Like clipping coupons or waiting for a clearance sale, there’s only one logical reason to refinance your mortgage: to save money.
By refinancing, or trading in your existing mortgage for one with a lower interest rate, you can reap big savings each month–easily a hundred dollars or more. But since the object is saving money, some borrowers are surprised at how much it costs in upfront fees to refinance.
In fact, the Chicago Tribune’s real estate department has received calls from readers in recent months complaining that when they get to the closing table to finalize their refinancing, they are faced with a bill that’s much bigger than they expected. That shouldn’t happen, because lenders are required to give a good faith estimate of closing costs that should pretty closely match the final tab for the borrower.
“We have received sporadic complaints dealing with refinancing,” says Charles Jolie, public information officer with the office of Illinois Atty. Gen. Jim Ryan. “Some of the complaints are legitimate and some are not.” Often, says Jolie, consumers are unaware of the fine print in their mortgage contract–that some lenders are allowed to charge prepayment penalites, for instance, when the borrower pays off the old mortgage to get a new one.
Steve Bernas, director of operations for the Better Business Bureau of Chicago and Northern Illinois, says that most of the complaints his office has fielded have involved either interest rate lock-ins that expire, resulting in the borrower having to pay a higher rate than he expected, or advertised rates that are not actually available.
But, a little know-how can help borrowers avert ripoffs and find the most economical refinance opportunity.
Counting costs
Lenders make their money three ways: by charging interest, points and fees. When you’re refinancing, it’s easy to focus on the interest rate, because the basic objective is to get a lower rate than what you’re currently paying. But you’ll find the lowest rate mortgages also carry a charge of one or more “points” (a point is equal to 1 percent of the loan amount you’re seeking). The more points charged, the lower the interest rate.
If you’re going to stay in your home and keep your mortgage for a long time, you’ll be better off paying points to get the lowest interest rate. You simply have to sit down and figure out how fast the cost of the points are offset by the lower interest costs, and determine if you’ll probably be holding your mortgage long enough to make the investment in points pay off. (Also keep in mind that points paid to refinance a mortgage are deductible over the life of the loan, rather than in the first year.) But, “it’s not as complicated as people think,” notes David Kliff of Personal Financial Advisors Inc. in Arlington Heights.
Focus on fees
Things do get a little more complicated when it comes to fees. While fees probably don’t add up to as much as points, they can easily total several hundred dollars and you’ll want to watch the tally.
Different lenders charge different fees. Some lenders market “no-fee” loans, but these are similar to no-point offers in that the costs are folded into a higher rate loan.
Appraisal fees, credit check costs, transfer taxes, title insurance and a charge for a property survey are fairly standard costs that every lender charges. Lenders can add on additional fees for “document preparation,” “underwriting” or other miscellaneous duties that they perform. “Lenders can charge anyone anything as long as the borrower agrees,” notes Steve Baker, regional director of the Federal Trade Commission. “The concern is hidden charges to the consumer once he’s committed to the transaction.”
All types of mortgage lenders are required by a federal law to provide a “good faith estimate” of closing costs to mortgage borrowers. This written statement must be provided within three business days of the borrower’s application, notes Grant Mitchell, senior attorney at the Department of Housing and Urban Development in Washington, D.C.
And how close must the estimate match the actual closing costs? “There are no rules on that,” says Mitchell. But Cliff Theriault, regional vice president of Commonwealth United Mortgage, Schaumburg, and past president of the Illinois Mortgage Bankers Association, says that “the fees should be within about 10 percent of the good faith estimate.”
Mitchell adds that the law also requires all lenders to provide a written statement of closing costs one day prior to the actual closing. If you’re dissatisfied at the charges listed, you simply can cancel the closing, although you’ll probably be forfeiting your application fee.
Shop first
Indeed, it can pay to check out fees by telephone before you actually visit a lender, says David Ginsburg, president of Loantech Inc., a mortgage audit and publishing firm in Gaithersburg, Md.
Most lenders should give you fee and related information over the phone, he says. Also, borrowers may get an intuitive feel for the service and integrity of a lending firm simply from the treatment they get over the phone. You can also make other calls to check out a lenders reputation.
Adds financial planner Kliff: “If a person doesn’t bother to ask the questions, it’s like getting a repair on your car without getting an estimate first of the costs.”
What’s more, says Ginsburg, borrowers can negotiate with a lender on certain fees. Fees termed “document preparation,” “underwriting charge,” or other such designation that implies that the lender wants to be paid strictly for his time, can sometimes be either reduced or eliminated. Moreover, especially if you are refinancing within a couple of years of when you originated your mortgage and if you have substantial equity in your home, you may be successful in asking the lender to reduce or drop the appraisal fee, notes Ginsburg.
Your chances of reducing fees may be greatest if you negotiate with the lender who currently holds your loan, notes Ginsburg. A “streamlined refinance” with your current lender may save you about $300, says Theriault.
In fact, if you start the refinancing process with a different lender, don’t be surprised if the lending company holding your current mortgage gives you a call, says Patricia Cunningham, consumer affairs manager of the Office of the Illinois Commissioner of Savings and Residential Finance. Your lender will know you are refinancing when requests come in for loan payout information, says Cunningham, and it’s perfectly legal for the lender to pitch the customer on an in-house refinance.
Of course, if a lender is eager to gain your business, you’re in a perfect position to negotiate on fees.
Going rate
While a lender offers you a good-faith estimate of closing costs, you should also look for a guarantee of what the interest rate will be on the loan you’ll be receiving.
If the lender promises to “lock” in a certain rate, or guarantee a specific rate at closing, “you should probably get at clear statement in writing about whether or not there are any circumstances under which that lock won’t take effect,” counsels Peggy Twohig, assistant director for credit practices at the Federal Trade Commission.
What if an advertised interest rate lures you to visit a lender, and then you find that a mortgage at that rate isn’t available to you?
This is an area where Bernas of the Better Business Bureau says he fields complaints. “People tell us that they go in and ask about a rate that they saw and then the lender quickly says that the rate isn’t available to them because they have a glitch on their credit record, but that they do qualify for another higher-rate loan.”
If you question the integrity of the lender’s business practices for any reason, simply walk away. Experts stress that there are plenty of mortgage lenders, and borrowers should select one they trust and feel comfortable with.
Cancel that
Perhaps the ultimate consumer protection is your right of rescission–meaning that you can cancel the loan within three business days from the time you closed the loan, or received written right of rescission notice, or received all material disclosures pertaining to the loan, whichever occurs latest, says Carole Reynolds, senior attorney at the FTC.
It’s like returning a blouse or sweater at a store for a full refund. When you rescind you not only cancel the new loan agreement, but you’re entitled to the fees you paid. This is true for all refinances, unless you refinance with your current lender, says Reynolds. Then, you can rescind only if your new loan was bigger than your first, and then you can cancel only on the new portion.
———-
If you want to find out if consumers have complained about a particular mortgage lending firm, call the Illinois Attorney General’s Office at 312-814-3000 and ask for the consumer fraud bureau. Or, contact the Better Business Bureau of Chicago and Northern Illinois at 312-346-3313.
To read more about the refinancing process, call the Federal Trade Commission at 202-326-2222 and ask for the free booklet, “Refinancing Your Home” F004387. Or write the FTC requesting the booklet at FTC, Public Reference, 6th and Pennsylvania Ave. N.W., Washington, D.C. 20580.
