By Dr. James M. Dahle, WCI Founder
If you are paying above 3% and have less than 15 years left on your mortgage or you're paying above 4% on a longer mortgage, get off your duff and go get a “no-cost” refinance. That's where you get an above-market rate where the lender takes some of the extra money they make for giving you that higher rate and applies it to your closing costs. As long as you keep the same term you currently have (easy to do just by taking your savings and applying it to principal, i.e. keeping the payment the same) you'll pay the mortgage off faster and spend less on interest. The lender makes a few bucks, the appraiser gets a few bucks, the title insurance/closing agent earns a commission, and you save some money. Usually it's worth it to refinance your mortgage in that case. It's a win-win for everyone but your current mortgage holder, but don't feel too badly, especially if you gave them a chance to have your refinance business.
In the past, I've had three different mortgages, refinanced three separate times, and had a home equity loan. I've made plenty of mistakes but learned something new every time. Let me share some of the lessons learned.
Lessons Learned from Refinancing My Mortgages
#1 Shorten the Term on the Mortgage
If you have been paying on a 30-year mortgage for a couple of years, and now you refinance to a new 30-year mortgage, you'll end up paying for your house for 32 years instead of 30, and you might just pay more in interest than you would have if you hadn't refinanced. Your goal should not necessarily be a lower payment, but rather owning your home free and clear sooner.
Let's use figures from the last time I refinanced to illustrate. I refinanced after 13 payments into a 15-year mortgage. My old principal and interest payment was $2809.16. The new principal and interest payment was $2613.20, or a savings of $195.96 a month. But if I still wanted to be mortgage-free after 15 years in the house, I then needed to pay an extra $157 a month. So my real savings were only about $39 a month, or about $6,500 over the next 13 years and 11 months. (Less actually, since we paid it off completely back in 2017). Not a huge savings, but I had a pretty good mortgage rate to start with. One benefit aside from the savings on interest is that if we got into a tight spot financially, we could default back to the lower payment and increase cash flow by $196 a month.
#2 Realize That There Is a Difference Between a No-Cost Refinance, and No-Cash Refinance
Lenders are tricky folks, and sometimes what they do is just add the closing costs to the loan amount. You don't have to bring cash to closing, but instead of owing $200,000, you find after the refinance that you owe $205,000. Sure, you have a lower rate, but was it worth it? Maybe, maybe not. Be very careful and understand exactly what is going on in the process. Pay close attention to the amount of principal you owe on the old mortgage and the amount of the new loan. For example, the amount of principal I owed on my old mortgage was ~ $368,000. The loan amount for the new loan is $368,700, which is within $50 of the payoff amount. Remember that the payoff amount is the sum of principal owed and the interest for the part of the month prior to the closing, so $700 for about half a month's interest is about right. But if the new loan balance had been something like $371,000, that would mean I was now adding some closing costs onto my loan balance AKA a “no-cash” refinance.
We were burned this way on at least one of the two refinances we did back in medical school. You're hardly paying anything toward principal in the first few years of a 30-year mortgage anyway. Once you start adding costs back onto the loan, you'll really be rowing upstream.
#3 Recognize the “Skipped Payment” Fallacy
Lenders and closers love to talk about it, but what does it mean really? There are a couple of things they may be referring to. First, I closed my loan in the first half of December. My old mortgage payment, due on December 1st has a 15 day grace period to pay it. If my loan is closed and funded before that grace period is up, technically I don't have to make the payment. But you better believe the bank isn't going to make the payment. That principal, as well as the interest, will just be added onto the loan (and your payoff amount will be higher).
The second thing the lender may be referring to is the fact that I won't make a January payment. While it is true that I don't have to write a check in January, there really isn't any savings going on. Again, no one else is going to make the payment for me. The reason I don't make a payment in January is that I made it at closing. That's right. Not only do you not skip a payment, you have to make it IN ADVANCE. That's because interest is collected in arrears. So at closing, you pay the interest for the first part of the month as part of the payoff amount (it's usually added onto the loan, like in my case, but you could pay it with cash at closing if you like). You also pay the interest for the second part of the month as part of your closing costs. I paid the interest for December at closing, so I obviously won't have to pay it again at the first of January. Interest never sleeps. From the day you take out a mortgage, until the day you pay it off, you'll never stop accumulating interest on the amount owed, no matter how many times you refinance.
Now, what about the principal? I don't HAVE to pay the principal in January. I can if I want, but I don't HAVE to. So in reality, I CAN skip a principal payment. But do you think someone else pays it for me? Not hardly. It just gets added on to the end of the loan. So if I didn't increase my payment after the refinance, it would take me another 15 years, plus another month to pay off the loan. Again, if I want the loan paid off after 15 total years in the house, I'd better pay the principal for January.
#4 Understand Insurance and Property Tax Escrow Accounts
An escrow account is an account, usually held by your bank, that pays your insurance and property taxes. It's helpful for those without the discipline to save up money for those large expenses themselves, and many lenders require you to have one, or at least make you pay a fee if you want to do it yourself. (Although you can often cancel your escrow account without a fee after you start making payments.) With an original mortgage, you usually need to put 2 months' worth of pro-rated insurance and taxes in the escrow account. With a refinance, you'll almost surely need to put in more, sometimes much more.
For example, I paid both my taxes and insurance in November, and so I only have 3 months of escrows in my old account (2 from the original buffer, plus the amount that was paid with my December mortgage payment). The bank, however, wanted 5 months' worth of pro-rated insurance payments, and four months of pro-rated property tax payments. That's the two buffer months, plus December and January for the taxes, and plus November, December, and January for the insurance (insurance was paid in early November, taxes in late November). I'll get 3 months' worth of escrow back from the old bank a few weeks after closing, but 4-5 months of escrow had to be fronted for the new escrow account at the new bank. Again, there is no skipped payment for interest OR escrows, and a skipped principal payment doesn't help you.
#5 Recognize That All No-Cost Refinances Are Not the Same
The theory behind a no-cost mortgage is great. It puts all the fees on the lender, who is better at negotiating them than you anyway, so all you theoretically have to do is shop based on the rate. In typical mortgage shopping, the lenders play a constant game of moving pieces. If you shop by rate, they nail you with points. If you only shop zero points to eliminate that, they'll start varying their fees. You can minimize the lender's advantage by doing a no-cost refinance, but there are a few places here where the new lender can still take advantage of you.
First, make sure you know what happens with the old escrow account. If the lender makes you pay it to them (“because we paid for your new escrow account”) that isn't as good a deal for you as if you get your old escrows back. How bad of a deal depends on how much you had in there. I seem to remember falling for this trick with one of my refinances.
Another place you can get burned is with the new escrows. Some no-cost refinances will fund your new escrow account AND let you keep the old one. However, you might not get as good a rate. For example, with my last refinance I was offered two options. They would pay for my new escrow account (and interest which we'll get to next) for a 3.5% refinance, but not for 3.375%. They wanted me to cover those expenses for 3.375%. I figured since I would be paying those expenses myself if I didn't refinance (remember nobody else will pay your interest, taxes, or insurance), I might as well take the lower rate.
Watch the interest too. With some refinances the lender will cover the interest for the part of the month after closing. That works out great if you refinance the first week of the month, but isn't worth much if you close the last week. If they're paying, try to negotiate a closing early in the month!
Another place a lender tried to burn me in the past was changing my loan from one without a pre-payment penalty to one with a pre-payment penalty. The only difference is a little tiny checked box. If you don't read the paperwork carefully at the closing, remember that by law you have 3 days to cancel the refinance if you find out someone has pulled a stunt like that on you.
Finally, be aware of costs paid outside of closing. For example, I had to pay for the new appraisal, an origination/lender fee, and a credit report charge. That was all credited back to me at closing, but if I hadn't closed the loan I would have had to eat those costs. If you're concerned the loan won't close for some reason (sketchy credit, etc.), try to get your lender to pay these expenses. The appraisal is usually the most expensive part ($300-500 is common), so try to delay that at least until you've been approved.
So that “no-cost refinance” covered all the fees, but didn't cover any of the interest or escrows. Yours may be different. But when shopping around, you need to understand who is going to cover the fees, the interest, and the escrows. You also need to be clear that you don't want any of those expenses added on to the loan total. Sometimes, it might be better to have the lender pay everything, then you can take your old escrow account and apply it to the principal. This might give you better bang for your buck than bringing cash to the closing and getting a little lower rate. It was close to a wash in my case, so we decided to go with the lower rate to save the hassle factor of another refinance in a few months or years. But if rates had dropped further and we refinanced again soon after, we might have been better off taking the 3.5% and having the lender pay ~$1900 in interest and escrows. So in essence, we had 3 options and chose the middle one.
- True no-cost refinance to 3.5%. Lender pays interest for last half of month ($500), funds new escrow account ($1400) and all fees ($1900).
- No-fee refinance to 3.375%. Lender just pays the fees ($1900).
- Standard refinance to 3.25%. I pay fees, interest, and escrows.
#6 A No-Cost Mortgage Might Not Be the Best Deal for You
If you're going to be in the house for a long time, you might be better off paying the fees and possibly even points to buy the rate down even further. Of course, there's nothing that says you can't do another no-cost refinance in a year or two if rates continue to fall, but realize you'll always be paying 1/8 to 1/2 a percent higher for your no-cost mortgage than a “market-rate” mortgage where you pay the fees.
#7 Don't Worry So Much About Your Credit Score
You only need a score of 740 to get the best rates on mortgages. We were getting some sweet offers in the mail for credit card freebies a month or two ago (you know, $300 with your first purchase, or 25,000 miles to sign up with another 25,000 after putting $2K on the card) so we actually applied for 5 credit cards just two weeks before initiating our refinance. It dropped our score a little, down into the 770s, but that was still plenty high to refinance. We had to give a quick explanation and show a couple of statements, but no big deal. Now, I don't recommend applying for credit cards the same month you try to get a mortgage, but if you pay your bills, your credit score will take care of itself.
#8 Shop Around for Your Mortgage
This is a major purchase and it is easy to save a few hundred dollars in fees and can be quite easy to save thousands in interest over the course of the loan. It's amazing that we'll go to another store to save 50 cents on bread but won't look at multiple lenders for a purchase where it may cost thousands of dollars less at one bank than another. Remember to check with all lenders on the same day, and look at rate, points, AND fees.
I recommend you first check with a mortgage broker to see what they can do for you. Take a look at lenders/banks who have traditionally had great rates like those from our WCI Recommended Mortgage Lender list or perhaps your local credit union. Finally, approach the bank that currently owns your mortgage and let them know about your best offer. Ask for a loan modification. They might just knock the rate down on your loan with no hassle and no expense. Probably not, but it's worth a try. What they will usually do is give you a significant discount on the closing costs. The bank that owned my mortgage offered me a 1/4 point discount (about $900) which almost beat out Rate One, the new mortgage lender.
#9 The Best Mortgage for You Might Not Be the Same Type of Mortgage You Had Before
Many times it will make sense to refinance into a 15-year or even a 10-year mortgage after paying on a 30-year mortgage for a few years. Perhaps you had a 30-year doctor mortgage but now your income has increased, or you simply paid down enough principal that you can now afford the higher payments of a shorter-term loan. You may save up to 1/2% on a 15 year over a 30 year. If you're just a few years from paying off your mortgage, you could even get a 3/1 or a 5/1 ARM. It's fixed for 3-5 years, and if that's all the longer you'll be paying the mortgage, that's good enough. You might also be able to get out of a jumbo mortgage or get rid of PMI when you refinance depending on how much you still owe.
#10 The Biggest Mistake Is Probably Not Refinancing Your Mortgage at All
The little errors we've made from time to time pale in comparison to the most common one, and that is to not refinance at all. Some people go for years paying rates that are 2, 3, even 4% higher than the market rate. Our first mortgage in 1999 was 8%. We refinanced it to 7.75%, then to 7.25%. The mortgage on our next house was 6.25%. We later took out a home equity loan at 5.3% and paid off that mortgage with it. My mortgage on this house was 3.625%, then 3.375%, and finally 2.75%. The difference between 3.375% and 8% on a $500,000 mortgage is $19,712 A YEAR. That's more than enough to max out a 401(k).
But there are millions of people in this country still paying 6%-8% on the mortgages they got just a few years ago. Some may be trapped in their mortgage by being underwater, but that's rare these days. Many are simply too ignorant or too lazy to get a no-cost refinance. Don't be “that guy.”
What do you think? When was the last time you refinanced? What mistakes have you made in the process? Comment below!
When you cut through the fog and come to the bottom line, it’s actually very simple: the rate and the lender credit net of all closing cost. It doesn’t matter whether you apply the lender credit to escrow, interest, principal, or just pocket it. Money is fungible.
The talk about funding your escrow, with or without getting the balance in your old escrow, or funding your first partial-month interest, is just trying to make you feel better. All that comes out from your lender credit, and it’s a fixed number (a percentage of your loan principal). The lender budgeted for the worst case scenario already. If you happen to close toward the end of the month, they just pocket the difference. Your job is to get that fixed number for the lender credit and compare it across different lenders.
In your options A, B, and C, A is a negative-cost loan. They pay you $1,900 after all costs for taking the 3.5% rate. B is a no-cost loan at 3.375%. C is a full-cost loan at 3.25% with $1,900 closing cost. Escrow and prepaid interest are not closing costs.
That’s a good way to look at it- lender’s credit net of closing costs.
I’d be interested to hear your opinion on why you chose a 15 year mortgage. I definitely see the logic in getting your mortgage paid off more quickly. It’s easier to plan for retirement without a mortgage, and paying off any loan more quickly is essentially a risk free investment with a return equal to the interest rate you are paying. It’s also psychologically nice to be “debt free”. But there are a couple of arguments for going with a 30 year. First, if you can borrow at under 4% and invest the money instead you would likely come out ahead. Even if you went with a good quality, tax free municipal bond with a 10 year maturity you could likely get over 4% return. Second, mortgage interest is one of the few tax deductions that is not subject to the AMT. Particularly in your likely higher tax bracket you will be missing out on substantial tax deductions.
This. Exactly correct. And in the unlikely event you can’t find an investment that beats your 4% (which is really like 2-4% based on your tax bracket), you can always double up on payments to emulate a 15-yr, albeit at a slightly higher rate.
The deduction is only of value that in essence your rate is now slightly less. It thus helps you get closer to a point where you might be able to invest and get a better return. This would need to also consider taxes on that investment since maxing out you 401k etc should be done regardless and thus this would be with non qualified money.
Where can u find rate one’s rates?
Did mortgage professor point you towards them? I believe u have referenced him in the past.
The 30 vs 15 year discussion is an interesting one.
Pros of a 15 year mortgage-
Much less total interest paid overall
Psychological effect of being debt free
Minimizes fixed expenses later/improves cash flow later- allowing for financial misfortune, part-time work, or early retirement
Lower rate (usually about 1/2%)
Forced savings
Safer from foreclosure sooner
Pros of a 30 year mortgage-
You pay more interest overall so can deduct more interest
You can arbitrage the rates- borrow at 2-4% and invest at 5-10%
You can always pay extra to turn a 30 into a 15, but you have to refinance to turn a 15 into a 30.
Minimizes fixed expenses now/improves cash flow now
Better inflation hedge, especially for a mortgage at less than the rate of inflation
Qualify for more house than you can with a 15 year (bad reason to get one BTW)
I liked the pros of the 15 year better.
Additional pro of a 30-yr: since your payments are lower, your chance of having your mortgage payments covered by rental income are significantly higher if you decide to rent the property later. This is increasingly more common.
Rex- You have to call them. They’re not an internet lender and are actually a rather small operation, just a handful of people.
thanks
how did u hook up with them. im trying to find who to concentrate on since i imagine this will take some work. im thinking of looking at penfed. i imagine suntrust who has my current mortgage isnt going to budge but ill give them an email to see.
My realtor suggested them and actually guaranteed they’d give me the best deal or he’d cover the application fee. They did.
white coat investor:
would you mind listing all your refi costs that you paid?
– s.b.
I just paid the interest and the difference between my old escrow account and my new one. These are basically costs I would have had to pay whether I refinanced or not.
The fees were all paid by the lender. Were you interested in the amounts of the fees that the lender paid?
im looking at an offer from suntrust that supposedly lists all the fees. ill black out my name and stuff and link it so we can talk about which fees to avoid/change
this is what suntrust is offering me for a 15 year refin. i currently am a little over 2 years on a 6% 30 year note with them. I did that with 5% down and now am at about 20% equity in the house.
http://www.mediafire.com/?6r3guvx9exp7sbn
I’m still not exactly sure what you’re asking, so I’ll offer some general comments on the paper you’ve linked to.
First, yours is a jumbo loan. That’s going to be a higher rate than mine, even with 20% down and with a 15 year fixed mortgage.
Second, you do have 20% down right? For some reason the form says the loan to value is 80.4%. Make sure they’re not nailing you for being 0.4% over.
Third, it says this is a “doctor loan.” Do you need a doctor loan? Generally with 20% down you don’t need a specific doctor loan.
Fourth, about the fees
$6030- Origination fee. Wow. That’s a lot of dough.
Lender’s credit $7538- that covers your origination fee and a little more.
Appraisal $500- A little on the high side. My 4400 sq ft house was only $350. My smaller house in VA was $250. But it’s in the expected range, just at the high end.
Application fee $50 (mine was $75)
Credit report fee $25 (mine was $32 or so)
Processing $575 (garbage fee. I didn’t pay one at all.)
Settlement $375- about what I paid.
State tax $1809. That sucks.
$10 loan fee. That sucks too, but not as hard.
Title insurance $1508. Mine was a little less, but not much. Maybe $1300.
Recording $75. Probably a state/county fee you can’t change.
Prepaid interest – 2 days. You must be planning to close at the end of the month.
Escrows- They’re all zero. I’m not sure why. Are you planning on doing your own escrows?
Overall, $3K in closing costs are being added to the loan balance. This is nowhere near a no-cost refinance. I didn’t know your county, so I picked a random one, but a quote at Amerisave shows a much higher rate 4.875% with $16k+ in closing costs. Your deal looks a lot better than that. You’re paying about $3K in closing costs and getting 3.625%. I’d get a few more quotes though. It wouldn’t surprise me if you could do better. But even if you can’t, this is probably a no-brainer for you. You’ll be dropping over 2% off the loan.
hey thanks for your comments. i actually posted it bc the person a few posts above wanted to know what closing costs were paid and i like this format to talk about them. Your additional comments should help that person as well. Just to answer your questions and a few additional comments. I was expecting you to point out that this is really a no cash (practically) closure instead of a no cost closure. Still given my situation, probably a great deal historically although maybe not the best deal currently. it is a doctor loan program so you dont need 20% although id easily put it there to get a better deal. i was given the impression this was the best that can be done currently but ill ask specifically about the 20%. suntrust will do this for 95% of value for docs currently. i do pay all my own taxes and interest seperately. as you mentioned its a jumbo although i imagine a lot of docs are in that category (not that im recommending doing that). when all is said and done with this offer, its really 3.5k or 0.58% of the loan to get a rate of 3.625% for 15 years. i was tempted to look more at the 2.875% 5/1 arm since my goal is to pay this off in 10 years but i think the math is such that its not worth the reduced flexibility. again thanks for all you do.
Hi,
I really enjoyed your post and I am in the exact situation right now. I was hoping to talk to you more about my situation through email and see what your thoughts are. Please shoot me an email!
Rex has no idea what your email address is. You might try posting your questions in the forum.
its more of documents to show than post questions. I had 0 knowledge on how this works until I read this post but still have some confusion, and was hoping someone could contact me. This post is amazing. [email protected] is my email.
Definitely a no-cash refinance, and far better than what you have (see point #10 in the blog post). Most of us just wait way too long to refinance because it’s a bit of a pain.
yes but when i took the loan with only 5% down it was the only and frankly not a terrible option historically. given todays situation and now that i have gotten to about 20% equity, im ready for the change. i actually contacted suntrust about the 20% part and they said the doctor loan program doesnt matter as long as you have 5% so this can be an option for others with low equity in their homes who are physicians. they also didnt have something better for me in the non doctor or regular arena.
That’s actually a very competitive “doctor’s loan.” I’m glad you’re able to refinance. That should save you thousands over the years.
i would like to sit down and refinance 4 different properties – my home, my cottage, my office building and a rental home i own. What do you think is the best strategy for this? should i try to spread them out to different banks? could i leverage them all at the same bank for better rates? just curious as to what you think?
i am the exact person you describe — someone who “doesn’t have time” to look closely and fill out this paperwork. but now you have motivated me, and i have all my paperwork in order.
now i just need a plan! thoughts?
I don’t know that it’ll get you better rates, but I would try to do them all with the same folks just to keep it simple. I’d ask for a discount, and you might get a few hundred bucks. You’ll get worse rates on the rental property/office building, so expect that.
Joe:
I’m in the process of looking to refinance 4 rentals and our occupied home. If you play your cards right, you will absolutely get the best deal by working with a single company. I can say this from experience as a customer and experience, albeit short, as a mortgage originator, which was the most awful job I ever had.
Also, consider the HARP 2.0 program if you have property that’s under water. I’ll be closing a refi on a property on Saturday, which I owe 65k and has a value of 20k. The refi is clear to close. It’s much easier than the traditional refinancing process.
Let me know if you have any other questions and I can try and help.
White Coat: I completely disagree on processing being a junk fee. I hate them as much as you do, but it’s been the standard everywhere I have looked. If you didn’t pay one, there’s a good chance they collected it from you somewhere else, or somehow (parhaps by gambling on your rate lock by floating it down). In a case of one borrower with multiple loans, I feel that the processing should only have to be paind once.
A few things to hopefully share with the board about rate shopping.
1. Don’t ever let anyone run credit until you have selected the lender you want to work with. Tell them you understand rates are based on scores and appraisals and that if your score comes in low, that you understand the rate probably won’t be available. Additionally, don’t even give them your social security number, until right before the credit is run. If they refuse to quote you or give a good faith based on credit assumptions, it likely means they offer high rates and realize you’re not going to get a crappy loan from them.
2. Only work with lenders that can complete your entire loan in 30 days, with a 30 day lock. I would consider a 45 day lock at the most. Here’s why: when a lender “locks” a rate, they’re committing money to the loan for the duration of the lock period. The longer the lock period, the worse the rate. It costs the banks money to lock loans and the rate on a 30,60 and 90 day lock will be very different. If the lender is going to take 90 days to get your loan done, you’re not getting the best deal.
3. Big banks are likely to NOT have the best rate. They are guaranteed to have the worst service and you will feel pain during the loan process if you work with them.
4. If you have a loan with an existing big bank and have paid on time for decades, they will offer you no prefential treatment than a customer that entered their bank for the first time and asks for a loan.
5. If you don’t need your spouse to qualify for the loan, don’t put them on the loan. They can still be on title. To me, there is only downside when adding unnecessary borrowers.
6. Companies listed on bankrate advertise by using bait and switch. Their advertisers offer rates & terms that are literally unattainable. Companies that advertise on the radio are a lot likely to be doing the same thing.
Lastly, I have saved the best, so please read this:
Don’t shop rates on different dates or times. Rates can change a few times every day, sometimes they don’t, but they do change every single day. Rates are historically inferior on mondays and fridays. I have seen it over and over, this is true.
When you’re ready to proceed with your loan, call up the few brokers that are competitive and tell them you’re going to lock your loan with someone in the next hour. Ask them for their best and final offer. By doing this, you’re comparing apples to apples.
For instance, if you call lender A on monday and lender B on tuesday, rates could’ve shifted considerably. Lender B might have a better rate, but the rates could’ve dropped from monday and you’re simply not comparing the same thing.
First, I should mention that I am not the same Joe that Inside-Outsider originally responded to – the one with the refi question. I’m the one who has responded elsewhere in this thread.
I have a few comments about Inside-Outsider’s points which were a mixed bag of good and bad advice.
“1. Don’t ever let anyone run credit until you have selected the lender you want to work with. Tell them you understand rates are based on scores and appraisals and that if your score comes in low, that you understand the rate probably won’t be available. Additionally, don’t even give them your social security number, until right before the credit is run. If they refuse to quote you or give a good faith based on credit assumptions, it likely means they offer high rates and realize you’re not going to get a crappy loan from them.”
Assumptions aren’t worth the calories spent to make them. It’s perfectly fine to let a lender run your credit. You’ll get a more accurate assessment and rate. While credit scores play a role in rates, credit history plays an even bigger role in overall eligibility. Unless your report is impeccable, let a lender run it to determine if there are any issues that may have an impact on financing. It’ll give you time to address issues in advance if there are any.
The trick is in how you go about engaging the lenders. Individual credit inquiries each ding your score slightly. So seven different inquiries for different purposes would collectively chip away at your score. However, if the inquiries are for the same purpose (e.g. an auto loan or a home loan) and they are made within a window of no more than 4 weeks, they count as a single inquiry for the purposes of calculating your score. So, you can shop several lenders in a 4 week period and let them all pull your credit, and although all the inquiries will show up on your report, they will only count once against your score as if a single inquiry.
While on the topic of credit score it is also worth pointing out that scores within the same range generally net the same rate. So your score could drop from an 810 to a 790 and your rate would very very likely remain the same. Rates are based on the ranges (and other factors) not on a specific individual score.
“2. Only work with lenders that can complete your entire loan in 30 days, with a 30 day lock. I would consider a 45 day lock at the most. Here’s why: when a lender “locks” a rate, they’re committing money to the loan for the duration of the lock period. The longer the lock period, the worse the rate. It costs the banks money to lock loans and the rate on a 30,60 and 90 day lock will be very different. If the lender is going to take 90 days to get your loan done, you’re not getting the best deal.”
I would agree that you want a lender that can close as quickly as possible, but it heavily depends on the circumstances. Actually, for a purchase it depends on the contractual closing date. You’ll find that most large depository lenders (a.k.a. the too big to fail banks) have a minimum lock of 45 days and an accelerated lock of slightly less, perhaps 35 days. Their infrastructure is larger and generally moves more slowly – it’s just the way that it is. If they do not believe they will close on time they’ll extend the rate lock often at their own cost, not the borrowers. But that doesn’t help the borrower, especially in a purchase for which missed deadlines may come with other financial consequences. So, yes, find lenders that have a proven track record with a high close-on-time rate.
“4. If you have a loan with an existing big bank and have paid on time for decades, they will offer you no prefential treatment than a customer that entered their bank for the first time and asks for a loan.”
This is a misunderstanding of the way the system works. Banks would LOVE to provide preferential treatment. Oh they’d love to. Now doubt it would be very lucrative for them. However, when it comes to home financing they cannot. Volumes of regulations and laws require that every borrower be treated the same. And both the government and investors will periodically audit closed loans to make sure nothing was done outside of established guidelines.
“5. If you don’t need your spouse to qualify for the loan, don’t put them on the loan. They can still be on title. To me, there is only downside when adding unnecessary borrowers.”
This is where context is critical. Borrowers should think about this scenario VERY carefully in their own context. From a narrow perspective of qualification for the loan, this appears to makes sense. If you can qualify on your own, why add another borrower? Well, as a couple you’ll want to address the bigger picture. Death, divorce and other potential future issues can quickly turn this arrangement into a huge headache.
“When you’re ready to proceed with your loan, call up the few brokers that are competitive and tell them you’re going to lock your loan with someone in the next hour. Ask them for their best and final offer. By doing this, you’re comparing apples to apples.”
This is just backwards, not to mention in conflict with earlier advice about pulling credit.
“Best” is relative. Oftentimes, especially at larger institutions where an originator does not have the authority to alter fees or adjust rates beyond a certain threshold, it takes the threat of a competitor’s deal to move the mountains necessary to receive a better than “best” offer. Sales managers and sometimes branch managers might get involved. And that is not going to happen unless a borrower can show, in writing from another lender, the precise terms of the deal. Absent that document, the borrower will get the next best offer. Verbal claims are absolutely worthless. And given that all of this game-playing depends so heavily on time, there’s a risk that playing one lender off another over the course of a day could easily backfire.
As for telling an originator that you’re going to pick a lender and lock a loan “within the next hour”, no originator worth his salt would believe you. I’d laugh – out loud. Especially if, up to that point, the borrower took the advice from your first point.
It takes time to gather the borrowers documentation, vet the information including credit history, find the loan product(s) that best fit the time and circumstances, and go over the information with the borrower to allow her to select the loan that best fits her needs. If she’s not even had her credit run yet…well…that’s a problem. See my response to your first point. A borrower should always always always shop a few lenders within the 4 week window, provide complete documentation (and let them run credit too). That way she can have multiple pre-approvals in-hand (assuming she even qualifies). And, when she’s ready to pull the trigger she can call each loan officer for her current rate and make a decision to lock immediately during the call.
I want to state that I completely agree with your #1 above… I worked with a mortgage broker and specifically told her not to run my credit until we come to an agreement. She ran it anyway. Not a big deal as I have great credit but I wasn’t going to work with her regardless of her rate for being slimy.
BTW BOA beat her rate out of the water at the time 2.75% on a 15year
I understand that you’re trying to convey your mortgage experiences, however each borrower’s present circumstance drives much of the lending process. Today you’re fortunate to have excellent credit, the required reserves and what appears to be sound financial responsibility. Not all buyers share your current context or level of fiscal responsibility. In fact, it is unclear whether your context was perhaps significantly different during those earlier transactions in which (in hindsight at least) you felt you were screwed. Your context would have affected the way your loans were structured, and your willingness to agree to terms that may not have been ideal but were acceptable under the circumstances. It’s difficult to say without and accurate and thorough presentations of earlier contexts.
Without a doubt there are disreputable lenders and brokers, just as there exists no shortage of disreputable borrowers. It’s less and “us” versus “them” and more “treat others as we wish to be treated” (as lenders and borrowers) is it not?
What stood out for me in this article, which otherwise shared some solid advice, was the following statement: “If you’re concerned the loan won’t close for some reason (sketchy credit etc), try to get your lender to pay these expenses.”
Basically, you suggest that buyers behave in exactly the manner they wish lenders not to behave toward them. If buyers are genuinely concerned their loans aren’t going to close (especially due to details they assumed they could hide from a lender), well, the risk should rest on their shoulders not the institutions from which they seek funding. I think we can all agree that this is not acceptable behavior for a borrower.
Overall, it’s a decent article. But I caution readers to fully research and understand the context surrounding any claims about a borrower’s experience before making assumptions about the borrower or lender. And I suggest that borrowers and lenders strive to create mutually beneficial transactions, not tit-for-tat attempts to manipulate an already complex and often exhausting process.
Great comment Joe. If every financial services professional shared your attitude this website would be out of business.
The ethics of disclosure to someone you’re doing business with are complex. If the lender needs more information to make a decision he usually asks for it. I feel there is very little of significance I can possibly hide for a lender, including “sketchy credit.” The problem with a transaction like this is that the information disparity between the two parties is usually so huge that it borders on impossible for the typical borrower who isn’t shopping multiple lenders at the same time to get a fair deal.
Many lenders are not willing to front the costs of an appraisal for exactly the reasons you outline. Even with no-cost refinances I’ve done, I’ve paid for the appraisal and other costs up front, and then as long as the loan goes through, the lender reimburses them to me. That seems like a fair way to do it to me.
Should I prepay on my mortgage before I refinance?
Depends on how long before you’re refinancing. If you just want to have a smaller mortgage (for instance to get your LTV down to 80%) you can just bring that cash to closing and make your new mortgage smaller with the same effect as prepaying the mortgage. If that refinance weren’t for a year, then whether you want to pre-pay a mortgage or not is a classic “Investing vs Paying Off Debt” question. Read more about that here:
Great comment Joe. If every financial services professional shared your attitude this website would be out of business.
One good reason NOT to prepay your mortgage is if you need that cash for closing costs (although closing costs could be rolled into the new mortgage.) Obviously home equity is a lot less convenient to get to than money in your bank account in the event of an unforeseen expense.
This is the most difficult website to try to read with the black type on the brown background but there is some good advice here.
That’s the first complaint I’ve had about that in 2 years. What colors do you prefer?
The brown is pretty terrible. But I can’t get enough of this site. I copy and paste everything over to white background.
I actually changed the color due to a similar complaint a couple of years ago. Those I asked agreed this new one was much more readable! But I’ll consider dropping brown all together when updating the site’s look in the future.
We are in a refi deal now with a big bank and I feel like we’re being snowed. Is it normal for the bank to add the escrow balance to the new principal? Here’s the facts: our mort. balance today is $126,150. We are not taking any additional cash out and I’ve been quoted closing costs of $2,300. Our escrow balance will be approx. $2400 at closing. However, the loan balance somehow jumped from $126,000+2300 ($128,300) to $132,600 and I can’t figure out why. Are they rolling my escrow into the new mortgage? We are moving from a 30 yr 4.75 to a 15 yr 2.88. At this point I have asked to cash out our escrow (our equity balance is around 30%.) Now our mortgage broker is saying the bank will use our escrow towards closing costs! Not cool… should we pull the plug?
There is no normal. There is what you negotiate and are willing to accept. There is so much variation with these things that there really is no standard. As a general rule, however, in a “no-cost mortgage” I would expect to bring money for my new escrow account to the table and I would expect to get a check for my old escrow account shortly after closing.
You don’t appear to be doing a no-cost mortgage for some reason (which is bizarre to me as you should be able to get a no-cost 15 year for about that rate-perhaps you need to shop around a bit more.) My most recent no-cost refinance was 2.75%. But assuming you think this mortgage is a good deal for you for whatever reason, and you’re willing to pay $2300 in closing costs, then I would expect your new loan balance to be very close to $126,000 (it probably won’t be exactly 126,150) and to bring a check for $2300 for closing costs and a check for the new escrow balance. (Probably just one check for the total.)
Before you pull the plug, I’d shop around a bit. Then ask these guys to match the offer you find elsewhere. If they won’t, then go elsewhere. Be sure you understand what you lose when you walk away. A lot of times you’re out some fees, such as an appraisal fee, if you walk away.
The first thing I’d do is ask the question you’re asking me to the mortgage broker and see if he comes up with a good answer. It appears you were okay with rolling the closing costs into the loan balance rather than bringing a check, but I have no idea why the new loan is going to be $132,600. Seems like an extra $4K for somebody, no?