Refinancing to a 4.8% FHA
We are finally refinancing! Jocie and I have spoken with several brokers, and explored a lot of options, but we are finally refinancing. We haven’t signed the papers yet but that’s really the only thing left to complete. You may have read my posts about the benefits of FHA loans or insights from a home appraiser. These post basically follow my process through the maze that is refinancing our home mortgage.
The Drop in Home Value
In my post about the appraisal, I mention that it went really well. We received a copy of the appraisal and it was filled with good comments about the features of our home and all the upgrades we’ve done. It feels really good to know that my projects have increased the value of my home. Despite all the positives, our home still dropped in value (just like most of the country). We purchased our home in January of 2006. Since that time, the value has dropped $22,000! I estimate the total cost of our home projects around $24,000, which means we’ve lost a combined total of $46,000!
FHA Loan Details
Our goal was to combine our first and second mortgage into one, lower interest rate loan. This in turn will drop our monthly bills and help us save money. Our first loan had an interest rate of 6.125% while the second carried a much higher rate of 8.250%. Rates had been hovering around 5% but have since jumped a little higher. We were able to score a 4.8% loan near the end of May. Here are a few more details:
- FHA loan
- 30 year fixed rate
- 4.8% interest
Payback Period & Closing Costs
The payback period is how long it takes to recapture the cost to refinance. You can calculate it by dividing the total real closing costs by the savings. Better estimates will take into account that mortgage interest is tax deductible. Lets examine my home as an example.
Our first mortgage balance is $220,000. With the old rate of 6.125%, that means we pay roughly $13,475 per year in interest. The second mortgage balance is $30,000 with the old rate of 8.250%. That calculates to $2475 per year for a grand total of $15,950.
Our new loan actually includes most of the costs so it’s for a larger amount – $260,000. At the new rate, the monthly interest payment is $12,480 or $3,470 less.
Mortgage interest is tax deductible. Since we are in the 25% tax bracket, the savings is 75% of $3,470 or $2,603. Here’s a helpful article on finding your tax bracket. So by refinancing, we are saving $217 per month in interest!
Here’s a breakdown of our real closing costs:
- $400 Appraisal
- $500 Broker Processing Fee
- $26 Flood Check Fee
- $400 Tax Service Fee
- $4,499 VA Funding Fee
- $2,570 Broker Origination Fee
- $950 Broker Points
- $75 Courier
(real closing costs that aren’t prepaid items for things like insurance and property taxes that will be refunded from our escrow on the current loan)
Total Real Closing Costs: $ 9,420
These are some steep closing costs. That means the payback period will be about 3 and 1/2 years. It’s a bit longer than we’d prefer but we also don’t expect to move. Really, the major benefit is trimming down our monthly bills. Plus, if rates drop again, we can refinance without paying nearly as much in fees (benefit of FHA loans).
Should You Refinance?
This is really the big question to ask yourself. A great personal finance blog I read answers that question. Jim from Bargianeering wrote a post about deciding to refinance. He goes over the different aspects of refinancing so you can make an informed decision. And here’s a good calculator to help you crunch the numbers. Wells Fargo even posts approximate interest rates for a good starting point.
Watch Your Credit Report and FICO Score…
Finally, whether you refinance now or not, you should always check your FICO score and credit report before applying for a mortgage loan. Keeping your credit clean will ensure you can qualify for a loan with the best possible terms.
What do you think? Are you refinancing?
Image courtesy of bwhistler
Comments & Conversation on this Article...
4 Responses to Refinancing to a 4.8% FHA
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June 2nd, 2009 8:49 am
How did you pay that high of a closing cost? $7000 of it was VA and broker “fees”! Did you roll it into the loan?
To me, thats the biggest hurdle in these times to refinancing. It takes thousands and thousands of dollars, which most people don’t have. I make a good living, but our budget is so tight, even if I saved $400 a month to attempt a refinance, it would take me almost 2 years at that rate to save $10,000! Who can cut out $400 from their budget right now? Not me. And 2 years from now, the interest rates might be higher than the rate I have now anyway.
June 2nd, 2009 9:05 am
@John, It is a lot in closing costs and it’s a huge hurdle. We don’t have that kind of money waiting around either. But as you guessed, we incorporated that into the new loan. It’s not the most ideal situation, but I felt like it was better in the long run.
June 25th, 2010 12:19 am
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September 2nd, 2010 7:39 am
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