Deciding When To Refinance Your Mortgage

December 21, 2008

I was recently propositioned by my original lender. He offered me a new 30-year fixed mortgage at 5.25%, which is a full 1% lower than my current 6.25%. This would save me roughly $200 on my monthly payment. Sounds great right? The catch is that I would have to pay closing costs to the tune of $1,600. Also, I would be starting over again on a new 30-year fixed mortgage.

Factors Affecting Refinancing Your Mortgage

  • Interest Rate – Obviously, the major driving force in refinancing a mortgage is the interest rate. Everything else equal, the lower the interest rate, the lower the monthly payment. The sudden increase in mortgage refinancing inquiries is due to the dropping interest rates. The current national average for interest rates on a 30-year fixed mortgage is 5.27% via bankrate. There’s a common misconception that you only refinance your mortgage if you’re lowering your interest rate by 1-2%. Really, what it comes down to is how long until you reach your break even point.
  • Closing Costs – Closing costs are the major drawback when considering whether or not to refinance your mortgage. Closing costs can be as high as 2-3% of your loan amount and they can be completely waived. Also, you can use negative points, which involves a higher interest rate, to cancel out your closing costs.
  • Break Even Point – Your monthly payment and closing costs effectively determine your break even point. To determine your break even point you take your monthly payment savings and divide it into your closing costs. This will tell you how many months worth of payments will transpire before you recoup your closing costs. After determining how long it will take to reach your break even point, all you have to do is think about how long you plan on keeping your mortgage and evaluate based on your current financial needs.
  • Remaining Length of Mortgage – When you refinance your mortgage you are agreeing to take on a brand new mortgage. You are not keeping your old mortgage with a new rate. If you have already made 5 years or 15 years of payments do you really want to agree to 30 more years? That may not sound like a good idea, but you can take your monthly savings with the lower rate and add it in as an extra principal payment. Also, you can always try to refinance your loan into a shorter term loan.
  • Type of Current Mortgage – The type of mortgage can be a defining factor when deciding to refinance. You might have enough equity in your property to refinance into a 15-year fixed rate mortgage and save some money on interest payments. You might have an Adjustable Rate Mortgage (ARM) where you want to refinance into a fixed rate mortgage. If this is the case, you might even take a higher interest rate than your current ARM rate because the interest rates will raise in the future.
  • Prepayment Penalties – I don’t know how frequent prepayment penalties are a factor for mortgages. I don’t have a prepayment penalty associated with my mortgage. These penalties are used by lenders to make sure they don’t lose out on the interest they feel they are entitled to since every extra payment on principal results in less interest earned by the bank. If you do have a prepayment penalty just add that to your closing costs when determining your break even point.

Conclusion

I decided not to take the refinancing deal from my original lender that I described above, because I did not like my first experience with him and I feel like I can get a lower rate. Although, my break even point with that deal was only 8 months, which is good considering I plan on staying in my condo for at least 5 years.

I don’t have a prepayment penalty and I don’t have to worry about my current mortgage as I’ve only made one payment. My original lender sold my mortgage to Wells Fargo, who I have been very happy with so far. I will most likely look into refinancing through them to give them a chance to keep my business. If I don’t find an acceptable break even point I will start looking around at other banks.

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My First Mortgage Payment And Updated Amortization Schedule

December 19, 2008

I made my first mortgage payment on December 15th, which is 2 months and 12 days after closing on my condo. I used the two and a half months with no payments to build up my cash reserves, pay for furniture purchases and start saving for retirement. Now that I have started making mortgage payments, I’ve decided to update my amortization schedule (see below) with the official loan value, interest rate and monthly payment. I originally posted an estimated amortization schedule, along with information to create your own amortization schedule.

amortization-schedule2

An amortization schedule is very important to create and interpret, especially when deciding whether or not to refinance. With the dropping interest rates, I may be afforded the opportunity to refinance at an interest rate below 5%, which would decrease my monthly payments by over $200 and allow me to make extra principal payments.

Amortization schedules allow you to see how much interest you will be paying over the life of your loan. They allow you to see how much extra principal payments decrease the length of your loan, as well as the amount of interest you pay.

As you can see from above, my first month’s payment was $1,392.75. $1,178.13 went towards interest, while only $214.63 went towards my principal. The paltry amount that went towards my principal makes me want to make additional payments towards principal to help build more equity in my condo. I now have to weigh whether or not I want to pay a little extra towards principal or save for my retirement. At least initially, I think the retirement savings will win.

In the near future, I will be playing around with my amortization schedule in excel to see how much extra principal payments may benefit me. Also, I will be looking at how decreased interest rates will enable me to save more for retirement and pay more towards my principal.

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Dropping Mortgage Rates And My Current Thoughts On Refinancing

December 18, 2008

My mortgage lender called me today to offer me a 5.25% interest rate if I refinanced my mortgage. This would lower my interest rate by 1%, which amounts to $200 a month in savings. The catch is that I would have to pay closing costs again, which are $1,600. In a strictly financial sense, I would break even after 8 months. In the end, I think I’m going to hold out for a lower rate or a lender that will waive or reduce the closing costs.

Dropping Mortgage Rates

Back on November 26th the Fed said that it would purchase $500 billion dollars of mortgage backed securities from Fannie Mae and Freddie Mac. Also, the Fed said they would buy $100 billion in direct debt issued by Fannie and Freddie. After this announcement, mortgage rates dropped from about 6.0% to 5.5% in a week. Mortgage applications more than doubled after the drop in the interest rate. Follow this LINK for more information.

Are the Mortgage Rates Dropping Further?

The Federal Reserve unveiled a proposal in late November or early December for the Treasury to buy securities backed by 30-year fixed-rate mortgages from Fannie Mae and Freddie Mac. This act would cause mortgage rates to drop. The treasury wants to bring mortgage rates down to around 4.5% as a way to reinvigorate the housing market. Bankrate has a good article by Dr. Don Taylor about the interest rate potentially dropping to 4.5%.

Why Didn’t I Refinance?

I am by no means an expert on mortgages and/or refinancing, but I am hoping the mortgage rates will move closer to the 4.5% level. Also, I don’t believe the full closing cost should be required to refinance my mortgage. This is the same company that gave me my original mortgage (it has since been sold to Wells Fargo) and my coworkers and parents have never paid closing costs on a mortgage refinancing.

Originally, I was happy with my mortgage lender. He was super helpful explaining everything to me and walking me through my first mortgage experience. Then came the month prior to closing. My lender did not frequently return my emails and phone calls regarding locking in my mortgage rate. His estimated closing costs were not very close and he seemed just disinterested in to talk with me.

Imagine my surprise when my lender calls ME and offers to refinance my mortgage. This tells me that they are really in need of some money. Here’s a paraphrase of his sales pitch (and it was exactly that):

I’m in a position to drop your mortgage rate a full percentage point to 5.25%. This is a savings of $200 a month. The catch is that you have to pay closing costs again, which are just under $1,600. I wish I could lower the closing costs, but with the current economy we have to reappraise the value of your property again. By the way, this offer needs to be agreed on 5 minutes ago.

I take this as a desperate sales pitch for a mortgage lender that really needs some extra cash. First of all, why does my property need to be reappraised? It was appraised just over two months ago and it was new construction. How could it have decreased significantly? You can’t tell me this appraisal will cost $1,600, so why can’t he waive the rest of the closing costs? Other mortgage lenders have been able to do so before.

Bottom Line

I am not comfortable dealing with a lender who is unwilling to provide me with ample time to do my research and consult with my friends and family. Instead of making me feel comfortable with a major decision, it seems like he’s trying to bully me into making a rushed and rash decision. I don’t know if the mortgage rates will drop any further, but I am fairly confident that they won’t be increasing in the near future. At the very least, it’s a very good feeling to know that I will be able to lower my interest rate and monthly payment.

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Frugally Purchasing New Furniture For My Condo

October 14, 2008

Recently I closed on my first home, a new construction condo. In college I lived in my fraternity house for my four years, which prevented me from buying any furniture. After graduating and moving into an apartment with a buddy, I had to purchase a mattress and box spring, but everything else was provided by my roommate. After moving into my condo, I had a lot of furniture to buy. Fortunately, my parents decided it was time to get new family room furniture, so I received a set of furniture that consisted of one leather couch, one leather chair, one leather recliner and one fabric chair. Other than my parents furniture, my mattress and box spring, a cheap computer desk and a drunken garbage picked coffee table, I had no furniture to fill out a 2 bed, 2 bath condo.

I set out on a journey to buy new furniture as frugally as possible (the down payment cost a pretty penny). Usually new furniture and frugally don’t go together, and I’m not talking about “new to me”. Most frequently frugally purchasing furniture requires craigslist, garage sales or resale stores. I was of the mind set that I wanted new furniture to match my new condo, but I did not want to pay top dollar.

One of my Mom’s favorite hobbies is to go to open houses, watch HGTV, visit resale stores and furniture stores going out of business. I had never personally been to a “going out of business” sale. One of those everything must go types of sales that you hear about on tv. There was a Bassett furniture store that was liquidating the sales room and the warehouse. Apparently they had too many Bassett stores in the same area and decided to liquidate the one closest to my parent’s house.

Buying from a high quality manufacturer going through a liquidation is how to frugally buy new furniture. Every item was drastically reduced. I found a bedroom set that consisted of a wood frame, dresser with mirror, highboy dresser and night stand for $2,400, which included tax, delivery and set-up. The original price was well over $5,000. Additionally, I found a small (which is the only size that will fit well) dining room table and four chairs for $460, marked down from $790. Finally, I bought a coffee table and two matching end tables for $156, marked down from $230. My current coffee table is being converted to a tv stand.

I am very pleased with my high quality new furniture that was purchased at severely reduced prices. Liquidation sales are a very frugal option for purchasing new furniture. Basically, the salesman has a certain number of days before the lease is up and everything has to be sold or packaged up and shipped to another store. It is much more profitable to sell the furniture rather than ship it to another store. The best part of the whole liquidation sale is that it was accompanied with a 6 month no interest, no payments financing deal. However, I would not accept a financing deal without having the funds to pay it off. If you are even a day late, the interest that would have been added during the 6 months (interest rate above 20%) is immediately charged.

The best example of how desperate the salesman are to sell the furniture is how much he kept lowering the price as we debated purchasing the furniture. Since the store was so close to my parent’s house, my Mom and I decided to walk to the store. We were planning on going home and thinking it over when it started raining extremely hard. We took a seat on a couch to wait out the storm. As we were sitting the salesman walked by and reduced the price two more times. After the second time we decided it was too good of a deal to pass up.

If you’re looking for new furniture at great prices, I recommend liquidation sales. I should be able to buy all of my furniture for well below the $7,500 first-time home buyer tax credit. Now what do I do with the remainder?

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My Mortgage Closing and Effects of the Credit Crisis

October 7, 2008

After a long and tiring weekend of closing, moving and unpacking I finally have my wireless internet set up and I’m ready to get back to my personal finance blogging. I imagine most of my posts will be looking forward towards my financial future as a home owner, but first I want to post about the closing process and how the credit crisis effected my housing loan.

Interest Rate

Previously I wrote about the effect of the government takeover of Fannie Mae and Freddie Mac on mortgage interest rates. My lender told me at that point that I had the option of locking in my interest rate at 6.0%. I declined to lock in the rate, as I thought the interest rates might drop lower. It was at this point that my lender at BancGroup went MIA. I constantly inquired about the current interest rate in order to make an informed decision about locking in my interest rate. I did not hear back from my lender about the interest rate until the day before I was supposed to close, when I was informed my rate would be 6.25%. Due to the lack or communication I was extremely unhappy with my lender, but it was too late to do anything about it.

Credit Crisis

Back in December when I first started looking at condos, I got pre-approved by BancGroup for a loan of $300,000. All I needed to do to get pre-approved was provide current assets for a down payment, my most recent pay stub and my planned down payment percentage, all of which was done over the phone.

As my closing date neared, the credit crisis started taking effect. About a month before my closing date, I faxed copies of my most recent pay stub and my most recent bank account statements. I even went so far as to provide the last statement from my CD to prove that the giant deposit on my most recent bank statement was in fact my money. I was told this was all that was necessary to ensure a loan.

Three days before my closing I was informed that my college diploma was needed, so I faxed over my diploma. Two days before my closing I was informed that I needed to provide proof that the earnest money checks came from my bank account. Also, I had to fax over a second bank account statement for each bank account. Additionally, I had to prove that I in fact closed my CD, despite the fact that I already sent over a statement that matched up very closely with the deposit into my checking account.

It was very aggravating to have to continually prove that I was worthy of a loan for the amount of about $220,000 when I was already approved for a $300,000 loan. It really shows how lax the lending criteria was in early 2008 and how strict it has become over the past few months. I can understand the extra scrutiny, however, I don’t understand why it had to be done last minute. It was very disconcerting to be preparing for a closing and not be 100% confident that I was going to be awarded a loan.

Closing Costs

I asked my lender continuously beginning a month prior to closing for an estimate of the total closing costs. He estimated closing costs to be between $1,500 and $1,700. Also, he said he would be able to provide me a better estimate about 30 days prior to closing when he has all of the figures from the seller’s side. Not only did I not get a better estimate 30 days prior to closing, I did not get an estimate at all from my lender. I received no good faith estimate. I called the seller’s attorney and was able to get a copy of the Housing and Urban Development Settlement Statement (HUD) the day before closing. I then called my lender and he still did not have a copy of this HUD statement, which he needed to provide me a good faith estimate of what I needed to bring to the table at closing.

I find it totally unacceptable that I was able to get a copy of the HUD statement prior to my lender. Also, it is totally unacceptable that I did not receive a good faith estimate. Finally, it is absolutely wrong that I was made aware the sum of money that I had to bring to the closing one hour before my bank closes the day before closing. My closing was scheduled for half an hour after my bank opened the next day. Basically, I had a one and a half hour window to secure a certified check once I knew my final closing value, which is very nerve wracking.

Lastly, my lender totally left me out to dry with the final value of the closing costs. He never made it seem like the $1,700 to $1,500 range was only for the lender’s fees. It would have been nice to know that the closing costs also included fees to the title company and various miscellaneous fees, totalling over $4,000!!! The following are all fees that are included in my closing costs: funding fee, application fee, underwriting fee, property inspection fee, tax service fee, courier fee, processing fee, flood certification, closing/escrow fee, environmental lien protection endorsement, condominium blanket 1 endorsement, gap risk update, mortgage exemption certificate, record assignment of mortgage, state regulatory fee and for good measure another courier fee. If that isn’t the definition of nickel and diming you, I don’t know what is.

Conclusion

Maybe I was just naive about what was involved in closing and what to expect for the closing costs. I also think my lender could have helped out a bit more, I mean they should want my money, right? Hopefully, you all have learned from my story and will not experience the same nerve wracking and stressful closing experience that I did.

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Walk-Thru Of My New Construction Condo

October 1, 2008

I had the walk-thru for my new construction condo this morning at 8 a.m. I then went to work for a full work day and followed that up with three hours of tutoring. I’m completely exhausted, but I will give a quick rundown of a walk-thru before I forget.

From the Ground Up

A representative from the builder, which just so happened to be the man in charge of the actual construction of the building because the builder was forced to lay people off, met my Mom and I at the entrance to the building. He explained the buzzer and directory, the mail system, the parking storage areas and the trash and recycling room (yes, we have recycling). We then took the elevator upstairs to my floor/hall where the builder explained the emergency fire protocol for the building. The hallway by the way still does not have carpeting yet to protect it from the construction process that is still going on in other units.

First Impression of my Condo

I started making selections for my condo back in February and today was the first time I was able to see any piece of my unit, let alone the final product. I am extremely happy with the finished product. The hard wood floors, kitchen appliances, granite counter tops and lighting are amazing. I could not be happier with the overall first impression, especially since the kitchen is the nicest part of the condo and is the first thing you see. I’m also very happy with the carpeting and bedroom and bathroom lighting selections. The granite counter top in the master bath is very impressive and goes very well with the cabinets. Overall, I don’t know if I would have done anything differently.

Back to the Walk-Thru

Upon entering the condo, the builder explained that the locks are changed immediately before closing and that I will be the only person with keys. It’s comforting to know that the construction workers will not have access to my unit while I’m at work. We ran all of the kitchen appliances, ran the faucets and showers, turned on the washer and dryer. All of the switches and fans were turned on and off. The builder explained how the air handler, thermostat and circuit breakers work. My Mom and I were given all of the time that we needed to check out the paint job, cabinets, walls and flooring to see if there was anything we were unhappy with.

Completing the Walk-Thru

After thoroughly examining my condo, the builder and I recorded anything that needed to be mended, touched up or fixed on a sheet that was signed and dated. In the end, there were only a few small paint touch ups necessary. The builder explained the warranty policy on every part of my condo. He went over the owner’s manual, which contained everything from the complaint form to schools in the area. I signed a form saying that I was taken on a walk-thru and we were finished.

In the end it took a little over one hour to finish the walk-thru. I was able to see the finished product for the first time, which is awesome. The only thing missing, other than my stuff, is a few lighting fixtures. The under cabinet lighting will be installed tomorrow. The light installed above the kitchen sink was the standard ugly florescent fixture, not the track lighting that I bought. Apparently, the track lighting is not in yet, and will be installed next week when it comes. This will not hold up my closing as I negotiated my lighting separate from the builder. Now all I have left to do is close, which is becoming more and more of an adventure with every day, but that’s a story for another day.

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First-Time Home Buyer Tax Credit

September 23, 2008

Recently I visited my condo building for the grand opening weekend. I was not allowed to see my unit as the unit itself was not complete, but more importantly the third floor was not completed. The grand opening was the first time I was allowed to see the inside of my condo building, instead of just driving by and observing from the outside. The builder had six completed units, two of which were fully furnished models. I find it sort of humorous that 13 units have been sold and they chose to finish 6 units for models, but I do understand they have a business to run. Also, in the long run it is better for me if the entire building is sold and occupied. While at the grand opening I picked up a flier from the National Association of Realtors about the first-time home buyer tax credit.

First-Time Home Buyer Tax Credit

Good old G. W. signed a new housing bill into law on July 30, 2008. As a part of this bill, a temporary tax credit will be offered to first-time home buyers, which I will be when I purchase my condo. A credit valued at 10% of the cost of the home, not to exceed $7,500, is available with the purchase of a principal residence between the dates of April 9, 2008 and July 1, 2009. My closing date is October 3, 2008, which puts me right in the middle of this range.

Eligibility

The credit applies to any single-family residence that will be used as a principal residence, which includes condos (WOOT!). This credit only applies to first-time homeowners. To qualify as a first-time homeowner the purchaser and purchaser’s spouse may not have owned a principal residence within 3 years of the date of the purchase.

What is a Tax Credit

Since this is a tax credit, it might be a good idea to explain what a tax credit is. Tax credits reduce income tax liability on a dollar for dollar basis, which is different than a tax deduction. A tax deduction reduces the taxable income so the value of the deduction is dependent on your tax bracket. For example, if you qualify for the full $7,500 tax credit and you owe $5,000 in taxes at the end of the year, the government will send you a check for $2,500. The government will send this $2,500 refund check because this credit is considered “refundable”.

Income Restrictions

There are income restrictions for the tax credit. Single filers are eligible for the full tax credit if their income is $75,000 or less. Joint filers are eligible for the full tax credit if their income is $150,000 or less. There are phase out rules with regards to exceeding the income restrictions. The tax credit for a single filer will begin to phase out above $75,000 and will completely phase out at $95,000. The tax credit for a joint filer will begin to phase out at $150,000 and will completely phase out at $170,000.

Principal Residence

The purchase must be used as a principal residence in order to receive the tax credit. A principal residence is defined as the home of an individual for more than 50% of his time. The credit applies to principal residences for single-family detached housing, condos or townhouses.

Temporary Tax Credit and Repayment

The tax credit is called temporary, because it must be paid back. Repayment will be done over a span of 15 years starting two years after the tax credit is claimed. Interest will not be charged on the amount of the tax credit, effectively making this tax credit more of an interest free loan. I will claim the tax credit in my 2008 income tax return and will begin paying 6.67% of the amount of the tax credit on my 2010 income tax return.

Selling the Home

I have a temporary plan of living in my condo for about 5 years. This is well short of the 17 year repayment plan outlined in the bill (15 years of repayments and 2 years of no payments). If there is an outstanding amount from the tax credit when the home is sold, the amount that has not been repaid will be due in the income tax return from the year of the sale. If the capital gains from the sale do not cover the amount remaining from the tax credit, a portion of the liability is forgiven. For example, if you still owe $5,000 of the tax credit and sell your home for a gain of $3,000, the remaining $2,000 is forgiven.

Applying for the Credit

The tax credit is simply claimed on the tax return of either 2008 or 2009. Even if your purchase will be in 2009, you may claim the tax credit in 2008, which would make the credit available for the down payment.

Personal Thoughts

I have heard numerous people claiming this tax credit will allow people to purchase a home who otherwise couldn’t afford a home, which is exactly how the subprime mortgage mess started. For most people this credit can not be used as part of a down payment, which does not allow people to qualify for homes they can’t afford.

I haven’t decided how I will use the tax credit. To save for my 20% down payment I have skipped retirement savings so far for 2008. I still plan on fully maximizing my Roth IRA and solo 401k. This tax credit could go a long way towards helping me catch up on my retirement contributions for 2008. If I decide that I can fund my retirement accounts without the help of this tax credit, I might use the money as a one time payment towards principal to advance quickly through my amortization schedule. Finally, the money can go a long ways towards furnishing my condo appropriately. I am grateful for this money even if it is only a 0% interest loan. I will never find an interest free deal and turn it away!

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