There is a great deal of confusion in the marketplace right now concerning refinancing. The first question that my clients usually ask is "Should I refinance?" Of course my answer is always "yes", how else will I make any money? (I am kidding, but consumers need to be careful who they ask for advice on this subject. The answer should not always be yes. . . )
Generally if refinancing will save a consumer money in the short run, it is an easy answer - however when I say "save money" I mean pay for itself in a short period of time. If refinancing saves you $200.00 a month and the costs are less than $2400.00 and you plan on staying in the house for more than 2 years, it would make sense to refinance. . . Many of the homeowners that I have conducted closings for have interest rates in the low 6% range. As I go to post this article there are many lenders that are offering 5% interest with 0 points. Generally, anyone dropping 1 percentage point will drop their payments between $100.00 and $200.00 a month (There are many loan calculators available for you to calculate your payments at your current and then anticipated interest rate in order to determine the savings per month try http://www.bankrate.com/brm/popcalc2.asp to figure your monthly savings.)
The next question is “Will I save money after I pay all of the costs for a refinance?” Now you have to figure out the costs and this is where you have to take some initiative and really shop around and become educated – because it is complicated. For some reason people do not spend any time reviewing the costs of their mortgage. The manner in which most people shop for a mortgage is in fact ridiculous. Most people walk up to the first salesperson (loan officer) they meet or better yet, their brother’s friend who just started in the business, and they say, “I would like to purchase your mortgage product. Is it the best product for me at the lowest price?” And the salesperson says, “yes, it is the best product for you at the lowest price” and the sale is completed. Wow, how savvy of that consumer. They got all of their research and education as to what is available in the market from the first salesperson they spoke with, who coincidentally will be the person who sells them the product.
Here is a secret about mortgages: The worst deal that you will accept equals the most money the loan officer will make on your refinance. Here is another happy thought: you will pay interest on every dollar that you overpaid your loan officer/bank. For example if you refinance for 30 years at 5% and pay an extra $3,000.00 in costs, at the end of the 30 years, you will pay another $4,500.00 in interest. Your mistake will have cost you $7,500.00. If your loan officer convinces you to accept a higher interest rate (sometimes they get paid more money if you accept a higher rate – they receive a yield spread premium) it can cost you thousands, just so they can earn a few thousand more. I advise my clients to call me before they refinance – I review the numbers for free!!!! I get paid the same amount for my discounted settlement services no matter which lender they choose. . . .
Here is a quick and easy overview regarding costs. Ask your loan officer for a good faith estimate, GFE and a truth in lending statement TIL. With these two documents from the three most competitive lenders in your area, you should quickly learn who is charging what and which offers the best deal.
Points: The first couple of lines on the GFE have to do with loan origination and discount fees – these are “points”. The lender may allow you to “buy down the interest rate if you pay a percentage point or fraction of a percentage point of the loan e.g. 2 and ½ points for a thirty year fixed loan at 4.5%. If you are borrowing $200,000.00, the points alone will cost you $5,000.00. You do not have to pay for points, but if you are planning on staying in the home for a longer period of time, the points may make sense. . .
Standard Fees : Every bank/ lender will likely charge certain fees all in the 800’s line on the GFE. Each fee is shown as a line item 800, 801, 802, etc. . . Typical bank fees will include an appraisal fee ($300), a credit report check ($35), a flood certification ($19), a tax servicing fee($65) and an overnight or funding fee ($45). The bare bones for the lender fees is probably around $500- $600 for these fees. These are the costs that you should accept and consider in your calculations. Any additional fees are the loan officer and/or lender making money on the transaction (see below)
Junk Fees: Processing fees, underwriting fees, documents preparation fees, closing fees, mortgage broker fees, etc. . . all of these additional fees are not necessary for you – maybe they are necessary for your brother-in-law’s fly by night operation, but they are not necessary for you to pay – SHOP AROUND!
Escrows and Prepaid Interest: These charges are “a wash” in a refinance and should not be included in your calculations. Your taxes and insurance cost what they cost and you are paying for these items already. The up-front costs of establishing new escrow reserves for your new mortgage should be offset when you pay-off your current mortgage and the old escrow accounts are closed – the money should be returned to you in a few weeks. Prepaid interest at the lower interest rate is a good thing. Close as soon as you can even if you have to pay 30 days prepaid interest. Your new payment will be delayed by as many days and will be at the lower rate – so do not worry about that fee. . .
Attorney fees and recording fees: Attorney fees can vary, I recommend real estate attorneys who will try to find discounts. Recording fees are what they are. There is no getting around the cost of recording the mortgage!
My final words on this matter are SHOP AROUND, SHOP AROUND, ask questions, and compare answers. Talk to a real estate attorney! Good Luck!
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