A personal finance blog dedicated discussing such topics as budgeting, asset allocation, 401K, IRA, cash flow, insurance, financial planning, portfolio management, and other areas in personal finance.


Wednesday, January 05, 2005

Do the Math BEFORE Refinancing a Mortgage!

I got an offer in the mail from a mortgage company in the Dallas area. Here's what it said:

"You now have the opportunity to refinance at "NO-COST" to a rate that is at or below 5.875% A.P.R. We will pay our closing costs because we are paid a percentage of the new loan from the new investor."

Since the offered APR was about 2% lower than the rate we are currently paying, I decided to check it out. We still owe about $80,000 on our original 30 year mortgage and another $11,800 on a home equity loan. My goal was to roll both of those loans together at a lower interest rate and therefore reduce our monthly payments.

I talked with a salesperson who was very eager to get my business. She sent me a packet with a Good Faith Estimate. Basically, their "NO-COST" line was a load of hooey. I just about fell out of my chair when I looked at all the costs associated with this loan (I'm just talking about the section entitled "Items Payable in Connection with Loan" on the Good Faith Estimate). They pretty much had a fee for everything. The fees were listed as follows:

Loan Origination Fee Due Lender          $1,013.00

Credit Report $12.05
Tax Service Fee $70.00
Processing Fee $495.00
Underwriting Fee $575.00
Loan Warehouse (what the heck is this?) $150.00
Courier $25.00
Flood Certificate $13.50
Grand Total $2,353.55

Just that portion alone was nearly $1,200 more than we paid with our original loan 5 years ago. And, all these fees were being rolled into the new loan, meaning I was going to be financing these expenses over 30 years. And, to top it off, I wasn't getting the 5.875% APR they stated in the letter.

By the time all the fees and reserves were calculated, the amount being financed was $101,300 and I was starting over with another 30 year mortgage! Needless to say, I didn't go for this mortgage.

That brings me to the point of this post: DO THE MATH BEFORE YOU REFINANCE! I'm afraid too many people don't take the time to really understand what they are getting into. Most people look at one number: the monthly payment. However, just because the monthly payment is lower does not mean it's a good deal.

Until next time...