The Top Questions to Ask Your Lender Before a Refinance

You waited long enough – interest rates are right where you want them so you are ready to refinance. Before you jump in head first, you should ask your lender the following important questions.







What is the APR?

Don’t let yourself get so focused on the interest rate that you forget about the APR. The APR is the total cost of the loan, including the closing costs in percentage format. It gives you a better idea of what the loan actually costs you.

Sometimes loans with low-interest rates actually have high APRs because of the excessive fees charged. The APR can help to keep you in line and avoid you from refinancing when it’s really not worth it. It’s so easy to get caught up in the low-interest rate that you completely overlook what the loan will cost in the end.

Is There an Origination Fee?

If you are using a lender other than your current lender, you may pay an origination fee. Even if you use your current lender, don’t just assume they won’t charge it – ask them. Lenders charge an origination fee when they think an applicant has a risk of default. Unless you have exceptional credit and a super low debt ratio, you have some level of risk of default; it’s only natural.

Not all lenders charge the origination fee, but if they do, it can really make your closing costs get expensive. One point in an origination fee equals 1% of your loan amount. If you have a $200,000 loan, that’s $2,000 on top of all of the other closing costs.

Can You Pay a Discount Fee?

The discount fee is an optional fee. If you want to buy your interest rate down, you’ll pay the discount fee. Lenders usually discount the rate 0.25% for every point that you pay. Each lender has their own pricing structure, though.

Make sure you look at the big picture before you decide to pay the discount fee. First, will you stay in the home long enough to realize the savings? Remember, you have to pay off the closing costs before you truly start putting the savings in your pocket. Also, is the savings enough to make it worth it? If you’ll only save $25 a month, do you really want to pay thousands of dollars? It will take many years for it to make it worth it.

When Can You Lock the Rate?

Just like when you bought your home, you need to lock the interest rate. You’ll have a certain amount of time to close the loan before the rate lock expires too. Luckily, you can usually take a smaller lock period with a refinance because you don’t have to do any of the legal work that was necessary when selling the home.


Make sure you know the cost to lock the rate (if any) and the consequences of an expired lock. You don’t want to find out the hard way that you’ll have to pay to re-lock your interest rate because you locked it too early.

What’s the Turnaround Time?

If you are in a hurry, such as is the case with some cash-out refinance loans, you’ll need to know how long it will take the lender to process your loan. don’t be afraid to ask what the turnaround time is and what you should expect as far as a closing date.

If you are getting cash out of your home’s equity, you’ll want to know when you’ll receive it. Plus you need to schedule your life around the closing. For example, your closing date will affect when you have to make your first payment. If you have a month off, you can use that extra money that you’ll save to cover your closing costs. If you close at the beginning of the month, though, you won’t have that month off; your first payment will be due the next month.

Who Will Service Your Loan?

Finally, you should know who will service your loan before you close on it. If the lender doesn’t do their own servicing or they know they will sell your loan, you’ll need the details of where your loan will land. Just because you like the lender you are using now doesn’t mean that you’ll like the company that services your loan.

The loan servicer is actually the company that you’ll have the most communication with so you want to make sure that it’s a company that you like. If your lender can’t tell you exactly who will service your loan, they can at least tell you the possibilities of who will so that you can do your research and decide if it’s the right loan for you.

Take your time to ask your lender these important questions before you refinance. They will give the answers that you need to make the best decision about your refinance. Since you already own the home, you aren’t under any pressure to refinance like you were when you bought the home and needed financing. This time around, you’ll have more time and be able to make clear choices.

source: blownmortgage.com

Easing Home Equity Standards

AS home values continue to stabilize in many areas, lenders are making home equity loans more accessible.

A report published in June by the Office of the Comptroller of the Currency noted that one in five lenders nationwide loosened up underwriting standards on home equity loans, while another 68 percent kept them unchanged from a year ago. In 2009 — during the heart of the housing crisis — no lenders had eased standards, according to the report, which surveyed 87 banks with assets of $3 billion or more, while 78 percent had tightened them.

Lenders also have been lowering the credit scores and equity levels needed to qualify, industry experts say. “You may not need to have as much equity as lenders may have demanded two years ago, when housing prices were going to fall,” said Keith Leggett, a senior economist at the American Bankers Association. This is especially true, he said, in areas where home prices are appreciating.

Nearly 90 percent of homeowners in the New York metropolitan area now have some built-up equity, versus 77 percent nationwide, according to a recent report from the data analytics firm CoreLogic.

Navy Federal Credit Union, with over three million members nationwide and five branches in the New York region, is among those easing qualifications, based on its periodic analysis of borrowers’ lending performance. “We have gone to lower credit scores,” said Steve Krieger, a vice president for mortgage collections and equity lending.

Mr. Krieger says the credit union’s evaluation of home equity applications is based on several criteria, including: the amount of equity available in a home; a borrower’s income; and a loan-to-value ratio. (As little as 5 percent equity may be enough to qualify.) Someone who has been in a job for just two or three months “will be dinged a bit,” he noted.

Lenders calculate the loan-to-value ratio by adding the home equity loan amount to the mortgage balance and then dividing that by the property’s value. Today, 80 to 90 percent would be the highest acceptable ratio, according to Jeanie Melendez, a vice president for market growth and development consulting at Wells Fargo Bank.

Those considering a home equity loan should begin the process by estimating how much equity they might have available in their homes. Mr. Krieger suggested checking recent comparable sales in the neighborhood at online sites like Zillow.com. “You can get into the ballpark of what your home is worth,” he said, though he pointed out that as part of the application process the lender generally requires an official appraisal.

Borrowers must decide whether they want a traditional home equity loan, sometimes called a second mortgage, which has a fixed interest rate and fixed payments, or a home equity line of credit, known by its acronym, Heloc. A line of credit usually has a variable rate and can be drawn down incrementally. The variable-rate Heloc is one and a half percentage points lower than the fixed-rate home equity loan, which in turn is around three percentage points above the average 30-year fixed-rate conventional mortgage.

Borrowers should also note loan restrictions. For example, Navy Federal does not allow home equity loans to be used for small-business investment or to buy a second home, while JPMorgan Chase does not allow them to be used on educational costs. (Some loans are actually audited after closing, to check.)

Wells Fargo, one of the nation’s largest mortgage lenders, has no such restrictions. “I don’t think folks are using it to buy a fur or a big-screen TV,” said Ms. Melendez, who is based in Boston and oversees the New York region. “They’re being more careful about how they’re using their home as an asset.”

Ms. Melendez says that although Wells has not made changes to its lending criteria, it has been seeing increased demand for home equity borrowing, largely to pay for home improvements and college education.

source: nytimes.com

Reviving Real Estate Requires Collective Action

IMAGINE that you are watching an outdoor theater production while sitting on the grass. You have difficulty seeing, so you prop yourself up on your knees. Soon everyone behind you does the same. Eventually, most people are kneeling or standing, yet they are less comfortable than they were before and have no better view. Everyone should sit down, and everyone knows it, but no one does.

This is a collective action problem, a phenomenon that is, unfortunately, all too common. At the moment, the trouble in our real estate markets and the drag these markets are placing on our entire economy may be understood as a collective action problem. In a nutshell, mortgage lenders need to write down the amounts owed by individual homeowners — that is, let everyone sit down and relax — but the different stakeholders have been unable to reach an agreement, even if it is in their common interest.

In the 1971 book “The Logic of Collective Action: Public Goods and the Theory of Groups,” the economist Mancur Olson argued that collective action problems are pervasive, plaguing nations and economic groups alike. “Most groups cannot provide themselves with optimal amounts of a collective good,” he said, because they cannot manage a “selective incentive” or arrange “coercion or some reward.”

In the current real estate market, the relevant group is enormous and complex. It includes those who own first and second mortgages or home equity lines of credit or residential mortgage-backed securities or the various tranches of mortgage collateralized debt obligations or shares in banks and finance companies that in turn own mortgages. These people live all over the world and have no way of communicating with each other, let alone coming to an agreement to give homeowners a break.

My colleague Karl Case and I showed in 1996 that when the value of a home falls below the value of the mortgage debt — when it is underwater — a person is much more likely to default on the mortgage. And it is well known that in foreclosures, lenders lose so much on the legal costs and depressed market values of the homes that it would be in their interest to lower mortgage balances so the homeowners stay in place and don’t default.

If such mortgage principal reductions could be applied on a large scale, there could be large neighborhood effects, raising a sense of optimism among homeowners and bolstering the value of all homes and, ultimately, the whole economy. But mortgage lenders in all their different forms lack a group strategy.

John Geanakoplos, a Yale economist, and Susan P. Koniak, a Boston University law professor, have proposed legislation that gives community-based, government-appointed trustees a central role. The trustees would have the authority to impose a write-down of mortgage principal that served the interests of mortgage issuers as a group, without having to prove that each and every one would be better off. But Congress has not acted on their idea. And so we are still lacking the authority to make everyone sit down.

ROBERT C. HOCKETT, a Cornell University law professor, has outlined another approach, which uses the principle of eminent domain, to solve this collective action problem. Eminent domain has been part of Western legal tradition for centuries. The principle allows governments to seize property, with fair compensation to owners, when a case can be made that such seizure serves the public interest.

Traditionally, we think of eminent domain law as applying to land and buildings. For example, a government can use eminent domain to seize real estate along a proposed new highway route so the highway can be built in a nice straight line. It would be absurd to expect the government to bargain with each property owner to buy a strip of land along the proposed highway route and to have to redirect the highway around a farm whose owner refused to sell. That is common sense.

But eminent domain law needn’t be restricted to real estate. It could be applied to mortgages as well. Governments could seize underwater mortgages, paying investors fair market value for them. This is common sense too. The true fair market value for these mortgages is arguably far below their face value, given the likelihood of default, with its attendant costs.

Professor Hockett argues that a government, whether federal, state or local, can start doing just this right now, using large databases of information about mortgage pools and homeowner credit scores. After a market analysis, it seizes the mortgages. Then it can pay them off at fair value, or a little over that, with money from new investors, issuing new mortgages with smaller balances to the homeowners. Taxpayers are not involved, and no government deficit is incurred. Since homeowners are no longer underwater and have good credit, they are unlikely to default, so the new investors can expect to be repaid.

The original mortgage holders, the investors in the new mortgages, the homeowners and the nation as a whole will generally be better off. There will surely be some who may not agree, like the holdout farmer opposing the highway, but eminent domain ought to be able to push ahead anyway.

San Bernardino County in California is working with a private company, Mortgage Resolution Partners, on the possibility of putting such a plan into action. We must hope this effort succeeds. If it works, it can be replicated all over the country.

But first we have to realize that much of our economic suffering takes the form of a collective action problem. We have to stop the wishful thinking that the problem will solve itself through a spontaneous rally in home prices. We need to summon our resources to exercise the authority that allows collective action.

Professor Koniak says the solution to this problem has been so slow in coming for a simple reason: “It’s the will that’s lacking! The will!”

article source: nytimes.com