By Dr. Jim Dahle, WCI FounderIf 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?
I am trying to refi my rental, currently quoted at 3.5 for 15yrs, with escrow balance and closing cost, I have to bring cash up front. If I don’t live in and don’t plan to keep it longer in a few yrs, should I go ahead with refi or just keep it at 6.5?
I’m surprised you’re getting such a low rate for an investment property. That’s very good. Sounds like you need to do a break even calculation. Alternatively, you could try to get a no-cost refinance, that way you’re ahead from day one. But the rate will be higher, such as 4.5%. Here’s a break-even calculator from the mortgage professor:
https://www.mtgprofessor.com/calculators/Calculator3a.html
I would add one or two more tips. I use bankrate.com to shop around and prefer to deal with the lender not through a broker – most loans are resold after closing anyway, so it really doesn’t make too much difference in going with No-name Lender rather than well-known Mainstreet Lender. In fact, Mainstreet Lender may end up being your loan servicer (the company you’ll end up making payments to). If your situation is tricky or complex, a broker may be helpful, but keep in mind, they are charging for their services. For a standard purchase or refi loan, as soon as the GFE is presented, see if you can find better rates on title/escrow elsewhere. Entitle Direct in my experience is the cheapest, but not all lenders will let you use them. One I used them, and they were cheap and good. On my most recent refi, the lender wouldn’t accept them, but I will still able to find my own title and escrow people, for about $700 less than the folks the lender defaulted to.
Am I the only one that feels this reads like an ad for Entitle disguised as a comment?
Frankly, nit-picking fees to save a couple hundred dollars here and there is practically without value. Generally, the time spent doing so isn’t worth it unless, of course, you don’t value your time.
I’d much rather pay the sticker price for a solid and efficient transaction with a lender that can actually close in a timely fashion than engage in analysis paralysis just to save a few bucks, all the while hoping the lower-cost resource can get the job done.
Could be. But how else do we recommend good firms to each other?
Sorry WCI, I missed your response earlier this season.
I don’t trust recommendations (or any opinion for that matter) without sufficient context. Two factors play a heavy role in any financial advice: time and circumstances. What was advisable five minutes ago may not be at this moment, even for the same borrower. And a strategy/service/product/provider that worked for one borrower may not be an option for another.
Your question is excellent and there is no easy answer. I tell people that it’s always a good idea to be aware of what others have done or experienced and, when possible, ask questions to understand the context of those experiences — but never assume the same will apply to them.
Which brings me to Truth’s comment. Truth mentioned “mainstreet lenders”. I’ve seen many initially “vanilla” purchases and refis head south at the 11th hour putting buyers and sellers alike in jeopardy. Some of those mainstreet lenders have a close-on-time success rate of <50%. That is to say more than half the deals don't close on time. That's something nobody wants to hear – buyer, seller or realtors.
It can be the result of an underwriter's inexperience, a lender's overlays, an inexperienced loan officer, the results of an appraisal or title search, or even a borrower's ignorance or dishonesty. Whatever the reason, the lender is unable to adapt and cope and the deal begins falling apart. At that point, the borrower faces some very real consequences.
1. the cost of another appraisal. In all likelihood the first appraisal will not be transferable.
2. the cost of another credit report pull. A minor cost but a cost nonetheless.
3. a new higher interest rate. They're not going to get the same rate they locked weeks earlier with the first lender, especially in this economy.
4. potential missed commitment and close dates now that the process has to start from scratch again. There may be financial consequences, not only as a result of their failure to adhere to P&S agreement terms but their living accommodations that may have been planned around a specific deadline (e.g. now having to pay an additional month's rent to their current landlord, pay for storage of their belongings, or having to stay with family or in a hotel if that's not possible).
I could continue, but I believe readers get the point.
My advice – don't obsess about fees and minor differences in rates. Find an originator with a reputation for closing on time and dealing with all but impossible circumstances. They may cost more up front, then again they may not. Either way, think of it as an inexpensive insurance policy for the peace of mind that your deal will be a) more likely to succeed and b) more like to close on time.
As for Truth's $700 savings…well, without sufficient context there's no way for any of us to tell whether or not s/he will actually save $700 over the course of the loan, even if the refinancing executed flawlessly.
I agree that you want the cheapest rate/points/fees possible with a lender who has the ability to close on time. After closing, service matters much less since most loans are rapidly sold off, often before the first payment.
re: loans being sold off. Generally, the note itself can be sold to another investor, and as a completely separate transaction, the servicing of the loan can be sold off to any number of 3rd parties that offer the service.
Something to keep in mind….if you happen to have a stellar credit history, solid job/income history, and you’re able to put at least 20% down (assuming an owner occupied primary residence), you may find some lenders willing to do the deal as a “portfolio loan”. Portfolio is just another way of telling you that they intend to keep it in-house on their books.
Most of the portfolios I have seen have been with local credit unions with a proven track record in the region. It’s not a bad idea to become a member of a reputable local CU just to find out what it might offer.
Two advantages: 1) portfolio loans do not have to adhere to strict Fannie/Freddie guidelines and may use the lender’s own, more relaxed guidelines; and 2) it is highly unlikely servicing for the loan or the loan itself will ever be sold off.
Mind you, they aren’t going to hand these loans out to just anyone. They’re done at the discretion of the lender and underwriter. Next time you’re speaking with a lender, ask if they’d consider making yours a portfolio loan….especially if you strongly dislike the thought of your loan being sold off.
A spam comment would have linked to their site and not mentioned how some lenders won’t allow them. On my most recent refi, I didn’t use them and still saved $700 with one hour of shopping around. I did this and let the lender know ASAP so there were no delays. The loan officer lied that their services were comparable in cost to any I would find on my own. It’s definitely easier but usually more costly to accept the lender’s defaults.
Hello,
I am surprised that you recommend fixed 15 years mortgage for doctors. In Canada,historically, variable rate mortgages usually came out cheaper over the long term than fixed mortgages.
https://www.theglobeandmail.com/globe-investor/personal-finance/mortgages/for-the-cheapest-mortgage-go-variable/article5945536/
I agree that variable loans are usually cheaper than fixed, especially in the last 30 years as rates have fallen. However, the reason they are cheaper is that the borrower is running the risk of rising interest rates, instead of the lender.
I don’t have a problem with a variable loan (and have used a 5/1 ARM myself), but you have to be able to handle the worst case scenario in the event of rising rates.
You’re making assumptions about the future. An adjustable mortgage is only “cheaper” if many conditions hold true over the duration of financing, not the least of which is the rate remaining low enough, for long enough.
Too many people made assumptions about the future and they managed to get themselves into a financial mess as a result. Prior to 2007, hundreds of thousands of American borrowers signed into adjustable rate mortgages based on assumptions such as:
– future increases in income (that never materialized)
– stable employment (with little or no financial buffer against job loss or economic downturns)
– sufficient equity to refinance (until the market went south)
– drawing on equity as the market rose (with no plan for a decrease in value)
– signing into an ARM because of the attractive initial rate (only to find themselves stuck in the property after the fixed period ended)
– this list goes on an on.
Think of the added cost of a fixed mortgage as an insurance policy against a rise in rates should the crystal ball prove defective.
WCI’s comment about being able to handle the worst case scenario (of an ARM) is now codified in current lending rules. With ARMs, the CFPB requires that lenders qualify borrowers based on the higher of the initial rate or the fully indexed rate. So, even if the initial rate is 3.5%, if the fully indexed rate is 5% you’ll need to qualify at 5% (in terms of DTI, etc). It’s part of the QM/ATR.
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People sometimes go for mortgage refinancing in order to save money. Finding the right refinancer is important along with understanding the terms and conditions. The major mistake here committed is the cost which the new financer or bank will charge to refinance is completely ignored. Thus, you must always check the present interest rates, future rates, mortgage amount before refinancing the mortgage.
Thanks for a great website! I am trying to refinance my mortgage from a 30 year doctor’s loan with a balloon payment. I have been paying it down with extra principal -only payments, but am still in a jumbo loan (I am in a high cost of living area). I have been presented with the option of having two mortgages, one at the regular 15 year fixed rate (3.625), for the maximum $417K, and one for the remainder, at a higher rate (5.25) than I currently pay (4.875). There is no prepay penalty, but since I’ll have a higher monthly rate, I am not sure I will be able to continue prepaying in order to reduce the 2nd mortgage. This is not a no-cost loan, and while I think it will work out better than my current loan in the end, it seems like a funny way to get around the jumbo status. Is it typical to need two loans to avoid this jumbo status without the doctor loan? Thanks!
The industry is in constant flux, but I’ve seen this one before. It is often done to prevent a loan from requiring PMI. In the end, it’s all the same, whether you call it fees, points, higher interest rate, PMI etc. It costs more if you want a loan that doesn’t fit the conventional description.
No, no, no.
WCI is correct that some loan programs are structured to circumvent PMI by splitting the financing into multiple loans…the equivalent of taking a first and second mortgage out on the property. These have been popular with State bond programs over the years. Within the industry you’ll hear terms such as “piggyback mortgage”, “soft second”, “80/20”, “80/10/10″…the list goes on. Unfortunately, even the above average consumer doesn’t understand these complex financial instruments well enough to correctly evaluate the impact, or s/he overlooks important details in the “fine print” such as interest only on the second mortgage for the first ten years.
There is simply too little information in your post to understand precisely what was presented to you. At a glance two things come to mind:
1. The loan officer with whom you spoke either has a very limited loan product set from which to choose, or your personal and financial circumstances severely limited the available options
2. Consequently, his or her solution was to break the loan amount into two smaller “conforming” loans, meaning they’re each under the current $417k limit on a single family home.
I cannot help but wonder which institution made such an offer, and why.
It’s virtually impossible to provide advice about home financing by way of a forum. The context necessary to determine precisely which loan products are available to you requires an in-depth look at your entire personal and financial profile, and in all likelihood it’ll require a direct lender or broker with access to an array of specialty loan products to find the best-fit solution.
I can tell you with 100% certainty that there are lenders with loan products much better than what was presented to you. There is absolutely no need to structure a non-conforming loan in the way you describe unless something about your financial profile limits your options.
How many lenders have you met with, and of which types (i.e. bank, credit union, mortgage lender, broker, internet bank, etc.)? Each offers a different product mix – some very limited and others broad. Some offer areas of specialization (e.g., jumbos, ARMs, etc) and that’s where you’ll want to focus your efforts to find what you need.
Disclosure: I am not a lender of any sort. I do free home financing education in local communities and online.
What’s the deal with this forum now WCI? Days pass and comments/responses aren’t showing up, at least not as quickly as they once did.
I added a second spam program. It’s tough to get the balance right between letting too much spam through, and tossing too many real comments into the spam folder. I had a post on it recently, and readers basically voted to email me when their comment was sent to the spam folder.
ahhhh, I understand now, thank you. I will do that in the future WCI.
It’s unfortunate the hoops through which we must jump these days due to spammers.
Hello Sir, I’m having a hard time understanding why I’m not able to refi only the remainder of the balance i owe on my home. If i owe seventy and my house is worth two fifty am I able to get a refi to simply pay less on what I owe?? Im currently paying 5.25 percent on a conventional loan since 2008 through usaa. Is it possible to get a refi without getting what the loan amount equal to the value of the house and just getting it for the remainder of my first loan. If so, please explain how and also if you think its worth doing if I can get a loan at 3.0 fixed. Original loan amount was 153k in 2008. Currently have 70 remaining at 5.25 fixed. Roughly 1500 a month with including taxes
thanks
Is it technically possible to refi the remaining balance on a mortgage? Yes. Refinancing does not increase your new loan amount over and above the remaining balance owed unless a) you roll the refinance closing costs into the new loan amount rather than paying them out-of-pocket or b) you request a cash out refinance (i.e. effectively drawing out some of your equity in your property) up to the permissible maximum Loan-to-Value ratio.
Is it possible for you to refi that balance? Possibly.
The answer depends on many many factors – most of which are too personal to discuss in a public discussion thread. What I would recommend is that you speak with a *licensed*, reputable, experienced AND local loan officer in private. That individual can thoroughly review your information and provide you with guidance about how to proceed.
[Note: I write *licensed* because 99.999% of consumers are unaware that a large number of loan officers are unlicensed (i.e. they have never taken nor passed the NMLS exams for the States in which they operate) and instead operate freely under their employer’s licensing. This applies to all depository institutions such as banks and credit unions. LOs working for other types of lenders and brokers absolutely must be licensed in their States and participate in annual training updates. I’m only aware of this because I was once a loan officer.]
Anyway, in the event that you cannot refinance today due to your circumstances, that would not eliminate the possibility of refinancing at some point in the future. If the loan officer explains that you cannot refinance today, don’t be afraid to ask about what you would need to do to correct the issues so that you may refinance at a later date.
Regarding the numbers you’ve given…it’s pointless to provide you with a generic answer whether loan structure A is “better” than B without diving into your personal details. The structure of a loan, and whether it is “best” is completely and wholly dependent on your specific financial profile. Anyone who tells you otherwise has no idea what they’re talking about. Speak with a loan officer.
I should mention that these days I teach free home buying and financing workshops in New England. I know a thing or two about these topics. 😉
I understand the issue you’re having, since I’ve had it myself. Refinancing a tiny little mortgage loan like yours is not particularly attractive to loan officers since there isn’t much profit there. In 6 years you’ve paid over half the thing off, so I assume you’re only going to have it for a few more years. A reasonable option might be taking out a home equity loan, and paying off the mortgage with it. You might not be able to get 3% fixed, but you may be able to do 2-4% variable. There would be interest rate risk, but if you’re only going to have the loan for a few more years, that’s certainly a reasonable option to lower your interest costs in the mean time. Or, you can just throw some extra money at it and pay it off in the next year or two. At any rate, take a look at Pen Fed. https://www.penfed.org/home-equity-loan/ They’re doing 60 month home equity loans at just over 3% fixed. Might be a great option for your situation (which as mentioned by the other commenter, isn’t completely laid out here.) We can’t quite tell what your goal is- to save some interest while paying it off quickly, to lower the monthly cash flow requirement or something else.
WCI,
To say a small loan amount “is not particularly attractive to loan officers since there isn’t much profit there” is inaccurate and just plain misleading. It’s a misunderstanding of the way the industry works. I encounter it quite often. It’s important to differentiate between the lender/employer and the loan officers employed by them.
Given two similarly complex loans (meaning the borrowers’ personal & financial circumstances are about equal, as well as any complications with the properties) with vastly different loan amounts, the level of effort is about equal for the loan officer. How that loan officer is compensated depends on the employer. Compensation can range from a fixed annual salary with zero commission, to a 100% commissioned income with a recoverable or non-recoverable base. Commission itself can range from a handful of basis points (the industry slang is “bips”) to well over 100 bips (1% of the loan amount). Furthermore, some lenders tier the bips – meaning the number of bips per loan increases with the loan officer’s total volume for a previous period (typically the last quarter).
Now, having written that, a professional, reputable loan officer could care less about the loan amount. They’re fast and efficient in their duties. Whether you want a loan for $70k or $700k it matters not to them. What matters most is identifying and structuring a loan such that you as a borrower meet the ability-to-repay requirements and that they support their findings with sufficient evidence. In addition, the property itself must meet financing requirements. It’s the loan officers job to prove to their employer that you’re worthy of the financing. And the best take that very seriously. I could go on and on about this topic because it is so incredibly misunderstood.
Out of curiosity, have you ever verified a loan officer’s licensing credentials? Do you know how to? If you do, you’re among the very few. Most borrowers do not.
Lenders (i.e. the employers) are a different story. They’re absolutely looking at the bottom line, but they’re also constantly assessing their own OPEX. If you see a lender with an unusually high rate for a specific loan product it’s not necessarily because that lender is swindling consumers. Rather, they’re purposely upping the rate to control loan volume – specifically to reduce the volume if their operations team is already proving itself overwhelmed at current levels.
If you find a lender with an unusually high credit report rate, let’s say $65 rather than $15, again it would me a mistake to assume that the lender is swindling consumers. Rather, that lender may be accustomed to a large percentage of borrowers who never follow through after their pre-approval. Or they may be smaller and less able to absorb losses, and so costs are passed on to their customers. Some borrowers will obtain a pre-approval from one lender yet do business with a completely different lender for the actual loan. The first lender east the cost of the credit report it had to pull to do the pre-approval because the pre-approval was free to the consumer. Now a large lender such as BoA recovers such losses elsewhere in its business model…how about those wonderful ATM fees. Smaller non-depository lenders have no such revenue sources. They may recover the losses by raising fees for the consumers who actually do business with them.
Still, at the end of the day lenders are tuned to the bottom line. They’re looking at the risk of lending to us. They’re applying rates and terms appropriate to the level of risk. And these days they’re praying for rates to climb because they’re making peanuts off the currently low rates given the operating costs of real estate lending.
For any loan officer that is paid at least partly by commission, which is in turn usually calculated at lesat in part from the loan amount, of course they prefer larger loans, that tend to be about the same amount of work for more money. I have known mortage brokers – paid entirely by commission – who outright refuse to take on sub-$100K loans or refer them to colleagues with less business or say they’ll do them, grudgingly, but more as a public service than for profit.
Truth (interesting that you chose that particular nick),
I have no idea how many loan officers you know personally, in addition to knowing precisely how they’re compensated by their employers, but I can tell you I know many working for depository banks and credit unions as well as mortgage lenders and brokers.
Any loan officer that refuses to work on, or in any way implies that they’re unwilling to work on a borrower’s loan app — for any reason — should be reported to their employer. And if you really want to make an issue of it, report them to CFPB as well (https://www.consumerfinance.gov/complaint/) You’ll want to provide their NMLS ID.
Why? Unless they have good cause or some other extenuating circumstance (i.e. if it is not an “arm’s length transaction”), they must give you the opportunity to present your information and apply for the loan. Even if their gut tells them you have a snowball’s chance in hell of being approved, they cannot tell you to not apply. They have to take your information, process it, and let the facts determine if you are eligible for financing at this time.
I would recommend that you not make assumptions about an entire industry or profession based on the handful of bad apples you’ve encountered in your experience. There are more than a quarter million loan officers today. When I was an LO I received commission, but I never cared about the specific loan size. As long as the loans collectively met the employer’s volume requirements all was fine.
It was (and is) FAR more important to produce quality loan applications, in accordance with current rules and regulations, and accompanied by the required supporting documentation. That is, if you’re a professional and care about your reputation as well as lasting customer relationships. A good loan officer may have the opportunity to originate loans for multiple family generations of a customer’s family.
Taken at face value, the implication of what you say is that an LO can’t refuse to take an application for ANY reason, which would presumably include being on vaction, being sick, being too busy, etc. Therefore, it’s doubtful that can literally be true. Assuming we forget about these circumstances, then you’re still saying the LO has to take any loan that walks through the door (or phone or email). If this summary of the law is correct, then your statement is too broad – instead, the LO may not refuse for a prohibited reason (e.g., race, sex, source of income is public assistance or alimony, etc.) but not on this list is loan amount: https://www.consumer.ftc.gov/articles/0189-shopping-mortgage
An employer’s internal policies may prohibit discrimination based on loan size (and they may have that policy in place to avoid any charge of prohibited discrimination that may arise or be implied from permitted discrimination), but I don’t see where the laws (Equal Credit Opportunity Act and Fair Housing Act) require that employer – or a mortgage broker who works for himself, not an employer (admittedly, a dying breed) – prohibit this. Are you referring to one of these laws or some other law? Does the FTC’s website not accurately summarize these two federal laws?
We cannot possibly give Tracy advice about what to do. There are tax implications both short and long term. There are questions about any current investment…should s/he try to pay the home off more quickly or sock funds away in an investment that’s earning a better annual return. As s/he is running the numbers is s/he accounting for inflation (future savings will be in depreciated dollars). The list of unknowns goes on and on.
This is definitely a conversation Tracy needs to have with a loan officer (to determine which options are available from a lender perspective), then a tax and/or financial adviser (to determine which of those option, if any, make sense in the greater context of his/her financial goals and planning.
So your solution to every question is “Go see a loan officer, tax advisor, or financial advisor?” Why bother posting here if you’re not going to try to help someone?
I think it’s pretty clear that accountants don’t have a monopoly on the tax code, nor do financial advisors have a monopoly on personal finance and investing information. I doubt loan officers have a monopoly on information about loans and lending practices. You don’t have to provide “formal advice” in order to provide someone useful information that allows them to answer their own questions. To make things worse, these professionals often are not ethical, and give self-serving advice and treat their clients unfairly. Consider the loan officer who tried to slip in a pre-payment penalty on a mortgage refinance I did. It’s because of people like that that I actually have to read all 50 pages of my closing documents to make sure I’m not being screwed over.
Truth,
Frankly, now you’re arguing for the sake of argument. I’m thoroughly familiar with the FTC, ECOA, FHA, etc, etc, but thank you.
Looking back, perhaps I could have worded my statement in a less confusing way. The “any reasons” in my statement isn’t a reference to the LOs personal circumstances (beyond the arm’s length transaction), it’s a reference to the circumstances of the borrower.
In today’s lending climate the law sets the low bar. You can reference the FTC all you like…think of it as the bare minimum. If a lender actually has the audacity to brag about meeting ECOA, for example, your response should be “want a cookie?” As consumers we expect not to be discriminated against
Employer policy and overlays as well as more recent QM (qualified mortgage, set by the CFPB) rules now set the higher standard. Having worked for one of the largest national banks as well as a small local mortgage lender, and having a circle of long-time friends who include numerous LOs, operations managers, underwriter, processors and attorneys from several competing institutions I can say with 100% certainty that they’re instructed to take all of the applications that come through the door, run them through their app (typically Desktop Underwriter/Loan Prospector) and let the chips fall where they may. Instinctively you know the ones that will fail, and perhaps even precisely why they’ll fail, but you’ve done your job and can go back to the borrower with guidance about how to move forward.
If DU/LP declines the app, the more experienced LOs will generally find a way to restructure the loan and successfully obtain approval more often than not. Some loans simply cannot be restructured in any meaningful way. QM rules specifically state that upfront fees and charges cannot add up to more than 3% of the mortgage balance. That includes title insurance, origination fees and points paid to lower mortgage interest rates. Consequently, smaller loans (below a threshold that varies from one lender to the next) fail to meet the CFPB QM requirements…and that’s a no-no. $3k closing costs on a $100k loan is fine. $3k on a $50k loan is not despite the fact that the processes and internal costs are virtually identical. You can thank the fine folks at CFPB (an organization that significantly oversteps its bounds in my opinion).
If you enjoy reading rules and regs, I recommend reading TIL Reg Z, X and the CFPB’s QM if you haven’t already done so.
Very cynical perspective WCI, no? Based on what? One loan officer out of the more than a quarter million loan officers who “slipped” a prepayment penalty into your documentation. The docs at many lenders are system generated these days….the software automatically includes all the standard language for the specific loan product as well as anything required by law (e.g. the TIL, GFE and other disclosures). The LO clisk and out comes the documentation. I’m going to assume you failed to read it that time and made a bunch of assumptions instead, yes?
You should always read your closing documents and any other documents that you receive/sign, cover to cover, regardless the circumstances. Make no assumptions. That’s my advice to anyone seeking financing. I’ve watched loan officers take the time to walk their clients through every aspect of the terms as well as the 3DP and closing documents. I’ve done it myself. Some borrowers hate it…and behave as if they have no time for it (they’ll be the first to complain and place blame elsewhere should something go wrong later).
I could tell countless stories of unethical consumers who do all sorts of things to attempt to qualify for financing they do not deserve, or in an attempt to otherwise manipulate the process, or to waste the time and resources of multiple lenders.
Professional accountants, financial advisers and loan officers don’t have a monopoly on the information, but they do have the knowledge and experience. It’s the difference between Joe Shmoe consumer reading a differential calculus book, maybe taking a course and suddenly believing he’s an expert (re: illusory superiority and the Dunning-Kruger Effect) and Sally McNally actually being an expert after years of experience and dealing with thousands of clients, not just a handful.
Rather than repeat myself here (because I’ve discussed this topic many many times in my career) I’ll offer this link to an article I wrote for a blog (the blog isn’t mine):
https://longmeadowbiz.blogspot.com/2014/04/we-dont-know-what-we-dont-know-buying.html
To sum up the article: you and I are in no position to provide advice to a specific individual about his/her unique personal and financial circumstances without first thoroughly reviewing and understanding those circumstances. Only then could we form an educated opinion. And the type and amount of personal details they would need to reveal to make that possible….it doesn’t belong here in a public forum.
So, at best, we’re giving them information that is as generic and misleading as a teaser rate on a sign outside a bank. We’re not talking about how to replace a ball joint or bake a cake. Real estate financing is a complex subject that requires a detailed understanding of the individual’s circumstances in order to prescribe advice tailored to them.
Why bother posting here? Because I am helping people by explaining to them that they need to speak privately with reputable professionals. I volunteer hundreds of nights each year conducting free 2-hour local home financing workshops. I do it because I’ve witnessed countless homebuyers act on half-baked advice from peers, friends, family and online resources that do not know the entire context of their unique financial circumstances.
I disagree that giving people information is misleading and unhelpful. Formal advice is one thing. Suggesting “you might want to take a look at this” or “this is what I did” is completely different and doesn’t require a full financial colonoscopy that people don’t want to provide for time and privacy reasons. For example, if someone asks, “Should I invest in index funds?” the formal advice answer is “I can’t tell you anything unless we spend two hours going over all your finances, previous investment experiences, goals for the money etc.” The helpful friend in the doctor’s lounge answer is “I use index funds because of their low costs, lack of manager risk, and broad diversification. I suggest you read up more at Vanguard.com to see if they’re right for you.” Which one is more helpful? Exactly. Taking your position to its logical extreme would mean there is no point to any finance and investing books, websites etc. Rather than telling someone “You need to go see a pro” why not illuminate the various issues that a pro would take into account prior to dispensing formal advice?
Regarding my own experience, I certainly did not fail to read it and it was quite obvious that the prepayment penalty was intentionally put there by the loan officer’s reaction to my objection to it. If the system is set up to have the prepayment penalty box automatically checked, that seems to me like evidence of a system that isn’t designed to the benefit of the consumer. Caveat emptor. Stuff like that makes it even harder to go to a pro, because it’s hard to trust what the pro says when you’re worried he’d doing stuff like that. Perhaps he’ll tell you a prepayment penalty is “standard for these types of loans” and if you believed him, you’d be out a bunch of money. Helpful information is “Read your loan documents and make sure there isn’t a pre-payment penalty since mortgages are only kept 7 years on average.”
WCI,
I am going to assume for a moment that you and I are not your average consumers. But even then that doesn’t make us experts, except perhaps in our own long-time areas of expertise.
How often have you actually dealt with the average consumer with an average or below average understanding of many subjects?
How many times have you deal with doctors, attorneys, investment bankers and others who fancy themselves intellectual who have such a poor understanding of real estate financing that it might be shocking to you if you weren’t already routinely exposed to it?
With all due respect WCI, there is no harm in friendly advice until you try to apply it to someone’s specific circumstances without first consulting a pro. It’s at that point that things tend to get away from us. it’s the DIY project that ended up with an expensive call to a pro to fix our mistakes. If you’re going to give “friendly advice”, always always always strongly emphasize the need to follow up with a conversation with a qualified professional before making a decision.
“Friendly advice” is one of the reasons why so many attorneys with whom I speak have stories of clients that could have saved a bundle had they proactively hired them rather than hiring them later to fix the messes in which they now find themselves because they acted on such advice without first consulting a pro.
Look at the assumptions you’re making about my comments. Rather than digging for more detail and asking me what I mean when I write “X”, you jump to incorrect conclusions. I never wrote that “the system is set up to have the prepayment penalty box automatically checked”. I wrote that “the software automatically includes all the standard language for the specific loan product as well as anything required by law”. The key here, if you had sufficient familiarity with the subject matter, is the phrase “the specific loan product”. The terms and conditions are specific to the loan structure. If I select an FHA 30yr fixed, the docs and language contained within are specific to it. If I select a 5/1 2-2-6 ARM that happens to include a prepayment penalty as part of its structuring, the docs and language will reflect that as well. I cannot arbitrarily choose to include a prepayment penalty in Joe Consumer’s loan without that issue being caught (in most cases) by the processor and/or the underwriter later in the process. If it’s not part of the product, it’s not part of the product. The call as to whether a prepayment penalty is part of a particular loan product is made at the company, State or Federal level depending on the product/program.
The loan officer’s reaction is circumstantial. Had I been a fly on that wall I could have explained to you precisely why you might have witnessed a specific reaction….and you may not have liked the answer.
You suggest that we “illuminate the various issues that a pro would take into account prior to dispensing formal advice?” as if there’s a handful of “various” silver bullet tips. Your tip (or mine) might be applicable in one context, yet changing a single seemingly innocuous variable about the borrower will render that tip inapplicable. There are thousands of regulations, rules, policies and overlays — some in a seemingly constant state of change — that govern and control lending. Hundreds of those might apply to you at any given moment given your current financial and personal circumstances, as well as the specifics of the property you wish to purchase/ref. I refer to it as your financial fingerprint or financial profile. Unless your readers are prepared to immerse themselves in thousands of pages of dry and often confusing laws and legalese, they should let a professional summarize it for them.
Quick story: I publish a list of very clearly written DOs and DONTs to follow in the months leading up to financing, and during the loan process. That list is provided freely online and to every participant in my workshop (note: some lenders offer a very similar list). I urge them to live by the points on that list to maximize their chances of a successful home financing experience. I repeatedly express how incredibly important it is to their success. I cannot tell you how many people go on to partly or completely ignore it. How do I know? A loan officer will inevitably ask “didn’t that individual attend your workshop?” “Why weren’t they told this?” To which I respond, “It was explained to them clearly and repeatedly. When asked if they understood they said yes. When asked if they had any questions about it they said no.”
No matter how hard we try, some people never learn, and others choose not to listen.
We’ll have to agree to disagree here WCI. I have hundreds of home financing workshops under my belt delivered to 5 local communities, and between myself and my friends in the industry, we have processed many many thousands of loan applications over the years (though I’m no longer an active LO). I was Neighborhood Lending and FHA 203(k) certified. When I say friendly advice is harmless as long as you always consult a professional before before making a decision, you can bank on it. Regret is an expensive lesson.
A couple final worthwhile observations and comments before I begin my day…
You advertise on your website. Regardless how much you earn from the advertising — be it $20, $20k or $200k — it’s still an income stream. In the same way that you’re skeptical about professionals “with an agenda” I am skeptical of the opinions of bloggers who earn revenue from their blogging.
The organization I founded to deliver home financing workshops receives absolutely no income from any source whatsoever. I do it because I enjoy it. The website and its content is created and maintained at my expense. In fact, I have an agreement with the local communities in which I teach that permits them to charge whatever they like to local residents – from free to whatever — and 100% of the funds go back into the local community program. My agenda is to arm participants with the tools they need to separate BS from reality so they can hopefully avoid the mistakes of those before them…always recommending they then consult with the pros afterward.
And lastly, you might wonder why someone like myself even bothers with a site such as this one, especially given my perception of bloggers and other “friendly advisers”. It’s simple. Yours is one of many sites that I’ve encountered accidentally in my research over the years. I love the topics. I aggregate the feeds and keep tabs on more than two dozen subject areas – from real estate and financing to theoretical physics and information management. When I find topic or a reply to one of my previous comments that strikes a chord…I invest the time to respond.
And there you have it. In any case keep up the great work. I’ve met many doctors and few are as aware of finance as you.
That’s very noble of you. Thanks for what you do.
I’ve been a loan officer for 18 years. Been through the good times and tough times. I love this job because I love helping people realize their dream of home ownership, helping people save a bunch of money on their mortgage, and providing solutions to tough problems a customer may have. I have had customers cry, hug me and thank me over and over for getting a loan done for them that put them into a payment they could afford, allowing them to keep their home. Those experiences are what drive me. Not screwing over people to make a few extra bucks.
A number of people on this thread have made the blanket statement that loan officers are not to be trusted, do not have the customers best interest in mind, will put customers in loans that give them the most commission, etc. This posses me off so much! To make a blanket statement like that is unfair, misleading, irresponsible and I don’t appreciate it one bit. Like every industry, there are some bad appples, and I’ve know a few. But most are very good at what they do. For me, I cannot in good conscience, put someone into a worse loan that may pay me a bigger commission. That thought has NEVER crossed my mind. I provide excellent service from the first time I meet someone, all the way through closing and well after closing. I’ve worked so hard helping people with their financing over the years. There has been so many changes in our industry the past 8 years or so, I would argue that having a loan officer working for you is essential. To have someone give advice that discourages people from working with a loan officer is horrible advice.
If you’ve had a bad experience, I’m sorry. But there are way more good LO’s out there than bad ones.
Also WCI, you say that working with a big bank is a bad idea because their service sucks and they have higher rates. That statement is completely false and I take great offense to it. I work for a big bank (I’ve also worked for smaller lenders). The bank I work for has the 2nd highest customer service marks in the country (which includes closing on time, communication, loan process, to name a few). This is feedback from customers who have recently done a home loan. This is an annual survey from JD Powers. So to say big banks have accross the board horrible service is bull. Big banks do a TON of loans, so I’m sure you hear some stories of bad service. This is unavoidable. As for rates, we have some of the most competitive rates in the country. One reason for this is a big banks scale. In this market, with the Frank-Dodd Act requiring all kinds of new guidelines and checks/balances, the big banks have the capital to make those changes without passing those cost along to customers in the form of higher rates or higher fees. These changes are costing lenders hundreds of millions of dollars to get in compliance. These changes are a HUGE deal. Your smaller regional or local lending institutions have to pass along these costs to their customers to afford these changes. Don’t believe me? Go shop for a mortgage. And don’t believe the internet rates/fees you see from these internet lenders without calling them and getting a Good Faith Estimate. Some of these lenders will have competitive rates, but no better than you can get at your local bank. And you get to work with someone face to face. Also, the big bank I work for DOES have incentives for customers who have a mortgage with us. WCI, you said there is no incentive for going back to your current mortgage lender. This is completely false. I’ve worked at my branch location for a long time, and know my customers really well and have personal relationships with tthem. Asking them about their kids, job, vacations, etc when I see them at the branch. So your advice to not go to your local lender is ridiculous.
With all the guideline and compliance changes this industry has seen the past 8 years, going to a professional loan officer is essential. Getting advice from friends or online blogs is great. But talk to a professional as well. If you are not in this industry doing this day in and day out, there is no way the advice you’re getting from friends and blogs are 100% accurate and may not even be applicable anymore.
So to wrap this up, I’m not trying to imply WCI didn’t have his experiences on the 5 or so rrefinances he’s done. I just know the advice he’s given on the topics I discussed is plainly not good. I’ve been doing loans for 18 years. It more important than ever to have a trusted loan officer in your corner, to help explain the rash of guideline and industry changes. To advise otherwise is ignorant and dangerous. Also implying that most loan officers will try to screw you over to make a bigger commission is equally ignorant and I take great offense to it. I work my ass off for my clients, and WCI is on here with his unfounded “advice”.
Wow! 3 1/2 years after writing the post there is another comment, and almost as long as the post too. Interesting that you bring up Dodd-Frank, as it had only been in place a year when the post was written and 4/5 refinances/mortgages I’ve had were done prior to that act. This is the issue with commenting on such old posts.
At any rate, I’m glad there are apparently awesome mortgage agents out there. I’m sorry they seem so hard to find sometimes.
I disagree that having a mortgage agent who will ask about my kids and vacations is somehow a significant benefit/incentive to me. I’m not sure why you’re so upset since I clearly tell people to go to their current mortgage holder and include them in their search.
I’m not just implying that loan officers will try to screw you over for a bigger commission. I’m saying it has happened to me and can happen to you if you’re not careful. If that offends you, sorry. It’s your industry, not mine. If your industry were filled with saints like you, there would be no need for me to have a website and I could spend my time doing something I enjoy more.
I think I am in the middle of a no cash reliance,however, it isn’t a full refinance before there is no inspection involved. But my total loan amount is increasing from 268k to 279k. I a, suppose be getting about 9k back out of this and I have to deduct the new escrow Acount moneys which are about 3800 last time I checked. This doesn’t seem right to me, I Dnt understand why my total loan amount would be increasing 11k. The only thing I canh ink of is if they are adding the closing costs to the loan. Also I would not have to pay my next pay,ENT beauce of this refinance. Does this mean they are just adding it to my mortgage as well? Someone please help, this stuff is way out of my league and I dnt understand how anyone can understand this crap
Yup, no cash is not no-cost.
If you’re balance goes up $11K, and you get $9K in cash, there’s a $2K cost in there somewhere. Now, you may put $3800 into escrow, but something similar ought to be coming out of the old escrow. At any rate, escrow doesn’t matter so much- that’s your money either way. You’re skipping a payment, but it sounds to me like that payment is being added on to the balance. Why not ask your loan officer all these questions? If he can’t resolve them to your satisfaction, go elsewhere. There are plenty of people who would like to refinance you.
So let me gets this straight – you refinanced two times to save a half a percent? [Ad hominem attack deleted and IP address blocked.]
We had decided to refinance-had been told that closing was to be yesterday, May 27th and thought that all was fine. We got a call several hours before closing stating that they couldn’t get ahold of the appraiser (he had done one appraisal that “didn’t appraise-by many thousands-like $50,000.00”. We told them that our neighbors had an appraisal that was way higher than that, just a few months prior and at our lenders request, supplied a copy of our neigbor’s appraisal, and voila, it was approved–apparently, it was challenged and it worked!! So, why at the last minute, would they request another appraisal-we told them we were not paying for a second one–we had been planning to refi to a 15 year at 3.125%. No one would respond to our calls demanding answers. Is it too late to pull the plug on them?
No, it’s never too late. Worse case scenario you’re out whatever fees you’ve paid.
Maybe you can explain:
The second week of December we refinanced our 30 year loan at 4.375% to a 20 year at 3.375%.
The prior balance was $257,0003.78
Escrow balance was $13,207.98
The new balance is $264,500.00
We brought to closing for costs $903.11
What am I missing out on? I am not understanding why the balance was so much higher. I think they mentioned something about taxes? Any help is appreciated!
There isn’t much to explain, Diana. I recommend that you thoroughly review your HUD1…it’ll contain the answer you seek. Looks like you may have opted to roll your closing costs into the new loan but fell short (of the final figures required for closing) just prior to closing….which isn’t uncommon.
I agree. Looks like closing costs were rolled into the loan.
What we paid to close includes the following:
(The loan and other costs were a total of $20,021.47)
Recording fee : $99
Prepaid Interest $391.36
Property Tax (12 months): $13,718.47
HO Insurance $1124.69
Property Taxes (again but for 4 months) $4193.16
Misc. Property Tax $246.75
Aggregate Adjustment -$1690.96
Initial Escrow Payment at closing: $3873.64
Origination charges $700
Prop Inspection $75
Flood cert $6
Tax Service Fee $82
Lenders Title $1259.80
Title Misc. $202.30
Title- Settlement Fee $525
UDM Alert fee $10.50
Does this still look normal or correct? I called and could not get an answer that made sense.
Thank you so much for your help.
If this is already a done deal, there is nothing you can do anyway. This is why I recommend a “no-cost” closing. That way I don’t care about any of these costs as they’re all covered by the lender. But the number of charges, the names of charges, and the amounts of charges are all over the map with these deals. There is no standard.
WCI, It’s important to point out what you mean when you refer to a “no-cost closing” and say costs are “all covered by the lender”.
Costs are “covered” in the sense that they’re either:
a) rolled into the loan amount (resulting in a higher loan amount, which is likely what Diane had done)
or b) offset by a slightly higher interest rate.
The “no-cost” refers to no out-of-pocket costs at closing time. Colorful marketing terminology. WCI, I know you’re already familiar with it….the explanation is intended for Diane and other readers.
Although there are many possibilities, in Diane’s case I suspect she may have hit a wall with her LTV or her DTI such that her costs/escrows exceeded allowable maximums by $903.11 under current regs. So even though her loan is still largely “no-cost” there was some unavoidable out-of-pocket expense at closing.
If only there was a “free lunch loan” that wouldn’t contribute to a new housing bubble.
No. If the cost gets rolled into the loan, I call that “no-cash.” If the cost is paid by the lender (using a credit exchanged for a slightly higher rate than market rate), that’s a “no-cost” loan.
It doesn’t sound to me like Diana got either.
With all due respect a “no-cash”, “no-cost”, “no-closing-cost” or “zero-closing-cost” loan is exactly as I described earlier. Either a higher loan amount or a higher rate (a.k.a. Lender Paid Closing Costs). It appears we agree on that.
With the latter the lender isn’t really paying your costs…it’s *fronting* your costs at closing. The lender recovers those costs by way of the additional interest earned over the life of the loan. Of course the lender hopes you’ll hold the loan long enough for it to fully recoup that credit and potentially make a little extra over the life of the loan.
If a lender credit of $3k on a 30yr fixed loan results in a borrower’s mortgage payment increase of $50/m, the lender will recover its credit in 60-ish months. For the remaining 25 years of the loan, the additional interest (due to the Lender Credit) would be gravy. Of course if the borrower refinances again or sells the home just 3-4 years into the loan, the lender won’t recover its entire credit. That’s the risk it takes.
Diane’s comments are somewhat unclear. At first glance it appears she brought just $903.11 to closing, later it seems like she’s telling us she paid significantly more. So it’s not quite clear what happened.
I disagree with your definition of “no-cost.” Someone may use that term for a no-cash refinance, but I would argue they are using it improperly. If that’s truly the definition, I would propose a new term, “true-no-cost” for a mortgage where the lender pays all fees with a credit for the higher interest rate. Yes, the lender hopes to recover it over time with the higher interest rate, but the advantage is that now the lender, who does this all day every day instead of 3 times in his life, is negotiating all the little fees, so you get a better price on them. Plus, of course, you can refinance or pay it off early at will all to your advantage.
I agree that it’s unclear what happened in Diane’s case, but it sure looks to me like she not only had to bring money to closing, but also had additional closing costs rolled into the loan.
Of course you’re free to disagree with me, WIC. Between myself and my local circle of colleagues in the mortgage industry we’ve only originated tens of thousands of loans. 😉 I’m simply stating how the game is played. We don’t make the rules.
As for the lender “negotiating” better prices…well, not really. You speak as if this occurs in real time. That’s simply not the case.
*Most of the “fixed” pricing is known in advance (e.g. the fees paid to credit bureaus, mortgage insurance, title agents, attorneys, etc). There may be some wiggle room in the origination fee, but that varies lender to lender. And borrowers are always welcome to shop costs such as attorney fees and homeowner’s insurance.
*In many modern loan originating apps the costs are filled in automatically by the software based on the lender’s pre-configured values maintained in central database, and on the user-specific loan application figures. Loan officers working for brokers, on the other hand, do quite a lot of manual entry. However, their costs are still set by the pricing sheets they receive from ‘upstairs’ on a regular basis. See above.
*And, ultimately, with LPCC you’re paying those closing costs by paying a higher interest rate. There’s really no incentive for a lender to negotiate a few dollars here and there on closing costs when they’ll recover that much and more over the life of the loan.
Of course, you are correct (though you simply reiterated what I had already written). If you choose Lender Paid Closing Costs you’re always able to pay the loan off early, sell the property, or refinance again. If you do that before the lender fully recoups the upfront costs, and if there’s no early payoff penalty, then you may save a few bucks.
As you know, a boatload of factors determine how all of this will play out. My general advice with “no-cost” closing is this:
If you’re planning to pay off the loan or sell/refi the property in just a couple years…take a closer look at LPCC options. Run the numbers with and without it and zero in on your costs 2-4 years out. It may save you a few bucks.
If you’re planning to stay in the home for several years or longer, and you feel uncertain about your future ability to refi the property in a couple years (i.e. job/career/health/market uncertainties), then it might make sense to pay the closing costs out-of-pocket up-front. Or you may find yourself trapped in a home, paying a higher rate for a longer than expected period, and unable to refi into something better.
Many thousands of Americans found themselves in this predicament in 2007-2012. They chose no-cost and ARM financing options several years earlier and never anticipated the housing market nosedive that began in 06.
You’re missing the major benefit of a no-cost (my definition) refinance- all you have to do is compare rate. So you can actually compare apples to apples between lenders and play them off one another until you get the best price you’re going to get. It standardizes the offers and eliminates the games.
I’m not missing any point. Let’s back up and frame your most recent response in more familiar context to which you can relate.
“All you have to do is compare rate.”
All you have to do….famous last words, WCI
Let’s consider your statement in the broader context of professionals from any field: doctors, attorneys, contractors, accountants, mechanics, heck, even security details or a nanny…
Is the goal to select a professional purely based on a rate? Or is the goal to find a professional who is most likely to help achieve the desired outcome? More often than not, consumers select professionals based on their expertise & track record, and the available budget. Savvy consumers generally want the best help their budget can afford, not the cheapest help they can find. Big difference.
“So you can actually compare apples to apples between lenders”
Not at all. Reducing service providers to a rate comparison is generally naive and unwise. Would you make the same suggestion about your own profession? Imagine if we selected doctors and attorneys largely based on rates without much thought about their expertise, and more importantly, their ability to help us achieve our desired outcome. Is that *really* an apples to apples comparison? I think you would agree that despite years of investment into both education and practice, not all medical professionals are created equal. I think you’d also agree that while cost doesn’t necessarily equate to superior performance on the job, great doctors cost more than those who are simply good.
“…and play them off one another until you get the best price you’re going to get.”
As one professional to another, this is horrendously disrespectful advice.
In healthcare, does it not upset you (or your employer) when patients schedule appointments, then choose not to show without warning? Assuming your office isn’t already overbooking, and assuming there’s no cancellation fee, and assuming you can’t fill the slot at the last minute, these are lost revenue opportunities.
I suppose one could refer to this as the “cost of doing business”. One could also refer to this as a deep disrespect of your time. Consumers who put little to no thought into the impact of their decisions on your profession.
Now imagine for a moment a consumer who is advised to “shop” doctors. And imagine yourself participating in this dance as one of the doctors he shops. Imagine that he drops off a folder of his records, and expects to speak in-depth with you about his condition. Imagine further that he expects you to review his records, no matter how complex, then analyze his condition and advise & recommend courses of action. Imagine that you invest your time at no cost with nothing more than a glimmer of hope that this consumer returns to use your services. Imagine that the time you invest is often 2-4+ hours, frequently more than 4 hours and far too often a day or more.
Now imagine that this consumer is playing the same game with other doctors, and that those doctors are also investing their time into reviewing his records and researching his condition.
We’re not talking about a couple minute quick glance at a file. Few consumers these days have lives vanilla enough to grasp in mere moments. The dirt and the complexity of a loan application is often buried in the details…. multiple properties, multiple jobs, multiple businesses, living trusts, mixed-assets, self-employment, divorce, career changes, the list goes on.
This, WCI, is what “playing them off of each other” entails in the world of home financing. And it’s not something to be encouraged. You certainly wouldn’t like it or appreciate it in your profession. Why in the world would you recommend it for home financing or any other profession?
I could go on. I could easily speak at length about how selecting a lender and loan officer based largely on rates could spell disaster if that loan officer and lender fail to close your loan. At one time in the not-so-distant past, one national lender had an abysmal 18% close-on-time rating….18 out of 100 loans closed late or not at all. The could mean the loss of a low rate in a rising market. Or if you’re buying a home, it could mean an irate seller who keeps your good faith payment, or worse.
My advice:
Find a 2-3 reputable local loan officers known for good service, solid expertise, and a track record of successful funding. Do not waste their time, just as you would not want them to waste yours. Arrive prepared…the bulk of the usual documents ready for review.
Speak with each of them in brief to gauge their expertise and available programs. Discuss your situation and have them run some numbers with the understanding that those numbers may change later once they actually dig into your documentation. Consider the ballpark rates they offer, but more importantly, ask yourself which one of these professionals is best suited to help you accomplish your goal of buying/refinancing.
Once you select your loan officer, see the process through with them. Don’t play games. Don’t waste their time by dragging them and others through the lengthy process of full loan applications knowing you’re deliberately wasting the time of all but one. Like you, they earn their livelihood when their customers follow through. And they lose income when their customers play games.
Do unto others…quite possibly the best advice ever given.
Disclaimer: I will not have time to proofread this…hopefully it’s not filled with spelling and grammatical errors. Thanks for reading it through to the end.
Mortgage lenders aren’t physicians. Mortgages aren’t sick patients. The comparison is not appropriate. All I need from a lender is a loan that closes on time at the best possible rate. Then they sell my loan a month later to a big bank who I make payments to for years with an auto-payment and never actually speak to anyone ever again. Let’s not overstate what’s going on here. I’m buying a loan not trying to establish a long term relationship with a professional I will repeatedly need advice from.
When the lender pays everything, then I can compare them purely on rate. I don’t get lost in the constantly changing fees, points, and rates. Of course, I have to make the assumption they’re not incompetent and can actually close the loan, but assuming that, it really is a rate comparison. You give me an extra 1/8th on the rate, I’ll go with you. If not, I’ll go with the other guy.
When financial professionals quit playing games with me, I’ll quit playing games with them. I have yet to have a lender give me the best possible rate they can the first time. Why is that? It’s because the higher the rate, fees, and points, the more money they make. They’re in business to make money. And I will certainly continue to advise my readers to do exactly what has worked well for me. Now they don’t need a half dozen lenders, a couple reputable guys is probably all they need. And I don’t care if they tell them what they’re doing up front. I told my lenders what was up and I gave them the chance to give me the best possible deal. The one who did, got my business and has been a steady advertiser on this site for years.
Quick correction:
“82 out of 100 loans closed late or not at all.”
And I wish you and your family the happiest of holidays!
That statistic kind of shows my point. If 82/100 doctors were incompetent like apparently 82/100 lenders at a “large national bank” are, we’d have a real problem. Mortgage agents aren’t doctors. That’s fine. I don’t need a doctor for this transaction. I just need a loan that closes on time at the best possible rate.
Predictable WCI. I knew what you’d write before you wrote it. One common thread in much of your writing is an air of arrogance toward loan origination. That’s inexperience on your part.
Judging professionals, any professional, by comparing their rates is absolutely 100% appropriate regardless which professional and industry I choose to use as an example. I chose yours for an obvious reason.
“Mortgage lenders aren’t physicians. Mortgages aren’t sick patients. The comparison is not appropriate. All I need from a lender is a loan that closes on time at the best possible rate.”
“All you need” is an interesting way to minimize a process that is often far more complex than you realize. All I need is a CABG. All I need is a neuroendoscopy.
You clearly have a very low opinion of mortgage originators, and a misconception about what is required (by a lender, originator and underwriter) to take a loan from start to finish. Yet, you haven’t originated one loan on your own. Not one, let alone an increasingly typical complex loan. Yes, you’ve applied for loans. You’ve even gone through the financing process from application to closing. But you haven’t actually ever originated a loan. You’ve been a participant and spectator in one side of the process.
Another analogy for you. It’s a bit like a patient, let’s say a NASA propulsion engineer (because we can), going through multiple surgeries and rehab. He then considers himself somewhat of an expert on surgical medicine. He’s read quite a few books, but he’s never actually performed a surgery himself. He claims surgery isn’t rocket science. And tells you that performing surgery on a patient is nothing like sending a man to the moon. All he needs from a surgeon is to perform the procedures and hopefully not kill him in the process. That’s *all*.
It’s an arrogance, you see, that blinds us. Failure to respect the experience and expertise of another profession because we a) do not fully understand it and b) have no actual experience with it other than as a spectator viewing it from the outside.
“Then they sell my loan a month later to a big bank who I make payments to for years with an auto-payment and never actually speak to anyone ever again.”
You mean like our NASA rocket scientist you leaves rehab and makes medical payments for years to a hospital network or insurer and may never see or speak to that surgeon again….unless something goes wrong. Got it.
“Let’s not overstate what’s going on here. I’m buying a loan not trying to establish a long term relationship with a professional I will repeatedly need advice from.”
This, in part, is one of the many *problems* with younger borrowers. You see, older and experienced loan originators can tell you many stories about how they’ve helped obtain financing for 2 and 3 generations within the same families. How they’ve helped couples buy their first, second, 6th and beach front retirement properties….as well their grandkid’s first home. They can also provide advice the family would never get from, say, Quicken Loans because they have an intimate long-term understanding of the family’s financial history and ongoing needs (e.g. suggesting how to help fund grandbaby Timmy’s college education without accidentally hurting his chances of obtaining financial aid.)
Ahhh relationships. I’ve yet to hear a woman refer to her relationship with Mass General Hospital. No, she’ll refer to her relationship with Doctor Smith, because Dr. Smith has always been helpful and while he’s not the least expensive doctor, she feels he always treats her well. If he moves to another local hospital on a different network, guess where she goes? With the Doctor, if she can. The lender isn’t the relationship, WIC, the loan originator is the relationship. Great loan originators have long-term clients that follow them no matter which lender they happen to move to (usually top loan originators only work for reliable lenders they can trust).
Today’s borrower–and let’s be frank I’m referring to mostly younger people, tail end of Gen X and younger– place less value on relationships and more on saving a buck in the short term. They claim to want relationships. They absolutely do not. Their decisions are too often driven by the bottom line and their only real relationship is with their wallet.
“When the lender pays everything, then I can compare them purely on rate. I don’t get lost in the constantly changing fees, points, and rates. Of course, I have to make the assumption they’re not incompetent and can actually close the loan, but assuming that, it really is a rate comparison. You give me an extra 1/8th on the rate, I’ll go with you. If not, I’ll go with the other guy.”
And this is why many hundreds of thousands of borrowers find themselves in a pickle each year. Assumptions and no real long-term relationship with a loan originator whom they can trust. Assumptions. Not about one or two things, but about nearly everything including competency. Again, so eager to reduce the complexity of a loan application process to a comparison of rates.
“When financial professionals quit playing games with me, I’ll quit playing games with them. I have yet to have a lender give me the best possible rate they can the first time. Why is that? It’s because the higher the rate, fees, and points, the more money they make. They’re in business to make money.”
Many of us, that is to say non-healthcare professionals, feel exactly the same way about healthcare professionals and insurance agencies. It’s a game. An an incredibly expensive one at that. A recent in-hospital visit from a doctor was billed at $580. He spent no more than 10 minutes in the room and told us nothing we didn’t already think we knew. Nice of him to show up. Even nicer to bill it out at $580. After all, he’s in the business to make money. The nurses were a fraction of the cost and provided ten times the value (from a naive patient’s perspective 😉 ). If only we could hire the nurses instead. Welcome to healthcare in 2016. I digress.
“I told my lenders what was up and I gave them the chance to give me the best possible deal. The one who did, got my business and has been a steady advertiser on this site for years.”
I’ll skip past the fact that you have an advertiser with whom you’ve done business in the past. Though I am curious if you now consistently use him for your financing.
Lenders can’t “give you the best possible deal” based solely on “telling them what’s up”. That’s an oversimplification. If you’re vanilla–meaning virtually nothing unusual about your income(s), assets, credit, businesses, job, family relationships/obligations, and property–they can certainly guesstimate the rate with 10-30 minutes of effort. Depending on the lender they may even lock a rate for you with minimal up-front documentation.
But until they have all required documents in-hand, and they’ve thoroughly reviewed that documentation, they aren’t going to know a) if they have to make adjustments to the rate later because of what they’ve uncovered in your docs or the property docs, b) if you’ll close on time, and c) if they can even finance you.
You can continue to play that game. If it continues to work out for you, I’m happy for you. But I assure you it isn’t personal brilliance. It’s the unseen skills and experience of the loan originator and underwriter that make your financing possible. And as you’ve written, that’s apparently “all you need”.
Merry Christmas WCI, and Happy New Year! Wishing you and your readers all the best this holiday season.
Merry Christmas! I’m at work, so forgive my cynicism reading you compare your industry to doctors and rocket scientists.
I don’t find “predictable” particularly insulting. I’ve written 1000 posts. If I’m not predictable by now, the reader isn’t reading very carefully.
If you want to write such long comments, you ought to send me a guest post instead. If we really have a difference in opinion, we can do it as a Pro/Con. https://www.whitecoatinvestor.com/contact/guest-post-policy/
I’ve had similar discussions with/about financial advisors, who like to compare themselves to doctors too. https://www.whitecoatinvestor.com/financial-advisors-arent-doctors/
Part of the reason I started this website is that financial professionals ripped me off. That includes financial advisors, insurance agents, realtors, appraisers, recruiters and yes, even mortgage lenders.
Why would I continue to play any games with lenders? I’m done borrowing money as near as I can predict. I certainly have no ongoing need for a relationship with a mortgage lender. I love that you think that I have ongoing “financing” needs. I would suggest you spend some time on the rest of the blog if you think I do much financing of anything. And I have no idea why you think it would be a bad idea to have an advertiser with whom I have actually done business with in the past. Ideally I would have done business in the past with all of them, but that’s a bit impossible, so I have to rely on my readers for ongoing feedback about them. I have a fully disclosed ongoing business relationship with each of them.
I think you misunderstand me when I say “tell them what’s up.” I mean that I tell them I have another lender who is also working on my loan and the one who gives me the best deal is getting my business. That’s just Negotiating 101, and it’s the way the business world works. I’m not expecting them to give me a rate without all my documentation.
The things you view as “problems” in the way I, other Gen Xers, and younger borrowers interact with your industry I see as very much the way a transaction like this should go. It’s a transaction, not a relationship. I need some relationships in my life. I even need some relationships with professionals. But having one with a lender is optional at best. Every loan I’ve ever done was with a different lender. They all closed on time. And none of them ever spoke to me again after the papers were signed. It’s a transaction, not a relationship.
If you don’t like health care, I suggest you start a blog teaching people who aren’t in it how to interact with it. There will be plenty of material to write about I assure you.
Diane, I like to tell people their situation is like a fingerprint…completely unique to their specific property; Federal, State and county requirements (e.g. property tax escrow requirements, flood zone boundaries/insurance); personal/ financial circumstances, point in time (e.g. current rules and regulations), loan officer’s experience and lender’s available programs.
Without a thorough review of your entire application and all of the documentation that you provided to the lender it’s not possible to know if anything is truly out of the ordinary.
Did something happen during your financing that led you to feel as if something isn’t correct?
I refinanced back in June 2016 with 3% interest rate on $335, 000 for 15 years. It was very attractive at that time, I had 2 jobs, helping me supplement my initial salary. I am a single Mom to #1 child, 13yo.
I have since lost that #1 part-time job & am feeling the struggle to meet my monthly payment of $2,853.00.
It has only been 6 months & I need more room to breathe. I am looking into going back to my 30 year term, obviously now with a higher interest rate. Are there any charges from a closing fee sheet that I can cut? Or should I say, can I argue about some of the closing costs they are asking for since it was just re-financed 6 mos ago?
Should I shop around? I don’t want to pay another $6,000 added to my loan amt for closing costs, but I cannot handle the monthly large payment now. I need some feedback & help. Thank you…
Have you considered selling the house if it’s not currently upside down? Perhaps you’ll find something in a price range, and with financing, that will give you plenty of room to breathe.
Here’s why. You’re struggling financially, and that was with 3 jobs. You’re not down to 2. That tells me you’re likely in “too much house”…it’s simply much more expense than you can comfortably afford. I’m guessing it’s stressing you out as a single head of household…that would be enough to stress two people, let alone one. That’s quite a lot of stress on your shoulders.
I don’t believe refinancing an unaffordable mortgage here is the answer. It’s a temporary bandage. Without knowing the specifics of your situation, I’d ballpark that a 30yr fixed at current rates with rolled in closing might reduce your P&I by just ~$550/month.
If you insist on refinancing, understand that many of the closing costs are from other sources (e.g. prop tax and insurance escrow, attorney, credit agency, title co, appraiser). You could attempt to find a real estate attorney that might reduce his/her fee a couple hundred dollars. You could try to find more affordable property insurance. You might convince the loan officer to drop the points or the rate ever so slightly (say 1/8-3/8ths). And you could possibly even convince the lender to reduce its origination/doc fees. But keep in mind that a $1000 reduction in closing costs for a loan of that size, at current rates, 30 yr fixed….is a “savings” of about $5/month in P&I. That’s right….$1000 less in rolled-in closing costs translates to just a $5 buck monthly savings on the refi.
Of course you’re free to do whatever you believe is best for you and your family. It’s not for anyone here to decide. But your best bet isn’t to refinance yet again. That’s a temporary reprieve. I’d sell the house and look for something that doesn’t force me to work 3 jobs to make ends meet. Life is too short. Whatever you choose to do…I wish you the best.
If you choose to keep the house (which I agree sounds like it may be too much for you) go for a no-cost 30 year mortgage. You’ll almost surely go up significantly in interest rate erasing much of the benefit, but you will still likely have a lower payment. At least that way you’re not adding anything to the loan. Selling and moving has its own costs of course.
Thanks WCI for this brilliant article.
In my opinion, this article should be included in WCI Classics.
Thank you.
Thanks for your kind words. It is one of the more frequently read posts on the site.
I’m having a hard time getting refinancing. My problem is I got a no income verification loan in 2004 at 6.75%. I’m up to date on my payments. I applied for refinancing with the original lender and they turn me down. Income to debt ratio. I paid mortgage insurance for years. What can I do? Need good advice here.
Hi Rosa,
You’re not alone. Many millions of homebuyers obtained stated income loans back before the market tanked (part of why the market tanked).
Have you looked into MHA/HAMP to see if your loan qualifies? Your lender may or may not have looked into it. That would be the fastest and easiest route to modification….but keep in mind the loan must meet specific Fed guidelines to qualify. There are no exceptions.
https://www.makinghomeaffordable.gov/pages/default.aspx
Refinance, like new home financing, is simple mathematics. When your DTI is too high (even beyond program exceptions), an experienced loan officer might look at ways to bring that number down.
There are many ways to accomplish this depending on your unique circumstances. For example it might involve paying off specific debts, or scouring your financials for other permissible sources of income (especially if you’re self-employed or part-owner in a business), or liquidating assets to bring the loan balance down. There may even be local financial assistance for homeowners/homebuyers unique to your State or town.
Keep in mind that different lenders will have access to different programs and investors. Just because one says no, doesn’t mean refinancing isn’t possible.
Brokers & dedicated mortgage lenders tend to have access to the broadest number of investors/lenders and programs…they may deal with several large banks behind the scenes. No two brokers offer the same menu. Large banks tend to offer a variety of programs of their own (keep in mind BoA isn’t going to offer a competitor’s product from, say, Wells Fargo). In addition, large banks tend to have access to a slew of State and Federal programs. But brokers and banks adhere to similarly rigid guidelines because, at the end of the day, most will sell your loan off as quickly as possible which means dotting their Is and crossing their Ts to ensure your loan is sellable. If it doesn’t meet investor guidelines, they’ll be stuck with it on their books until they can figure out a way to package and sell it off to an investor willing to take on the risk. Small brokers usually lack their own capital, which means your loan is owned by whichever lender they’ve been working with on the back end.
Local credit unions are an interesting option, though you would have to become a member to take advantage of their programs. Sometimes that means simply opening an account with a couple hundred dollars in it. Frankly, I like CUs. They don’t always offer the broadest range of products, but they have a few advantages. Some offer low loan costs….I recall competing against a local CU that offered costs half that of the best I could offer (at a national bank). Others keep their loans in-house so they adhere to internal guidelines that can sometimes be more flexible than, say, Freddie and Fannie guidelines. If they feel it’s a good loan, a solid property and you’re a low-risk borrower…they may choose to keep it in-house.
My point…ask around. Talk to an experienced loan officer at a CU, a broker and a bank. Get a feel for what is available. If they’re all saying no, then your challenge is a lot deeper than a simple DTI issue. Ask for clarification and for insight about how to correct it. In extreme cases, some borrowers may need to spend several months or longer getting their finances in order before re-engaging lenders for refinancing.
One more thing…
The level of effort required to find a solution is often non-trivial so some loan officers may not be enthusiastic about looking at every possible option if your loan balance is on the small side (e.g. if you’re trying to refinance <$100k). I used to handle cases that other loan officers simply wouldn't touch because they felt the loans weren't worth the effort. Loan officers are paid a percentage of the loan…often a fraction of a percent. When it takes a similar amount of effort to find a solution to refi $100k as it might to find a solution to refi $1million….well, you can see why some loan officers might just tell you they can't help you. The good ones won't do that to you….they'll invest the time to at least attempt to find a solution.
I’m amazed anyone still has a 6.75% mortgage. Why is your income to debt ratio bad after 13 years of payments? I would have thought it would be pretty good by now, or perhaps there are other debts besides this mortgage.
Hi WCI!
I’m helping my sister with a refinance. She’s currently 3 years into a 3.625% /30 yr mortgage at $400,000 of principal left.
She’s looking to refinance and have “no-cost” (your definition) refinance offers available at 3.25% for a 30 and 2.75% for 15 year mortgage. She will be in the house for at least 5 more years. Her total (sunk) closing costs (not including escrow) she would end up covering at a 2.5%/15 rate would be about $2,700 and the “breakeven” for that is just a few months at least when looking at interest savings. How do you decide on whether to just take the no-cost rate or pay the fees and take the lower rate?
A few months breakeven seems pretty attractive. Sounds like a no lose situation between those two choices.
I recently refinanced to a 2.625% 15 year fixed. I did not pay any fees. Also, rather than get back my existing escrow account balance, we instead put it toward my principle. Then, instead of “skipping a payment” altogether, I paid the amount needed for the new escrow account.
Not sure if this is typical, but it sort of made sense to me. It’s just what my banker recommended.
A great article. Thanks for posting it again.
One thing I did not see mentioned in the article or comments:
Evaluate refinancing as a net present value project. The variations in points, fees, and closing costs mean you have cash flows occurring at different times. The way to handle this is with a spreadsheet or online calculator that will collapse the variables down to an NPV. This forces you to consider the time value of money and how long you are likely to stay with the new mortgage.
It also confronts a problem I have seen come up in the last few years- Some lenders want you to allow them to pull a credit report before they will quote you the full terms of the loan. This pushes you to go with them since you have already taken the credit score hit from the hard pull. This might be ok if you were certain you would refinance soon with someone. Then you could let a dozen places pull your report over a short period and see who offers the best rate. But most of the time the decision to refinance depends on the terms of the loan. One is trying to decide whether to refinance car all. Cannot assume you will, so don’t want a string of hard pulls going on for months or years as you shop. To decide whether to refinance, one need to know the figures to calculate the NPV. Which they will not give you without a credit report.
I tell lenders that I am filling out a spreadsheet. If there are blank entries then I cannot crank out an NPV and therefore cannot consider their company.
I get two responses. Some will give me the information without a hard pull. These remain in the running.
Others refuse to divulge anything without the pull. These drop off the list. Being in the business, I assume they know whether their all-in costs are competitive. I assume if they were good prices, then the salespeople would be eager to tell me what they are. If the overall cost is too high, the salespeople know that and try to make it about things other than the price.
Thank for re-publishing this article in April 2021. It was the kick in the pants I needed to refinance from 3.75% to 2.5% (no cost!). We only have 5 years left on the loan, so I hadn’t wanted the hassle of refinancing. But you made me realize it was worth doing and now we will save $10,000 over the next five years. Really appreciate the work you do here.
Looks as if some spam got through anyway! It must take you forever to moderate these comments. More power to you.
Looks as if some spam got through anyway! It must take you forever to moderate these comments. More power to you.
Regarding spam, do you actually earn money because of site hits when spammers reply? Or no? Just trying to look for silver lining.
Nope. Spammed comments don’t really give me any income at all. No upside to it as far as I can see.