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.
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 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.
Mortgage and Home Loan
I kept saying I refinanced my mortgage. Actually I don’t have a mortgage. Nor did I ever have one. A mortgage does not have financial terms. Refinancing it makes no sense either.
The word "mortgage" is probably one of those most widely misused words that eventually the misnomer will trump its true definition. When people say they are applying for a mortgage, paying a mortgage, refinancing a mortgage, they really mean they are applying for, paying, or refinancing a home loan.
A home loan is a loan. It has its terms: principal, interest rate, number of months to pay, etc. etc. The home loan is evidenced by a Promissory Note. The Note is secured by the borrower’s home. The security document that pledges the home in exchange for the loan is called the mortgage in some states.
Mortgage Refinance Completed
My mortgage refinance is completed. I called the servicer for my old mortgage and they told me the loan was paid off as of Wednesday. The payoff amount matched what my HUD-1 closing statement showed except the servicer took $57 from the payoff amount as fees for recording the lien release with the county. They still owe me some money because the payoff amount exceeded the principal balance plus accrued interest. I expect a check in the mail in a couple of weeks.
Before I make the first payment on my new loan, my new lender already sold the loan to another bank. Actually their paired me with that other bank at the time I locked my rate. I expect a letter from this new bank with a new loan number. The whole refinancing process took 40 days from the day I submitted the loan application to the day my old loan was paid off. I’m glad it’s finally done and over with.
In retrospect, I think I entered the value of my home too high on the mortgage application for the automated underwriting system. That triggered the requirement for a full appraisal. Had I given the lowest value necessary for my refi, I might have been able to get my application approved without requiring an appraisal or with only a drive-by appraisal.
Signed Mortgage Refinance Documents
I signed the documents for my mortgage refinance yesterday. A recap for the process since the beginning (sorry for lack of updates when I was on vacation):
Week 1. Found a good rate. Filled out application.
Week 2. Locked rate. Signed disclosure documents. Faxed supporting documents.
Is an Escrow Waiver Fee Worth It?
Last week was week 3 for my mortgage refinance. Here’s what happened in week 3 with a brief recap for week 1 and week 2:
Week 1. Found a good rate. Filled out application.
Week 2. Locked rate. Signed disclosure documents. Faxed supporting documents.
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The Elements of Investing by Burton Malkiel
