So we are entering the home stretch of my quarantine period. I’ll be able to get out of here in 5 days! This leads me to some positive share some positive thoughts !
First some Virus related Thoughts
I know that everything seems scary right now. Multiple states and cities are starting to close everything down. Italy continues to have more and more deaths reported. Its easy to feel like that this thing is spiraling out of control, however our leaders are taking this seriously and that is the cause for all the closures. They are making sure we are making short term sacrifices for the long term viability of our country.
Our generation has never experienced anything like this in our adult lives, but this is not unprecedented. Our grandparents or great grand parents lived through the 1918 Spanish flu epidemic. That was in a time when the country was not nearly as connected as it is now. We are reacting much swifter and medicine is much more advanced now. These extreme measures are just what is required.
I read a great post on Chris Powell’s instagram tonight and it really helped me focus on that our end goal is to get life back to normal as quickly as possible. Here’s a link to his post:
We need to remember to surround ourselves in as much positivity as possible in order to mentally get through this time.
Some financial positivity
Even though the stock market is down a huge amount over the last month, there are always places where we can financially improve our lives. One of the key places many people forget to look is at refinancing their mortgages. Often the process is viewed as complicated or intimidating, but it doesn’t need to be.
Currently I’m in the process of refinancing our mortgage on our house, and we were approved to close today. Obviously the actual closing will have to wait until later this week when I can get out of the hotel, but the numbers are all finalized. Currently we are 3 years in to a 15/15 ARM at 3.5%. It was the lowest 30 year rate I could find at the time, and it would only adjust after a period of 15 years. A lot can change in ones life in 15 years and when you factor in the average homeowner stays in a home for ~8 years this was a no-brainer to go for the ARM at the time.
Now rates have dropped to 3.0% for a 30 year fixed (check your local mortgage companies and banks, because of the pandemic rates are now all over the place), it becomes another easy decision to refinance. For each $100,000 of financed money this rate drop will save at least $500 per year! Here’s the part where most people get intimidated, the costs to close are nearly $6400! But lets break down what is that $6400 figure.
Breakdown closing costs
Closing costs for conventional mortgages generally consist of 2 parts, the loan costs and the “other costs”. These are usually classified as these categories on the Loan Disclosure Document. This document is required for all closings on conforming loans in the states.
The loan cost section is what the loan is actually going to cost you. This is where the you’ll find things like the title company fees (what you have to pay for a licensed title company to process your transaction) and the underwriting fee (the cost the mortgage company or bank is charging you to process your loan). On my disclosure sheet this section totals out to only $2400.
The “other costs” section will generally make up the bulk of the closing costs. For me this section is about $4600. Lets take a closer look at what these fees include. My other costs section is broken up into 3 subsections.
Breaking down the “Other” Costs
The first of those sections is the Taxes and Government fees section. This section only contains $125. This is the recording fee to record the new loan with your city or county. This is a one time fee only.
The next section is the Prepaid section. In this section there are several line items for insurance, taxes, and interest. Since this is a refinance and not a new purchase, I’ve already paid my taxes and home owners insurance for the year so these two line items are blank. The only item that has any cost to it is the prepaid interest at right at $1,000. But why are we prepaying interest? This covers the interest between the time that we close (end of March) until our first payment is due (June 1). So we are essentially trading our current April first mortgage payment for this prepaid interest. Since its only interest for April and no principle and we are not going to make a April mortgage payment we come out ahead!
The last section, and where the bulk of the cost lies, is our escrow account setup. Here is where we fund our escrow account for our next years Homeowners insurance and Property taxes. This section is $3500. So why is it so expensive? The answer is pretty simple, this is approximately how much is already in our escrow account for the original mortgage. Each month our mortgage payment consists of PITI- Principle, Interest, Taxes, and Insurance. The taxes and insurance each month go to our escrow accounts so your bank can make your homeowners insurance or property tax payments when they are due.
Now I’ll tell you a secret. When you complete your refinance and your current loan gets paid off, they will send you a check with the money that is in your current escrow account! These numbers may not match exactly, but they will likely be within a few hundred dollars of each other, so these costs essentially offset!
Closing on the Closing
So if your doing the math these numbers don’t add up to $6300. They add up to $7,000, so how did I get to $6300 in closing costs? Simple, the bank wants my business and is giving me an additional $700 credit (discount) on the overall closing package, making my costs only $6300!
So now when we factor everything in where are we at? If you subtract out the prepaid interest and the escrow account setup my actual out of pocket costs are only about $1700. With this refinance I will save approximately $220 a month. This means that not only am I freeing up ~$220 a month in cash (or $2640 a year), but I will also have recouped all of my closing costs after 8 payments ($1700/$220=7.7 months). These are the single most important stats when you look at refinancing in the short term. My personal rule of thumb is that if you get ROI (Return On your Investment) in 2 years or less that it makes sense to do the deal. With an amazing 3.0% rate locked in for 30 year, and an ROI of only 8 months this was a great deal!
Finally if your not interested in saving the monthly cash flow, you can add that savings to your monthly payment and payoff your loan even faster! For us if we add that $220 a month back in we will shave nearly 4 years off our current mortgage time frame (or 7 years of the new mortgage)! This is really a win win!
This whole ordeal shows that even in times of chaos, there are still great financial decisions to be made that will help you and your family. Remember we must live for today, but continually plan for tomorrow!
- Get 8 Hours of Sleep- Check
- Eat Healthy- Check, Muffin and Yogurt for breakfast, tortilla wrap and pretzels for lunch, steak enchiladas for dinner! (Still eating in style!)
- Exercise Everyday – Check, Day 9 of 9. Doing extra sets now!
- Still be productive- Check (Refinance is a big productivity booster!)
- Virtually date my wife (and talk to the kids)- Check, Face Timed with them for few hours tonight!
- Launch the blog –Complete, day 9 of 9 posting!
- Read more – Trying to read, but after reading all the news everyday I’m having a hard time getting into my book
- Minimize TV/Internet/Video Games –Check, mainly watched a couple comedy sitcoms today.
- Relax- Check
What are you doing to stay positive? Are you still making financial moves even in these uncertain times? Do you need help understanding your mortgage? Drop me a note in the comments!