Last year I lived through a mortgage refinance nightmare. Through an incredibly frustrating experience with a mortgage broker that “had the best rates,” funding their deals with the “lowest rate provider” who has a reputation for the worst customer service in the business, and a loan officer lacking the courage or professionalism to tell me he’d failed to lock my rate after the market jumped half of a percent–I learned a ton about the mortgage markets and process.
First lesson learned: you may get the “best rate” from a particular lender or mortgage broker and you may also lose money in the process because your mortgage transaction isn’t handled properly. I’d always heard this was possible, but assumed it rarely happened and if it did, wouldn’t happen to me.
In this particular situation I’d paid $500 up front for the appraisal to be performed with the understanding that I was locking at a particular rate. When that rate wasn’t locked I became the proud owner of an appraisal for a refinance that wasn’t saving me anything. In essence, the pay-off period for closing costs and monthly savings no longer made sense for my situation.
Second lesson learned: Don’t pay for the appraisal until the rate is locked.
In the end I was able to refinance into a slightly better situation when rates eventually moved lower, but not until after the funder failed to fund the loan at the closing date because underwriting flagged an issue at the last minute and sent file in for re-review. A more experienced loan officer would have proactively worked to mitigate the issues presented by this particular situation before underwriting asked for more information. Fortunately the mortgage broker ate the cost of the lock extension.
Although the required monthly payment on our new loan was lower, we continued to make the same monthly payment as before, resulting in a faster pay down of principal and less interest over the life of the loan.
Third lesson learned: refinancing is is not all about lowering your monthly payment or worse, taking cash out. There is no way around the fact that you will have to pay the principal off some day. The more principal outstanding, the more interest you will pay until that day comes. Most people don’t hold the same mortgage for 30 years anyway.
It’s a year later and “the lowest rates we’ll probably never see again” from a year ago are back and even lower. We’re refinancing our mortgage again.
Fourth lesson learned: Nobody knows for certain what the future of the financial markets will be. Only an experienced professional can provide the guidance and options to help you conduct a mortgage transaction that best fits your situation. An informative site I found during last year’s education is the Mortgage Daily News.
In the process of setting up the new loan we saw no reason to finance the prepaid costs or the impound account balance (for insurance and property taxes). Prepaid costs are typically the interest accrued between the time the loan funds until the first payment is due. Lenders like to sell this as a good thing–“look your first payment won’t be due for 45 days.” All that is happening here is that interest is accruing on your loan, but the due date for the payment has been extended. You might as well use the money you would have normally used to make a monthly payment and pay the prepaids with cash at closing.
Money is required up front to fund the new impound account, but a month after the loan closes you should receive a check for the balance of the unused impound account from the previous servicer.
Fifth lesson learned: It is fairly standard practice to roll the prepaid costs and amount of the new impound (escrow) account into the principal balance of the new loan. This could have added $5,000 or more to the loan balance. It doesn’t make sense to finance money you’re going to get back or would have paid anyway. Plus, it slightly increases your new monthly payment. If you refinance several times with this approach, you’re potentially increasing the amount you’ll have to pay back someday by three to five thousand dollars each time.