Q. I have been trying to refinance my home for three months. I applied with a company in the Midwest, and the effort dragged on for months. I signed all the paperwork and sent it back. Every three weeks I’d call to get a status report, and nobody would return my call.
Finally, last week, I received a call to inform me that my loan had been approved and the lender wanted to schedule settlement. At the same time, I learned that my rate had gone from 4.75 percent to 5 percent.
There’s nothing that should have caused such a delay. I have good income, excellent credit scores and plenty of equity in my house.
Needless to say, I chose not to settle. Is this indicative of what I can expect with all lenders?
A. No. The company with which you were dealing is pathetic. It is true that closing on a simple refinance requires a lot more paperwork and explanations than it once did, but the loans are being made to folks, such as you, who are well-qualified. I have been in this business for 19 years and have never been unable to honor a particular rate that was quoted and locked per the request of the borrower.
Here’s a general guideline readers might find helpful when refinancing or purchasing a home.
c Don’t ever apply for a loan without knowing whether your interest rate and terms are locked. This means the terms disclosed to you are guaranteed for a specified period of time. I typically recommend that applicants not “float” their rate, which means the rate can change during the process. Floating a rate is a crapshoot; the movement of interest rates is simply too unpredictable.
- Make sure you understand the basics of the terms of the loan. Understand the total transactional fees, such as appraisal, title insurance and so forth. Ask yourself this question: “How much money do I have to spend in closing costs to obtain this rate?” Remember, an interest-rate quote alone is only half the story. It’s meaningless - you can’t determine whether a particular rate quote is any good without knowing the costs involved.
- Know the difference between closing costs and escrow deposits and interim interest. An initial escrow deposit is simply a sum the bank collects so it can make future tax and insurance payments. Interim interest is simply interest paid to the lender until the end of the month because mortgage payments are amortized and paid monthly. Interim interest and escrow deposits are not transactional closing costs.
- Don’t pay a lot of attention to the annual percentage rate (APR). Despite what the so-called “experts” say, shopping for a mortgage by comparing APRs is just plain wrong. The APR gives the borrower the cost of the loan expressed as an interest rate when it takes into consideration both the note rate and certain fees associated with obtaining the loan. The problem is, the APR makes the unreasonable assumption that the borrower will hold the loan for the full term.
If a borrower pays several points upfront to obtain a low 30-year fixed rate, for example, the disclosed APR will indeed drop. But if, for some reason, he pays off the loan in less than 30 years, his true APR will jump because he is not entitled to a refund of any of the points paid to obtain the lower rate.
- Choose a loan officer who will review all of the paperwork with you and answer any and all questions to your satisfaction. Never apply for a loan without knowing what to expect at settlement.
Actually, I probably could write several articles on this subject. These pointers are a start.
Henry Savage is president of PMC Mortgage in Alexandria, Va. Send e-mail to henrysavage@pmcmortgage.com.
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