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My Biggest Tip For Refinancing A Home

December 12, 2011 · 35 comments

in Home & Garden, Personal Finance

We bought our house 10 years ago, at a price and interest rate that seemed incredibly reasonable.

A few years later, we refinanced our mortgage from a 30 year to 15 year term, and got what we thought was an incredibly low rate of 4.75 percent.

A few months ago, I started looking in to refinancing yet again, even though it was something I thought I would never have to do since my previous rate seemed so low at the time.  After a lot of research, we decided to refinance with ING Direct.  We chose a 7 year ARM at 3.125 percent.

The process was incredibly easy.  Most of it was done over the phone and internet, and the closing costs were reasonable.  (Yes, I do know there are no-cost refinancing options available, but from what I saw, the higher interest rate that came with the no closing cost options more than made up for what I would pay in closing costs.  Proved the point that not much in life is truly free.)   We didn’t even have to go anywhere to sign the final paperwork – a representative came to our house for that!

Refinancing took about a month, and the most stressful part was waiting for the final appraisal value on our home.  I wasn’t worried that our home was underwater or anything, I was just afraid it was way below what we paid for it since housing prices have dropped so much in our area.  Unfortunately, our house appraised out at $20,000 less than we paid for it 10 years ago, even though we have spent quite a bit of money in home renovations.  It could have been worse though.. but it does drive home the fact that a house is not an investment, but a place to live.

We didn’t just refinance what we owed.  We took out some extra money for various other reasons.  After all, when else will I ever have the opportunity to borrow money at just over 3 percent?  Keep in mind, we still plan on paying off our house within 6 years or so.  However, this extra money will provide some flexibility and we also invested some of the money in the kid’s college funds. (Considering we can deduct up to $10,000 in college plan contributions from our Michigan state income taxes, we are already coming out ahead since the interest rate on the borrowed money is so low.)  However, we still did not borrow the entire amount that we qualified for, as we wanted to keep our monthly payment below a certain amount.

My Biggest Tip When Refinancing Your Home

When you start the refinancing process, you are asked how much you want to refinance (meaning the amount owed or amount owed + cash back), and how long you would like the loan term to be.

Know the answers to those questions before you even initiate the process!!!

Mortgage companies want you to borrow as much money as possible and for as long a term as possible.  Don’t be influenced by what you can have, only take out what you can afford.  In our case, the increased payment is easily affordable and our payoff date will be no different after the refinance than it was before.  (Based on the payoff plan we created for ourselves.)  We are very disciplined when it comes to money, so we are trying to optimize the money available to us.  However, if you do not have a set amount in mind ahead of time, it might be tempting to just borrow the maximum amount allowed.   (Which can lead to disaster down the road.)

Overall, I found the entire refinancing process easy, and it was also interesting to know the market value of our home. (Even if it wasn’t the amount I wanted it to be.)  The real test will be how responsive ING Direct will be if any issues arise down the road.

Have you refinanced lately?  What was your experience?

 

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{ 30 comments… read them below or add one }

So You Think You Can Save December 12, 2011 at 10:34 am

We just finished re-financing our 30 year loan into a 15 year loan. It went just fine without any hitches. I agree that you have to keep an eye on the bank though. They had originally estimated our closing costs higher than what they turned out to be, and were going to write the final paperwork so that we’d get the difference in a check. I didn’t want that, because even though it was only a few hundred dollars, that meant I would be paying interest on that or have to pay it back into the loan, neither of which I felt I should have to do. So, the closing was actually delayed by a few hours when I refused to close until they revised the paperwork to meet the original request.

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Kris December 14, 2011 at 10:26 am

Smart move. I would never trust that the check would be actually written either.

I am so glad that when we originally refi’d that we went from 30 to 15. Since the rate was a lot lower, the difference in payment was minimal. Yet, it made a huge difference in how quickly the balance was paid down.

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Linda December 12, 2011 at 10:46 am

Ugh. My experience trying to refinance recently didn’t turn out as well as yours. I worked with my mortgage broker to drop my rate from 4.875% on a 30 year term to 4.1% on a 20 year term. My credit was stellar, but I did not complete the deal because my home appraisal was too low; in this latest appraisal I am not underwater but I have less than 20% equity. I find this really upsetting. I never looked at my house as an investment, either, but I have lost real money because of this.

The house was originally purchased in 2001, well before the real estate bubble had gotten out of control. I bought out my ex-husband’s equity in February 2009. The mortgage I got at that time was based on a home appraisal done in December 2008. My rate wasn’t super low (5.5% for a 30 year term), but that was because I also took some extra money out. I wanted to do some work to the house and the divorce left me with literally $2,000 in cash in the bank, so the home equity dollars were essential. In December 2010 I got another home appraisal in preparation for refinancing. The Dec. 2010 appraisal was $35,000 less than the one done in Dec. 2008. That means if I had waited a year to get divorced I would have had to pay my ex $17,500 less when I bought out his equity. Ouch!

Rates dropped more and so I tried to refinance again last month. The appraisal report completed in November 2011, though, valued my house at $50,000 less than the appraisal from Dec. 2010. In fact, this latest appraisal values my house at $20,000 less than we bought it for in 2001. And there have been many improvements done since 2001! I keep thinking about the $40,000 plus that I lost due to the divorce. Was it worth it? I guess getting out of a miserable marriage is priceless, but this experience has really soured me on owning real estate. I would be better off just renting.

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Kris December 14, 2011 at 9:49 am

Linda, I am so sorry your home value has dropped so much. We have put close to 80,000 into our home in renovations, and as I said, it is appraising at less than the original value. It is indeed very frustrating.

When I got out of college, I was under the impression that home ownership was almost a requirement on the path to financial security. Well, that thought was definitely flawed. The thing about renting is that it is hard to live under the constraint of knowing your landlord could kick you out at the end of the lease term, so stability can be an issue. An apartment can be tough if you have kids, so I am still glad we bought a home. However, it is a home to live in, not a place to build up savings for retirement.

I have never divorced, but from what I have heard from others, it can be very devastating financially. However, as you said, peace of mind can be priceless.

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Jacq December 12, 2011 at 12:58 pm

We don’t have these 20-30 year terms. BUT I did sit down with my bank manager about a month ago and when I’m up for renewal in September (or buy a new place, whichever comes first), I’m going to go with the combined LOC + mortgage option because that allows you to overpay as much as you want. Now that the mortgage is in the 5 figure range, I think I’m getting sick of its very existence. If I go back to work, I could get that sucker paid off in 2 years. (Note that I’m probably leaning towards the mortgage because like Linda being soured on real estate, I’m soured on the stock market lately.) 🙂

We’ll see though, my plans are kind of all predicated on whether I start working again soon and on the real estate market. Fortunately, I should know about the work side of things by the end of this month – maybe this week – and I think I’ll like my house a heck of a lot better when the renovation is complete (should be this spring).

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Kris December 13, 2011 at 9:57 am

Jacq- it is great that you are in a position to pay off your mortgage in the next couple years. Choice is a wonderful thing. Plus, you have structured your life so you have been able to fulfill your dreams too.

I don’t know what to think about the stock market. I keep thinking ‘long term, long term’. However, I am getting older every year and my returns have definitely not what I have wanted them to be.

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Squirrelers December 13, 2011 at 2:43 pm

“Don’t be influenced by what you can have, only take out what you can afford”

Wise words! I find it unfortunate that many people take out a mortage based on what somebody else – namely, a lender – tells them they’re able to afford. Or, what amount they’re “approved” to borrow. Take that number, cut it half, and maybe we’re talking about something worth doing!

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Kris December 14, 2011 at 9:42 am

I can say that even for the financially conservative, it can be tempting. We borrowed about 50,000 less than we could have. However, we worked so hard to get the mortgage paid down that I just couldn’t go that far backward.

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Roshawn @ Watson Inc December 13, 2011 at 4:32 pm

I’m so happy that you will no longer have a mortgage in just 6 years! You guys rock, and I know that’s been such a concern of yours. I’m not suggesting in any way that your acts weren’t together to begin with, but I know you still wanted the mortgage gone. Cheers to you!

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Kris December 14, 2011 at 9:40 am

Hey, I am glad you think I rock- just what I needed to hear! I know that some people love to have money available at such a low rate to invest in maybe rental properties or something, but that ain’t me. I love my security. When the house is paid off, then I can invest my monthly payment!

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Money Reasons December 13, 2011 at 5:40 pm

I so regret paying off my house early… A buddy of mine is going through the process of refinancing too. What a great opportunity!!! The rates are so low that it’s hard not to upgrade to a larger house!!!

Congratulations!!!

P.S. Normally I only go with Fixed but when you get the amount down to a certain amount, I too would go with an ARM…

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Kris December 14, 2011 at 9:38 am

MR, don’t regret paying off your house! You just need to take that mortgage payment and invest it! You love dividends, just take your payment and buy some high yielding stocks and you will do great!

I agree with the Fixed vs. ARM, but we have a plan that will have us all paid off a couple years before the rate could ever change.

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retirebyforty December 13, 2011 at 7:11 pm

I’m looking to refinance now. We owe just about as much as the house is worth so I don’t know if I can do it with ING. I talked to the local bank and their fee is very high at $4,000 and the rate wasn’t even that good – 4.25% fixed 30 years. I’ll have to call ING and see if I can work out something with them.

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Kris December 14, 2011 at 9:34 am

Hopefully you are backed by Fannie or Freddie, then you should be fine with Obama’s new plan!

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Kevin Yu December 13, 2011 at 9:58 pm

I used to be in the mortgage industry. It’s very true that they want you to borrow as much $$ as possible, because it increases their commission. Another simple, yet overlooked, tip is to shop around with different lenders. After seeing what kind of interest rates they are quoting you, you may be able to see what the “par” rate is.

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Kris December 14, 2011 at 7:59 am

Very true Kevin. I spent hours digging around trying to find the best rate. Some deals ‘look’ great on the surface, but when you dig deeper, you realize the deal isn’t as great as you thought. (That is what I found to be especially true on the ‘no closing cost’ offers.

Thank goodness for the internet, because it makes it so much easier to check out rates, and you can do it any time of day.

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Miss T @ Prairie Eco-Thrifter December 14, 2011 at 12:21 pm

We have discussed refinancing but interest rates are expected to remain lower in Canada over the next couple of years. We really aren’t in a rush. However, at the first sign of them rising we will look into refinancing.

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MoneyCone December 14, 2011 at 12:28 pm

I refinanced recently Kris and this is exactly what they did even though I did not want a cash back! Basically they pocketed the difference.

Excellent tip Kris!

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Crystal December 14, 2011 at 12:48 pm

We refinanced this year too. We were at 5.375% and used a no-fee refi from Chase to go down to 4.5%. But we are now aiming to pay off our house by the end of next year, so despite the nice rate, we won’t be having it very long.
And good point – don’t take so much in a loan that you will be barely covered by your income. Take what you need and can easily afford or you may not be able to cover your loan during the months of road bumps in life.

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Christa December 14, 2011 at 7:00 pm

I haven’t refinanced recently, and I think we’ll just stay where we are. If we did refinance, we’d go for a 15 year loan again, basically starting over on the interest payments when we’re already ahead. So it wouldn’t save us enough money in the long run to justify the refinance.

Congrats on your refi!

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Jenna, Adaptu Community Manager December 14, 2011 at 7:02 pm

Nope, I don’t own a home. Hopefully I’ll conquer that milestone soon!

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Freda Wren December 15, 2011 at 1:21 am

I never refinance ever before, although a thought drifted my mind recently and then I saw your article regarding this issue. I’ll think about it again.

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Ivy December 18, 2011 at 12:10 am

I bit late maybe but will comment anyway. Same situation here – we just closed with ING on a 5-year ARM at 2.75. Our previous one was a 15 year loan at 4.375, and we certainly intend to pay off the new one in 7-8 years. Even if the rate goes up in 5 years the principal will be much smaller. The appraisal came in quite low though – a bit below the original price from 2005 and after we’ve done a lot of improvements. It didn’t matter for the loan because we were within the 80% but I was annoyed since a 2009 appraisal was significantly higher, and the zillow estimate is also way higher. It just didn’t seem the appraiser they use did a thorough job – he didn’t come in and wouldn’t have even circled the house if we hadn’t urged him to at least look at the whole outside.
But now I asked ING for a copy of the appraisal report and will try to do something about our property taxes which went way up with the improvements we did. I’ve heard it’s a painful process to appeal tax assessment, but maybe that low appraisal will at least help here. Kris, have you thought about doing this?

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Kris December 19, 2011 at 10:15 pm

Ivy, we kind of have different situations. My taxes did not go up with our improvements, and I am not sure why. Our appraiser was pretty thorough that ING hired, and spent about forty minutes going thru the house. If my taxes were based on an amount higher than my appraisal, I would definitely fight it.

You make a good point about getting a copy of the appraisal report though. We paid for it, why didn’t we automatically get a copy I wonder?

Good luck with your fight, it is totally worthwhile.

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Doable Finance December 29, 2011 at 1:47 pm

We refinanced last year. It went just fine.

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Kris December 29, 2011 at 10:55 pm

Glad to hear a good refinance experience, it doesn’t seem like many have been able to go through the process because of home valuations. Congrats!

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home staging New York March 2, 2012 at 11:13 pm

Before opting to refinance, it is important for home owners and property investors to consider the savings or benefits of refinancing vis-a –vis the costs of refinancing. Do your own break-even analysis between long term savings and refinancing costs to determine whether the savings really outweigh the costs of refinancing or otherwise.

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Christina Nolen August 3, 2012 at 11:08 am

There is a lot to consider when you are under taking a whole-house remodel, will it be a do it yourself renovation or will you be getting a Expert home remodeling firm in to complete the project or finish the repair. Another thing to consider is design what are your favorite kitchen designs or bath designs do you want bathroom vanities, which kitchen cabinets do you want? home remodeling costs so will conforming loans turn in to one jumbo loan, can you make the down payment? There are specialist companies that deal with renovation financing, your realtor will have contacts. You have to play it very safe to keep your home renovation costs down, it is not easy but is can be done.

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PaydayLoans@ August 30, 2012 at 3:44 am

The up-front costs associated with refinancing imply that this action makes sense only if the homeowner desires to retain property ownership long enough to recoup the expenses, which primarily include appraisal, closing and title fees. According to BankRate.com’s 2008 survey, the average cost associated with refinancing a $200,000 mortgage loan is about $3,100 (excluding taxes, insurance and other prepaid items such as prorated interest and homeowner association dues).

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Shelly Slader August 6, 2013 at 6:08 pm

Could someone help me to understand a little better what brokers insurance is for?? I don’t quite understand..

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