Mortgage Refinance: Tradeoff Between Rate and Closing Cost
Say you chose a lender for your mortgage refinance. You still have to decide whether you should go for a lower rate with a higher closing cost or a higher rate but with no or minimal closing cost. You can also buy down the rate by paying points.
Making the perfect decision requires a crystal ball. Will the mortgage rate go down in the future? When and by how much? How long are you going to keep this loan? Note I didn’t ask how long you are going to stay in the house, because you can still stay in the house and refinance the loan again if the rate goes down.
The good thing is we have some calculators to help us make this decision. I will use a hypothetical loan as an example. Say I want a $200,000 loan in Missouri with a 30-year fixed rate, I see these choices from a lender’s website:
Mortgage Refinance: Which Lender?
As I mentioned last week, I’m doing a mortgage refinance with a lender I haven’t used before: First Internet Bank of Indiana ("First IB").
My previous two refi’s were done through National Mortgage Alliance (NMA). NMA did the jobs well both times. My last one finished in 2 weeks from application to closing.
So why change? Lower cost for the same rate and term. Is it worth it? I think so. Let me explain how I chose the lender in this post.
Mortgage Refinance: Is Your Lender Legit?
When you see a mortgage offer from a place you are not familiar with, you may be concerned whether it’s a legit business or a scam. When you apply for a loan, you have to give out a lot of personal information . You don’t want to give those information to a scammer doing identity theft. How do you know they are legit?
Banks
If the prospective lender is a bank, you can try finding it in FDIC’s directory. For example I’m using First Internet Bank of Indiana. I see it in FDIC’s directory. It’s been FDIC insured since 1998. Previously I used National Mortgage Alliance, which is a division of Georgia Banking Company. Georgia Banking Company is also a FDIC-insured bank.
FT vs WSJ: Which is Better?
My Wall Street Journal subscription expired in July, but they are still sending me the paper. Maybe they wish I would renew, but I already started a subscription to Financial Times. Having both papers at the same time gives me an opportunity to put them side by side for a comparison.
Both Financial Times (FT) and Wall Street Journal (WSJ) cover business news. I like FT better. Let me explain why using last Friday’s papers as an example.
Fewer pages. Friday’s FT had 22 pages in two sections; WSJ had 46 pages in four sections. FT had one full ad page and two pages of market data; WSJ had six full ad pages and four pages of market data and legal notice. FT is more concentrated, with less fluff. 22 pages are plenty to go through already.
Volcker Tax Reform Report
Back in February 2009, President Obama appointed former Fed chairman Paul Volcker to head a President’s Economic Recovery Advisory Board (PERAB). The Board issued a report on tax reforms last Friday.
Who’s on the Board
The board is largely non-political. Besides Paul Volcker, the Board has as its members a former SEC chairman, a venture capitalist, a representative from AFL-CIO, corporate executives, endowment fund manager David Swensen, university professors, and Obama’s economic advisor Austan Goolsbee.
Hopping On Another Refi Train
I thought the last train for mortgage refinance left in March but the trains keep coming. Rates have gone lower and lower. I’m doing another refinance to lower my rate to 3.75% for a 15-year fixed rate loan.
This time, instead of going to my twice favorite National Mortgage Alliance (NMA), I’m using a different bank: First Internet Bank of Indiana ("First IB"). Don’t laugh; it’s a real bank (FDIC cert. # 34607). It just has a name from the dot com era because it was established during the dot com boom in 1998. It still does business primarily through the Internet without a physical branch, just like ING Direct.
The reason for going with First IB is of course its lower fees. For the same rate and term, First IB’s fees are much lower than NMA’s. I heard about First IB from the FatWallet Finance forum. Several people there posted positive experience with First IB.
You Should Still Beware of A Bond Bubble
As interest rates go down and down, people have raised warnings for a possible bond bubble. Vanguard, being a major provider of bond mutual funds, has published several white papers and articles trying assure investors they should stick to bond funds and not worry about a bond bubble.
Unfortunately the arguments put forward by Vanguard are not 100% logical. The short story is that investors should still beware of a bond bubble.
Before I continue, I should define what a bond bubble is. I see the bursting of a bond bubble as "substantial rise in interest rate causing losses in bonds." As you must know, bond values are mathematically determined by the prevailing interest rate. If interest rates go up, bond values go down.
Index Funds Or ETFs? How About Both?
Investors should thank Schwab for pioneering free trades on its in-house ETFs. With the pressure Schwab put on the competitors, now both Fidelity and Vanguard offer free trades on select ETFs. The free ETF trades are a gift to investors.
Free ETF trades make it really easy for small investors to put together a diversified portfolio at extremely low cost because the minimum investment in a ETF is just one share, usually less than $100. See previous post Low-Minimum Index Funds and Commission-Free ETFs for Small Investors.
If you don’t have a problem with meeting the minimum initial investment requirement and you are already investing in traditional open-end mutual funds, should you switch to ETFs?
Last Week for Bing Cashback: 40% Off Shoes from Endless.com
Endless.com is a website created by Amazon for selling shoes online. It was Amazon’s answer to Zappos before Amazon bought Zappos. However, Endless didn’t go away after the Zappos acquisition. Like Zappos, Endless offers free shipping (often overnight), 365-day return period, and free return shipping. It makes it really easy to buy shoes: buy a few pairs of different styles and sizes; try them; keep what you like and return the rest.
Bing Cashback is an online shopping cashback rebate service offered by Microsoft. Microsoft announced the program will end on July 30 at 9:00 pm Pacific Time. Before it bids farewell, Bing Cashback offers 40% off shoes at Endless.com. I’ve been buying from Endless.com through Bing Cashback for some time now. At times it was 25% off or 30% off. 40% off is the best I’ve seen so far.
Luck, Hard Work, and Retiring Overseas
Not too long ago I took a vacation in Costa Rica. I stayed at a Bed & Breakfast. A single mother was running it with her 19-year-old daughter. The mother doesn’t speak much English and I don’t speak Spanish. With hand gestures, we were able to communicate — I suspect she understands English more than she speaks.
I was feeling pretty good about having my tourist dollars help a minority-owned small business until Friday evening when the real owners showed up. They arrived in two separate cars; one of them was a Lexus LX470 full-size luxury SUV. They also brought a maid, who cooked for them.
Although their arrival totally blew my fantasy of helping a struggling single mother, I was able to talk to the owners, who speak English. It turned out that they were a hardworking couple before they became capitalists who earn their living from their money as opposed from their labor.
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