Refinincing questions and appraisal waivers

[Alex Franke]

We want to take advantage of the low rates and lock in a new 30 year refinance before our ARM starts adjusting. But this crazy market brings up some questions...

We're getting quotes, approvals, and rate locks, so I'm assuming the money is there to lend. But this is the first time we've dealt with a mortgage broker as opposed to a lender directly, and our first refinance.

• Should we be concerned with the actual lender that the broker chooses? I'm guessing that once the loan is made at the end of the day it really doesn't matter who the lender is because they'll pay off my current lender and I'll be sending a check to the new one.
• Turns out the lender is not requiring an appraisal, presumably because of our credit. Any reason we'd want to do the appraisal anyway?
• How does the money actually get to the current lender? Is that all handled by the new lender?
• Any hints or tips from those of you who have done this before?

I was hoping I would find someone here who is "in the biz" or at least more knowledgeable on the subject than I am.

P.S. Don't you just hate it when you don't notice the typo in the subject until *after* you've posted? :lol:

[JR]

The process may differ from state to state. Here are a few thoughts.

In CA there will be a "closing" handled by an escrow agent. That agent will take care of getting a check from the new lender and making sure the old one gets the appropriate amount. You will get the remainder (if you are able and desire a new loan greater than the old one and your property's value supports such a thing).

You should find out the details of the new loan prior to signing the new loan docs. For instance, is the a penalty for paying off the new loan early. Will you be required to be covered by PMI? What are ALL the costs of the new loan (points, origination fee, agent's commission, etc.)? Is the advertised payment fully amortizing?

When you are prepared to sign the documents, iff any of these details change from what you think you knew prior to that time, do not sign anything.

JR

[crokett]

Not to disparage the fine members of this forum, but also post this on WoodNet. There are a few members there who may not be exactly in the biz but are closely related to it. You may have to wade through a few wiseacre posts but you will get an answer. For the 2 mortgages I've gotten both were sold to a third party a month or so after I signed the papers so IME it doesn't matter who your original lender is.

[Ed62]

[*]Turns out the lender is not requiring an appraisal, presumably because of our credit. Any reason we'd want to do the appraisal anyway?

Maybe I'm off base here, but something doesn't seem right. Regardless of how good your credit is, if the lender is lending more than he can get back, he could be stuck. Maybe a red flag??

Ed

[cgallery]

Maybe I'm off base here, but something doesn't seem right. Regardless of how good your credit is, if the lender is lending more than he can get back, he could be stuck. Maybe a red flag??

Ed

Depends on how old the previous appraisal is, and how the market in that area is holding up.

[Alex Franke]

Depends on how old the previous appraisal is, and how the market in that area is holding up.

The last appraisal was about 5 years ago, and the market has done surprisingly well since then, given the current state of the real estate market in the US.

Both brokers were inputting data into some automated system -- one while I was on the phone -- to get the approval and rate lock. I *think* it was actually a Fannie Mae system. Both seemed surprised that when they discovered the appraisal was waived, but I don't know if it was genuine surprise or just sales skills.

You should find out the details of the new loan prior to signing the new loan docs. For instance, is the a penalty for paying off the new loan early. Will you be required to be covered by PMI? What are ALL the costs of the new loan (points, origination fee, agent's commission, etc.)? Is the advertised payment fully amortizing?

Good points -- especially the pay-off penalty, which I hadn't though of. No PMI because the loan is <80% of the current estimated home value -- again, though, an actual appraisal was waived... hmm...

I'm not sure I understand what you mean by "advertised payment fully amortizing" -- does this mean that all the expenses are rolled into the mortgage?

crokett, thanks for the tip. Not sure I'm comfortable introducing myself to a new community with a question like this, though. They'd probably think I was one of those spambots who posts a questions and miraculously discovers the perfect answer a few days later...

[gordons]

Alex. I rather suspect that there is money to lend to you because of two main reasons: (1) Your property value has more or less held its value in NC, unlike many other States where values have declined considerably, and (2) you have a fair chunk of equity in your home - certainly way over 20%. Same goes for the appraisal. If it's not required, don't concern yourself with it - I doubt that anyone can do an accurate appraisal these days anyway. If you want a quick and dirty, go to www.zillow.com and look up your property - then take 10% off and that should be about the worst case scenario.

When we bought our house down here in Charlotte, we dealt with a mortgage broker recommended by a friend. They will generally do a good job for you in finding the best rates and deals - especially now that the competition amongst them is more fierce to obtain your business. Our mortgage was placed with an institution called First Federal of Charleston - not even in NC! On review of the documentation, I noticed that this is now a Fannie May account. I suppose that FF of C sold it out to Fannie almost immediately but still front the deed. Who knows what goes on behind the scenes - just look at what's going on right now.

Some advice:

• Make sure that you have a Truth in Lending Statement and review every charge very, very carefully. Query, dispute and reject what are commonly known as junk fees. Many fees are just scams to get money from you in the heat of the moment, kind of like buying an extended warranty on that new computer you bought at Worst Buy.
• If you have a fair amount of equity in your home, refuse to escrow your property taxes and insurance premiums and refuse to pay any points for doing this. Why? Because you can save the money every month yourself, earn some puny amount of interest on it and then pay it out when the day comes. Better in your pocket than theirs. You have to be disciplined to adopt this approach.
• Get your bank to give you a quote (if they're still in business by the end of this week). May want to get another broker too. It doesn't hurt to keep everyone honest. Remember that it's you who is going to be paying out for a long time - get the best deal you can.
• Get rates for 15 and 20 year mortgages as well. You might find that they are affordable too and can chop years off your loan. Alternatively, ask yourself whether you can pay an additional 10% per month on your repayment. This will also bring your term down by quite a bit.
• Consider this. If you refinance for 30 years and you're 50 years old now....... may as well sell and rent because you're never going to own your home.
• Maybe try something completely different like www.ingdirect.com and stick with a good low cost ARM from them. Pay in the difference between a 30 year premium every month against principal and when it's time to renew the ARM, you may be pleasantly surprised. Of course you will want to be somewhat of a risk taker to do this.
• Finally, remain calm during this entire process. Don't let anyone bully you, or push you into making a decision. Right now, the fear factor is very much in play and they will use it.

I hope that this has been of some help. Some of my views may seem a little radical or crazy, but the School of Hard Knocks is a great learning center. Good luck.

[jackellis]

One more obvious point I think a lot of people overlook.

Set aside plenty of time for the "closing" - it typically takes us about two hours. Read every single piece of paper that's put in front of you before you sign it. Ask questions about anything you don't understand and get answers that make sense. Be sure names, rates, addresses, plot number, and payments are accurate. Take your time. We've sent documents back twice to be redone because there were errors.

Once you sign, you're committed. Read and understand the fine print!

[JR]

I'm not sure I understand what you mean by "advertised payment fully amortizing" -- does this mean that all the expenses are rolled into the mortgage?

See also gordons' advice about the ARM and paying the monthly difference between the ARM rate and the 30 year fixed rate.

Some mortgages, notably ARMs, will advertise a payment which does not pay down the principal - it is not fully amortizing. In those cases you will make a payment that makes the lender happy, but since you are not fully amortized, you might actually be acquiring a small addition to your principal each month. The amount of your loan balance goes up. In a hot market, on a house you will live in for 3-5 years, this can be a good strategy to mitigate monthly costs. In a down market, with illiquidity amok in the land, it's probably not such a good idea.

Another variant on this is the "30 due in 5". This would be a loan in which all the particulars of a payment rate are based on 30 years of payments, but after five years you must pay off the loan. This might also be called a "balloon".

IMHO, the complexity of this transaction is one of the main reasons for our current credit crunch. Too many people got loans using these basic principles, but didn't understand or underestimated the risks.

One last note. gordons has given some wonderful advice. However, I might make a small argument against this point

If you refinance for 30 years and you're 50 years old now....... may as well sell and rent because you're never going to own your home.

There are a number ways that this advice does not fully tell the story.

1. There is the issue of income tax mitigation due to the payment of interest. This means that roughly 25% of your interest payment (almost all the monthly payment in the first years of a loan) is returned to you through lower income taxes than you would otherwise have paid. Your mortgage payment, minus the tax "rebate", might well be less than rent.

2. The gain in value of the property over 30 years would not accrue to you if you rented. In today's market this may seem like a minor point, or even represent risk, but over any 30 year period during the last century the gain would be quite good.

3. You might choose to pay off the loan before 30 years, or to pay additional principal amounts during the life of the loan, therefore paying it off early. The analysis of this point can be pretty complex as it has to do with comparing the use of some amount of money in one vehicle (the mortgage) vs having it in some other vehicle (ie a bond or mutufual fund) and overlaying your monthly costs at some point in the future. Generally speaking, I'd rather be in a 30 year mortgage rather than rent. As gordons impies, though, this is not a cold hard fact.

4. Pride of ownership is absent in a rental.

JR

[Alex Franke]

Awesome advice -- all of it. Thank you all so much!

If you want a quick and dirty, go to www.zillow.com and look up your property - then take 10% off and that should be about the worst case scenario.

Zillow is genius. It's actually how I found one of the local brokers that I'm working with.

If you have a fair amount of equity in your home, refuse to escrow your property taxes and insurance premiums and refuse to pay any points for doing this. Why? Because you can save the money every month yourself, earn some puny amount of interest on it and then pay it out when the day comes. Better in your pocket than theirs. You have to be disciplined to adopt this approach.[*]Get your bank to give you a quote (if they're still in business by the end of this week). May want to get another broker too. ...

Checked into waiving the escrow account. They'll do it, but only for a 1/4% fee. But we'd probably break even on that in <5 years, so I think we'll pursue it.

I talked to my current lender (actually through Merrill Lynch! I wonder if they'll be rolled into Countrywide now that BofA has picked them up...). Their best rate when I called was 6% with 1 point. The local broker locked me in at 5 5/8 with no points or fees, wich is a much better deal. Only problem is that the loan will probably change hands unlike the Merrill loan.

Two brokers: One found on Zillow, and the other was a referral. Both are pretty close.

See also gordons' advice about the ARM and paying the monthly difference between the ARM rate and the 30 year fixed rate.

The ARM rates weren't all that much better than the fixed rates actually. We're currently at 4.5 for a couple more years, but then it adjusts to a maximum of 9.5%. When I ran the numbers, it turned out that if the rate for the last 23 years were at 7.25% or greater, then we'd save money overall by fixing it now. Historically, the rate we would pay (I think 2.5% above the 1 year treasury yield) has averaged a lot higher, even just over the past 20 years.

So it's a bit of a gamble, I guess. We're thinking that the rates will start climbing again in the long term, so we want to lock in a lower fixed rate now.

Some mortgages, notably ARMs, will advertise a payment which does not pay down the principal - it is not fully amortizing. ...

Ah -- so this is like an "interest only" loan? Yeah, we don't think that's right for us at this time.

[jonmulzer]

Get an ARM when rates are at historic lows?? Bad advice!! Where do you think the rates are going to adjust to?? Lock in the low rate. ARMs are a vehicle that banks use to push off some of their risk onto the lender. A fixed rate is the only way to go and people taking out ARMs is at least part of the reason we are in the mess we are in right now.

NO BALLOONS!! Balloons are a huge risk!! Enormous!! The only time a balloon mortgage could remotely make sense is if you do not plan on staying in your house but a few years, and it is still a huge risk! And if you only live in a house for a few years and then sell it, it would have been cheaper AND less risk to just rent. Balloons come due about six months after the company you work for closes the doors.

ARMs, balloons and a myriad of other "creative financing" schemes are part of the problem we are facing right now. Learn from history, don't repeat it.

[khf314]

Remember that most loans are serviced by large companies like Countrywide. Say you get your loan thru Friendly Loan Company - they will probably sell the servicing rights to a third party and you may not be aware of it. Countrywide does a large business in third party servicing, customer service even answers the phone "Friendly Loan Company".

Beware of the broker adding "junk" fees that are there to add to the bottom line. A good example of this would be an "underwriting fee".

Sadly, while the broker has to provide you with an estimate of the closing costs the truth in lending laws have no teeth and the final costs can wildly exceed the estimate. You might try to get a commitment in writing from the broker that the costs will not exceed the estimate by 10%.

Another thing to think about is that you are not obligated to use the lender's choice of title and escrow companies. The broker probably has some relationship with their companies of choice and that may not be the best deal around. Get some quotes from other companies and the differences may be surprising.

[just started]

1. GET YOUR OWN LAWYER!!!!!!!!!

2. Title insurance cost should only be minimal since all you need is an update since your purchase 5 years ago.

[ragswl4]

Get an ARM when rates are at historic lows?? Bad advice!! Where do you think the rates are going to adjust to?? Lock in the low rate. ARMs are a vehicle that banks use to push off some of their risk onto the lender. A fixed rate is the only way to go and people taking out ARMs is at least part of the reason we are in the mess we are in right now.

NO BALLOONS!! Balloons are a huge risk!! Enormous!! The only time a balloon mortgage could remotely make sense is if you do not plan on staying in your house but a few years, and it is still a huge risk! And if you only live in a house for a few years and then sell it, it would have been cheaper AND less risk to just rent. Balloons come due about six months after the company you work for closes the doors.

ARMs, balloons and a myriad of other "creative financing" schemes are part of the problem we are facing right now. Learn from history, don't repeat it.

Truer words were never spoken. All this crap about ARMS, Ballons, and other creative financing is EXACTLY how we got into this financial mess. It irks me that loan brokers convinced so many first time buyers to use these types of instruments to finance their homes. I feel very sorry for the young people who got sucked into this. Anyway, get a fixed 30 year loan and don't look back. You won't be sorry.