What we learned from our refinancing

[Nords]

We just refinanced for our 12th mortgage in 25 years. We've made money on every one of them, and we thought we were pretty hot stuff, but we learned a few new wrinkles. Maybe it's "only in Hawaii" or maybe it's only at our very small (undercapitalized?) bank, but perhaps this data is useful for the next guy seeking a refi.

Our previous refi was late 2005 with Navy Federal Credit Union. It was a no-doc to drop the rate from 5.5% to 5.375%, database appraisal, deep discounts, and combined with a no-cost HELOC. The notary drove out to our house to sign the papers on our back lanai. If I'd thought to ask, he probably would've picked up a six-pack on the way.

Today's refi environment is a little bit more, shall we say, conservative. We were even charged $50 extra for a "large lot" appraisal. But at least they closed at their branch office (1.5 miles from the house) instead of us having to drive into town.

- Banks are not dead. I'd been watching PenFed, NFCU, other local credit unions, and USAA like a hawk. USAA was leading the race. However I was searching BankRate.com one day when a tiny local bank popped up with a rate well below the others. We flirted around for a few phone calls, narrowly missing 4.25% at three points, but applied at 4.5% for 2.375 points.

- Rates change frequently. It used to be that rates changed weekly or even monthly, but some lenders are Internet-connected enough to change their rates 3-4 times per day. We were quoted the above 4.25% rate, or 4.5% at 2 points, on Wednesday just before New Year's. When we showed up 9 AM Friday to do the paperwork, only 4.5% at 2.375 points was available. I muttered about "bait & switch" and was told that this bank didn't take website applications or offer a lock over the phone, and this was the price we paid for access to such below-market rates. She was right-- at the time the closest competitor (USAA) was 4.875% at over three points. We would've only caught the lower rate by driving right over to the nearest branch, persuading them to unlock the doors, and filling out the application right then.

- You get what you pay for. We couldn't apply over a website or a phone call, and we had to submit everything on second-millenium paper. Our appraiser was terrible, which I'll vent to the bank after the loan is recorded & disbursed. OTOH I could talk to our processor just about any time with no voice-response-from-hell phone systems. She also used an escrow company that was offering great [-]kickbacks[/-] discounts on fees & title insurance. We would never have figured this out from their website. We paid only $1100 for title insurance & processing, about half of "normal".

- Income matters more than assets. As retirees we were surprised to hear this. She said "Assets can vaporize overnight, and we've seen it happen all last year." Our lack of W-2s confounded them. They were much more interested in my pension check (and our portfolio dividends & CD income) than they were in our brokerage balances. (She later admitted she thought I must be retired on disability.) They insisted on seeing evidence that I'd ever been paid a pension (1099-Rs) and then they wanted evidence that I'd continue to be paid one.

- Points can be your friend. I used to be against points, but this time they dropped our rate significantly without having a proportionate effect on the payback. Even if I assumed that I could earn 5% on the money instead of paying points, the refi payback is only 44 months. The no-points payback was 40 months. Sold! I think the bank realized this mispricing (or got a lot of applications that week) because points were already rising when we applied. So when seeking a good rate, it may be worth comparing paybacks with & without points.

- Title is important. If the title doesn't match the mortgage then the lender may want them changed to match. For example, if you leave the house title in spouse's name, then her financial data may have to carry the mortgage application without you. Or you'd have to change the title to joint before being able to use both incomes/assets. We refinanced three previous times at NFCU without this being an issue.

- It's hard to take cash out. In our case we were trying to match the new mortgage balance to the old. The processing delay (35 days into a 45-day lock) meant that another old-mortgage payment might come due before closing, which would lower the old mortgage balance below the new mortgage amount-- $400 cash out. The good news is that our processor lit a fire under the underwriters to avoid having to deal with the paperwork required by this situation.

- NFCU was a PITA. Not only would they not give "valued 25-year member discounts" or drop the rate on the old loan for a small fee, but they wanted to charge origination fees & points as if they were starting over from scratch. They wouldn't even subordinate the HELOC to the new mortgage, although maybe they were pouting over not getting our mortgage business. Instead we closed the HELOC and they got none of our business. I inquired what I'd need to do to request cancelling the automatic mortgage payment, and their response was to cancel it. They even mailed me a coupon book...

- NFCU is not a "local" bank. Hawaii may be a state for 50 years this year, but in this regard the title companies are still a paranoid provincial backwater. We deposited a NFCU cashier's check of way more than enough funds more than two weeks ahead of closing. Of course it cleared immediately (the world's largest credit union?) but no one thought to offer to return the interest.

- Impound accounts for taxes/insurance are not easily waived. We insisted on this from the beginning but it still proved a hard sell. The processor said only an extremely high credit score (= "no delinquent payments") convinced them, and we were still the 1% exception. Apparently banks are insisting on having these accounts to protect their collateral, no matter how much equity we have (or how little they have). My cynical side thinks that impound accounts are one of a bank's few remaining profit centers.

- Checklist mentality. We were queried on why our checking account showed a $30K deposit just a few weeks before closing. They were concerned that we were being "gifted" or loaned the closing costs-- hey, guys, it's a refi, not a home purchase! When I faxed over page four of our seven-page brokerage statement showing the source of the $30K, they then wanted to see the other six pages "just to have the whole picture". I finally persuaded them that we were chasing yield. When I explained to the processor that the other pages showed tax-loss swap transactions, she agreed that underwriting wasn't ready to handle that information. (Our processor implied a good-cop/bad-cop relationship with underwriting, or maybe we were feeling Stockholm Syndrome.) My impression of underwriting is an image of Dilbert's "accounting trolls".

- HELOCs. After we finished with the notary, I asked our processor about upselling us a HELOC. She shut the door and advised us to go to Schwab or Fidelity! Apparently brokerages are offering HELOCs at or below prime. That's my research project for next week…

 

[LOL!]

For someone who seems to refinance on average once every 2 years, I can't possibly see why you would pay any points.

One can buy down the interest rate by paying points. If you paid 100% in points, you would buy down your interest rate to 0%. The only way I can tell if it was worth it to you is if you tell me what the rate would be with 0 points. Furthermore, the numbers you quoted are about where they were when we refinanced a few years ago. I'm gonna have to wait until the Feds pay me $15,000 to refinance.

PS: Our appraiser lost a full bathroom when we refinanced even though it was on the floor plan included with the appraisal. Go figure.

 

[2B]

Interesting. Our realtor has said that qualifying is much more difficult now which has slowed our housing market.

DW and I will hopefully be homeless soon. We're in the option period where they get an inspection done and then try to get us to lower our price. If they ask for much, our deals off. We're going to look at rentals today so I'm taking the other path.

This is step one for our downsizing and becoming relieved of hard assets tying us to Houston.

 

[Amethyst]

Nords,

When you find an appraiser who isn't terrible, please describe your experience.

We would appreciate having a benchmark for what an appraiser is actually supposed to do, other than walk in the front door, glance around for <5 minutes, then send us a document in the mail that disses your house, compares it with other houses in the area that are not really very similar, and puts a dollar figure on it that any Realtor would recognize as having been pulled out of the appraiser's [orifice].

We assumed appraisals are a formality that must be tolerated in order to get the loan, not an actual service.

 

[Bikerdude]

- Income matters more than assets. As retirees we were surprised to hear this. She said "Assets can vaporize overnight, and we've seen it happen all last year." Our lack of W-2s confounded them. They were much more interested in my pension check (and our portfolio dividends & CD income) than they were in our brokerage balances. (She later admitted she thought I must be retired on disability.) They insisted on seeing evidence that I'd ever been paid a pension (1099-Rs) and then they wanted evidence that I'd continue to be paid one.

I had this problem the last time I refinanced. Finally Schwab wrote a mtg for me because I had my IRA's with them. My pension was not enough to qualify. I'm hoping that when I take SS that it will help. Its curious that they didn't count assets in your case but would count the income from the assets even though they would disappear if the assets did.

 

[free4now]

I've decided that impound accounts are my friend. Spending a few dollars on opportunity cost of the impounded money avoids the possibility of spending hundreds of dollars on usurious late fees for the prop tax man, who is always trying to find ways of tricking me into paying late so they can collect the penalty.

If the points only increase your payback time by 4 months that sounds like a great deal, probably a pricing error. It's good to point out; I've come across many situations where paying a certain amount of points is a much better deal than the others. It's definitely worth running the numbers to see if there's something to take advantage of at point levels other than what you were planning on paying.

Interesting that you couldn't lock the best rates. I always thought that unpaid locks were a bad deal for lenders because they encourage lock-jumping which drives up origination costs, and a bad deal for consumers because they create an ethical dilemna of whether to stay with your locked loan out of duty to the originator that you have a relationship or jump ship to maximize your savings.

In most cases I'd prefer to pay a fee for the lock which covers the actual cost of the lock to the originator, so I could make the decision of whether to jump and have the forfeit of the fee be my liquidated damages. But for an originator who you trust isn't bait and switching, maybe just forgoing locks altogether makes sense.

 

[W2R]

Sounds like the process has become quite a pain in the rear lately, Nords.

Did it lower your payments significantly? Hopefully so. I'm all for lower payments.

 

[Nords]

For someone who seems to refinance on average once every 2 years, I can't possibly see why you would pay any points.
One can buy down the interest rate by paying points. If you paid 100% in points, you would buy down your interest rate to 0%. The only way I can tell if it was worth it to you is if you tell me what the rate would be with 0 points. Furthermore, the numbers you quoted are about where they were when we refinanced a few years ago. I'm gonna have to wait until the Feds pay me $15,000 to refinance.

I think it's the second time we've paid points (I can remember taking the points deduction on tax returns). I wish I'd had your banks a few years ago. The lowest we saw on 30-year fixed rates back then was in the 5s.

Part of our mortgaging has been the Navy's relocation program, another part has been "they can't possibly go any lower" dropping interest rates. (We refinanced our rental mortgage a couple times in that total.) I used to harrumph indignantly about points but I changed my mind when I saw the (narrow) difference in paybacks. As my father-in-law would (ahem) point out, we're now a full percent below his 1964 mortgage. We'll let you know if it's been worth it in about 44 months. I don't think we're moving before then.

I'd love to know if banks use analysis software to set their points or if it's driven by customer demand. They went from 2 points to 2.375 in a couple of days (including a holiday) so someone is constantly assessing the decision. Somehow.

When you find an appraiser who isn't terrible, please describe your experience.
We assumed appraisals are a formality that must be tolerated in order to get the loan, not an actual service.

This guy appraised our ~$15K photovoltaic array, which retails for ~$30K, as adding $40K of value to the home. (And that was before he started pimping our photos to his friends.) I think the only appraisal service worth its fee is Zillow.com...

I've decided that impound accounts are my friend. Spending a few dollars on opportunity cost of the impounded money avoids the possibility of spending hundreds of dollars on usurious late fees for the prop tax man, who is always trying to find ways of tricking me into paying late so they can collect the penalty.

In the 1980s I had a lien placed on my condo by the state for non-payment of property taxes. It turned out that our mortgage-servicing company had been experiencing a little difficulty making payroll and had "temporarily" dipped into the impound money. They eventually made good but these things tend to worry you a bit when you go to sea for 90-day patrols. I'd prefer to be in control of my money and paying my bills. I don't even have taxes witheld from my pension.

Did it lower your payments significantly? Hopefully so. I'm all for lower payments.

Assuming that the money we paid on points could've been invested for the next 30 years at 5%, we dropped our payments by 12%! I'll make the final payment when I'm 78 years old... if we don't refinance before then...

 

[brewer12345]

For a HELOC I would check out Pen Fed. They are still offering prime minus 50BP for up to 80% CLTV. I assume they would insist on squeaky clean credit.

I niticed the other day they also have an oddball HELOC product now: a 5/5 HELOC. Rate is fixed for 5 years and then adjusts once for another 5 years.

 

[W2R]

Assuming that the money we paid on points could've been invested for the next 30 years at 5%, we dropped our payments by 12%! I'll make the final payment when I'm 78 years old... if we don't refinance before then...

That is great! It makes it all seem worthwhile.

I know you have decided that having a mortgage works out best for you, and given that, it seems to me that it's worth some effort to lower your payments that much.

 

[LOL!]

.... I wish I'd had your banks a few years ago. The lowest we saw on 30-year fixed rates back then was in the 5s.
...
I'd love to know if banks use analysis software to set their points or if it's driven by customer demand. They went from 2 points to 2.375 in a couple of days (including a holiday) so someone is constantly assessing the decision. Somehow.

We refinanced with e-loan last time who promptly sold it to WellsFargo. e-loan has gone out of business.

My impression is that brokers have a pile of money to lend. Let's say they borrow that money themselves at 4% and now wish to lend it out and pocket the spread. They just need to cover their 4%, their overhead, maybe a little profit for their company and their salaries. Anything above that is bonus. So they could write mortgages for 3% and charge "origination fee" and "points" to cover the missing 1% and the other items. Or they could write a mortgage for 5% plus origination fee and no points. They could sell a loan paying 5% for more than a loan paying 3%.

Anyways, my point is not only that I know a pun when I see one, but you can use points to dial in any mortgage rate or monthly payment that you want. Points are essentially pre-paid interest. No need to pre-pay if you are going to refinance in 2 years. If you get a mortgage at 4.5% and 2 points, that ain't a 4.5% fixed rate mortgage.

When we did the e-loan thing, they gave one a chart of mortgage rate and points, so you could dial in your monthly payment given the existing no-points-rate by pre-paying interest (i.e. paying points). That's why you want to always compare the no-points-rates. The government form is supposed to tell you your APR with points paid included to help you do an apples-to-apples comparison, but I found it much better to get the 0 points rate directly from the lender.

E-loan didn't care which mortgage-rate you picked, but whatever you picked had a corresponding points you paid to make it all the same to them. My take on that is that you can negotiate any monthly payment you want by paying points. The bank is lending you the money at its possibly hidden no-points-rate no matter what APY and points go on the mortgage documents.

 

[Nords]

For a HELOC I would check out Pen Fed. They are still offering prime minus 50BP for up to 80% CLTV.

PenFed looks like a good deal.

Our processor said her Schwab HELOC interest rate was prime minus 100BP, but that probably depends on the size of the customer's account. I've asked Fidelity if they do the same.

 

[OAG]

PenFed looks like a good deal.

Our processor said her Schwab HELOC interest rate was prime minus 100BP, but that probably depends on the size of the customer's account. I've asked Fidelity if they do the same.

Current rate is 2.75% - Current WSJ Prime -.5 (but one year ago the WSJ Prime was 6.5%). Not sure if they are still doing this - No cost closing if account remains active (a unpaid balance) for 2 or more years.

 

[Zubini]

I recently got a large heloc from Schwab. The rate is prime -1.01%. I don't have substantial assets with Schwab but do have A1 credit. I found the heloc group to be very professional with excellent customer service. I went to Schwab after Discover cancelled my open heloc saying home values in my area had declined. My home had lost little value as the Scwab appraisal proved and I had $900k+ equity but Discover wouldn't even do an appraisal. Discover just wanted the open line off their books.

 

[Elderdude]

We applied for a loan rate advertised by a mortgage broker in the paper just before Christmas. The "loan consultant" came to our home and we filled out the application. Using my copier, I was able to supply most of the required documentation during that initial contact. Our home was appraised on New Year's Eve.

It has been 6 weeks since initiating the process. We recieved a package from the bank, which was to have supplied the loan. (They recently had to curtail their Las Vegas junket.) It contained mostly disclosure information, did not require a response, and stated that the package did not mean the bank had made the commitment to loan at that point.

Our contact at the broker firm said that the next thing we should recieve would be a call from that bank setting up a closing date. Supposedly our 30 day lock had been extended to "over 45 days" but that time frame appears to be here or past.

At this point, we are out the appraissal fee, ($25 above the good faith estimate.) Since we'd stand to save $600 a month more a month for the next 30 years with this new loan, we are still keeping our fingers crossed, but I'm a pessimist by nature. I can't find a similar rate quote that comes even close to our "lock."

 

[Elderdude]

Yesterday, 3 months after applying for our refi, we finally signed the papers. We got our 4.375% fixed rate, 30 year loan paying 2 points. Loan costs were supposed to be rolled into the loan so that we had no out of pocket, but we ended up shelling out the equivalant of a point. The incompetent broker failed to include that amount in the final papers forwarded to Wells Fargo. We never saw the "revised" good faith until we got to closing. We decided to eat the screw up rather than give them another chance to delay. We stand to save $600 a month which is a nice chunk on our fixed income retirement.