How to refinance a mortgage?
October 7, 2016 10:22 AM   Subscribe

I am 8 years into a 30 yr mortgage, with a fixed rate that is about 1.25 to 1.75 points above where rates are now, so it seems like a good time to investigate refinancing. What are the problems and issues I need to watch out for?

I'd like to look into refinancing our mortgage with the current or nearest term (22 years, or 20 years, say). Our credit is good, but I don't know what the risks are.

There are always pitfalls, it seems, and banks get away with a lot of shenanigans in this day and age (like Wells Fargo, who holds our mortgage, as it happens).

I don't want to end up losing our home because of legalities or costs we didn't anticipate.

What are the upfront and hidden costs of refinancing a mortgage, and what should I look at avoiding when shopping for a bank?

I took a look at the Lending Tree service (and a couple others), but they all seemed spammy and the offers seemed all too good to be true. I'm unsure that doing this online is the best way, unless there are more reputable services out there.

Recommendations for fee-based financial advisors in the Seattle area who specialize in this are also welcome. (The advisors I found seemed to specialize in playing the market or doing retirement planning, and didn't announce much expertise in this subject.)
posted by anonymous to Work & Money (14 answers total) 6 users marked this as a favorite
Is there any reason you are adverse to mortgage brokers?

Brokers can explore multiple banks on your behalf and find the best fit for your needs. Don't use one on the internet. Find a local company. And don't use a financial advisor to handle a real-estate refi.
posted by JoeZydeco at 10:31 AM on October 7, 2016 [1 favorite]

Agree on a mortgage broker. We have had good luck twice with ours. We were clear about what we needed and why (we want to reduce our payment, but also take money out against debt, AND switch whose name the mortgage was in, since the role of full time job haver had switched.)
posted by chesty_a_arthur at 10:34 AM on October 7, 2016

a vanilla conforming fixed rate re-fi with a low LTV and good credit metrics is really not going to be something scary. I'd use online tools to figure out what best prices are and then approach people directly - like your local bank. Chase, Wells, etc. All of them will be fine for this. Compare prices - you can ask them what payments, rates, points, fees will be.

This is a commodity you are buying. The financial disclosure documents should be relatively clear - by law.

Where the pirates exist is in more esoteric products. Not here.
posted by JPD at 10:42 AM on October 7, 2016 [5 favorites]

I went through a broker for the initial purchase and I don't think I would use one again. You could easily do the research to find a lender that will meet your needs.

On our refinance, I checked out the big banks, the smaller banks, the banks that were recommended by friends and family, the local banks and credit unions. In all I looked up rates and costs at more than 100 banks until I narrowed it down to 3-4 and then put all the numbers down on a spreadsheet and compared them.

After speaking to them and getting inital estimates, I went with one of the ones with the lowest rates (even today they're still @ 3.375 for a 30 yr) and low closing costs. They even sent the closing attorney to our house to do the closing there. can go the easy way and use a broker or do the kegwork yourself. It's not hard.
My issue with the broker is that they don't really have your interest in mind when finding you a lender. They say they do but I wouldn't quite believe them.

You can always speak to your current lender about refinancing, which was the first thing I did, but you'll find that they don't really care about refinancing and losing you as a customer won't make a difference in their bottom line. Plus it's Wells Fargo so I probably wouldn't give them any more money if I could help it.

All in all, my refinance cost me about $3000-4000 USD but saved us about $350/mo so the break even will be well worth it in a few more months.

I liked my lender so much that I went back to them for a HELOC. Which is something to think about because it will be easier to do at the same time as refinancing rather than later. I was lucky that they didn't have any costs other than registering the mortgage with the state for the HELOC.
posted by eatcake at 10:42 AM on October 7, 2016

Upfront costs: typically just closing costs, which the lender should tell you upfront. You may or may not need to get a new appraisal.
Hidden costs: if you refinance for a full 30 years or do cash-out you will end up paying more in interest over the long term, of course. Otherwise there shouldn't be any.

I agree with just talking to a mortgage broker about your options. There are fewer lenders offering a 20-year mortgage (it's just not that popular a loan for whatever reason) and 15-year mortgages currently have sub-3% interest rates, so if you can swing the payments you might want to look at the shorter loan term.
posted by The Elusive Architeuthis at 10:42 AM on October 7, 2016

did some rough calculations on a $100,000 loan-

22 year loan at 4.75%: $611.25/month for total of $161,369.53 (what you presently have)
20 year loan at 3.38%: $573.30/month for total of $137,592.44 (what you're looking at)
15 year loan at 3.00%: $690.58/month for total of $124,304.70 (considering a 15 year instead)

this is just raw mortgage numbers, no PMI, property taxes or insurance included.
posted by noloveforned at 10:54 AM on October 7, 2016

You do want to get a number of quotes from a variety of sources. As JDP said, "This is a commodity you are buying." The strange thing is that in a well-functioning market, commodity prices should be pretty much the same from seller to seller. I was shocked how much they varied.

We ended up with a small local bank I had never heard of but who was recommended by a realtor I trusted. The rate was significantly lower than that offered by any of the others, including another local bank, a national online mortgage service, and several brokerage and banks that we already had accounts with, resulting in many thousands of dollars in lifetime savings.

So a few hours of calls and emails are well worth your time.
posted by Mr.Know-it-some at 10:57 AM on October 7, 2016 [1 favorite]

If you're using a broker, set up a throwaway phone number and e-mail address to give them - some have been known to sell their customer's contact information.

Mostly it'll be a pretty simple transaction. There will be a few thousand dollars in closing costs. If you don't have cash on hand for it, you can have them add the sum to the principle as long as it doesn't push you below 20% ownership of the house. Most banks aren't going to offer a 20-22 year mortgage, but you can get the same effect by getting a 30 year mortgage and using the savings from the lower interest rate to pay down the principle ahead of time.

You could also go with a 15 year mortgage, which would get you an even lower interest rate, but might push your monthly budget.

I got mine from a bank that I have a checking account with that specifically advertises that they don't sell the servicing of their mortgages, so paying/checking on mine is a simple electronic transfer inside an interface I use regularly anyway.
posted by Candleman at 11:29 AM on October 7, 2016 [1 favorite]

Other advantages to refinancing... Often, your closing costs can be written directly into your mortgage, so the only fees you pay are credit check and appraisal costs. Also, you usually get a 'free' month with no mortgage payment, due to the way it times out. They pay off your old loan, and your first payment isn't due for another month.

If I were in your shoes, I'd get a 20 or 30 year loan, and just pay extra on it every month. You still get it paid off in 10 or 15 years, but if you have a tight month, you're not tied into the larger payment amount. (Make sure there's no prepayment penalty, of course.)
posted by hydra77 at 11:45 AM on October 7, 2016

Get some quotes - APR and closing costs are the numbers you want to compare - and post them here. There are enough financially savvy people here that we can walk you through the specifics. Things to watch out for include prepayment penalties, assessment details (who does it, how much, and whether they use the right comps), and details of documentation (make sure they credit all of your income, etc).
posted by Dashy at 3:05 PM on October 7, 2016

I did all the refinancing stuff for my ex except signing the docs because he just couldn't deal. I think I went through I also checked with Quicken, etc., compared rates, and attempted to negotiate because yes, it's a commodity. Here's a recent NYT piece on refinancing factors to consider.

Before you approach anyone, get copies of all the documents you will need (tax returns, credit score, etc.) to make the process faster. Also, compare what you are being promised with what the the finance company documents say; the finance company my ex chose got the numbers wrong a couple of times, and not in his favor, so stay on top of that.

Because of those screw ups, the company extended the locked-in-rate period so it all worked out in the end. But I wouldn't recommend that firm because on top of the screw ups it kept the mortgage all of 3 months then resold it to another company. My ex only found out about it when his mortgage check didn't show up at the right place.

Quicken claimed it could beat any rate and then folded when I named the rate we had. In the end, my friend opted to go with a traditional 30-year mortgage (he had 25 years left on the old mortgage). In the process, he cut $1000 off his monthly mortgage costs, which he cared about more than the total cost of the mortgage cause he'll be dead before it gets paid off.
posted by Bella Donna at 3:08 PM on October 7, 2016

Mortgage broker is the way to go, IMO. I've used this guy 4 different times.
posted by humboldt32 at 3:27 PM on October 7, 2016

Adding up all of the payments and saying "see how much cheaper a fifteen year mortgage is than a thirty" is not the correct way to think about things. It's really just the spreads that matter. The economic difference in present value is much less than what is implied by those totals.
posted by JPD at 3:58 AM on October 8, 2016

One big gotcha is adjustable rate mortgages (your rate is set relative to a floating rate, and typically resets higher in 5 or 7 years). Don't get one; get a 15 or 20 or 25 year fixed rate mortgage. Make sure that you can afford the new payments, and that you can afford the closing costs.

Shorter mortgages typically come with lower rates but higher payments. You pretty much have to do the budgeting yourself.

When we refinanced, we made the deliberate decision that we wanted money now rather than later, and took a slightly higher rate and rolled the closing costs into the loan. Over the life of the loan this will cost a little bit (not a ton, but some), but we wanted the flexibility in the short term. Again, only you can do that budgeting math for yourself.

Mortgages are currently highly regulated. There are not many hidden costs aside from compounding interest.

And yes, dropping your rate 1.5 points is worth a significant amount of money to you. That's what we did and even with the long-term sacrifices, after closing we walked away with a few hundred dollars, our payments went down 15%, and in another 30 years we'll have saved a significant chunk of money.
posted by contrarian at 5:03 PM on October 8, 2016

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