First Step in Underground Renewal Project: Dig Up the Money : Awakening: Couple finds realities don’t match common beliefs when it comes to financing.

The first step for us, and I suspect many others, in our remodeling plan was to refinance the existing first and second mortgages. If this step is representative of unnecessary costs and “watchdog” time required when remodeling, then our dream house will be more like nightmare house. Why is it all of our lessons are so expensive?

We started with the premise that the less it cost to obtain the new loan, the more we would have left for the improvements. Achieving it however, was to be taken through the black hole of mortgage banking. The following is what happened and what we’ve learned.

Before going any further, we should state that our credit history is impeccable, the loan-to-their appraiser’s value was only 30%, and income was more than sufficient to qualify.

Belief No. 1: One appraisal is as good as another and get it as quickly as you can.

Reality No. 1: An early appraisal does nothing more than tie you closer to a particular mortgage broker or lender. Too many times the deal, for a hundred different reasons, falls apart. One week away from signing papers, one lender told us they discontinued that particular program. They had other packages available but you can guess as to how attractive the terms were.

So there we were, out shopping for a new loan with a $450 appraisal in our hands. By the time we found another acceptable loan we had two strikes against us. One, the appraisal was out of date. Over the last 60 days our property could have dropped substantially in value. Two, the appraiser was not on the new lender’s “approved list of appraisers.” To get this loan another appraisal would be required.

Belief No. 2: One year (leap year excepted) equals 365 days.

Reality No. 2: A 365-day year may be true for mere mortals, but it does not hold true for the calculations performed by the mortgage gods. For their convenience and, as it turns out, their financial gain--funny how it works that way and rarely the other--lenders use a 360-day year. This means that for a year’s worth of interest, the per day cost gets larger as the number of days in the year gets smaller.

Our mortgage funded (the day the loan began) on the 18th but payments are due the 1st of each month. Therefore, in escrow, the lender had us pay interest from the 18th to the 31st. That’s 14 days (365-day year) times their per day rate (one year’s interest divided by 360 days). Even February (28 days) doesn’t help because they’re still calculating the per-day rate using a 360-day year. This cost us more money on both the old mortgages and the new mortgage. The higher, fictional per-day rate (360-day year) was multiplied by the actual number of days (365-day year).

Belief No. 3: Once the new loan begins, the old loan ends.

Reality No. 3: Yes, Dorothy, but when you’re in the Land of Oz, you must first pay your respects to the Power of the Float. Our loan was scheduled to fund on a Wednesday. California’s Good Funds Law AB512 (see how much we’ve learned), passed in January, 1990, requires the title company (the old lender and new lender’s go-between) to hold the check for a minimum of one day. This is to verify that the check is good, even if it’s a certified or cashier’s check!

What all of this meant, of course, was that we would be paying interest on our old loans until the check cleared and they were paid off. At the same time, we would be paying interest to the new lender from the moment they wrote the check.

We realized that, in a worst case, we might very well be paying interest on all three loans from Wednesday until sometime the following week when funds were released. We tried to delay the funding until Monday thereby having the greatest number of consecutive working days to clear the check.

It would have helped to ask for a certified check, but that point was missed. After conferring with the lender, the mortgage broker told us the loan commitment was only good until Friday. Sounds kind of like a game of chicken, doesn’t it?

Our worst fears were realized (we chickened) when a company check was issued late in the day on Wednesday. Despite the best efforts of the escrow officer, the bank and the title company, we didn’t close until the following Tuesday.

In the final analysis, the avoidable cost of our mortgage lesson was $823.16. This money could have been better spent on upgrading remodeling material. A better grade of tile, paint, wood or insulation more than pays for itself in durability and lower maintenance costs.

Assuming our transaction was typical, we can’t help but wonder how much the total cost is to the consumer considering all of the re-financing that goes on. In the past, when California real estate was appreciating rapidly, it was probably something you would overlook. Also, considering the interest we’ll save (fixed at 9 1/2% instead of variable) over the life of the loan (15 years instead of 30 years) we still come out ahead. However, it doesn’t make sense to waste the money especially when it can easily be avoided.

If you’re going to re-finance, here are our suggestions to keep costs down.

* Wait until the last possible moment before ordering the appraisal. If the deal falls through you won’t have a worthless $300-$500 piece of paper.

* Find out if the lender uses a 360-day year or a real world 365-day year. There may not be much you can do about this point, but do complain. If enough people voice their opinion, a change is possible. Otherwise, the lenders have every incentive to keep things just the way they are.

* Never fund later in the week than Wednesday. You don’t want to be paying interest on both your old and new loans any longer than necessary, so watch out for weekends. Better yet, have the new lender wire funds to the title company. The one-day minimum hold does not apply on wired funds and interest on the old loan stops the same day interest on the new loan begins. If the lender won’t wire funds then make sure they issue a certified or cashier’s check so the hold is only one day. With wired or certified funds the Wednesday rule can be a little looser.

* Tell the mortgage broker your requirements up front. Find out what the lender’s practices are with regard to the above items. Talk to the escrow officer hand-ling your file. Ours was of immense help to us in trying to keep costs down and explaining the entire process.

* Verify the Final Settlement Statement. Check the math. Check the prorations. Count the days.

Now that our financial house is in order, Phase II is under way. We’ve been through the planning, architectural and city approval processes. The house has been shored up to allow excavation of 300-plus yards of dirt and to pour new foundations, and we’re learning about structural engineering, compressive loads and more.

When the job is done, we’ll have a four-car garage, laundry room and den--all under the existing house.