Refinance questions

lkgarnNovember 9, 2010

I am in the process of looking at rates for refinancing our mortgage from a 30 year (23 years remaining) down to a 15 or 10 year fixed rate. I have rate quotes from about 5 different companies - should I only apply to one company or should I apply to several different ones? The terms that they sent me seem to be similar - rates about the same also. Some closing costs are higher than others.

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Hi lkgarn,

Choosing which origination firm to work on your loan by calling around for rates is simply futile, unfortunately. It roughly the equivalent of needing a personal injury attorney and "calling around" the yellow pages to see who will estimate the best jury awards.

You can't lock your best interest rates until you are far deeper in the processing pipeline (and that means your appraisal has to be completed, and that means you're out of pocket $4-500... before you are in a position of timing to actually know the objective rates you can lock.)

Advance quotes of closing costs are roughly irrelevant as well, because although one firm or loan officer may actually be trying to be forthright and transparent, others treat advance inquiries from a sales perspective and give out only the sweetest/lowest perspective. When the dust actually settles, you will have discovered that there are many line items on your closing costs that can shift during the process, so advance "quotes" are meaningless for choosing a provider source.

MOST IMPORTANTLY; *HOW* your financing is structured will ultimately save or cost you many many multiples of the surface difference you might see on your own in interest rates or closing costs. You can literally save tens of thousands of dollars more (and/or eliminate your debt many years faster) by having your financing properly structured.

My suggestion; Focus on shopping the jockey, not the horse.

Dave Donhoff
Leverage Planner

    Bookmark   November 9, 2010 at 6:33PM
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I guess I am not sure how to go about getting the best rate, etc. Could you expand on what you said about having the financing properly structured?



    Bookmark   November 10, 2010 at 8:38AM
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Yes, you should compare rates/terms and apply for the mortgage that best fits your situation and needs.

If multiple companies have comparable rates and terms, I would go with the most trustworthy company. eg if there is a credit union in the mix, I would go there. Credit unions almost never play any bait and switch games. Next, if there is a local bank, I would prefer them. If you encounter any problems, it is usually easy to talk to a true decision maker there. I'd put giant, monster mega-banks and (primarily) internet based business in about the same category. Sometimes everything goes smoothly with them, but if there are any issues, it is really hard to get them resolved.

    Bookmark   November 10, 2010 at 8:41AM
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Hi Laurie,

I guess I am not sure how to go about getting the best rate, etc.

At any moment in time, pretty much everyone has the same (or very similar) access to the market rate structures. The major difference (to you) is that mortgage brokers are required to fully disclose the actual underlying wholesale rate structures, while retail bank loan officers can hide them and "mark up" the rate you actually get to lock.

Comparing "quoted" rates before you have your appraisal done & are ready to lock is futile, because even if the loan officer you are asking is being truthful, the underlying lockable market rates can & do shift literally daily (sometimes hourly.)

The *BEST* way to get the absolute lowest available rate at the time you are actually locking is to use a mortgage broker who will agree to a flat/fixed fee, and show you the actual wholesale market rates you can choose from at the point of rate lock.

Could you expand on what you said about having the financing properly structured?

Sure. There are many ways to unintentionally get yourself locked into paying much more of your money out to the bank, and losing what you could have been gaining.

Here's a very vanilla & simple example;
Some people take a 15 yr FRM loan in the belief that it is better due to a lower interest rate offered. They may save 1/4% or even 1/2% in mortgage interest in doing so.

Unfortunately, this also increases their amortization burden (a higher payment, with more money going into the actual real estate equity.) The amortized funds COULD have been accumulating in a compounding tax-advantaged growth account, and almost always at a higher rate of growth than the apparent interest "savings" from the paying down of the mortgage.

Further, the starving of cash away from reserves and growth accounts by sending the money against the mortgage also means that a responsible family has to carry (and pay for) more insurance coverages... because they don't have the liquid reserves to be able to safely increase their deductibles and take more lenient terms (which then drops their insurance premiums.)

Lastly, the money that gets directed into the real estate (against the mortgage balance) is money that is *NOT* growing the family net worth at all. It secures the one-time saving of interest (which counts, no doubt,) but it doesn't have the compound growth of funds growing alongside (but not INside) the real estate.

Of course, there are lots of variables in the above explanation, and frankly a lot more that aren't even detailed out here.

Ignoring these *WILL* cost the average homeowner tens of thousands (if not hundreds of thousands) of dollars more than they had to pay, over time.

Hope that helps,
Dave Donhoff
Leverage Planner

    Bookmark   November 10, 2010 at 6:03PM
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