Mortgage refinancing can be a straightforward process, but complications often arise. A few of the common ones are described in this article.

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Your Refinancing Questions Answered
October 5, 2017

What is the worst mistake made by borrowers looking to refinance?

The most common mistake, it may or may not be the worst, is assuming that if the
monthly payment savings arising from the refinance cover the refinance settlement
costs within a short period, such as a year or two, the refinance will benefit them.
What makes this rule of thumb wrong is that it completely ignores the impact of
the refinance on how rapidly the borrower will pay down the loan balance.

The proper way to determine whether refinance pays is to compare the total cost of
retaining your existing mortgage with that of a new mortgage over a future period
that is your best guess as to how long you will have them. In such comparisons, an
increase or decrease in the loan balance is counted as a cost or cost reduction. This
is a more demanding calculation than the rule of thumb, but I have made it easy for
you. If you already have price quotes from a lender, you can make this comparison
using calculator 3a on my web site if you now have one mortgage, or calculator 3b
if you now have two mortgages. If you don’t yet have price quotes, you will also
find live competitive prices there.

If a borrower is paying a rate well above the existing market, why don’t lenders
simply drop the rate, avoiding mortgage settlement costs?


Lenders who service the loans they own sometimes do that, since they would
rather cut the rate than lose the loan. However, most loans are serviced by firms
that don’t own them. While such firms would like to be able to cut the rate so that
they can retain the servicing income, their contracts with the lenders who own the
loans bars them from doing it. Owners fear that if servicers have the discretion,
they will agree to rate reductions too readily because they lose nothing from a rate
reduction and they retain the same servicing income. For example, a loan with a
rate of 4% and a servicing fee of .25% yields 3.75% to the owner. If the rate is cut
to 3.5%, the net return to the owner falls to 3.25% but the servicing fee of .25% is
unchanged.

Can I rent my house immediately after refinancing?

No and yes. When you apply for a mortgage loan, whether to refinance or make a
purchase, you are asked whether you intend to occupy the collateral property as
your residence, or if you intend it to be an investment. If you indicated on your
application that you would occupy the house as your residence, which I assume is
the case or you would not be asking the question, and if you offer it as a rental the day after closing, you are committing a fraud. You may or may not get away with,
depending on whether you are unlucky enough to have your documents subjected
to a post-closing spot check. Assuming you do get away with it, if you get into
payment trouble down the road, your fraud may well be uncovered at that point.

On the other hand, if you wait a year before renting the house you will be OK,
because everybody has a right to change their mind.

When does a no-cost refinance make sense?

On a no-cost mortgage, you pay a higher interest rate in exchange for the lender
paying your settlement costs. The question at issue is how long you are going to
pay that rate? If you expect to be out of the house within 3 or 4 years, it is a good
deal. If you stay put for 15 or 20 years, it is a bad deal. Somewhere in between is
your breakeven period, which you can find using my calculators 11a or 11b.

How do I determine whether it is cheaper to raise the cash I need by refinancing
my current mortgage with cash out, or by taking a second mortgage?


My first answer to this question listed the many factors that affect the outcome, but
I cut them out to get directly to the bottom line. All the factors are pulled together
in my refinance calculator (3d), Refinance to Raise Cash or Take Out a Second
Mortgage. This calculator computes all costs of both options and facilitates the
shopping process by showing a break-even interest rate on the second mortgage --
the highest rate you can pay on the second and come out ahead of the refinance
option. The second mortgage is the less-costly option if it is available at an interest
rate below the break-even rate. 

If I feel that I have been bamboozled by the loan officer handling my refinance, do
I have any recourse?


If the property involved is your primary residence, and if the lender involved is not
the lender who holds your existing mortgage, you have the right to rescind the
transaction and recover any payments you have made. You must exercise the right
within 3 days of closing by providing written notice of your decision to rescind. To
make sure that your rescission letter does not end up in the shredder, send it
registered mail with return receipt requested.
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