'When banks compete' is it really enough?

Dear Ms. Mortgage Maven:A few months ago, my husband and I applied online to refinance our home. It is worth about $270,000 and we owe about $206,000. In two days, we must have gotten twenty phone calls from different lenders. We decided to work with a broker who offered us a 30-year fixed at 5.875% with no points. Since then, he said our loan was approved by two banks, Flagstar Bank and Countrywide, yet nothing has happened. A good faith estimate he sent us has an $8,500 "broker fee" and about $3,000 in various loan fees, plus title work. The total fees are over $15,000. Also, he said that our loan will be for more than 80% of the value of the house (only about $7,000 over) and this is a problem. Our middle credit score is 631, by the way.

Why is this taking so long? We are trying to refinance out of an adjustable rate mortgage (ARM) and did not want to continue to make the higher monthly payments now that our ARM has gone up.

Amanda S.

Dear Amanda,

Your situation raises several different issues. First, you applied for a loan on one of those Web sites that says you will benefit by having all these different lenders compete for your business. You got bombarded by phone calls and probably selected the lender solely based on the very low interest he quoted. I bet you were quoted rates in the 6.125 - 6.375% range as well, but you were not interested in those rates because you had someone promising you 5.875%.

With your credit score and assuming an 80% loan to value, your rate is in the 6.25% - 6.375% range. Granted, interest rates just nudged up a bit, but for several months the rate for a 30-year fixed has been just a bit lower than this - but not as low as the rate you were quoted. And with a 631 middle credit score, the lowest rates (which are the ones you read about in the paper) would not be available to you. My guess is that the interest rate he quoted was only to get you to do business with him. I bet if you had gone with one of the lenders offering a higher rate, you would have completed your refinance by now.

Second, $15,000 in fees for a $206,000 refinance? Will your deed be gilded in gold or something? Refinances are supposed to be less expensive than purchase loans. In this area, the rule of thumb is that a purchase loan can have closing costs of anywhere from 3% to 4.5% (depending upon property taxes for the jurisdiction, escrows, etc). Even if we bumped your loan amount up to $215,000 to cover closing costs (that would let you finance up to $9,000 to cover loan and title costs), $15,000 puts your loan fees at 7% of the value of the loan. That is high. If you were buying down the interest rate (when you pay "points" to get a lower interest rate), then that would be okay, but for a basic refinance that is steep.

Since the high costs of this loan are being rolled into the new loan amount, the new loan amount of $221,000. As you know, lenders like first trust loan amounts that are not above 80% of the value of the property. Your house is worth $270,000. Eighty percent of this is $216,000. Because of the steep loan costs, you will go above an 80% loan-to-value and will end up spending more for your loan each month. You will have to pay mortgage insurance, on top of your monthly mortgage payment, or you will get a loan without mortgage insurance but at a higher interest rate.

As you now know, trying to save money by going with the lender who promised you the lowest rate has cost you money, since you have to keep making your current mortgage payment, after your ARM has reset to a higher interest rate. And it was also going to cost you a lot in unnecessary fees.

I would start over again with another lender. Ask your family and friends for referrals, and get a good faith estimate up front and in writing. Best of luck.

Jessica White, also known as "Ms. Mortgage Maven," is a mortgage lender for a national bank with an office in Fort Washington, MD. She specializes in helping first time homebuyers and can use DC HPAP, the DC Bond program and the Maryland CDA programs. Please call or email her with your questions at 202-607-4449 or Jessica@msmortgagemaven.com.