TL;DR – I created Zenlen (www.zenlen.com) so you could hack your mortgage without having to go through everything I did.
Last year, I decided to refinance the loan I had against my home. At the time, I had an adjustable rate mortgage (commonly known as an ARM), which meant that my monthly payment could rise over time. By refinancing, I figured I could lock in a really low rate and, since the value of my house had risen, take some equity out.
I wrote 62 emails, made 41 phone calls, and spent just over 33 hours applying for my loan. This is the story of how I hacked my mortgage, and saved $9,566.08 doing it.
The first step in getting the best home loan is finding the cheapest combination of interest rates and closing costs (closing costs are costs that you pay upfront when your loan is funded, while interest rates determine the amount you have to pay to your lender each month).
I did some research online, and the New York Times suggested “taking an entire weekday” to call up lenders and get quotes. “This sounds severe,” added the Times, “but there’s no other decent way to compare apples to apples.” So that’s what I did. It took me 12 hours and 17 minutes to call up and get quotes from 18 different lenders.
It’s hard to talk about interest rates without talking about closing costs – if you’re willing to accept a higher interest rate on your loan, you’ll pay lower closing costs, and vise versa. That said, let me talk about closing costs first:
The closing cost quotes on my $250,000, 30-year mortgage at a rate of 4.00% ranged from between $6,874.32 and $9,824.83. The differences were the result of the processing fees each lender charged. Sometimes, the lenders called their fees “origination fees” or “underwriting fees” but in every case, these were just euphemisms for profit.
Closing Cost Savings: $2,950.51
After identifying the lender that would provide the lowest closing costs (Wells Fargo), I asked that they charge me a higher interest rate and eliminate all my closing costs entirely. The primary reason that people ask to do this is because they can’t afford to pay closing costs (in my case, $6,874.32) upfront. For me, it was because I knew I wanted to keep the loan for only a short period of time (less than four years).
Why would that affect the type of loan I want?
Assume I had gone with the 4% loan and paid $6,874.32 in closing costs. Over the course of four years, I would have paid $57,289.92 in interest and principal. The balance on my loan after four years would have been $231,283.90. In total, I would have paid $295,448.14 over the course of the loan (my closing costs + my monthly payments + my remaining principal).
By going with a 4.25% loan, I was able to pay no closing costs. Over the course of four years, I would have to pay $59,032.80 in interest and principal. At the end of four years, the balance on my loan would be $232,013.41. In total, I would have paid $291,046.21 over the course of the loan (my monthly payments + my remaining principal).
By paying a higher interest rate and no closing costs, I was able to save $4,401.93 over the course of four years on my home.
In addition, the higher interest rate I agreed to pay will cause me to spend an extra $3,472.47 in tax-deductible interest payments on my mortgage over four years. This means that I will save an additional $1,215.29 over the course of four years on my taxes.
Title insurance is one of the largest costs you’ll pay in order to get your home loan. In addition, the title insurance industry doesn’t make much sense to me – title insurers pay out just 5% of premiums that they collect as claims. In comparison, healthcare insurers must pay out a minimum of 80% of premiums they collect in the form of claims. Wells Fargo told me that my title insurance policy would cost $2,230 (meaning the insurance company expected to pay out just over $100 in claims on my policy, and pocket a hefty profit). I called around to a bunch of title insurance providers, and was able to reduce my costs to $1,231.65. I couldn’t find any company that would charge me less than that, but I still saved nearly $1,000.
The process of getting a home loan in the United States is incredibly broken. It’s time-intensive and really confusing. In addition, the process is unfair. The Department of Housing and Urban Development, together with the Urban Institute, found that minorities “face a significant risk of unequal treatment when they visit mainstream mortgage lending institutions.” Wells Fargo was sued by the Justice Department for charging minority borrowers higher interest rates, even when they posted the same credit risk as white borrowers. JPMorgan Chase was sued by the City of Miami for discriminatory lending too.
It took me over 33 hours of researching, organizing and calling lenders in order to get a home loan, but I saved nearly $10,000 doing it. Not a bad return. I created Zenlen (www.zenlen.com) so that other borrowers could save similar amounts of money without having to write 62 emails or make 41 phone calls.