Valuable lessons in refinancing

Marketplace Staff Mar 16, 2007

TESS VIGELAND: So what, if anything, can you do if you’re in a bad mortgage and want to get out? Well, you can sell your house. Or you can refinance. Now, because of the meltdown in the subprime market, lenders are tighetning up on how much credit they give out, and to whom. But if you do have good credit, and are looking to get out of that 3-1 arm that’s about to adjust to a higher interest rate, John Dimsdale has some tips on what to watch out for.

JOHN DIMSDALE: Three years ago, Scott Herbold, opted for an easy-term mortgage. He only had to pay the interest for the first three years.

SCOTT HERBOLD: The reason I did this was we’d experienced a business setback, and so I was just trying to do my best to stay in the house that we were currently in.

A fully renovated home. Four bedrooms, two and a half baths in San Antonio, where Herbold lives with his wife and three kids. He knew the mortgage was headed up, but just how much caught him by surprise.

HERBOLD: Indeed, after the three-year fixed period, the payment went up about 50 percent.

Figuring it was time to switch to a fixed rate mortgage, Herbold contacted his mortgage broker.

HERBOLD: They had my payment record which was perfect and they said I was rated an A-plus customer, whatever that meant. So I felt like well, they should want to keep my business and so it should not cost me that much to refinance within their system. I was surprised that that was not the case. I mean, it was gonna be very complicated and very expensive to stay with them. So I ended up shopping around and found a local person who was just fantastic to work with and she put me in a great product.

Herbold learned lesson number one in the mortgage business: Shop around.

Ellen Schloemer with the Center for Responsible Lending says too frequently, mortgage lenders have taken advantage of the customer’s desire to get into a home.

ELLN SCHLOEMER: What consumers didn’t realize is that the brokers did not necessarily have their best interests in heart. They were just trying to make a deal. It would be better for consumers these days to think about mortgage brokers like used-car salesmen and think, “Is this guy really trying to give me a good deal, or is he just trying to get this piece of junk off the lot?”

Lesson two is understand exactly what you’re getting into. How much are the monthly payments — not just now, but years into the loan? Are there any hidden fees? Could they hit you with an extra charge to pay off the loan early, which you may want to do if you re-finance again later?

Richard Lord wrote the book “American Nightmare,” describing more than thirty cases where people were roped into loans they could not afford.

RICHARD LORD: In the back of the book I provide about 85 questions that I argue could save you $80,000 on even a relatively small home mortgage. Among the things you should ask yourself are: Have I had enough time to review these documents? And another thing you should ask is: Is there a sophisticated friend who knows a lot about these kinds of transactions who could look it over with me before I sign on the line here?

Another recommendation when you refinance: Resist the temptation to cash in on any equity your house has built up. That will only add to your debt and your monthly payments.

Allan Fishbein with the Consumer Federation of America says you could end up having to refinance again, paying those fees all over again.

ALLAN FISHBEIN: It’s through repeated refinancings, which is very prevalent in the subprime market, that existing homeowners, each time they refinance, keep having their equity they have in their home stripped out through the fees they have to pay. And often these fees are financed into the new loan and the borrower isn’t aware, or doesn’t really feel the pain of the high level of fees that they’re paying.

Congress is beginning to look at protections for borrowers. Limits on fees, more disclosures. Ellen Schloemer says maybe offer a grace period for struggling borrowers.

SCHLOEMER: For example, when Hurricane Katrina hit the Gulf Coast, a lot of borrowers were able to delay their monthly payment for several months while they got their financial footing. And that certainly should be an option for people now as well.

But lenders say more rules could force them to abandon loans that have given the middle class access to homeownership.

In Washington, I’m John Dimsdale for Marketplace Money.

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