Little Bites: Yes, I’m Still Here

When I had our daughter — who is now 28 months old! — I knew this blog would become less and less of a priority. In addition to fewer blog posts, I’ve also been drifting away from personal finance-related topics. Sure, finances are a major consideration when you’re raising a family, and a lot of what goes on in our lives nowadays relates to money. But I’ve chosen to spent most of my free moments with Emily, who is an incredibly spirited toddler who keeps us on our toes and challenges us to whip out our best parenting skills, especially when she’s in public.

Refinancing the Mortgage = More Money Toward Debt Repayment

Our mortgage refinancing was completed in February, and our first payment came due April 1 — it felt great to pay $360 less than we had been on the old mortgage. Those extra funds have been going toward paying off our credit card debt, and we’ll be making the last payments on that in the next two weeks. It’s exciting, since we haven’t have zero balances on our credit cards since before Emily was born, back in early 2011.

Two-year-olds and Tantrums

In the parenting vein, holy terrible twos. Along with the language burst came explosions in the way of tantrums. Emily’s learned to express herself AND toss her little body on the floor like a wet noodle if we dare to tell her she can’t do something. There’s no holding back Miss Independent! Except, we have to hold her back, because she doesn’t know any better. So we’re working on teaching her limits. “No, you can’t play on the Nook again!”

Our First Post-Baby Weekend Away

Mr. Not-So-Frugal and I booked a weekend getaway for just the two of us — sans toddler. We’re not venturing too far, only an hour away, but it will be nice to spend time together as a couple without the parenting duties. I’m sure I’ll be a worrywart while we’re gone, but it will also be nice to partake in some cocktails at an oceanfront bar. It’s just a motel, but we’re paying for proximity to the ocean. So it’ll be worth is (as long as the weather cooperates!).

Refinancing Our Mortgage: We Did It!

When we bought our modest Cape Cod home back in June 2009, we thought interest rates on mortgages would never drop lower — they were already at historic lows! We got a 5% interest rate on our mortgage and put 20% down so we’d avoid paying PMI (private mortgage insurance). You know, doing it “right.” It’d be our one and only mortgage for the rest of our lives, barring a big lottery win.

Oh, how wrong I was on both counts.

First of all, mortgage interest rates have dropped even further in the four years since we purchased our home. And then we busted that whole “only one mortgage, ever” idea.

I’d flirted with the idea of refinancing our home last February, when interest rates were around 4%. But I knew despite the 20% down payment and principal-building monthly payments, we weren’t going to crack that magic 80% loan-t0-value ratio come the crucial appraisal time — home prices were still fairly low for the Northern New Jersey/NYC metro area.

I decided to bide my time. By December, I was back to researching home prices in our area, brokers, banks and their corresponding rates, and figured it was worth a shot.

After a ton of Internet research, I decided I wanted to go with Guaranteed Rate, a newer mortgage company out of Chicago. I found a representative, Joe Cafiero, out of the Philadelphia area who was very active in answering questions and assisting others on Zillow.com, and who had a great rating across the board. And he wound up being even better than the loan officer from our local bank who worked with us on our original mortgage.

Our stellar credit scores (hovering thisclose to 800, but actually 800 at one credit reporting agency in my husband’s case) allowed us to lock in a 30-year mortgage interest rate at 3.375% for 55 days, at .25 point. Yeah, points suck, but if you’re going to stay in your house forever like we are, do the math for each interest rate/points option — it’s usually worth paying a little more up front to save tens of thousands of dollars in interest in the end.

 

The Paperwork — Ack, Ack.

This was the most tedious part. It took forever to scan in all of our supporting documents, as they would jam in the feed tray of my dad’s printer/scanner, and I had to start from scratch because of the craptacular software. And I didn’t want to send the company a billion PDF files. It was a few hours of my life that I’ll never get back, but it got done.

Then the appraisal had to happen — and the estimate had to come in at a certain number so we could (again) avoid the PMI payments (a complete waste of money — they don’t go toward the principal!). I was on pins and needles the entire week it took to get the appraisal report.

Amazingly, the appraisal came in very close to what we were looking for. But in order to get to that 80% LTV ratio, we would have to make up the difference by paying $3,000 toward the mortgage principal. Otherwise, we’d be paying PMI for a few years. In the end, it was a no-brainer: Pay the $3,000 toward the principal now, rather than make PMI payments toward nothing.

The next step was getting through the underwriting process. After submitting our 2012 W-2 forms, we waited. Three days later, we had full approval for the new mortgage loan. The refinance was actually happening!

End Result

Our closing was scheduled for last Friday — the day that crazy blizzard named Nemo slammed into the Northeast. The woman from the title agency barely made it to our house — she’d already moved up the closing a few hours since we were home. After signing a bajillion pages, initialing a few thousand more, and handing over a sizeable bank check, we were good. Then we watched her head back down our front steps in her five-inch heels and prayed she didn’t fall.

Dropping our interest rate from 5% to 3.375% is saving us a whopping $362 a month in a lower mortgage payment. The closing costs will be recouped in 10 months. Even though we made 3 1/2 years of payments on the original mortgage loan, we’ll still save nearly $60,000 in interest by the end of this new 30-year refinance mortgage loan. And I’m hoping with some well-timed extra principal payments, we’ll be on track to shorten this mortgage by a few years.

I think we did the right thing. The numbers say we did, at least.

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.

Should I Pay Extra on the Mortgage Principal?

I’ve been paying extra on the mortgage for a year and a half now — I always pay at least $25 extra a month toward our mortgage principal, with a few months of an extra $50, up until our escrow payment increased $100/month this past August, after which I just rounded up to a nice, even number and paid an extra $23.

Fast-forward to last week, when we received an escrow disclosure statement/notice of new mortgage payment in the mail from our mortgage company. The good news is it indicates that starting in February, our total mortgage payment (which includes an escrow payment for property taxes and homeowners insurance) will decrease by $46 per month.

But with Baby Frugalista scheduled to arrive in early March, I’m wondering if that money would be better spent on, well, things for the baby. She’ll require diapers, wipes, and possibly formula if nursing doesn’t work out the way I hope. These items will alter our budget. Then there’s the savings account(s?) I want to open for her.

Another consideration is that I plan to stay home for 6 months after the baby is born, which means I’ll only be receiving 66% of my pay for 12 weeks or so, then nothing for the next 3 months. So our finances will be squeezed as it is — why make it worse by “spending” $25-$50 on an additional mortgage principal payment?

Paying the December Mortgage Bill Before December 31

Now that we’re snowed in (thanks to a blizzard that no one seems to have nicknamed as of yet), I’ve been cleaning my little heart out. The bathroom is sparkling, the Christmas gifts have been sorted and the tissue paper, boxes and gift bags carefully tucked away for re-use next season, and the back room that was loaded with baby stuff generously given to us by family and friends has been organized into a tolerable mess.

One thing I did remember to do before the end of the year is to pay our December mortgage before the 31. Why does it matter, you ask? By paying it before the end of 2010, we’ll be able to deduct the mortgage interest on our taxes come February. Between the mortgage interest and property tax deductions, we know we’ll be getting a hefty refund, and this will boost it. Yes, it’s an interest-free loan to the government, but this will be the first full year we’ve been paying these things, and I want to see what the numbers are before we readjust our W-4 withholding, if we choose to do it at all.

Currently, we both claim “zero” on our employer W-4s. I did so because I’ve always had freelance gigs. I get a 1099 at the end of the year, and I’m responsible for paying the taxes — and the last thing I want is to pay taxes in April. But now that we own our own home, it’s a whole new ballgame.

Do you remember to pay your December mortgage bill before the 31st? Worst comes to worst, you’ll include that mortgage interest in the follow year’s tax deductions, right?