounting for the mortgage interest deduction. (For someone in the 25% tax bracket, the deduction might reduce the effective mortgage interest rate from, say, 4% to 3%.)
This gambit, however, demands a propensity for risk, according to Shashin Shah, a certified financial planner in Dallas, because the borrower will have to invest in volatile stocks.
For me personally, I’d rather invest that extra capital in the market, but for less risk averse people, the 15 year fixed would make more sense if they can afford the monthly payments.
Remember, I had no idea I was even going to do this refinance, or else I wouldn’t have signed up for 3 new credit cards recently for my wife. My broker pulled my wife’s credit and asked us to sign a form stating why we had those 3 credit pulls. The un-edited template she gave us said, “Those credit pulls were NOT for new lines of credit.” I had to reply to her and say, “Ehhh, those WERE for new lines of credit.” She then told me to edit the template and send back.
Also, those pulls also made her average credit score dip a tad below 740, which would have disqualified her for the “best rates.” My broker still made it happen, but clearly that’s the main reason why you don’t want to do an app-o-rama before a refinance. The issue isn’t the new lines of credit (which you can explain) – it’s the temporary dip in your score that may push you below 740.
There was also an issue on an AMEX Platinum card. Since that card is a charge card, she had a balance of $1203 and a payment of $1203. My broker asked why the payment was so high and I told her why. This was an issue because it caused my wife’s debit to income ratio to go above 50%, which would have disqualified her from the loan. If it had been a credit card, then the monthly minimum balance would have been small and not been an issue. So be careful about charge cards when you are applying for loans. Another issue was that I had to show proof that I paid for it and sign a letter saying that it was paid from my account. Luckily I didn’t have to show that account’s statement, or I would not have been able to explain all the MS.
The best and cleanest way when applying or refinancing a home loan is to keep a “clean” bank account that shows payroll direct deposits. You’ll have to show 3 months worth of bank statements, so try not to deposit lots of MO’s in so you don’t have to explain it.
As for credit cards, you’ll have to explain any hard pulls from the last 3 (maybe 6) months. Also, it’d be best to refrain from doing app-o-ramas so your credit score stays above 740.
While I think I should have stuck with the 30 year fixed, it feels great to know I won’t have any more house payments after 15 years.