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.
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.
Last Train for Mortgage Refinance
On March 16, the Fed announced it would stop buying mortgage-backed securities effective March 31. Instead of going up, the mortgage rates reached a new low on the next day. As a result, I’m doing another no-cost refinance to lower my rate by a quarter of a percentage point. I think this really will be my last refinance.
I’ve been following a step-down-the-ladder approach for mortgage refinancing. Whenever I can lower my rate for at least 0.25% with no closing cost (credit from the lender covers closing cost), I would do it because I have nothing to lose. Every time I do it, I save hundreds of dollars a year, every year.
The Fed purchased $1.25 trillion in mortgage-backed securities. The purchase has kept the mortgage rates low. When the life support is withdrawn, the rates won’t necessarily jump up immediately, but I don’t see how the rates will be lower without the support than with the support.
Mortgage Refinance and Option Pricing
Being a blogger with a contact form, I often receive PR outreach messages. They want me to write about what they are trying to promote. I ignore most of those. Once in a while, I get something worth reading.
Andrew Kalotay Associates is a fixed income analytics and debt management advisory services company in New York. They sent me a special report they wrote for Mortgage Bankers Association, the industry trade group.
A Financial Analysis of Consumer Mortgage Decisions, Andrew J. Kalotay and Qi Fu
Mortgage Rates Back to April Lows
Back in April, I refinanced my mortgage. The timing was good. I caught a low point. The rates went up subsequently. I just noticed the rates have dropped back to the same levels again.
If you missed the April lows, now you have another chance to start calling for refinance rates. The benchmark rate for 30-year fixed should be 5.0%, no point. For 15-year fixed, it should be 4.5%, no point. Those are the rates I see at the lender I used last time. If your current mortgage rate is higher than the rates for a no-cost refi, refinancing will save you money from day one.
I will start watching the rates. If the rate drops another quarter percent, I will refinance again.
Foreclosed Homeowners’ Rate of Return
Via a post on the Bogleheads forum, I read this piece of news from the WSJ Developments blog:
Study Finds Underwater Borrowers Drowned Themselves with Refinancings
From that WSJ blog post, I read this research paper: » Read more …
Does a Mortgage Escrow Account Pay Interest?
If you a regular reader of this blog, you probably read that I signed up for using an escrow account for my mortgage when I did my mortgage refinance a few months ago. This is the first time I’ve used an escrow account. I did it because I didn’t want to pay the escrow waiver fee or give up the credit the lender offered to me for my trouble.
When you use an escrow account, you pay a few hundred dollars extra every month on top of your regular monthly mortgage payment. The mortgage servicer holds those money until your property tax and homeowners insurance bills come due. Then they use that money to pay the tax and insurance bills.
I was hoping the mortgage servicer would cancel the escrow account after the loan is sold and the servicing is transferred. But they said no. They won’t close it unless I pay them a fee. I will just stick with it.
Mortgage Ecosystem: Direct Lender
My mortgage refinance was completed on June 3. I made my first payment to my new lender today.
I did the refi through National Mortgage Alliance (NMA), which is a division of a bank Georgia Banking Company (GBC). The name on my loan paperwork was “Georgia Banking Company dba National Mortgage Alliance.” Officially, I borrowed money from GBC. But at the time I locked my rate in April, six weeks before the refi was closed, I already knew that my loan would be sold to another bank right after it closed.
Let’s call this other bank Bank B. When I locked my rate with NMA, NMA also paired my loan with Bank B. The money, for all practical purpose, really came from Bank B. It was only routed through GBC/NMA temporarily. NMA earned the difference between what Bank B offered and what it offered to me.
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Investor's Manifesto by William Bernstein
