As someone who bought a home when the market was still declining (2010), I thought I had jumped in at just the right time. I locked a 5 percent rate for 30 years, confident my home value would soon increase because the housing market had "bottomed out." Unfortunately, the news was not all true. My house continued to decline in value -- while interest rates were lowering along with it! I was pretty content with my 5 percent until I heard news of rates in the 3s. I started to wonder if I could refinance my mortgage.
A quick look online showed my house was (most likely) underwater, so I figured I was out of luck. I even called a few mortgage places to see what my options were, but they were reluctant to help. One told me I couldn't do anything because I was underwater, and the other told me the increase in MIP (mortgage insurance) would wipe out any potential savings. So I gave up my quest.
We contacted a mortgage broker
After a conversation with a friend about my housing woes, he mentioned that he was in the same situation and had been able to refinance without MIP. I decided to call a broker -- though, in the back of my mind, I figured he would just tell me the same thing everyone else had told me. I shot off an email, described my situation to him, and waited for the "I'm sorry, I can't help you" email to come back. To my surprise, he told me he had some options available and wanted to set up a quick call to go over them.
After introductions, we got down to the details. I set up a call the next day to go over a questionnaire he had put together to filter out the different mortgage options that we would qualify for. After answering all the basic questions about our existing mortgage and employment information, he came back with three refinance options that we could choose from:
Option 1 - We could refinance our mortgage and completely get rid of our MIP. The only drawback would be a slightly higher rate than the going 30-year rate, but it would still be a full percent lower than our current rate, coming in around 4 percent. At $360 a month savings, it would take us about two years to break even and make up for the loan fees.
Option 2 - We could refinance our mortgage and roll our MIP payment as a lump sum into the mortgage. This would add an extra $7,500 to our mortgage, but our rate would only be 3.5 percent. At $415 a month savings, it would take us about three years to break even and make up for the loan fees and extra MIP. But we would then be saving $55 a month more than Option 1.
Option 3 - We could refinance our mortgage while keeping our MIP. The insurance payment would increase from about $145 a month to around $325 a month. The advantage would be our rate decreasing to 3.25 percent. This option also offered the lowest savings per month because of the MIP increase. At $175 a month savings, it would take us about three years to break even and make up for the loan fees (which were much lower than the other two options). We would only be saving $175 a month after that, but if we paid our mortgage down to have 22-percent equity, after the five-year mark we could be saving $500 a month!
We ended up picking Option 3, not because we wanted to but because it was our only option. The first two loan options required that we have at least 5-percent equity, so our house would need to appraise for about $8,000 more than we bought it for. That sounds easy enough, but since it had dropped a ton in value (after looking at comparable house sales and values), we would be lucky to appraise for $8,000 less than we paid. We decided to forego the appraisal (a $525 fee) and go with the FHA Streamline refinance, which does not require an appraisal.
I contacted our broker with our decision, and he sent us a list of items he would need, as well as a ton of paperwork to sign. With the FHA Streamline, we didn't need to prove our income or have any equity in our house. All we needed to do was prove that I was employed and that we indeed owned the current mortgage to the house. We had to give him copies of last year's W-2s, recent pay stubs (only to prove employment), bank statements, driver's licenses, and our first mortgage note. We scanned in all the paperwork and signed all the required docs, and sent it to him for processing.
We locked our rate at 3.25 percent in October 2012 and our loan was funded by the end of November. All in all, the process went very smoothly and took less than 50 days from start to finish. We did everything over email, except the final signing. We are now saving $200 per month and will break even on the refinance costs in less than two years. Once we pay down our mortgage to have equity of 22 percent, we will be saving $525 per month. I'm taking that savings and am now able to fund my 1-year-old's college savings account.
Jacob is the author of I Heart Budgets, a personal finance blog dedicated to putting the "Fun" back in Fundamentals of Finance. He is a husband, father, and avid budget nerd who actually spent his recent birthday budgeting for FY13 at his home. If you ask anyone who has known him for more than 13 seconds, you would know he truly does Heart budgets. Follow him on Twitter @iHeartBudgets.
- mortgage broker