Loans Answers

Mortgage refinancing question

Question: My DH and I had an odd experience when we tried to refinance our mortgage.

We have a fairly small mortgage on our house (72,000 on 138,000 appraisal) at 8.5 percent interest. We’d read that once interest rates hit 2 points lower than one’s mortgage, that one can save money by refinancing. So we went to a mortgage broker (Jericho) recommended by a client of my husband’s. He said he could knock 50 bucks off our payment per month and get us a 15 year mortgage to boot (we have 18 years left on our 30 year mortgage, so this would save us some money in the long run).

The broker got us refinancing at 6.5%. When we got to the closing, we looked at the numbers and saw that the new mortgage would actually be $30 more per month, and we declined to sign. The closing costs were going to be about $6000 so the total new mortgage would have been for $78000.

As soon as we said we were not going to sign, the mortgage broker snatched the closing papers with all the figures on them away from us. I know we were supposed to pay one point, but I don’t know where the rest of the charges were coming from. Can anybody give me an idea of what % of mortgage usually would go toward refinancing costs??

We would like to try this refinancing business again (this time through my credit union), but we’re a bit gun-shy. We do not want to be out the $300 appraisal fee (this past time, the appraiser was the person who recommended the mortgage broker, and he was so upset that the broker didn’t do right by us that he refused to let us pay for the appraisal. However, we will need another appraisal if we decide to try this again).

Opinions and advice welcome.

Answer: As a mortgage broker let me shed a little light on the subject of refinancing and mortgage brokers:

Refinancing and breakeven points: 1. Any broker or banker should be willing to calculate a breakeven point for you regarding refinancing. The breakeven point will tell you how many months of payments on the new loan it will take to payoff the closing costs. Payments made after the breakeven point will be direct savings to you, if the new interest rate is lower. If the broker/banker are not willing to calculate and tell you the breakeven point, go someplace else. 2. If you plan on staying in you home for many, many years having a longer period for breakeven is ok 3-5 years. For instance if you paid extra points to get a really low rate. You will still reap many years of reward at that lower rate. If you plan on selling in 10 years or less, shoot for a shorter breakeven period anywhere from 1-3 years. This may mean taking a higher rate but you will reap savings in a shorter timeperiod. 3. If you’d like to play around with breakeven analysis go to this website and click on “should I refinance”. You can put in your current loan information and proposed loan information. It will then calculate a breakeven period for you. http://mnamb.org/calc.html

Demystifying Closing Costs: 1. First let me say that assuming you have good credit scores, closing costs will typically run 2-3% of your loan. However, because most of the individual closing cost items are a set dollar amount, the lower the loan amount, the higher percentage the closing costs will be. Only the origination fee, title insurance, and any registration tax are calculated as a percentage of the loan. This may result in someone with a $100,000 loan having closing costs come to 3 1/2% of the loan whereas someone with a $300,000 loan may have closing costs of only 2% of the loan. 2. Loan origination fee: This is typically 1% of the loan amount no matter if you use a broker or banker. This is also where the wiggle room on closing costs lies. If you want to go with the market interest rate, you will be paying the 1% fee. If you want to lower your closing costs and are willing to take an above market interest rate, this rate can be lowered or even waived. Essentially, the higher rate you take the more closing costs the broker/banker will absorb. In your case, at 6.5% for a 15 year loan, the broker should have been waiving the origination fee and some add’l costs. For example, my 15 year market rate for a $75,000 loan is 5.625% with all closing costs absorbed by the borrower and rolled into the loan. Make sure you get a least a couple of quotes and have them provide, with the quote, a written good faith estimate. 3. The Good Faith Estimate: A written copy should be provided to you within 24 hours of your loan submission. Another copy should be provided to you prior to closing for your review. This helps avoid any nasty surprises and you know exactly what to expect for a final settlement number at closing. There will be minor adjustments sometime but nothing outlandish. 4. Escrow: All lenders want to escrow your property taxes and homeowners insurance. This makes it easier to sell the loan and provides ease of mind that their investment, your loan, is insured and without a lien regarding taxes. a. That said, you can pay an escrow waiver fee as part of closing costs so you don’t have to escrow. This is typically, .0025 times the loan amount. For smaller loan amounts that have a great deal of equity, go this route. It means less money you have to bring to closing or less money to roll into the loan amount. Keep in mind that you then are responsible for paying your own property taxes and homeowners insurance. b. In Minnesota, property taxes are paid twice/year. The closer a closing is scheduled to the month property taxes are due, the higher amount of tax escrow is required at closing. For example, closing a loan in September required 8 months of tax reserve at closing. This is because the lender wants the 6 months due to be paid in October plus they want an additional 2 months of reserve. c. If you are refinancing and currently have an escrow as part of your loan payment, your current mortgage holder will refund your escrow balance diretly to you. It will take about 3 weeks after closing to receive this balance. So, if you have cash you can spare for that 3 weeks, bring it to closing or pay the taxes yourself. This will save having to increase the loan amount to cover escrow. 5. Other closing costs: Except for the origination fee and sometimes a loan application fee all other costs should be third party costs which the broker/banker can’t change and should be very similar from broker to banker.

How does a mortgage broker get paid? 1. The loan origination fee goes directly to the broker/banker. A broker will get a percentage of that fee with the balance going to the company he works for. 2. Yield spread premium is a backend fee the broker gets from the lender. This is based on the interest rate and the amount of the loan. a. Smaller loans are paid smaller fees which may result in the borrower not getting the lowest advertised interest rate. b. The lower the interest rate, the lower the fees paid to the broker. The higher the interest rate the higher the fees to the broker. So, if you’re willing to go with a rate above “par” the broker should be willing to pick up some of the closing costs.

Home Equity Loans 1. If you have a small enough loan, definately check into getting a home equity loan to replace your mortgage instead of refinancing. 2. I had my aunt get a 10 year fixed rate home equity loan at 6 1/2% with no closing costs. The closing costs were going to kill her. Never refinance just for the sake of refinancing, always make sure you will be better off financially after the refinance.

Amortization 1. If you are refinancing and don’t really want to extend out the life of your loan from what it currently is, talk to someone about alternative loans. You might be able to do a 7 year balloon, 10 year conventional, etc. With the lower payment of principal and interest, you might be able to keep making the same payment you are now and have the loan paid off early. 2. Any broker/banker should be able to run an amortization schedule using what if scenarios for you. They can load in loan information and then calculate what would happen with different extra principal payments.

Appraisals For future reference, if you’ve already had and paid for an appraisal and then don’t go through with the loan there are some options. Your appaiser might be willing to reissue the same appraisal to the new lender for a reduced fee. Your lender needs to ok this but as long as it was within a reasonable timeframe, there’s no reason why they shouldn’t accept a reissue.

Why use a mortgage broker? 1. A broker can shop different lenders for you. 2. A broker often can get you a lower rate than what is posted online. They get volume breaks from lenders. 3. If you have any unusual circumstances, a broker can match you to a lender that specializes in those circumstances. If you like your bank get a quote from them and get a quote from a broker for comparison. In most cases the broker will match or beat the banker.

If you have problems with a broker. Every state has different regulations for brokers. Some states require brokers to be licensed, some don’t. Check with your state’s licensing bureau and file a complaint either against the individual broker or the brokerage company he/she works for. In your individual case, it appears that you have a legitimate complaint regarding the good faith estimate. There are pretty strict laws regarding that document and they sound as if they were broken.

I hope this helps and gives you an edge going forward;

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