Hannah and Dominic’s Refinance
My phone is ringing off the hook with questions about refinancing. Everyone has a different question. What about jumbo loans? How low will the rates go? Is it worth the closing costs for me to refinance?
Hannah and Dominic, clients of mine from Newton, MA, faced several refinancing challenges: a jumbo loan, a high home equity line, and a real financial need to reduce their payments fast. I talked with the couple last week about their situation.
Q. What was your PITI payment before you refinanced? How did that work for your family?
A. We paid just about $4,000 per month. The payment was getting very difficult for us. We have three young children, and only one income. Our kids are involved in expensive activities: one daughter requires a weekly private tutor for learning issues, another is a competitive gymnast, and our youngest goes to preschool five mornings a week. With those kinds of expenses, we often turned to our home equity line of credit (HELOC) and now owe the bank $100,000 for that. We felt like we were sinking and had nowhere to turn. Refinancing sounded like a natural solution, but we didn’t think it was an option since we have a jumbo mortgage – a mortgage of more than $417,000.
Q. When did you buy your home, for how much, and at what interest rate?
A. When we bought our home in 2004, the market was so hot that we kept losing any house that we bid in the $700,000 range for. So we moved up to the next price range rather impulsively and got an interest-only mortgage with a low rate of about 4.5%. Our home cost $826,000, and we put down a healthy $340,000. Our mortgage was $426,000. Our PITI payment at that time was about $3,000, which was OK, but we weren’t making any progress on our principle.
Q. Did you refinance the interest-only mortgage quickly?
A. Yes. In 2005 we switched to a 30-year fixed mortgage. We got a rate of 5.75%, which we were happy with at the time. While we were refinancing, we paid off some expenses and increased the amount our mortgage to $500,000. This is how we got to the $4,000 PITI payment.
Q. How did you decide to refinance again?
A. Dominic works in finance, and it was driving him crazy to see the mortgage rates so low and not be able to take advantage of them. Our jumbo loan was keeping us back – or so we thought. We contacted Westchester Mortgage and found out about a program that allows you to refinance “conforming” jumbo loans. Any loan more than $417,000, but less than XXX may qualify.
We were so excited! Could we really get a mortgage rate as low as the FOURS?! We got a rate of 4.5%.
Q. Were there any obstacles?
A. Remember that pesky home equity loan? Well, we still owe $100,000 on it. We wondered if that would be considered part of our loan. Debbie explained that we could go ahead with the refinancing if the bank that held that HELOC agreed to “suborbinate” it, which means that the bank would have to agree to be second in line for our money, should we [shudder] default on our loan.
We did a happy dance around our kitchen when we learned the news. Our mortgage payment was going to decrease by more than $500 per month. The hole we felt like we were sinking into was going to get a little smaller, day by day. However, everything hinged on getting that subordination from Sovereign Bank.
Q. How did your HELOC get so high?
A. Naively, we expected real estate values to continue skyrocketing. We accessed the home equity for large expenses: an international adoption, lots of home projects, and to pay off a car loan. We assumed that because we had so much equity and the house value was increasing, it was like “free money” that would be absorbed into our equity quickly.
Q. How did the situation resolve itself?
A. We waited and waited. No word from Sovereign. The rates started coming up. We were heartbroken about losing out on the 4.5%, but kept the faith that the bank would get moving. After some nail-biting weeks, the bank finally produced our letter! We signed our papers over the December holiday vacation in our dining room. Our monthly PITI payment will go from $4,000 to $3,500. We plan to put that extra $500 each month toward our home equity loan.
Q. Why did you choose to work with Westchester Mortgage instead of a big bank?
A. That’s easy! We were looking for personal service, since – like most people – we were dealing with the biggest investment of your lives.
When we call Debbie, she picks up the phone or returns the call really quickly. We know she can put her fingers on all of our mortgage information immediately. We’ve heard so many nightmare stories from friends who call banks over and over only to get put off or have their paperwork “lost” by someone in a big office somewhere.
When we closed on our refinance during a school vacation week, Debbie and the lawyer brought the papers to our house for a weekday morning closing. She knew we had kids at home and wanted to accommodate us. That kind of personal service goes a long way!
January 08, 2011