The Do-it-Yourself Mortgage Refinance

November 11, 2010, By PJ Mullen 1 comment

With rates at historic lows, my inbox is frequently flooded with mortgage refinance offers - even from my current mortgage company. And it seems no matter what site I’m on; the web is drowning in banners ads and pop-ups touting unbelievable deals.

You’ve likely seen these same things and it has probably made you skeptical. Well, it should. In my previous professional career I slung mortgages for six years and have been alternately amazed and disgusted at some of the marketing tactics these companies employ. They are at best misleading and in extreme cases, dishonest.

The reality of today’s mortgage market is that it is more difficult to get a mortgage than these overly optimistic advertisements and emails would lead you to believe. Long gone are the days when all you needed was a credit score and the ability to fog a mirror in order to obtain high loan- to-value financing on a home you owned or would like to purchase.

The renewed focus on the veracity of a borrower's credit, collateral (home value) and capacity (income to expense ratio) is a good thing to help avoid a repeat of the current real estate morass in which most of the country finds itself. The tightening of credit standards for new mortgages and the steep decline we’ve experienced in property values, however, have made it more difficult to complete a refinance transaction.

Even if all factors were lined up in your favor, there is still the cost of refinancing combined with the fact that, unless you are changing your loan term, you will be starting all over again with 360 payments to be made on your shiny new loan.

If you find yourself in this situation, then there is a way for you to get close to today’s market rates on the mortgage you already have without the hassle or expense of refinancing. This doesn’t involve any crazy schemes or expensive programs like the bi-weekly payment plans we were encouraged to sell back when I was a mortgage broker.

Pay A Little More

All you need to do to reduce your mortgage interest expense is add a small amount of additional principal with each payment to force your loan’s amortization schedule to accelerate. To be clear, this will not reduce your interest rate or APR, nor will it in any way change the required monthly mortgage payment over time. Those things will always remain the same as long as you have that mortgage.

If you put this into practice with the very first payment you make on your mortgage you could knock approximately six years off your repayment schedule. Even if you have been paying on your loan for a number of years you can still generate significant savings without paying to refinance or resetting the number of payments due on your loan.

Do the Math

According to the 2010 second quarter report from the National Association of Realtors the median home price in the United States was $176,000. Assuming a borrower puts down five percent to purchase their home they would have a principal balance of $167,200. Based on the current market rate of 4.375% for a 30 year fixed mortgage per Bankrate.com their principal and interest payment would be $834.80 per month.

Let’s contrast that with a second borrower who purchased a similarly priced home with the same down payment two years earlier when the mortgage rates were approximately 5.375%. That borrower would have a principal and interest payment due of $936.27 per month, or $101 more per month than the other borrower.

Over the life of the loan the first borrower in this example will pay a little more than $133,000 in interest, whereas the second borrower will pay a little more than $169,000 to service their mortgage debt.

A Little Goes a Long Way

However, if the second borrower were to start paying 1/12th of their monthly mortgage payment (principal and interest) extra every month (approximately $78) they would reduce their interest expense by approximately $27,000. Additionally, their mortgage would be fully repaid by month 307, which is more than four years early.

Had the second borrower been doing this from their very first mortgage payment, their savings would be closer to $32,000 and they would have knocked nearly five years off their mortgage. Also, they would have paid only $3,600 more in interest over the life of the loan as compared with the first borrower.

The difference between the interest paid by the two borrowers could just as easily have been spent on a refinance transaction to get the second borrower to today’s market rate. So that refinancing would essentially be a wash.

Before you go through the arduous process of trying to refinance you home, consider a do-it-yourself mortgage refinance. While you will be paying more per month, not less, you don’t have to come out of pocket for or capitalize the cost of a refinance transaction.

As you see a one percent difference in rate with all other variables constant equates to only $100 a month in savings. If you’re going to have to drop $4,000 or more to refinance it makes a lot more sense to come out of pocket a little more each month and directly impact your principal balance rather than adding to your overall borrowing expense.