With interest rates dipping lower, refinancing a mortgage may seem like a wise idea. There are hidden snares, however, awaiting the unwary.
“A lot of people get involved when the mortgage rates are low. When they get high again, they’re gone,´ said Bob Stewart, senior loan officer for Automated Lending, a mortgage bank and brokerage firm in Boulder. “They’re in it to take advantage of clients.”
While Stewart is seeing a few people come in for refinancing, he is not seeing as big a boom as he has in the past, he said.
When considering refinancing a mortgage, people should watch out for scam artists. When deciding whether to refinance, they should weigh the amount of money saved by refinancing against fees involved, Stewart said. “Every situation is different,” he said. “If you plan to move in the next one to two years, it might not make sense. If you are in your dream home and plan on staying 15 to 20 years, it makes sense.”
A general guideline Stewart goes by to determine whether refinancing would be profitable is whether there is a 1 to 1.5 percent difference in interest rates, he said.
In considering refinancing a mortgage, he said, it is good to establish a relationship with the loan officer. “I’m in the business long term,” he said. “I look at 98 percent of my clients as lifetime clients.”
Stewart recommends people get referrals from a loan officer’s past clients. People looking at refinancing a loan should consider the officer individually more so than the company, he said. “You can have a company with a bad reputation but a good loan officer,” he said. “Conversely, you can have a company with a good reputation and the person not do a good job for you.”
Matt McCartney, residential lending manager for Commercial Federal Bank’s Fort Collins branch, said his refinancing business is up 300 percent since the middle of this January. The last time there was a comparable refinance boom was in late 1998 and early 1999, he said.
McCartney offered some recommendations for people considering loan refinancing. “Get good faith estimates of costs,” he said. “Shop smart. Talk to more than one lender. There is a lot of lingo. Origination fee and points don’t mean anything until you have a good faith estimate.”
Another good rule of thumb, McCartney said, is to avoid people who solicit others for mortgage refinancing. “That is a red flag,” he said.
Many newspaper advertisements claiming low rates are misleading, McCartney said. “If it seems too good to be true, it probably is,” he said.
If one lender is offering a 7 percent rate with a 1 percent origination fee and another offers 6 3/4 percent with a 1 percent origination fee, that does not necessarily mean the latter is a better deal. “The origination fee is only one of many costs involved,” he said.
Many Internet mortgage refinancing deals also are misleading, McCartney said. “The Internet has a lot of traps,” he said.
If a person goes onto LendingTree and three lenders make offers, for example, the person is obligated to choose one of them and cannot back out without paying some type of fee, he said. People who look for rates on the Internet should always call the lender to confirm rates, he added.
George Hamblin, vice president of mortgage banking for Commercial Federal Bank’s Lakewood branch, said the amount of mortgage refinancing at his bank has doubled from last March. While last year 83 percent of the bank’s business was purchases and 17 percent was refinances, he said this year the number has almost flip-flopped to 63 percent refinances and 37 percent purchases.
To determine whether to refinance, Hamblin recommends comparing the payment on the new loan to the payment on the old one and considering how much refinancing would cost. “If you spent $1,000 to refinance and the difference in interest is $100, it would take 40 months to recapture the closing costs,” he said. “You would need to ask if you are going to be here another four years. The longer you’re in the house, the more sense it makes to refinance.”
A surefire way for a consumer to avoid getting ripped off when refinancing his or her mortgage is to ask for the annual percentage rate disclosure and get a good faith estimate, Hamblin said. That way, people will be able to compare apples to apples and will be protected, he said. “Get the documents and compare them,” he said. “If they’re stringing you along, later on you’ll have grounds to sue.”
People always should get a written rather than a verbal agreement, he added.
Jim Doyle, a partner in Littleton-based Professional Mortgage Alliance with an office in Boulder, said the amount of refinancing has increased by 300 percent over two months ago when there were no refinances. “It is a direct result of interest rates dropping,” he said.
“Refinance bubbles,” or periods when many people are refinancing loans, occur only once every two years or so, Doyle said.
People looking to refinance should watch out for individuals who charge an origination fee, he said. “That doesn’t make sense,” he said. “There is no tax benefit like when you purchase a home.”
Doyle also advised people to get a good faith estimate before committing to a lender.
The Better Business Bureau also offers tips on their Web site for consumers who are considering refinancing their mortgages. “If you decide to refinance, shop around by calling several lending institutions to ask what interest and fees they charge,” the Web site states. “Remember, you don’t have to refinance your mortgage with the same lender that provided your original mortgage. Also, check with your Better Business Bureau for a reliability report on lending institution(s) you’re considering.”
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