Sometimes we focus on saving in small ways and forget to question the really big expenses. With refinance rates at crazy low numbers, this might be the time for you to reduce one of your biggest expenses–your mortgage payment.
At the end of last year we refinanced our mortgage from a rate of 3.625% to 2.875%. It cost exactly $254 and took four hours. Our total savings is $7,000 in interest. And that number is much lower than it could be. We earned just $1,750/hour for our four hours because we plan on paying off our 15-year mortgage in five years. That means we enjoy the lower rate for less time. If we were paying off our mortgage over 15 years, our total interest savings would have been $21,000, or $5,250/hour for those four hours! I can’t think of anything else we could do that would even get close to being that profitable.
Let’s look at this another way. Imagine that your mortgage company calls up and says:
“Hey! We know these are tough financial times and we want to give back to our customers. We’ve made mountains of money over the years and to show our appreciation we’re going to send you a check for $117 every month for as long as you have a mortgage with us. We’ll start next month and send a check every month for the next 6 or 10 or 15 years!”
“But we know some of you are really busy. As an alternative gift, we’ll offer to do four hours of housework instead. You can watch a few episodes of your favorite show, go out with friends, or just take a nap. We’ll make dinner and watch the kids and run to the store. Just make sure you’re back in four hours, because it’s all up to you after that.”
“Let us know which you prefer. If you don’t call in the next two weeks, we’ll assume you’re the busy sort and just give you the four hours.”
Does that sound crazy? Your actual numbers will be a little different, but essentially that’s the real choice. $117 a month for every month remaining on your mortgage or four hours of extra free time. Which will it be?
I hope you don’t think about it for too long.
The amazing thing is that we didn’t even have a high rate to begin with. 3.625% was already incredibly low! There have only been a few years in the history of U.S. home mortgage loans when rates ever dipped lower than that. Some of you are paying 4.375%, and your savings would be double ours, a “monthly check” of $234. Some of you are at 5.875% and your savings could be four times as much as ours! Your “monthly check” might be $468!
A Tale of Two Mortgages
Let’s dig right into the numbers first. This is what our mortgage looked like before and after our re-fi.
|Loan Before Re-finance||Loan after Re-finance|
|Lender||Quicken Loans (aka Rocket Mortgage)||Owning.com (Owning Corporation)|
|Remaining Loan Term||13 years||15 years|
|Monthly Principal + Interest||$2,687||$2,191|
|Total Remaining PMI||$705||$0|
|Total Interest Paid (5 years)||$30,357||$23,933|
|Total Interest Paid (13 years)||$81,775||$63,895|
|Total Interest Paid (15 years)||$95,317||$74,321|
I don’t include anything about our escrow account, because property taxes and homeowner’s insurance are the same no matter who the lender is. This table includes all the numbers that changed.
How Much It Cost
The total cost to get from the old loan to the new loan was $254.
- $50 to Quicken Loans to have them issue a final payoff statement
- $184 to Quicken Loans to record our payoff documents after the re-fi
- $20 to our bank to wire the cash-to-close money to the closing agent
- $0 to Owning Corporation, the new lender
Let me expand on item 4. Owning Corporation is one of the few lenders I’ve found that offers a true no-cost mortgage re-fi. I was very impressed.
(Edited to add the following in October 2020:
As of October 21, 2020, Owning Corporation is no longer offering the same fee-free re-finance loan that we used. In the loans they currently offer, they no longer appear to pay everything for the borrower. How can I tell? Because the Interest Rate and APR are no longer the same.
That does not mean that a re-fi isn’t a good idea. In fact, if we could re-finance again with Owning today, we would do it. The interest rate today is 1.875% and the APR is 2.056%. While the difference reflects costs and/or fees rolled into the loan, in calculating the actual cost as a borrower, the only rate that matters is APR. Our re-fi in 2019 brought us from an APR of 3.625% to 2.875%. That was a decrease of 0.75%. Re-financing now from 2.875% to 2.056% would be a decrease of 0.819%. So even though there are some fees rolled into the re-fi, we would save a huge amount, even more than we did during the re-fi a year ago, by doing another re-fi. Another four hours and another payday of over $1000/hr in savings.)
But a lot of “no-cost” re-fis are actually not great deals. To explain, we need to examine the two ways a re-fi can cost you money.
First, there are usually out-of-pocket costs that you have as part of cash-to-close, the amount you pay when you finalize the re-fi.
Second, there are often charges that are rolled into the new loan principal. With rolled-in costs, you have fewer costs at closing, but because you still pay all those costs, plus interest, for the entire remainder of the loan, you pay more in total than if you pay them up front at closing. Many no-cost re-fis just roll all the costs into the loan so that there aren’t any costs at closing. Instead, you pay those costs for years and years during the life of your loan, with interest.
Now, we didn’t just bring $254 to the closing. Because we pay one-twelfth of our annual property taxes and homeowner’s insurance into an escrow account with each mortgage payment, we had to fill up the new escrow account at Owning with $3,960 cash-to-close. Of course, we got a refund from Quicken Loans for just about the same amount, but we had to wait two weeks to get it. The one caveat to a deal like this is that you need to be able to carry the escrow fill-up costs until your old lender sends you a check for everything left in your old escrow account.
But that $3,960 was entirely to fund the escrow account. Owning charged no loan origination fee and paid many of the fees that the property owner usually pays, including the appraisal fee, credit report fees, closing fees, signing fees, notary fees, and title insurance fees. This is pretty rare. I asked Quicken Loans if they could match the Owning re-fi terms. Quicken met the rate, but wanted about $5,000 cash-to-close, even without any escrow fill-up. I was plenty suspicious that there were some fees hiding somewhere in our Owning re-fi, but I went over both the pre-closing estimates and the final closing papers painstakingly and found our total out-of-pocket, besides the escrow, was really just $254.
Rolled-in costs are what make most re-fis advertised as no-closing-cost loans into really bad deals. It’s easy for a lender to move costs from the cash-to-close bucket to the rolled-in costs bucket. Because of that, almost any loan can be structured to have no out-of-pocket closing costs. The lender just rolls all the transaction costs and fees into the loan amount and you pay them over time, plus interest, for the rest of your loan. You can tell that costs have been rolled into the principal because the interest rate is lower than the APR. Savvy mortgage shoppers know that when there’s a difference between the interest rate and the APR, the interest rate means exactly bupkis.
You can see this in this unsolicited ad we got from CashCall Mortgage recently. It highlights a great interest rate of 2.875%, and includes the 3.076% APR in parentheses like it’s an unimportant detail. In truth, the APR is the only rate that matters. That’s the number you use to compare mortgages because it’s what you actually pay each month when you take into account all the rolled-in costs.
In contrast, see the rate from April 4, 2020 from Owning.com. The Rate and APR are both 2.75%. Since the numbers are the same, you can be confident that you’re only paying interest on the principal of your loan, not a bunch of extra costs rolled into the transaction.
What Happened in the Four Hours
1.5 hours – Mike vets the deal to make sure the company is legitimate and the no-cost re-fi is for real.
0.8 hours – Mike exchanges documents and communications with Owning. It was pretty easy because we already have all the relevant documents scanned and saved. This might take a little longer for people who have to look them up.
0.2 hours – Mike reschedules our closing because our new baby makes an entrance (!) the same day Owning had originally scheduled the notary.
1.0 hours – Stephanie and Mike, back from the hospital, sign papers with the rescheduled notary who comes to the house.
If you spend a little less time vetting the company and a little more time preparing and sending documents, you’ll likely come out just about the same. Ron Piri and Casey Love were the people we worked with at Owning, and in addition to keeping it inexpensive, they made this one of the smoothest real estate transactions I’ve ever been involved in, personally or professionally.
A Dodged Bullet (and a shout out for ridiculously good customer service)
Actually, if I include absolutely everything, there was another hour in there, but it’s unlikely to apply to anyone else. Twelve days after I first talked with Owning, Ron and Casey had everything set up and ready to close. Still suspicious that some things are too good to be true, I did a final double-check of online reviews. I found a new review from a customer who mentioned that after her re-fi was complete, Owning sold her loan to Specialized Loan Services (SLS), who took over servicing.
A big red flag went up in my head. It’s common for lenders to quickly sell the loan on to someone else; many are primarily loan originators, focusing on transactions, not on holding and servicing loans. I’m ok with that, but not with SLS. Without details, I’ll just say that I’ve had the displeasure of working with SLS a handful of times for clients, and I had sworn to never voluntarily do business with them myself. They must work fine for some people because they’re still in business, but I called Casey at Owning and asked him if it was standard practice to resell to SLS. He confirmed it was. I regretfully told him I was pulling out of the re-fi.
As we finished the call, Casey mentioned that they were working on getting a new secondary purchaser soon. He told me he’d call me when the new contract got worked out. I never expected to hear from him again.
To my complete surprise, a few weeks later, Casey contacted me and said they would soon be able to resell to a new secondary purchaser, Dovenmuehle Mortgage, Inc, and could guarantee my loan went to Dovenmuehle instead of SLS. The interest rate had already gone up nearly half a point, but Owning would extend my rate lock for several weeks until they had the new purchaser ready. Online reviews for Dovenmuehle weren’t stellar, but I had no personal bad experience with them and many of the bad reviews seemed to be related to loan modifications for borrowers in default. I talked to Stephanie and then told Casey we’d go for it. Four weeks later, we signed on the new loan, at our original much-lower APR.
I want to highlight two pieces of this story. First, I think that knowing your loan will eventually end up at SLS or Dovenmuehle is helpful to a prospective customer. Second, that sort of customer service is pure gold. The fact that Casey actually called me back several weeks after I cancelled the re-fi with news of a new secondary purchaser, and the fact that Owning extended the rate lock so we could keep our lower rate even though it may have actually cost them money, that just doesn’t happen much. If either Casey or Ron ever read this, well done, sirs.
How Do You Qualify For a Loan Like This?
Owning’s mortgage disclosure page gives some guidelines for what sort of assumptions they make in calculating the advertised rate. We matched some, but not all of those assumptions.
|Loan Assumptions||Our Loan|
|Property Type||single family residence in California||single family residence (with above-garage apartment) in California|
|FICO Credit Score||> 740||804|
|Loan-to-Value (LTV) ratio||50% LTV with no subordinate debt||77% LTV with no subordinate debt|
How Do I Find a Loan Like This?
Well, if you live in California, you can go to owning.com/index-refi and get a 2.75% APR loan, as of today. That’s the one lender we’ve had recent personal experience with. Owning Corporation isn’t paying for this endorsement; they don’t even know it’s coming. Here at Six Figures Under we just share our financial lives as they happen and hope they might be helpful for you. I haven’t personally vetted any other no-cost re-fi lenders, but I’ve heard that they exist and that they do business in many states. You should have some idea now of what to look for and how to compare prospective loans.
And if you can’t find a no-cost re-fi, it might still make great sense to re-fi with a traditional lender. Rates are as low as they’ve been in the last hundred years. If you’re currently at 4% or 5% APR, or higher, there are likely savings to be had. Consult an amortization calculator to see how much you could save, even if you have to pay the loan costs yourself.
And if that increases your time by a few hours, there’s still not much you can do that will earn you as much money as lowering your mortgage interest rate.
Is Now The Time?
We know the current COVID-19 outbreak makes this a difficult time for a lot of people. We’re surrounded by worries about health, work, and the general economy. Is it really the time to look for a new mortgage? Well, maybe. If your situation lets you take advantage of a low-rate mortgage re-finance, rates are incredibly low and you are likely to save money both now and for years to come. You can at least get started, choose a company, and apply.
It might seem like this would be the time to put off big financial decisions. Thankfully, a re-fi is actually a pretty small financial decision. You already have the house and the loan (those were big financial decisions) so all you’re doing with a refi is making your payment smaller. There’s time yet to figure out how to meet with a notary or closing agent for final document signing.
Finally, if you know of any good re-fi lenders, in or out of California, or if you know of any lenders you wouldn’t recommend, feel free to share with everyone in the comments below. We only have our personal experience and it’s only in one state. We’d love recommendations for others who come looking for information on re-fi loans in other places.
Thanks. And be safe out there.