The average American gets a new mortgage every 3-5 years. For the past 10 years, we’ve been part of this average by buying three homes in that timeframe. We bought a house in Maryland in 2011, two years later we moved to Georgia (house pictured above), and bought another house. Two years later, we sold it before we moved to Texas. In 2017, we moved from Texas to Washington DC and bought a house there. Again, two years later, we moved to our current location and bought the house that we’re trying to pay off as part of our FI journey. One of the drawbacks of a military career is having to move every 2-3 years. Despite owning several homes in the past, January 2021 was the first time we’ve ever refinanced a home. We learned a ton which we hope will help you in your refinancing journey. This article is an aid to help you on your journey and not direct financial advice. If you have questions about the process, feel free to send us an email.
Prior to our refinance, we had an interest rate of 3% on a 15-year fixed. In early December 2020, we learned, through a facebook group called “Mortgage Payoff Challenge,” that some members were able to get rates as low as 1.75%, and so we started to research options. Unfortunately, the 1.75% rate was only for existing mortgage accounts with Navy Federal Credit Union. Nonetheless, we tried to find the lowest rate available to us. Here are some lessons we learned during the process. We are not affiliated with any of the lenders mentioned. You are free to choose anyone.
Lesson 1-Shop Around
When shopping, have an idea of how much you’re willing to spend on closing costs, any points, interest rate, and the length of the loan. If you have an idea of what you want, it makes comparing and selecting an offer that much easier. Because we were starting at an interest rate of 3% on a 15-year fixed, we wanted to drop the rate to 2% or less and reduce the term from 15 to 10 years. Even though we had been in the home for only a year, we had paid down the mortgage aggressively and wanted to reduce the term so that we would pay less interest. The shorter the term of the loan, the less you will pay in interest.
We tried several different places before we settled on the winning bid to refinance our home. We tried Navy Federal Credit Union & Pentagon Federal Credit Union because we used them in the past. We also searched locally by calling the credit unions in our area to review their rates. Sometimes you can find the best deals with the credit unions in your area. Our original home loan was with Guaranteed Rate before it got sold to 5/3 Bank so we tried them as well. Finally, we used Lending Tree to have lenders compete for our loan. Lending Tree proved to be the most beneficial because we had several lenders compete. At the end, the final competition was between Loan Depot and Guaranteed Rate as they offered the lowest closing costs. Most of the lenders could only offer a 2.25% rate on a 10-year fixed.
Lesson 2-Avoid Cost, Perhaps
With Lending Tree, even the companies we did not consider will call to pitch an offer. Be ready to be inundated with lots of calls. This is where it is helpful to field some of those calls because you can then start to have the lenders compete against each other.
Because I knew I did not want to pay closing costs of more than $2,000, I shopped around until I could find companies willing to cut their cost down to $2,000 or less. The first few companies were offering amounts of $3,500 in closing cost at a rate of 2.5%. I kept turning them down until I was able to get Loan Depot to agree to lower the cost to $2,000 at a rate of 2.25%. This was far better than the other competitors at the time, with the closest being $3,500 in closing cost. with a savings of $1,500 in fees, I felt comfortable spending the $25 to get the loan processed. But as soon as I was willing to consider Loan Depot, Guaranteed Rate came up with an even better rate of $1,000 in total closing cost at a 2.25% interest rate. Guaranteed Rate is affiliated with my wife’s fortune 500 company so they were able to waive many of the costs associated with the loan. With a saving of another $1,000, I felt comfortable spending the $150 Guaranteed Rate wanted to charge to get the loan processed. This same $150 would go towards the $1,000 closing cost so it was a win for me.
Beware that some companies will charge you a processing fee or a credit report fee to process the initial loan application. You will have to decide whether paying the initial cost is worth it to you. I paid several processing fees during the process. I paid a processing fee of $150 to Guaranteed Rate, $50 to Navy Federal and $25 to Loan depot in the process of shopping for our loan. Only Navy Federal required the $50 first before they would give us a loan estimate.
Normally, I would have told Navy Federal to pound sand, but I wanted to see if I could get them to beat the current offer of 2.25% since they were offering 1.75% to their current customers. The decision to pay the $50 to Navy Federal was based on a calculated risk at the time. Navy Federal had the best advertised rate of 1.75% afterall and the mortgage clerk said that they would look into beating any rate that I receive, so for the cost of $50, I could potentially get the 2.25% rate reduced, which would save me far more than $50 over the timespan of the loan. So I decided to give them a try. Their customer responsiveness was by far the worst of all the companies. They claim it was because they had way too many loans to process. They also said that it would take 90-120 days to process the loan. These issues are problematic. However, the goal for me was to get them to beat the best offer and then take that offer to the next competitor for a match or beat it, and also process the loan far faster than 90-120 days. So I was willing to take the risk of paying the $50 fee. As you will see, that didn’t work out as I had hoped.
Keep in mind that most companies competing for your business will provide you with a loan estimate outlining their fees and cost so that you can make an informed decision. Try not to pay a processing fee unless you feel that you are likely to go with that company. I paid the fees to Loan Depot and Guaranteed Rate because they had the best offers on the table at the time.
Navy Federal was not able to match or beat the offer of 2.25% or the closing costs. However, two weeks into the process, Intercontinental Capital Group called to pitch an offer. Like I said, posting your info on Lending Tree means that for weeks you will get random calls from lenders willing to pitch an offer to you. Somehow Intercontinental was able to reduce the closing cost to ZERO. I was excited and told them to process my application for a $25 fee. I then sent the loan estimate to both Loan Depot and Guaranteed Rate. Loan Depot quickly sent me an updated offer matching the closing cost. Guaranteed Rate knew that one of my requirements was to close as quickly as possible so they banked on Intercontinental not matching my closing timeline so they decided to postpone making an offer until they were close to closing. This is how Loan Depot ended with completing the offer. Both Loan Depot and Guaranteed Rate were pushing to close at the same time.
The final week before closing, Loan Depot and Guaranteed Rate sent their final estimates. Guaranteed Rate thought that they had won the race and decided not to reduce the closing cost to zero. I had to tell them that Loan Depot was also set to close and had reduced the cost to zero. So at the end, I ended up going with Loan Depot and my total closing cost was “$275”, the total amount paid to all the companies in processing fees.
A note of caution
Be honest during this process and have clean hands. Let the lenders know that they are competing against each other and that you’re searching for the best deal for your family. Even though Intercontinental had initially offered the best deal, I did not go with them because they were going to close much later. I had to be honest with them and let them know so that they didn’t spend time working on a deal that was not going to work. Also, both Guaranteed Rate and Loan Depot knew that they were competing against each other. I had sent them copies of the offers that I was considering so they knew what was important to me and why I would choose one over the other.
Lesson 3-Prepare the Necessary Documents
The better prepared you are the faster you can refinance. Most folks waste time searching for documents or are late in submitting them. Every day you waste during the process, is extra interest money that you are losing so time is of the essence.
Here are the documents you will likely have to provide (if filing jointly, you will likely need the same documents for the other person). Keep in mind you will likely have to provide the most current documents a month later or two weeks before closing to make sure that your financial situation has not changed:
1. Most recent mortgage statement
2. Copy or picture of photo ID (Driver’s License)
3. Homeowners insurance declarations page
4. Last year W2; but best to have the last 2 years.
5. 2 Most recent paystubs (this is a continuous requirement, you will need to provide updates)
6. HOA Statement showing $0 balance due.
7. Property tax statement showing paid
8. Insurance document showing payment
9. 2nd mortgage statement if you have one
10. **If you own other real estate property, be sure to provide the same documents that are needed for the current home).
11. Have last year’s tax return available, but they will likely get you to sign a release so that they can get it from the IRS.
Tip: Create a file to keep all these documents and name each document. You will need to provide them to multiple companies as you have them bid against each other.
Lesson 4-Stay patient
Keep shopping until you get the deal that you’re comfortable with. We went through this process in late December 2020 and January 2021. When we started we were quoted 2.5% with $3,500 in closing, by the time we were done, we were at 2.25% and zero closing cost. Therefore, get bids from at least five lenders, not all at once but consecutive so the second lender bids against the first, the third lender against the second and so on.
Our Vision board and motivation for paying off our house early. Read the story behind it.
Lesson 5-Points or no points?
Points are used to lower your interest rate but are charged to you during closing. You will have to do a lot of math to know whether points work in your favor. Often they do not. I have used points in the past because of lender credits which meant that I did not end up paying for them so they worked in my favor and reduced the interest rate on the loan. Remember the general rule is that points will not work for you, unless it is an exception to the general rule. Don’t trust your lender to tell you whether it’s a good idea to get the points. You will have to do the math and points will raise your overall closing cost.
Lesson 6-Restarting the terms of the loan
Try not to restart the loan. We moved from a 15-year to a 10-year so that we could pay the loan faster. Most of the lenders will pitch you the idea of restarting your loan to a 15-year or 30-year so that you can lower your payments. They will even pitch it as a great idea because it will free up cash so that you can pay for debt or buy other things. Sounds great, but only serves to keep you in debt faster and will result in you paying far more in interest. Now for savvy finance folks they may consider extending the time of the loan so that they can use the cash to save for their next real estate deal, but know that the savvy finance person is making a calculated analysis on why extending the loan works for them. For the average home owner, extending the term of the loan only works in the favor of the bank. Not restarting the loan term means that you pay less in interest.
Lesson 7-Cash out refinancing to pay debt
Most of the lenders pitched the cash out refinancing to me. I told them I did not have car debt or credit card debt that I needed to pay off with a cashout refinance. I personally don’t like cashout refinance several reasons. First, it increases the loan payment on your house. Second, you are moving the debt from one pile and adding it to another. This also means that in the case of credit cards, you are moving an unsecured debt to a secured debt, which increases the risk on your home.
Finally, by moving the debt, you haven’t changed the behavior that led to the debt, which means you are susceptible to going back into debt. You are taking a shortcut to paying your debt, and shortcuts tend to have consequences. If you have not changed your behavior which led to the debt that you’re trying to wipe out, there is a likelihood that you may find yourself increasing your debt. This sometimes happens when someone takes a cashout to pay for credit card debt. If you don’t change your behavior around using the credit card, you will slowly start increasing your credit card debt. Speaking from experience, I took money out of my IRA to pay off a credit card but because I did not change my behavior, a year later I had a balance of more than $1500 back on that credit card.
How should you pay for your closing cost?
Since we didn’t have any closing cost, this wasn’t an issue. However, for most folks, you will end up having some type of closing cost, at times it could be close to $5,000. If you have the cash, my recommendation is to pay the closing cost upfront. If you don’t have the cash and you’re trying to get out of debt, you can choose to have the closing cost added to the total loan amount. Adding it is the most popular choice and most common. However, do know that doing so increases your debt and you will pay the interest on that amount for the timespan of the loan.
Cash out refinancing for an investment.
Some savvy borrowers will refinance or get a home equity loan so that they can use the cash to help finance an investment property. If you are in this category, you are likely to be a “savvy investor” and able to manage risk and leverage. This type of refinancing and investment is a step higher than most average homeowners. If you’re starting out in real estate, my humble recommendation would be not to do this type of refinancing and to save aggressively so that you can have the cash needed for your next investment.
Even though we refinanced to a 10-year, 2.25% interest rate, our goal is to pay the house off by my birthday in December 2022 (We adjusted our goal in early March 2021). Our Original FI journey goal was to pay it off within the next 5 years—our FI journey. This new rate also lowered our monthly interest from $701 to $525, which will help us pay it off faster. The mortgage is our final debt and the final goal we have before we are truly financially independent and can retire early. So we are trying our best to pay it as quickly as possible.
Having a paid off house is great, but it may not be the goal for everyone. We did the math and it turned out that paying off the house early means that we will lose out on a potential gain of $288,000 in the stock market. However, the safety and security of having the paid off house means more to us than the financial gain. (My math brain still has an issue with it but I understand the freedom we will gain by not having that debt over our head). You can read all about the math and our reasoning here.
What about you? Are you thinking about refinancing? Have you completed a refinance? Any tips or comment, leave them below.
As always, if you need help, feel free to drop us an email.
3 Steps you can take:
1-Do the research on refinancing your home. If you’re paying more than 1% interest than the refinancing rate, it may be in your best interest to refinance.
2-Get comfortable with understanding the amortization table, this will help you see how much interest you will save by refinancing.
3-Get your documents ready and be patient when it comes to finding the right rate and the right cost.