How to avoid the dirty tricks of refinancing
businesstoday.com
Family Finances/by Gail Liberman and Alan Lavine
Sunday, October 20, 2002
We have been hearing from friends, very excited over the prospect of refinancing their homes.
However, we're disturbed over the tricks played by lenders, particularly in discussions over the fees they charge.
``I'm getting $6,800 back and saving $150 monthly!'' one friend said enthusiastically about the deal sold to her by one mortgage broker. ``No fees.''
The lender had portrayed her deal as wonderful. Because her home had appreciated so much, she was entitled to money back on her loan, which would be at a lower rate.
Upon looking at her good-faith estimate, however, we discovered that the extra money she was getting definitely was no gift. In fact, she was agreeing to borrow an extra $14,000 over and above about $100,000 or so that she previously owed on her home.
Plus, she was adding another two years to the term of her loan. Only 28 years had been left on her existing mortgage. Under the arrangement, sold to her by a mortgage broker, she would pay $40,704 more for her home than she could have paid had she not done a cash-out refinance or extended her term.
Of the added $14,000 loan she had agreed to, $6,800 would be returned to her as part of the ``cash-out refinance.'' ``We need the money,'' she acknowledged.
But the remaining $7,200 - which appeared to be excessive for the amount of her loan - was going out the door to cover upfront costs, prepaid items and escrowed payments for the first two months.
As for the lender's claim of ``no fees,'' there definitely were fees, according to the good faith estimate we saw. Among the fees charged: title insurance, appraisal, credit report, underwriting, loan documentation, survey, tax service and flood insurance certification.
It may have seemed like there were no fees because the fees were rolled into her loan, and our friend was not responsible for paying any upfront costs. Meanwhile, her monthly payments would be dropping from what they had been over her previously high rate. It appeared to be a utopian situation. Not necessarily, in the final analysis.
As we see it, refinancing definitely is worth looking into if today's rates are significantly lower than the rate you're currently paying on your mortgage.
But besides lower payments, the aim should be to get out of debt as quickly as possible. Toward that goal, we urge you to:
* First, pursue a loan modification through your own lender. By getting your lender to slash your rate for the remaining term, you're probably going to pay the least amount of upfront fees. Plus, you probably won't have to extend your term. Some lenders are willing to do this rather than lose you as a customer.
If you must go to another lender, make certain you plan to live in your home long enough to recoup your upfront costs of refinancing. Those costs can be steep.
Avoid the added interest charges of rolling upfront fees and payments into your new mortgage. Pay any fees upfront.
Try not to extend the term of your mortgage. By doing so, you may owe more in interest- even though you've cut your rate. While many lenders limit the terms available on mortgages, others may customize your terms.
So it pays to shop around. At the opposite extreme, you might not wish to cut your term either - despite the fact that shorter terms often have lower rates. Because a shorter-term loan is being amortized over a shorter period, your monthly payments may well be higher - even though the rate is lower.
Negotiate fees ferociously. You might be able to slash title insurance fees by going through the title insurance companies that already provided you with insurance on the house. Shop around and see if you can get services, including survey work, more cheaply.
If you have some savings, it could pay to avoid escrowing for insurance and taxes. It's better to have the money to invest rather than loan the money - interest-free - to your lender. Some lenders, we found, charge one-quarter of one percentage point more in upfront fees if you opt not to escrow.
When shopping for new mortgages, ask lenders to fax you good-faith estimates, so you have the information in writing.
If a lender says there are no fees:
Make certain that fees are not being rolled into your loan amount.
Check to make sure the lender does not merely mean that there are no points. One point equals one percentage point of the loan amount. Even if there are no points, expect to pay other fees for processing your loan. Fees for appraisals and title insurance rarely are waived.
Above all, don't buy your lender's party line that because your home appreciated, you're entitled to cash back. That lender is trying to sell you another loan that, if at all possible, would be great to avoid. |
