Refinancing - What lenders won't tell you!

Lenders won't tell you which mortgage loan product is right for you! It is still absolutely essential for borrowers to do their homework before contacting lenders about refinancing.

Earlier this week, my step-dad who is retired, called me to ask my advice about refinancing.  He had already spoken with his lender, Wells Fargo, but wanted to know what I thought before he made a decision.  I told him that I thought it is a good time for him to refinance because he has at least twenty-percent equity in his home, his current interest rate is 6.02% and he is approx. 13 years into his 30-year fixed rate mortgage loan.  I suggested he consider a 15 or 20 year fixed rate mortgage product (almost all of the major lenders are now offering 20 year fixed rate loans); the interest rates are currently approx. 1% less than 30-year mortgage loan products.  Unfortunately, the lender did not recommend a 15 year or 20 year mortgage product to my step-dad.  Instead, the lender offered a 30-year fixed rate mortgage loan at an interest rate of 5.02%.  Below I provided an analysis of the lender's offer, against my recommendations:

30 year, fixed rate
Loan Amount = $77,000 (closing costs included)
Interest Rate = 5.02%
Est. Property Taxes = $4500
Est. Home Owners Insurance = $550
Monthly Mortgage Payment = $835.13 (includes Principle/Interest/Taxes/Insurance)
Principle & Interest = $415.12
Interest Only = $322.12
Total Interest paid after 30 years = $115,215.20

20 year, fixed rate*
Loan Amount = $77,000 (approx. closing costs included)
Interest Rate = 4.04%
Est. Property Taxes = $4500
Est. Home Owners Insurance = $550
Monthly Mortgage Payment = $889.06 (includes Principle/Interest/Taxes/Insurance)
Principle & Interest = $468.23
Interest Only = $259.23
Total Interest paid after 20 years = $62,215.20

15 year, fixed rate
Loan Amount = $77,000 (approx. closing costs included)
Interest Rate = 4.825%
Est. Property Taxes = $4500
Est. Home Owners Insurance = $550
Monthly Mortgage Payment = $983.66 (includes Principle/Interest/Taxes/Insurance)
Principle & Interest = $562.83
Interest Only = $245.44
Total Interest paid after 15 years = $44,179.20

Most people over 50 should be concentrating on paying off their homes.  Likewise, retired people should be doing the same.  So, why didn't the lender recommend a shorter term mortgage loan after he was informed that my step-dad is retired and that he was simply looking to reduce his interest rate and his mortgage payment?  Because lenders are conducting business as usual.  Business as usual means, making the most money for investors, which doesn't equate to doing what's in the best interest of the borrower.

Ultimately, I recommended that my step-dad choose the 20 year fixed rate mortgage loan.  His interest rate will be significantly reduced, and he will shave approx. $100 per month off of his current mortgage payment.  Consequently, his mortgage loan will be extended an additional five years compared to where he is in his current loan, however, he will have the option of paying an addtional amount towards the principle over time to help offset the additional cost involved (approx. $18,036.00 over the term of the new loan).*  With the 20 year loan at 4.04%, he will save at least $53,000.00 over the twenty-year period. 

Remember, before you contact a lender about refinancing, establish what is best for you.  Look at the numbers and then shop the lenders to find the best loan product for you!

Merry Christmas and Happy New Year!

Loan Modifications

Last night I met with a friend of mine's just to chat and catch-up.  I hadn't seen or talked with him for a few weeks.  I asked him about the status of his loan modification, which he desparately needs as a result of his impending divorce.  My dear friend told me that he had hired a third-party to negotiate on his behalf with Bank of America to reduce his mortgage payments and get rid of the outrageous balloon payment that is coming due in a couple of months.  I was absolutely mortified at what he told me, including the fact that he has paid this third-party, in full, fees to the tune of approximately $3,000.00.  I told him to call his servicer first thing in the morning and inquire about the status of his loan modification.  I have a gut feeling that he's been scammed.  Below are some tips for you to avoid being scammed as suggested by California's Attorney General's Office:

5 Tips to Avoid Being Scammed

1. Don't pay up-front fees. Foreclosure consultants are prohibited by law from collecting money before services are performed.
2. Don't ignore letters from your lender or loan servicer. Responding to those letters is your best bet for saving your house.
3. Don't transfer title or sell your house to a "foreclosure rescuer." Beware! This is a scam to convince homeowners they can stay in the home as renters and buy their home back later. It might also be part of a fraudulent bankruptcy filing. Either way, a scammer can then evict the victim and take the home.
4. Don't pay your mortgage payments to anyone other than your lender or loan servicer. Mortgage consultants often keep the money for themselves.
5. Never sign any documents without reading them first. Many homeowners think that they are signing documents for a loan modification or for a new loan to pay off the mortgage they are behind on. Later, they discover that they actually transferred ownership of their home to someone who is now trying to evict them.

If you reside in California, you can go to the Attorney General's website and check to see if the third-party you are working with is registered with the Attorney General's office.  You can also obtain a list of consultants who are.  Just click on this link California Attorney General.  I also highly recommend NACA (Neighborhood Assistance Corporation of America).  They have a very good track record working with servicers and advocating for a mortgage solution that is in the best interest of the homeowner NACA.

Be smart, be diligent and be persistent.  Help is available.  Have a great day!