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Errors to Avoid When Refinancing The White Coat Investor. I just refinanced from a 3. Rate One (No financial relationship, but highly recommended.)  If you are paying above 4% and have less than 1. That’s where you get an above market rate where the lender takes some of the extra money he makes for giving you that higher rate and applies it to your closing costs.  As long as you keep the same term you currently have (easy to do just by taking your savings and applying it to principal, i.

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The lender makes a few bucks, the appraiser gets a few bucks, the title insurance/closing agent earns a commission, and you save some money.  It’s a win- win for everyone but your current mortgage holder, but don’t feel too badly, especially if you gave them a chance to have your refinance business. In the past 1. 2 years, I’ve had three different mortgages, refinanced three separate times, and had a home equity loan.  In fact this is my third closing in a year.  I’ve made plenty of mistakes but learned something new every time. Let me share some of the lessons learned.# 1 Shorten the term on the mortgage. If you have been paying on a 3. Your goal should not necessarily be a lower payment, but rather owning your home free and clear sooner. Let’s use figures from my recent refinance to illustrate.  I refinanced after 1.

My old principal and interest payment was $2. My new principal and interest payment is $2. But if I still want to be mortgage- free after 1.

I now need to pay an extra $1. So my real savings are only about $3. Not a huge savings, but I had a pretty good mortgage rate to start with.  One benefit aside from the savings on interest is that if I get into a tight spot financially, I can default back to the lower payment and increase my cash flow by $1. Realize that there is a difference between a no- cost refinance, and no- cash refinance. Lenders are tricky folks, and sometimes what they do is just add the closing costs to the loan amount.  You don’t have to bring cash to closing, but instead of owing $2.

Sure, you have a lower rate, but was it worth it?  Maybe, maybe not.  Be very careful and understand exactly what is going on in the process.  Pay close attention to the amount of principal you owe on the old mortgage and the amount of the new loan.  For example, the amount of principal I owed on my old mortgage was ~ $3. The loan amount for the new loan is $3. Remember that the payoff amount is the sum of principal owed and the interest for the part of the month prior to the closing, so $7.

But if the new loan balance had been something like $3. I was now adding some closing costs onto my loan balance AKA a “no- cash” refinance.

We were burned this way on at least one of the two refinances we did back in medical school.  You’re hardly paying anything toward principal in the first few years of a 3. Once you start adding costs back onto the loan, you’ll really be rowing upstream.# 3 Recognize the “skipped payment” fallacy. Watch Batman Online Hitfix on this page. Lenders and closers love to talk about it, but what does it mean really?  There are a couple of things they may be referring to.  First, I closed my loan in the first half of December.  My old mortgage payment, due on December 1st has a 1. If my loan is closed and funded before that grace period is up, technically I don’t have to make the payment.  But you better believe the bank isn’t going to make the payment.  That principal, as well as the interest, will just be added onto the loan (and your payoff amount will be higher.)The second thing the lender may be referring to is the fact that I won’t make a January payment.  While it is true that I don’t have to write a check in January, there really isn’t any savings going on.  Again, no one else is going to make the payment for me.  The reason I don’t make a payment in January is that I made it at closing.  That’s right.  Not only do you not skip a payment, you have to make it IN ADVANCE.  That’s because interest is collected in arrears.  So at closing, you pay the interest for the first part of the month as part of the payoff amount (it’s usually added onto the loan, like in my case, but you could pay it with cash at closing if you like.)  You also pay the interest for the second part of the month as part of your closing costs.  II paid the interest for December at closing, so I obviously won’t have to pay it again at the first of January.  Interest never sleeps.  From the day you take out a mortgage, until the day you pay it off, you’ll never stop accumulating interest on the amount owed, no matter how many times you refinance.

Now, what about the principal?  I don’t HAVE to pay the principal in January.  I can if I want, but I don’t HAVE to.  So in reality, I CAN skip a principal payment.  But do you think someone else pays it for me?  Not hardly.  It just gets added on to the end of the loan.  So if I didn’t increase my payment after the refinance, it would take me another 1. Again, if I want the loan paid off after 1. I’d better pay the principal for January.# 4 Understand the escrows.

An escrow account is an account, usually held by your bank, that pays your insurance and property taxes.  It’s helpful for those without the discipline to save up money for those large expenses themselves, and many lenders require you to have one, or at least make you pay a fee if you want to do it yourself. Although you can often cancel your escrow account without a fee after you start making payments.) With an original mortgage, you usually need to put 2 months worth of pro- rated insurance and taxes in the escrow account.  With a refinance, you’ll almost surely need to put in more, sometimes much more.  For example, I paid both my taxes and insurance in November, and so I only have 3 months of escrows in my old account (2 from the original buffer, plus the amount that was paid with my December mortgage payment.)  The bank, however, wanted 5 months worth of pro- rated insurance payments, and four months of pro- rated property tax payments.  That’s the two buffer months, plus December and January for the taxes, and plus November, December, and January for the insurance (insurance was paid in early November, taxes in late November.)  I’ll get 3 months worth of escrows back from the old bank a few weeks after closing, but 4- 5 months of escrows had to fronted for the new escrow account at the new bank.  Again, there is no skipped payment for interest OR escrows, and a skipped principal payment doesn’t help you.# 5 Recognize that all no- cost refinances are not the same.

The theory behind a no- cost mortgage is great.  It puts all the fees on the lender, who is better at negotiating them than you anyway, so all you theoretically have to do is shop based on the rate.  In typical mortgage shopping the lenders play a constant game of moving pieces.  If you shop by rate, they nail you with points.  If you only shop zero points to eliminate that, they’ll start varying their fees.  You can minimize the lender’s advantage by doing a no- cost refinance, but there are a few places here where the new lender can still take advantage of you. First, make sure you know what happens with the old escrow account.  If the lender makes you pay it to them (“because we paid for your new escrow account”) that isn’t as good a deal for you as if you get your old escrows back.  How bad of a deal depends on how much you had in there. I seem to remember falling for this trick with one of my refinances.

Another place you can get burned is with the new escrows.  Some no- cost refinances will fund your new escrow account AND let you keep the old one.  However, you might not get as good a rate.  For example, Rate One offered me two options.  They would pay for my new escrow account (and interest which we’ll get to next) for a 3. They wanted me to cover those expenses for 3. I figured since I would be paying those expenses myself if I didn’t refinance (remember nobody else will pay your interest, taxes, or insurance), I might as well take the lower rate.