Adventures in Refinancing

So now that its been over a year since we closed on the house (so crazy!), we can finally refinance our mortgage (the reason we were told we should wait a year is so we could get the house reappraised as the original appraisal is in effect for a year).

Even with interest rates shooting up, it made sense for us to look into it because we could get rid of that pesky mortgage insurance and move into a regular old conforming loan. Our house has well over 20% equity in it.

Exactly two days before the one year anniversary of our closing date, I email my current lender and ask to start the refinance process. I also tell him we want to possibly take some cash out, confident that the appraisal is going to be higher than it was originally. The real estate landscape this last year in Bushwick had been on fire.

After taking updated documents from me (bank statements, w2’s, etc), he comes back with a rate of 4.75%, which, even after taking out the mortgage insurance, puts us almost back where we started. He says the rate is high because we want to take cash out and we have a 2-family. Now we would just be paying more interest to the bank instead of mortgage insurance. It’s amazing what half of percent can do when hundreds of thousands of dollars are involved.

I thank him and immediately begin looking elsewhere. He would be a good back up in case something else didn’t pan out.

I remember a mortgage advisor we use for our clients talking about this great program at PenFed credit union so I go to their website and take a look at their rates. 30 year fixed at 4.125%? Worth a phone call.

I get on the phone with a nice man named Herb who walks me through a pre qualification of sorts. He asks questions about the house and I tell him I want cash out and he says they can do 4.125% but there is a 1% origination fee, I’d have to pay an extra point on the mortgage, and I would have to pay the mortgage recording tax again to transfer the mortgage. Basically I would need to come up with $18,000 at closing just to do this loan.

You’re sure I have to pay the recording tax again, even for a refinance?

Yes, there’s no way around that one, believe me, NYC will want their money one way or another.

Hmmm, and those points are just what they are?

Yes, if you want this rate.

Okay, well let me run some numbers on my end.

We do have this other product where they pay for all your closing costs as long as you use our title company.

All the closing costs?

Yes, it’s. special program we have called the 5/5 ARM.

I’d heard of 5/1 ARM’s before but ask him to explain the 5/5.

Basically, he says, your rate is fixed for the first five years, then resets in year 6 for the next five years, and so on, and can only go up a maximum 2% every five years, and a lifetime maximum of 5%.

So the highest my rate can go is 5% over the entire life of the loan?

Yes, and for the first 10 years, the highest it can go is 2%.

Where do I sign up??

Are you a member yet?

Oh right, credit union. No, I tell him, how do I become a member?

Are you a member of the armed forces?


Do you have family members who are members of the armed forces?


Okay, well if you would like to become a member of PenFed, you would just need to also purchase a one-year membership to either voices for our troops or <<look this up>>.

Oh, okay, I will do that.

Then after you sign up as a member, you can start a loan application online and a loan processor will give you a call.

Awesome, thank you!

I talk it over with my boyfriend – we think through the risks of an ARM and do a quick calculation of how much our payment could rise.

But that’s in 10 years, right? And for the first 5, what would our rate be? And how much money would we save in 5 years?

About $22,000…

Sold. Let’s do this. In 10 years, we will be in a much better place financially anyway.

I filled out the application that afternoon.

I got a call and email a few days later, asking for tax returns, lease agreements, etc.

I sent everything over as soon as I could and got another phone call and email a few days after that,

We can’t take your rental income into account because it doesn’t show up on your 2012 return and you took out the loan last year.

But that’s because we’ve been renovating the house for the last year and no one was living in it.

I’m sorry but I talked to my supervisor and the rental income has to show up on the tax return of the year you purchased the house.

Okay, so can I still qualify for the loan without taking cash out based on just my income?

So you don’t want cash out?

Well, it sounds like I won’t be able to qualify for it if I can’t include rental income as part of my income.

Okay, I’ll go back to the underwriters and get back to you soon.

Okay thank you.

A few days later, I get a call that I am 47% debt to income, even with just my current loan amount.


Yes, so you would need to pay down the mortgage by $15,800 to get to 45% debt to income. Do you want to proceed?

Okay, let me think about this. Don’t close the loan yet.

I start running through all the options in my head and come up empty. Maybe I can’t do a loan with penfed.

I put in a call to the mortgage advisor that originally told me about the loan, the guy we use for our clients.

They won’t use your rental income?

No, which is pretty funny because I originally closed on the house and qualified with potential rental income, but now that I’m actually getting rental income, they won’t count it.

That’s Fannie Mae guidelines for you.

So is there anything else you might have that I can look into instead?

Well, the penfed program is really unique, he says. Our 30 year fixed is starting at 4.375% and our 10 year ARM is not worth you considering because the rate is so close to a 30 year fixed. Not sure how comfortable you would be with a 5 or 7 year ARM.

Hmmm, okay.

Do you know what numbers they used to calculate the DTI?

I actually didn’t even think to double check that…

Well, penfed won’t use the rate you’ll be paying in the first 5 years, they will use a higher, qualifying rate to calculate your DTI. This is pretty standard with 5 year ARM’s, lenders basically want to make sure you’ll be able to make payments in case rates go up. Now as soon as you hit 7 or 10 year ARM’s, they don’t use the higher rate to qualify you. Don’t know why, maybe they think its that much less risk than a 5 year, those are just the rules. Okay, tell me what your debts are.

I told him my two small debts.

And property tax and homeowners insurance?

He laughed at my property tax amount. That’s for the whole year? Where do I sign up?

Ahh Brooklyn.

And your payment will be based on, lets see, according to penfed’s guidelines, the qualifying rate is 2% more than the initial rate–

Okay, that shouldn’t be too high.

So with everything you’ve told me, I have your DTI at 44%.

Oh. Wow. Okay. I wonder if they’re using my current mortgage payments?

I would go back to them and have them go through the numbers they are using.

Okay, I will. Wow. Thank you so much!

No problem. Let me know how it goes.

I go back to penfed and ask them to run through the DTI numbers with me. It turns out they were using the higher loan amount I originally applied for (because i was hoping to get some cash out) to calculate the monthly payment. I have them recalculate based on my actual loan amount. The only thing pushing me over the edge is a high credit card balance on my credit report.

I paid that down last month. Here, I will send you a statement right now. Also, my minimum payment is less than half of what you’re using in the calculation.

That’s what showed up on the report, but I will talk to the underwriters and see if they can take your statement.

Now it’s back in underwriting and my fingers are crossed. You never know what could get thrown at you next.

She calls me back later that day. She tells me there is a different account number on the credit report than what shows up on my statement.

Oh, that’s weird.

Yeah, we need the account numbers to match up to use the statement you sent.

Um, okay, let me call Amex and find out what’s going on.

I call Amex immediately and they tell me they always put fake account numbers on credit reports.

It’s for security reasons, she explains. We aren’t sure who will be looking at your report so we never put your real account number on the report.

Oh, okay, that’s clever. Is there anything you can send to the mortgage lender to let them know what my current balance is?

We can certainly fax them a letter stating your current balance.

Can you also include my last two months’ balances so they can at least cross reference the amount on the report?

Sure, no problem.

I leave my mortgage processor a voicemail and send her an email and then it’s the weekend.

She comes back to me today and says she needs a letter from Amex stating that the fake account number and the real account number are the same account. Which of course I already asked Amex to do and they said they don’t do because this is a pretty standard security practice and there is no such letter detailing the standard practice.

So I email the mortgage processor back to see if she will get on the phone with Amex to have someone explain the situation. And sent her my July statement which has the exact same balance she quoted me on the credit report. I don’t really know what else to do to prove that I’m totally responsible.

Fingers crossed? My head is still spinning.

UPDATE: I called Amex with my mortgage processor today and she knew exactly what to say to get them to issue a letter – the fake credit card number is actually called an “account identifier” so Amex can issue a letter stating the account identifier matches up with the real account number (of course providing only the last four digits of the actual account number). Amex said they would fax it right away and then we should be all set? I can’t imagine what else can get thrown at me, but I’m sure they’ll come up with something 🙂

7 thoughts on “Adventures in Refinancing

  1. And we wonder why this country got into financial problems with mortgages! I thought you could only get rid of PMI after 5 years and 20% equity?

    • You do have to stick with mortgage insurance for 5 years with the FHA loan, unless you have 20% equity in your home (which, yes, you can get from the value of the home rising), then you can refinance into a regular, conforming mortgage.

  2. Regarding you wanting to do a cash out refinance – Did you consider getting a 1st mortgage and then accessing your equity through a HELOC in order to get your hands on some cash?

    • Hi Ryan – Thanks, I did try to go that route as well, but with PenFed, you can’t have a 1st mortgage and HELOC application out at the same time, and I really wanted to go with this bank because of the great deal. Refi is going through soon, though!

    • Hey! the refinance has been working out so far. I really like the 5/5 ARM model and in the next 5 years, the rate can only go up another 2%, then after that only 5% total for the life of the loan (max rate is 7.875%). I was more interested in keeping our payments low in the first years of owning the home so this deal worked out for me.

  3. Hi Pamela, My partner and I are looking into refinancing a place that we are in the process of closing on (that is we have not even bought it!).

    Here’s our math (we get a different number every time we do this, so we need some help). Online calculators like this one,, don’t seem suited to refinancing out of a 203K, because they don’t account for money invested in the reno. We are confused about how the LTV ratio comes into play in thinking about the future financing of the house.

    Our purchase price for the house is 685K. Our downpayment will be 37K just over 5%

    The house, as I understand it, will need to accrue in value by 15% (for a total of 20%) for us to refinance. Some of this will be accomplished by our renovations and sweat equity we plan to put in. We will have the streamlined 35K to invest. Let’s round up & just for the sake of this math problem, that this 35K plus our sweat equity, gives another 5% of equity in the house. Then, as I understand it, the house needs to increase in value only 10% more for us to have 20% equity. (is this correct?)

    If the house, in a few years, were assessed at 792K, that would mean it had accrued in value over the purchase price by 10%, and that value, plus our initial deposit (5%), plus renovations (5%) would mean that we had 20% equity in the home. And would be ready for a re-finance. Is this correct or is there something we are missing?

    685 – purchase price
    (includes 37 – downpayment = 5% equity)
    + 35 – renovations = 5% equity
    = 720 – new value after renovations & sweat equity. At this point we have 10% equity right?
    + 72 , that is 10% of 720
    = 792 – new value we are aiming for, so that we can refinance?

    Does this seems right to you? Or do we need the home to increase in value even more to be owners of 20% of the equity?

    We look forward to your thoughts!

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