We are currently refinancing for several reasons. First, we plan to buy a multi-family investment property within the next year, and need to refinance our current loan to make that possible. Taking advantage of the lower interest rates is just icing on the cake. When we got our first loan in 2017, the interest rate was 3.75%. Everyone who knew our rate commented on how great it was. We expected a good rate, with excellent credit scores and low debt to income ratios, we should’ve gotten the best rate. When I originally looked into refinancing a year ago, the process was so intimidating. I couldn’t quite figure out if it was a good idea. Looking back, it was not. Rates were higher than when we purchased and we would have lost money upfront and over time. I’m glad I stuck with my gut feeling that something wasn’t right and left it alone.
This month, one of my big goals is to refinance the home. Learning how to navigate the process and understand the numbers are tall tasks. But I’m up for a challenge! I will share 4 things that helped me move beyond fear, armor myself with knowledge, and secure the best rate possible. These steps took me two weeks to work through:
- Start Researching
I was a little too intimidated by mortgage stuff to dive into a book, my usual go-to. The real estate books I’ve read in the past were confusing. I started with Youtube videos by searching “when to refinance” and “refinance a home”. I watched a few videos per day. These vids made the previously fuzzy concepts of amortization, points/ origination fees, etc. more clear. I don’t think watching one or two videos is enough. Refinancing is so nuanced and complicated that some people with popular videos on the subject miss key understandings, so keep watching to get the full picture of all the considerations you should keep in mind when refinancing. I also listened to Afford Anything’s podcast on real estate investing, which got me to my second key understanding.
- Know your Long-term Plan
When you get into the calculations to determine which combination of points and interest rates are best for your situation, you will need to know what your long term real estate goals and plans are. The rate we eventually selected for our refi was 2.5% with 1 point. I could have selected a 2.375% rate at 1.9 points, which would save us an additional $400 per year on interest compared to the 2.5%. However, this comes with the risk of the additional upfront cost of $3,000 to buy that lower rate. Only after 7 years will the $400 savings outweigh the $3k upfront cost.
Do we know for certain that we will not sell this house for 7 years? Although we’re like 60% sure, we can’t predict the future. Our plans may change. And if they do, we’d rather lose $3k less on closing costs. Of course, after 7 years we’ll be missing out on an extra $400 a year. I would rather pay for the upfront costs out of pocket and make sure not to touch any investment accounts. At $9k in closing costs, that’s doable. At $12k in closing costs, we’re not so sure. We do not want to lose out on the money we have that’s working for us.
Maybe in 7 years we’ll still have this home and I’ll look back on this decision and regret not putting in the extra $3k for additional savings down the line. I’ll use that as a learning opportunity.
- Shop Around
I have so many thoughts about this topic. First, know that you should shop around for the best rates. I got quotes from 5 companies before deciding. I also used quotes to spark bidding wars between lenders. Each one would go lower and lower until they backed out, leaving the best deal as the winner. I didn’t feel bad about this at all. The tactics used by loan officers are a hot mess. If I was less assertive and sure of myself, I would have given in; the forceful pitches, the condescending tones, all while using mortgage jargon I didn’t understand in order to make as much commission as possible.
Instead, I asked questions, even if they sounded dumb and showed how ignorant I was. I wrote down everything they told me so I could research it on my own. I’m sure it made me look like easy pickings at first, but little did they know I would not be pressured. I was persistent, patient, and eager to learn. Another thing I did was search for mortgage loan officer sales tactics. So many of the ones listed were used on me (creating a sense of urgency by telling the client the offer will end soon, trying to pressure you to make a decision immediately, saying they have to talk to their manager to give the client a better rate even though they have control, etc.). I hate those sorts of tactics.
Another thing, I contacted my current mortgage company Guild first. I knew that if they had equal rates to the competitors, it would be best to stick with them since they had my documents already and likely the refi would go a bit more smoothly, and they don’t resell mortgages (like Better does). When I first talked to a loan officer he was nice. He was not responsive to my emails or calls after that. By the second call he was rude. After he sent me the quotes, I told him I’d get back to him after shopping around. HIS TONE CHANGED COMPLETELY! He went from treating me like a nuisance to providing top rate customer service. Ultimately, the rates at Guild were a joke compared to what I found elsewhere.
I will ALWAYS shop around in the future, whether it comes to a mortgage or life insurance. These things that I thought were fixed prices actually have lots of variation from business to business, and it’s up to me to find the best rate. I did this with car and home insurance a week ago. I’ll probably shop around for cell phone coverage and the internet next. This should be fun! I really mean it, knowing how much money I am saving my family from the first quote to the one I decided on makes me giddy. I didn’t settle and it will save my family tens of thousands of dollars this year, and more thousands each and every year we own the house. HA!
- Learn the Math
As a woman, I was socialized to believe math was hard, and that math wasn’t for me. Although I’ve been a straight A student since kindergarten, including in math, I still believed it was boring and hard. I don’t believe that anymore. I use mental math often, and am pretty good at it. Once I find a formula, I practice with it until I master it. Math can be fun! I did the same with this project. I watched refi videos featuring graphs and spreadsheets. When a Youtuber did a hypothetical calculation, I ran my own scenarios using my actual mortgage numbers. Mortgage math can look deceptively easy. At first glance it is, but there are several calculations that need to be considered for you to get the full picture. My advice is to play with math. As you practice things, you understand them better. It’s expected that your calculations will be too simplistic at first, that’s okay because you’ll build off that understanding as you learn. Even if it doesn’t end up working out, at least you tried. In my case, I feel so confident now because I understand the math, and I know for certain that I got the best deal possible that aligns with my family’s goals.
Conclusion
Refinancing isn’t always a good idea, even if you see an interest rate 1-2% lower than your current one. There are thousands of dollars in fees that come with financing a mortgage, combined with origination fees. It’s best to know these numbers inside and out so you don’t get taken for a ride. Mortgage companies will ALWAYS tell you refinancing is a good deal, this is how they get you to restart the amortization process, paying mostly interest on your monthly payment just like you did when you first purchased your house.
When I started this process, I didn’t know what a point was and thought the first quote I got for 3.375% was a good deal. I wasn’t willing to go along with the process until I knew what was going on, and what would happen throughout the rest of the process. I am happy with my choice. I may or may not do a later post showing my calculations, but I typed them out and it’s just a sea of numbers, I’m sure no one wants to see that.
Now that the first step is done, I am hoping for a smooth and easy process throughout the rest of the process. A girl can dream…
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