Like so many folks, my wife and I wanted our dream home. It was going to be our last, so we wanted it to be laid out a certain way. We were going to build on family land and spend the rest of our lives there, so we drew up the plans and put the wheels in motion. With that, we had to obtain financing.
That was 2006.
My wife and I did as many folks have done, we got a 30-year mortgage. We also got a 6.75% interest rate, with zero down.
Yep, that was back when rates were higher and I wasn’t as smart as I am now. Over the years we’ve put enough away to pay off the mortgage and we toyed with doing just that. But, when I ran the numbers on the percentage of portfolio growth (8+%, annual average) vs the 6.75% that we’re paying on the mortgage, it didn’t make sense to pull that much out and lose the earning potential.
I decided that I really wanted to shorten our loan and reduce the interest rate as I’ve learned a bit in my blundering through the world of Personal Finance. Took me 10 years to figure out how much we would save by going to 15 years (We have almost 20 years left on our 30-year mortgage) and dropping the interest rate.
So, we started looking into options.
I logged into Lending Tree Dot Com and applied for a refi. Offers started coming in and we decided to go with one that was appealing. 3.75%. Six points lower than our original loan.
I ran the numbers and calculated that we’d save almost $90K in interest. 90K! That’s a chunk of cash. Definitely worth pursuing.
“Houston, we have a problem.” Turns out the lending agency we chose doesn’t deal with rural land, and after shelling out for a survey and an appraisal, we were dancing around how many acres they could tie into the lien.
On top of that, we were told that we might not qualify because we’re retired, and they said our Income to Debt Ratio was pretty close. Hmmmmm. We bring in almost $6K a month, take-home, but because we have a bunch of deductions, our adjusted income doesn’t reflect it and it looks like our income is much lower than it is.
After almost 2 months of trying to refinance the house, I decided to call our bank and ask about options.
The delightful loan officer shared some interesting info. I was familiar with refinancing and knew a little about recasting but was not expecting to hear about modifying our original loan. Turns out we had three options available.
Here they are.
RECAST THE LOAN – Recasting a loan only makes one change to a mortgage, lower monthly payments. It all boils down to making a large one-lump payment towards the balance on the loan, thus lowering the balance due. The payments are then adjusted for the remainder of the loan.
There is no change to the interest rate, nor is the length of the loan changed, just the payment amount.
Now, if you have a large chunk of capital sitting and want to reduce your payments, this is an option. Great thing about it, there is no qualification process, not appraisal needed, no title insurance, etc. That’s all done with the original mortgage so it’s not necessary in this case.
Since recasting would only lower our payment, it was definitely not what I was looking for.
REFINANCE THE LOAN – In refinancing a mortgage one obtains a new loan to pay off the first. This can be as simple as borrowing the exact amount owed on the original mortgage and changing from a 30-year to a 15-year loan, or one can also cash-out equity and pocket some money for improvements, paying off consumer debt, vacationing, etc.
In doing so, one can lower the monthly payment or increase it. That all depends upon the details of the loan.
I’d been hearing about refinancing for a long time and figured that this was the option to go with. As I mentioned earlier, I logged into Lending Tree Dot Com and we filled out an application. We simply wanted to pay off the original loan, reduce the interest rate, and the length of maturity. We didn’t want to pull out any cash, so I thought it would be a simple process.
Wrong!
We received an offer accepted it and then began the drawn out process. Since this would be a brand new, 15-year loan, we had to go through the whole ordeal that we did when we built the house. Application, survey, appraisal, qualification, title insurance, a title search on the land, etc.
It was a pain, then we got word that we might not qualify because of our Income to Debt Ratio.
Great! Now, even with the money spent on the survey and appraisal, we might not get to refinance. With that, I decided to call our bank. That’s when I learned about modifying our mortgage.
MODIFY THE LOAN – Modifying a loan is a neat option, but it’s not without limitations. Basically, you contact the lender that holds the original note and see if modifying is an option. If it is, you’ll be able to make the following changes to the loan:
- Shorten the loan from 30 to 15 years. You can only shorten the length of the mortgage when modifying. You can’t go from 15 to 30 years.
- Reduce the interest rate.
- Possibly reduce the payment amount.
All of this is possible by simply signing a Request to Modify document that was emailed to us from the bank. We didn’t have to fill out an application, we didn’t have to go through the Income to Debt Ratio dance, we didn’t have to have an appraisal, we didn’t have to have a survey, but they did check our credit scores. That was basically it.
Modifying our mortgage was just what I was looking for.
Why the “HELLO” didn’t I just call the bank first?
Oh well, live and learn.
We signed the papers the other day and we now have a 15-year mortgage at 4.24%.
So, that financial milstone is complete. We’ve modified our mortgage and will pay it off earlier than if we’d kept the 30-year note, plus we’ll be saving about $70k in interest.
I have to admit, I’m pretty pleased with myself.
I can only do better by paying of the note earlier than 15 years, which is my next game plan. Gonna take care of a few other financial issues then start directing extra $$ towards our mortgage.
Stay tuned I’ll be sharing more on that, in the future.
So, are you interested in improving your mortgage? I suggest that you look into modifying it.
