Refinancing Your Mortgage Isn’t As Easy As They Claim

We’re not struggling to make mortgage payments, but some extra cash flow wouldn’t hurt. That’s why I was looking into our refinance options.

Wells Fargo’s website screamed out, “Online Refinancing for Existing Customers! No Closing Costs!” While I figured the interest rate wouldn’t be spectacular, anything that lowered our currently mortgage payment would be great. And no closing costs? Bonus! We have excellent credit scores and history, so I figured we’d be shoo-ins for this no-cost refinance program. Right?

Wrong. I know, I know. I fell for it. As someone who deals with advertisers and public relations reps on a regular basis, I should have known better.

The mortgage rep emails me that we don’t qualify for the no-cost refinance program, but we could reduce our payments by $200 a month with a lower interest rate of 4.125% — so let him know if we wanted to go ahead so he could start the paperwork. Whoa, slow down, buddy. There was no further explanation. I then had to email back and forth with him to find out if there were going to be closing costs/points, what would happen with our current escrow, if there would be a prepayment penalty attached, whether there would be another home appraisal, and if we’d get stuck paying PMI (private mortgage insurance).

It took a few days, but I got my answers:

Our current interest rate: 5%

Proposed refi interest rate: 4.125%

PLUS: $3500 in closing costs

PLUS: Thousands of dollars more toward a whole new escrow account for property taxes and insurance
(while waiting for the old escrow funds to be returned to us)

PLUS: The possibility of $80/month in PMI payments if the appraisal put us back above the benchmark 80% loan-to-value ratio.

 

A few things that make it more difficult to refinance

  • Being “underwater” on your home: owing more than your house is worth
  • Bad credit and/or a low credit score
  • Lower Appraisal Value on your home
  • High Loan-to-Value ratio. If you don’t have a lot of equity in your home
  • High closing costs

 

Why we probably won’t refinance right now

Closing Costs. This would be either money out of our pocket or rolled into the new mortgage, increasing the payment, interest and total amount owed. No thanks. Of the $3,500 quoted as the “closing costs,” $699 is a fee paid to Wells Fargo. I’m willing to bet our closing costs would be higher in the end, if they tack on things that aren’t included, such as a needed home appraisal.

“Escrow Juggling.” We’d have to pony up the cash to fund a new escrow account — they won’t just pull the money from our existing account. That’s another $3,000 or so, an amount, as the mortgage rep so glibly told me, could be rolled into the new mortgage amount and then repaid once our old escrow is cashed out and returned to us.

Not Enough Savings. The $200 a month we could save is reduced to $185 if we roll in the closing costs, and plummets to $100 if we get stuck paying PMI for a few years. I didn’t even bother calculating how much less it would be if we also incorporated the new escrow amount into the mortgage. It’d be a lot of work to see a savings of barely $100 per month. Yes, it does add up over time, but the upfront costs aren’t worth it at the moment.

Increase in Mortgage Amount. Our current principal would go up $3,500 for closing costs, plus another $3,000 for escrow. That’s unacceptable.

Possibility of Additional PMI Payment. Home prices have dropped since we purchased our home three years ago. So even though we put 20% down and have been paying toward the principal for 3 years, we’re probably just a few thousand dollars short of that magic 80% loan-to-value ratio, if I use the Zillow estimate. And if we rolled the closing costs and new escrow payments into a new mortgage, we’d be even further away from a no-PMI payment.

If we DID refinance despite all these variables and increased costs, sure, it would save us anywhere from $25,000 to $30,000 in interest. We can reduce our interest costs by making extra principal payments over the life of the loan. So while we can’t throw a ton of money at the mortgage now, I add anywhere from $25-$50 in an extra principal payment each month. Every little bit helps: Just an extra $25 per month will save us more than $11,000 in interest and shorten the mortgage by a year. So while we won’t be lowering our monthly payment, we can still get ahead by prepaying the principal through extra contributions.