Refinance Closing Complete! Consolidation Begins!

Today I closed on the refinance of my current mortgage and HELOC into a new 30-year mortgage. I went through my local credit union and lowered my interest rate from 6% to 4.5% on my entire balance. This is a great rate and I freed up almost $200/month in cash flow as a result!

I finished my closing around 2 hours ago and I feel a big relief. All the paperwork, applications, appraisal, inspectors, and general hectic mess is over. I am now paying just shy of $400 per month for my newly remodeled foreclosure home in a great area. It took me 1 year, 2 months to get to this point. It feels great!

Now some real work begins. As I write this I am on hold with yet another credit card company. Now that I am past credit checks and needs for borrowing I am doing an "avalanche" of account closings. I have multiple cards that I no longer use. I opened them to get bonuses and rewards and am now closing the accounts I don't need.

I am in the big process of simplifying my financial life so I can focus on other things. I have paid off all of my credit card balances except for 1 and that will be paid off this month and I will close that account too. I will be left with only a handful of my oldest accounts to maintain my credit history and to have for emergencies. I will continue to use my Delta SkyMiles card to earn my free travel rewards as usual.

House Appraisal: $98,000!

I just got my appraisal in for my mortgage refinance. My home value, according to the appraisal, has risen $8,000! This is great news as I can now refinance with no out of pocket costs. This also means my net worth has risen a bit too!

I am moving forward with my refinance at 4.5% which is a lot less than the 6% I am paying now! I will also roll in my HELOC to make one payment and total monthly out of pocket too. My HELOC is at 4% but it is a variable rate that will eventually rise so I am OK with locking in 4.5% now.

This is a big leap forward for my monthly cash flow and overall interest rate on my mortgage debt. I am locking in one of the lowest interest rates in history for my 30-year mortgage. I intend to pay extra toward the mortgage once I have exhausted all of my other debts to speed up the repayment. I will continue my debt snowball as planned.

Now is the time to refinance if it makes financial sense!

(Some) Mortgage Fees are Negotiable!

Everyone knows that mortgages are expensive. Closing costs can add up really fast and you normally have to come up with the money in the case of a refinance. I have been working with a local credit union and I am negotiating the closing costs a bit.

I recently got a home equity line of credit on my house to repay family for borrowed remodel money. It had $0 closing costs and a good interest rate of 4%. It is a variable rate and I believe rates will begin to rise in a couple years. Fixed rates are low too so a refinance in my case makes sense as my current mortgage is at 6% (FHA).

I have to get the appraisal on my house updated as a result. Appraisals are costly and normally are $325. I got them down to $225 since I had one done 3 months ago and nothing has changed much. That's $100 in my pocket!

I am now working on getting them to remove the points on the mortgage. As I do intend to sell the house one day and not live out the entire 30 year term of the loan I am OK with a little higher interest rate as it will save me $720 right now. Points are expensive (and pure profit to the lender)!

It is also good to thoroughly check the good faith estimate. People make mistakes, including mortgage underwriters, and that happened to me. They had me set up for escrow of my insurance and taxes and I had it removed (it is optional in my case). I would rather earn the interest myself thank you very much! That brought down my closing costs since I don't have to maintain a surplus in an escrow account!

As always with a mortgage it is best to shop around. I suggest getting 3 good faith estimates from the institutions in your area offering the best rates. Bankrate.com is a great place to start looking!

HELOC Closing tomorrow!

Tomorrow I close on my home equity line of credit. I am getting it from a local credit union that pegs the rate at prime + 0.00%. The rate is currently at their minimum rate of 4%. This is being used to repay all the money I borrow form family to do my home remodel.

I am paying $0 in closing costs and will have access to the money next week. This is the final step in my house remodel process. I can now move on with my life!

Refinancing my mortgage!

I have started the process of refinancing my mortgage. It is a lot of paperwork and coordination but will produce some good results for me. I am dropping my interest rate by 1%, dropping mortgage insurance, paying off all of my remodel expenses, and simplifying my financial life all at once.

As an added bonus I am not required to escrow my property tax and insurance. I will set up a savings account and escrow it myself so I can earn the interest instead of a bank. I will also get some of the escrow "required surplus" money back that I can use as I wish. It will be added to the emergency fund.

This time I am using a local credit union for the mortgage. They were the best deal I could find and I like the idea of keeping it local. I also have some savings with them so I like the idea of moving to them for the mortgage. They are very easy to work with and treat me more like a person and less like an account number.

I have come a long way remodeling my foreclosure purchase. I am 98% done with the house now and the only remaining variable is the appraisal. Once that is done I can lock my rate and continue onto closing the new loan and consolidating. It will be a great feeling to have this done and over with!

Mortgage Escrow Surplus! ...and reminders!

I got notification that I have a mortgage escrow surplus from last year. I will get getting almost $800 back from Chase which I will in turn throw against debts immediately. This is a nice surprise and a great boost for my net worth. I also like getting unexpected checks in the mail!

This brings me to the point that it is important to read your annual escrow statement from your mortgage lender. It can go the other way where you might have to actually send them more money. I always check the accuracy of their calculations and the actual numbers they use. Does the property tax, insurance, and other escrow items match what you have? These people do thousands of these a month and mistakes do happen!

If you do find any mistakes you need to bring it to their attention immediately as underpaying over 1 year's time could lead to having to cut a big check the next year. Also if you personally receive bills that are covered by escrow funds be sure to send them onto your lender so they get paid on time. Most of them have a mailing address and/or fax number to send them too. A little paperwork now saves a big headache later!

Benefits of Mortgage Prepayment

Paying off a mortgage early can give us a feeling of accomplishment and relief. Dropping a large monthly payment can put us in a great position to save more and do more of the things we enjoy. It is a step to financial freedom!

Warning: Do not prepay a mortgage if you have other debts outstanding. This is the last step in the debt elimination process. I have had people as me how much they can really save so I put together this post!

Example:

30 Year Mortgage, $100,000 @ 6.00%

Normal payment: $599.56

Prepayment Examples (assuming you pay extra from day 1):

• Add $100 in principal each month: Paid off in 258 months (21.5 years) and save $39,896.57 in interest
• Add $200 in principal each month: Paid off in 197 months (16.42 years) and save $58,446.42 in interest
• Add $300 in principal each month: Paid off in 163 months (13.6 years) and save $69,460.99 in interest

As you can see adding as little as $100 per month can save you a lot of money. You also knock off 8.5 years of payments to boot. Prepaying a mortgage can help us get to our goals faster. If you have the free cash flow and no other debts or obligations I highly suggest you do this.

To calculate the above scenarios I used this free tool here. It is a little quirky but once you get the hang of it you will be able to play with the numbers and decide what is best for you!

15 year versus 30 year mortgage

Since I was recently house shopping I have decided to share my thoughts on mortgages. I am not a fan of adjustable rate or interest-only mortgages as they tend to only cause financial trouble or even crisis later on. I only support fixed rate, fixed term mortgages and that is what I have on my foreclosure that I just bought.

When I was looking at houses I decided that a 30 year mortgage was best for me. I am over 30 years away from retirement, have a lower payment, and can always add principal payments if I desire. I like the flexibility. Having the lower payment allows me to tackle higher interest bad debts and get them gone faster. I end up saving in the long term.

If you are house shopping and no longer have bad debts (credit card, auto loans, etc.) I would suggest a 15 year mortgage if you can afford it. You will save a small fortune in interest in the long term and the monthly payment goes away a lot faster. You should absolutely get a 15 year mortgage if you are 20 years or less away from your target retirement age. The ideal situation is to have the house paid for by the day you retire at the latest.

That said, their are exceptions to the above rules. If I knew that I would be selling the house in a few years after I bought it or going to use it as a rental property after I moved out then I would do a 30-year mortgage. The tax breaks and more positive cash flow from a rental make sense in this case. If your cash flow becomes exceptionally good you can always accelerate the payments on principal.

The best way to pick the term of your mortgage is to take a close look at your personal financial situation. Ask yourself these questions:

• Would I save more in interest by taking a 30 year term and paying down other debts?
• How much of a monthly mortgage payment can I afford?
• When is my target retirement date and how close am I to that date?
• When do I plan to sell the house (if at all!)?
• Am I going to need to borrow money to do remodel or repairs on the house as well?
• What are the tax, insurance, and maintenance costs each month?

You should also consider your tax bracket and tax breaks from the interest. This is only a secondary concern but does changes the numbers a bit. It is best to avoid paying interest when you can but sometimes it can make sense to pay more interest and refinance later if rates are expected to drop. If you fall into a 20% marginal tax rate, for example, you can reduce the total interest on the loan by 20% as you would save that money on your income taxes assuming you itemize deductions.

One final item to consider and should really not affect your decision at all is future borrowing potential. Having a higher payment from a 15 year mortgage could theoretically drop your ability to borrow for other needs as you have less disposable income. This should be a non-issue for most as we should save for things and not borrow.

Buying a house is a big investment and it is important to make the right mortgage choice for your situation. If you have covered all of the above items then you have "done your homework" and are on the right path. Now that you have figured out your mortgage details and how much you can afford go out and find your new home!

Buying a house? New PMI Rules!

This is another personal experience that I will share for those of you looking to buy a house in the near future. With the recent rash of foreclosures and bad deals the entire industry is buttoning down. It is a LOT harder than it was a couple years ago.

A little background on my scenario:

I am buying a 3 bedroom, 1.5 bath town home here in the Atlanta area. It is a foreclosure that needs work. I can put up to 5% down on the property with my savings. This puts me in the situation that I would need PMI or Private Mortgage Insurance.

I was informed that my credit score was not high enough to be able to obtain PMI. As it turns out the insurers are really getting hit hard now and they raised their minimum credit score to get PMI. I was blind-sided by this and had to change to an FHA loan last minute.

If you are unable to qualify for PMI and you don't have 20% to put down you are left no choice except to get a government sponsored (read: insured) loan. You still pay "mortgage insurance" but instead of private it is provided by the US Government. I am personally using an FHA loan with 3.5% down since I am a first time home buyer. My interest rate ended up being lower too!

This came as a complete surprise to me so I thought I should share my experience here. I will soon be rid of the insurance as once I get the house, do the repairs and upgrade, and get a new appraisal I will have more than 20% equity. This is a temporary headache (I hope!).

Since I am buying the house through a normal FHA loan I have to pass a HUD inspection. This put me in the unique situation where I have to do repairs on a house I do not yet own. The only reason I am doing this is that once the work is done on the home I should have close to $50,000 in equity. Worth the risk in my opinion.

If you are in the market for a home and will need PMI keep this information in mind. It would be heartbreaking to find a place you like to only find out 2 weeks away from closing that you cannot get it and have the whole deal fall through.