Refinancing Rush : Loan Seekers Find Fees Can Be Costly
What a deal! Hovering around 10%, mortgage rates are still enticing. Time to join the home refinancing-and-buying parade before the rates inch up any higher. Right?
That’s what Geraldine Cassidy of Los Angeles thought, but even Cassidy, who is knowledgeable about real estate as executive director of the California Escrow Assn., winced when she heard that it would cost $4,000 to refinance her house. “I just wondered to myself if it was worth it,” she said.
The narrowing rate gap added to her doubts, since she already had a loan at 12 1/2%--”not bad,” she noted. But it’s the cost of refinancing and financing that is discouraging some homeowners and surprising others.
“I haven’t run across any complaints about misleading advertising (on the part of lenders or builders),” Herschel Elkins, chief of the consumer law section of the state attorney general’s office, said, “but I am hearing a lot of disappointment.”
Not as Good a Rate
He has heard from people who bought or refinanced homes when the rates dipped below 10% in March, the lowest in nearly eight years. “They were happy with the low rates,” he said, “but points and other fees added so substantially to the costs that the deals weren’t as good as the people expected.”
Points are usually charged for loan origination, and one point equals 1% of the loan amount. In the past, the one-point origination fee was about it, when it came to financing charges.
But recently, the number of points has multiplied, and other fees have been tacked on to pay for loan processing, appraisal reports, title insurance, title searches, credit reports and documentation, even including the applications themselves.
Fred Case, an economist and professor of housing, real estate and urban-land studies at UCLA, told why:
“Lenders are quite concerned about where interest rates will go and are fearful that they will wind up with portfolios of fixed-rate, low-interest loans, even though it appears that rates will remain stable for the next few months and then will slowly rise, at most maybe one full point, through ’87 and ’88.”
Lenders Try to Hedge
Because of this and escalating operating costs, lenders are trying, he said, “to hedge by increasing the points and costs to get new loans. And in this competitive market, they can raise their prices and get them,” he said.
“If a lender says to a borrower, ‘OK, that will be three points and $100,’ the borrower will say, ‘OK, fine. How soon?’ Later, as Elkins has experienced, there can be some borrower remorse.
Three points and $100 isn’t far-fetched. Kirk Hallahan, a spokesman for the California League of Savings Institutions, said that, from what he perceives, lending institutions are charging 1 to 1 1/2 points for adjustable rates and 2 to 2 1/2 points for fixed rates while mortgage companies are “more in the 4-to-5-point range.”
Brokers Shop for Loans
“They tend to charge more and always have,” he added. An application fee, typically $200 or $250, is added by many S&Ls--and; mortgage brokers charge even more.
Stan Reyburn--a banker, Los Angeles Valley College real estate instructor and author of the textbook “California Escrow Procedure: Blueprint for a Nation”--said that mortgage brokers charge more because they shop for loans and package the documents, verifying employment and deposits, for example.
Scanning the whole market, Reyburn is seeing loans from 1 1/2 points with $600 to $650 for processing a first trust deed to as high as 10 points on a second mortgage “for the more difficult placements, people with marginal credit.”
As he put it, “The smaller the down payment and the less ability there is to repay, the more expensive the loan becomes, usually in the way of points,” which may be on the increase, along with mortgage rates.
Rates Drifting Up
Tom Marder, a spokesman for the Mortgage Bankers Assn. in Washington, explained: “Points will go up with upward pressure on interest rates, and it’s possible that points will increase generally because rates in general have drifted up in the past couple of weeks.”
So far, however, loan fees have remained about the same, he said, since he researched them a couple of months ago. “We’ve generally said that costs can range from 3% to 6% of the overall loan amount, and this includes closing costs and points on the loan but not necessarily the prepayment penalty,” he elaborated.
Often the cost of refinancing is slightly higher than originating a new loan for a couple of reasons. Reyburn said it’s because lending institutions are “trying to mitigate the lost yield if the borrower is refinancing with the same lender.” Another way to put it: The lender is charging more for refinancing because the lower rate, say 10% instead of 12 1/2%, will eventually pay the lender less.
Heavy Application Load
Another reason refinancing costs more was suggested by Chris Christy, a loan officer in the Los Angeles office of Bank of America. “I guess it’s because there is such a backlog (of loan applications) that the higher cost is a way of discouraging refinancing. Our office, as offices for all (lending) institutions, is booked so heavily that we’re working six to seven days a week.”
The difference in costs between refinancing and originating a loan is slight, sometimes representing only half a point or 0.5% of the loan amount, but this varies, like the mortgage rate, from one institution or broker to another.
The rate may also vary by loan type: whether it is conforming or nonconforming (a home under or above $133,350), has an adjustable or fixed rate, and if it’s fixed, whether the loan is for 15 or 30 years.
Then there are what Reyburn calls “those funny rates,” advertised by builders, which are low the first few years after the homes have been purchased because of builder “buy downs” (forms of subsidy). “Then the developer jumps out, and the consumer is left gasping (when the rate rises to its current level),” he added.
Sell to Secondary Market
The financing market is becoming even more complex, because lenders sell their loans to the secondary market, which is beginning to institute higher appraisal standards that are expected to further delay the already bogged-down processing, which is taking 60 to 75 days now, in contrast with 30 to 45 days a short time back.
Borrowers get the mortgage rate that is current when the final papers are signed, and new delays in the loan process will just panic the public even more, Case noted.
Frightening. And complicated! Too complicated for most people, says Richard Rosenthal, president of the California Assn. of Realtors, who strongly urges anyone interested in home refinancing or buying to consult real estate professionals.
In the case of refinancing, he urges borrowers to sit down with a realtor, who might suggest seeing a loan officer or mortgage broker even before a decision is made to go ahead.
Borrowers who have submitted multiple loan applications have contributed to processing slowdowns, he stressed, “and so you should never put in an application until you decide that that lender is the right one for you.”
Shop for Loans
He suggested investigating all options and asking for all of the fees to be charged. “S&Ls; usually don’t charge fees until the loan is made. In fact, many let you finance the fees, adding them to the balance of the loan,” he said.
“Mortgage brokers and bankers want their fees up front and in cash for appraisals and credit reports, but they can put together the loan package and shop for financing, whereas lenders can only offer their own programs.”
What about people like Cassidy, who are so shocked by the fees they are in doubt about refinancing?
“People don’t think about the financing cost when they buy a house because that is not the overriding expense,” he said, “but when they go to refinance, all of a sudden those points and other administrative costs become a big number.”
Once over this surprise, these homeowners might consider what Rosenthal describes as “guidelines from lenders,” which are:
“If you stay in your house two years or more and can reduce the interest rate by 2% or more, you should seriously investigate refinancing, because it will take two years to break even on costs.”
“Lenders are real good at working those numbers out exactly,” he said.
