Tuesday, October 5, 2010

Refi Teasers, part 2

(Hopefully, my experience will give you some ideas when doing your own mortgage refinance.)

After my initial collection of refi quotes, Lender 1 sounded like the best deal. After all, it quoted the lower interest rate.

But the quoted closing cost from Lender 2 sounded like a huge difference.

I requested Good Faith Estimates from both lenders to get a more accurate idea of closing costs. At first glance, things looked like this:

WOAH! Both of them had higher closing costs than they quoted on the phone, especially Lender 2! Lender 1 suddenly had the lower closing cost when Good Faith Estimates came into play. But something kept nagging at me to take a closer look. I remembered the contrast in tones and language used by both lenders' reps.

Lender 1's rep was confident our home would appraise high even though he had not yet researched our neighborhood values. Also, he was using a lot of words and tones I recognized from having been in sales most of my adult life. I felt he was selling to me instead of serving me.

Lender 2's rep was annoyingly overcautious. She said things like "well, I will overestimate costs just in case" and "let's say it doesn't appraise high enough." She said nothing that made me feel the appraisal was a slam dunk.

I decided to look closer at the two estimates. Right away I noticed one of the biggest differences in cost was in the line item "daily interest charges". Lender 1, Mr. Confident, had quoted me daily interest charges of 17 days. Lender 2, Ms. Cautious quoted me at 30 days, the most amount of interest we'd have to pay if we closed late in the month. I adjusted the two so they would quote for the same amount of time, 17 days.

I then noticed that Lender 1 had assumed I would pay my own escrow (only allowed if my house appraised 20% or higher than the loan balance) making his quote for escrow charges $0. Lender 2 assumed they'd handle my escrow (in case our house did not appraise high enough) and had a line item of $1304. I removed the escrow item off her estimates. After these adjustments, the chart looked like this:

Now, that was comparing apples to apples! See what a difference that made in estimating true closing costs? The interest rate started to look less and less important in the short term. What about in the long term?

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