So you want to refinance?

Where you get your loan makes all the difference
By Robert J. Bruss Inman News

For some unexplained reason, mortgage lenders who service your current mortgage often don't want to refinance it even if you have an excellent on-time payment record. Why don't lenders want to keep their current borrowers? Only twice have I refinanced with the same lender. But it's a smart idea to start with your present lender to see what refinance terms you are offered.

ASK YOUR CURRENT LENDER ABOUT A LOAN MODIFICATION. If all you want to do is reduce the interest rate on your current mortgage, ask your current lender about a loan modification to reduce its interest rate. Personally, I've never had any luck doing this because my loans had been sold in the secondary mortgage market to other "investors," but you might be fortunate to learn your lender still owns your existing mortgage and is willing to modify its interest rate to keep you as a borrower if rates have declined.

With your current lender starting point, then you can compare other lenders you contact. I suggest contacting at least half a dozen lenders by phone. Ask friends, relatives and business associates for lender recommendations. Also, check the newspaper real estate section for current mortgage offerings. See how you are treated as a new customer. If you aren't treated well, that's probably not a good lender for you.

As a refinancing borrower you have the luxury of taking your time for mortgage shopping. I suggest phoning at least two mortgage brokers, two direct lenders and two mortgage bankers. Be sure to speak with a loan officer, not just a clerk who answers the phone.

MORTGAGE BROKERS. These folks are "middlepersons" between the actual lenders and the borrowers. They take your loan application, "package it" by obtaining your credit reports and property appraisal, and then "shop it" to one or more actual lenders. In other words, mortgage brokers get interest rate and term quotes from several actual lenders. Today, mortgage brokers arrange about 60 percent of new and refinanced home loans so they are very important loan sources to mortgage lenders.

Unfortunately, some mortgage brokers have a very bad reputation for making promises to borrowers they can't keep. I've had mortgage brokers lie to me, but without an ounce of guilt or shame. Ask how long the individual mortgage broker has been in business; if it is less than five years, watch out!

Experienced mortgage brokers can perform finance miracles. They usually deal with several dozen lenders on a regular basis and they have access to many more lenders for specialty mortgages, such as for borrowers with unusual financial situations or low FICO scores. My experience with mortgage brokers is they often "overdocument" their loan application files so the lenders don't find anything wrong or missing. This can be extremely annoying to loan applicants.

Watch out for the "yield spread premium" mortgage broker trick. Although mortgage brokers are supposed to disclose any extra compensation they receive from the actual lender, many "forget" to do so until the loan closes and the extra income to the mortgage broker shows up on the closing settlement statement. The "yield spread premium" is a bonus mortgage lenders pay to mortgage brokers for producing above-market-interest-rate loans.

EXAMPLE: Suppose the "going rate" for a fixed-rate home loan is 6 percent but a mortgage broker gets you to pay a 6.25 percent interest rate. In gratitude, the lender will "rebate" several thousand dollars to that mortgage broker for producing a higher-than-required interest rate. It is perfectly legal, but the borrower often doesn't know a lower interest rate could have been obtained either by paying a loan fee (usually called "points") to the mortgage broker or going direct to the actual lender. Be sure to ask the mortgage broker if he will be receiving any kickback or "yield spread premium" from the actual lender.

DIRECT LENDERS. These lenders loan their own funds. Examples include Washington Mutual (the nation's largest home loan direct lender), Bank of America, Chase, Wachovia, etc. Some of these lenders are very flexible because they keep many of their mortgages in their loan portfolios. But they sell most of their mortgages into the secondary mortgage market and keep the loan servicing so the borrower never knows his or her mortgage has been sold.

A big problem with direct lenders is they often don't have much variety in their mortgage offerings. "One size fits all" seems to be their motto. Many of these lenders approve mortgages in huge impersonal centralized loan centers so the person you talk with usually has zero loan-approval authority. However, with today's "automated underwriting," if you meet the initial loan qualifications you will be told within a few minutes if your application is approved, or if it must be sent on for "further evaluation" by a human (called an "underwriter").

MORTGAGE BANKERS. These are hybrid lenders because, while loaning their own (often borrowed) funds, they usually quickly resell those mortgages to a direct lender or into the secondary mortgage market. But mortgage bankers usually keep the loan servicing so the borrower doesn't know their loan has been sold to a distant lender.

The nation's largest mortgage banker is Countrywide, which has both local loan offices and a large Internet Web site at www.countrywide.com. I tried to do business a few years ago with Countrywide when I was refinancing my home loan, but I found their operation to be totally incompetent. Perhaps they have improved since then.

Another huge mortgage banker is Wells Fargo. That's right! You probably thought Wells Fargo was a bank. It is. But Wells Fargo runs its mortgage banking operation out of Des Moines, Iowa. I've found Wells Fargo to be both very bad and, lately, very good.

EXAMPLE: When I refinanced my Wells Fargo home mortgage a little over a year ago, although I live in California, I was referred to loan officer Joe Lobasco in their Las Vegas mortgage office! At first, I was very skeptical. However, he started out the phone conversation by saying, "After we successfully complete this refinancing, you will receive a survey from Wells Fargo. I expect to earn a perfect score so please let me know if at any time I don't deliver the service you expect." Joe took my "no-doc," no-hassle loan refinance application over the phone, delivered the promised 5.75 percent fixed-interest-rate jumbo mortgage with no loan-fee points and no surprise extra costs, arranged the appraisal, and the loan closed within about 30 days. I had nothing to complain about (except the bad title company I selected -- First American Title!). Needless to say, Joe earned his perfect survey score.