Friday, May 29, 2009

Mortgage Refinance Completed

On Wednesday, May 20, 2009, I completed my first mortgage refinance using United Home Loans. I stayed with a 30-year fixed mortgage, but was able to reduce my interest rate down to 4.625% and save $176.51/month on my monthly payment. The process will have increased my principal by ~$5000, but a lot of that is the interest for the month of May that I rolled into the new loan, a quarter point for waiving escrow, plus some money back to ensure that I didn't have to mess with getting a cashier's check. The closing costs were comparable to the other places I looked, and the rates were quite competitive.

Most importantly, yesterday marked one of the worst days in the MBS (mortgage-backed securities) market, which resulted in rates climbing into the 5.25%-5.5% range. I timed my closing pretty well! The site I follow, Mortgage News Daily, seems to think rates will come down again this year, but it's a whole different feeling to follow the MBS market when I have no direct financial stake in the matter.

A couple people have expressed surprise that I decided to waive escrow, seeing how it cost me .25% of my loan amount. I did some number crunching before coming to this decision, and in my case it definitely made sense. First, I had just paid property taxes, and my insurance doesn't have to be renewed until December, yet they were going to collect 6 months worth up front, or about $3000. I don't think I'd like to pay $3000 out of pocket now if I don't have to, which means I probably would have rolled that cost into the new loan amount. A $3000 loan equates to $15.42/month in extra payments, which means I will recoup my escrow payment in about 3 years directly. That .25% is listed as a discount point, though, which means its tax-deductible. I also get some interest on the $3000 that can stay in my savings account (I actually used it to max out my Roth IRA for the year, so hopefully that will result in even better returns). I also keep the flexibility of scheduling my property tax payments. This gives me the opportunity to shift my tax burden between years a bit by paying either half or all my property taxes in December. Mostly, I don't like the idea of giving my money to somebody and getting nothing out of it, so there is psychological value for me in waiving escrow.

Some of the closing costs are offset by not making a payment in the beginning of June (at the cost of increased principal, of course). This will mean $1500 extra into my pocket this month. I think I will lower my payment to $1400/month on my new loan, however. This will mean an extra $100/month for me, but still be prepaying my mortgage faster than I was on my old loan. Here, I'm fighting the strong psychological benefit of paying off debt with the intellectual knowledge that prepaying on a 4.625% (tax-deductible) loan almost certainly is not the best use of my money. I just love seeing the balance jump down!


Lord Hughes said...

Some though would recall your money shock when you actually had to pay your taxes and come up with the few thousand dollars when things were tight and in those cases the piece of mind of an escrow is more than worth the few extra dollars of interest you would lose. We'll see your 'psychological value' in December when you have to pull money out of funds to pay your outrageous tax bill b/c you think it will give you a better tax break :)

Also for small amounts of money, ours was ~$500, they let you use a personal check instead of a cashier check (some places) to cover that little bit of money from the refinance they might ask for.

eis271828 said...

True, there was a time when I actually had to borrow money from my parents to pay my property taxes. I now have enough of a cash reserve at any given time to pay a half-payment, so I'm not worried about that anymore. It's kind of my own escrow, I suppose. If I had rolled my escrow costs into the loan, my principal would have been the same as it was for the first mortgage. It'd be like the last two years didn't even happen!

I didn't pursue the matter too much, but they didn't offer to accept a personal check for small amounts. But, definitely a good tip for anyone refinancing in the future!