Best. Financial. Decision. Ever… ?

We just made one of the best financial decisions of our 25 years together, even though it involved signing up for new debt. For about $450 out of pocket now, we will be able save up to $450 per month for the next 15 years. Yes, we refinanced our mortgage. Based on the terms of the new loan, and a few other things we’ll talk about below, we will be able to save all this money without changing our anticipated payoff date. Of course, rather than taking the full 15 years and simply stashing the difference, we plan to put much of that potential savings into early principal payoff so we can really accelerate our path to being totally debt free.

How did we do it? As with most good things, it was not “luck”, but the intersection of preparation and opportunity, plus a fair amount of patience. While there are always many variables at play, anyone who takes the time and effort to be similarly prepared and watchful can have similar results. We’re sharing this account of our experience in the hope that it will help others.

Before continuing, we want to be very clear that we are not attorneys, mortgage brokers, financial advisors, or any other sort of financial professional. We are not giving legal or financial advice. We are not suggesting you refinance your mortgage. We are simply sharing our experience, as consumers, and our actions in our particular circumstances.

The Background

We purchased our current home about five and a half years ago. We ended up going quite a bit larger and more expensive than we had originally planned. We weren’t yet on our debt free journey and, after backing out of three accepted offers due to serious defects found during inspections — the first of these left us in a one week scramble to find a rental house for six people, a dog, and a cat; it was 1,300 square feet and we were there 13 months — we were feeling cramped, stressed, and ready to move on, so we got a 30-year mortgage to “afford” a house we would all have our own space in.

A couple of years ago, we finally got serious about our finances and started using a zero-based budget. We were able to move quickly in that we had a sinking fund that we were able to convert to a good foundation for a full emergency fund — what’s in a name? Quite a bit, actually. We eliminated all of our debt, except the mortgage, in less than a year, cranked up our retirement savings beyond 15% (we’re late bloomers playing catch up), and then started beating down our mortgage principal.

The Credit Score

Ideally, when you buy anything, you’d be able to pay with cash. Even for such a large purchase as a home, there would be no need to take on debt. If you are one who has won the lotto, inherited a great deal of money, invested very well, or understood the value of savings and applied that wisdom diligently for some time (we know you’re out there; kudos to you!), you have that option. For the rest of us, there is the mortgage.

While there are those who poo poo the importance of one’s credit score, it is virtually impossible to get a mortgage without one. While, as with nearly everything, there are some exceptions, they are exceedingly rare. The better your score, the lower your rate and, the lower your rate, the less your overall cost.

The Monitoring

Our credit union contracts through a third party for their online mortgage application software. It provides a secure platform for gathering your personal data as part of the initial loan application. It also automates the estimation of loan terms based on your entry of a few basic details about the loan you’d like including the value of the home, the amount, type, and term of the loan desired, the location of the home (city/county/state, not address), and into what range your credit score falls. By supplying this information in a simple web form, you almost instantly get a page listing the various rates the lender currently has available across various loan products. Generally, you will also be presented with the monthly payment at each rate as well as the number of discount points required to get a particular rate, or the lender credits you can receive toward closing costs if you accept a higher rate. The software our credit union uses also allows you to see detailed estimates of the costs associated with closing, combined with the cost of points or lender credits, so you can get a pretty good idea what your net out-of-pocket expenses will be.

While, as stated, the forms are generally pretty easy to fill out and give quick responses, you do still have to go to the website to fill them out. Fortunately, this web app also has a “rate watch” feature. In a nutshell, if you provide your E-mail address, they will save the selections you made on the form and send their available rates to your inbox monthly, weekly, or even daily. As we were ready to pull the trigger, we chose daily so we could monitor changes closely.

When rates started declining into a range that we already knew to be a good fit for us, we went through the online application process. This should be on a secure server (think https://), and is where you will be giving all of the personal and financial information required for the lender to issue the mortgage. This creates a file in the lender’s systems and, generally, results in a mortgage representative getting in contact with you.

Reaping the Rewards

Because we had already paid down the principal on our 30-year mortgage to just over 70% of its starting balance, and because we had excellent credit, and because our initial down payment for our 30-year mortgage was 20% of the purchase price, and thanks to some appreciation in our home’s value (in large part due to improvements we made to give everyone his or her own bedroom — yes, we paid cash), as well as a huge but brief dip in mortgage rates at the end of February, we were able to get a great rate on a 15-year loan.

How great? It was under 3%, and a full percentage point lower than our existing mortgage. To put it into perspective, we were just over five years into our 30, and had already paid it down enough that we could have finished it in 15 years if we paid about $500.00 a month in additional principal, which we had been doing, and occasionally much more. With the new mortgage, we will (obviously) be able to pay it off in 15 years. Our new minimum payment is only $53.27 more than our old one.

We were also able to get a lender credit by selecting a higher rate. Lender credits are pretty commonly available, and is simply a credit toward closing costs that the lender gives you for selecting a higher rate; they do this because, assuming you make only the scheduled payments, they will make a LOT more money off of you at the higher rate. On the other side, you can pay cash up front (aka points) to have a reduced rate over the term of the loan.

Our plan, of course, is to continue to hammer the principal, so we chose a rate at the higher end of those available. The difference in scheduled monthly payment was less than $8 (a cheap lunch when I forget to brown bag) for each eighth of a point in rate, which is negligible in our circumstances. The check we wrote at the closing table was less than $200, but the lender credits were high enough that we got a principal reduction of over $100. Adding in the application fee we paid up front, we netted out to under $450 in one-time cost out of our savings in order to save around $450 per month for the next 15 years, if we were to simply make the scheduled payments.

Additionally, because we closed late in the month, the timing of the first payment for the new loan is allowing us to go two months without a mortgage payment at all. This will allow us to quickly add some additional cushion to our emergency fund during these uncertain times and start off our new loan payments with a bang in principal pay down.

The Process

Filling out the loan application is just the first of several steps on the way to getting your new loan. Once you have completed this step, you’ll likely have a conversation or two with a mortgage officer or broker that works for the lender. At some point, you’ll work with this person to “lock” your rate. What this means is that you make a commitment (assuming you go all the way to close for the loan) to borrow at the terms (rate, points/credits, loan term, etc.) that you are locking, and the lender agrees to honor those terms for a given time frame. Typically, a lock can have a duration of 30, 45, or 60 days and, generally speaking, the shorter your lock, the lower the rate you can get.

Based on our particular circumstances, we chose a 30 day lock. Since our loan to value ratio was relatively small (less than 45%), we were able to get the loan without an appraisal. This is often referred to as a Property Inspection Waiver, or PIW. The threshold to qualify will vary from lender to lender, so be sure to ask your mortgage officer or broker whether this option is available. It saves money, and gave us a savings of time in the overall process that allowed us to choose the 30 day lock and, therefore, get the lower rate.

Once you’ve locked in the terms of your new loan, it’s off to the races! At that point you will have to prove, or help the lender prove, all of the information that you listed on your application. At a minimum, this will include the lender contacting your current employer to verify your employment, getting a copy of your tax transcripts (with your authorization, of course) from the IRS to validate your income for the last several years, as well as trying to validate all of the assets you listed on your application. You’ll be asked to share the names of the relevant banks, brokerage houses, etc. and account numbers to facilitate this.

We cannot stress enough how important frequent communication between you and the lender is during this process. If they tell you they’ll get in touch if they need anything from you, follow up anyway to make sure things are still moving forward if you haven’t hear anything for a few days. As a case in point, we contacted our loan processor mid week after not having heard anything since the prior Friday. The response? An auto reply stating the processor would return to the office the following Monday. We then reached out to the mortgage rep, who forwarded me to another person in the processing department. That person then told me that the only thing we were waiting on was proof that we had paid the IRS $18.24 for a SNAFU (IRS data-entry error) from a couple of years ago. We were able to quickly provide documentation from the IRS showing we owed nothing and our application was moved forward to underwriting. Had we waited, however, until we heard back from our lender, it is almost certain that we would have lost our rate lock and, with it, the opportunity for the huge savings we are now experiencing. Remember, while the process may be helping you financially, the lender is making money, or they wouldn’t be in the business they are. You are their customer. Don’t be afraid to be a pest when necessary to make sure things are working the way they need to.

The Devil is in the Details

We have owned four homes since we have been married and, with this being our second refinance, have gone through mortgage closing a total of six times. While we certainly wouldn’t consider ourselves experts, we have learned a little each time we have gone through the process.

Years ago, we received sage legal advice that we think everyone would be wise to follow; never sign anything without reading it. Yes, Mr. Seriously Frugal is the guy who actually reads the terms and conditions before accepting a software license agreement, always read the HIPAA disclosure at the doctor’s office, and reads every single word of all the mortgage documentation. Early on, I would do that at closing. While a generally prudent act, it was clearly annoying for the others at the closing table with us.

Most mortgage-related documents are boilerplate, and there can be portions that don’t fit your situation. If you find one of these while sitting at the table, it is almost always more difficult and time consuming to get corrected. As you often close at a title company’s office, changes may require phone calls to the lending institution or involvement of the title company’s attorney(s); we’ve experienced both. To avoid this, we now always request what is often known as an “Attorney’s Packet” at least 24 hours in advance. This is simply a copy of all the documentation you will be expected to sign during closing. Not only will you be able to experience the sleep-inducement associated with reading legal documentation before bedtime, you’ll also have the opportunity to double-check the numbers and raise any questions beforehand. While the issues have typically been pretty minor, we have found something that needed to be corrected almost every time we’ve closed on a mortgage; currently six (6) and, if everything goes according to plan, no more.

The Closing

We were back in the car and driving away less than thirty minutes after we arrived. Considering all of the documents that must be signed, and all of the verbal explanations that are given, whether you had a chance to read the documents the night before or not, this is pretty much record time. This speed mimicked the entire process as we went from locking our rate to closing in just 24 calendar days.

It took quite a bit of effort and focus to pull this off, but it will be well worth it to be debt free so much sooner.