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Refinancing a mortgage
means a new rate,
but also a new lender and new rules
By Michael
D. Larson • Bankrate.com
Sure, change
is good. But switching from one mortgage company to another can
be downright traumatic.
Sometimes it's a "paper or plastic" choice,
in which two lenders do something differently but still get it done
because the law requires it.
Other times, moving the mortgage involves more
hassle than moving the family did. Either way, experts say borrowers
should take steps to avoid problems with the fees, extra junk mail
and escrow account foul-ups that occur around the time people refinance
or have their loans sold.
With the advent of national uniform documents,
the paperwork people fill out during the loan-making process looks
similar everywhere. After closing is when differences
among lenders crop up, says Howard Gosnell, escrow services manager
for Mercantile Bancorporation Inc.'s mortgage company.
"People can expect for the very most part to
be treated about the same by any lender as any other with regard
to the legal requirements. But culture is different," says the executive
from St. Louis-based Mercantile. "Just from my own personal experience,
there are very big differences in terms of how they do customer
service -- how long you have to wait to talk to a human being. Those
kind of things will vary from institution to institution."
More borrowers face new lenders
A growing number of people have to face a new lender, by choice
or chance, due to the boom in refinancing plus a trend among lenders
toward re-selling the loans they issued.
Many borrowers look at refinancing as a necessary
evil: They enjoy the familiar practices of their current lenders,
but with rates hovering well below the level of even a couple of
years ago, it often makes sense to lock in a better loan. The resulting
lower interest rate and monthly payment can free up cash for other
uses or just make the debt load more manageable. Indeed, when 30-year
fixed mortgage rates dropped to about 6.5 percent in late 2000,
almost 70 percent of the applications tendered to lenders nationwide
were for refinance loans.
Amid the low-rate glee, however, homeowners
sometimes forget that refinancing can usher in many other changes
that have nothing to do with interest rates. A new lender may not
"service" the new loan the way the old lender did, for example.
That means a borrower may have to deal with a telephone rep halfway
around the country rather than someone at the local bank branch.
The new lender could drop the ball on making escrow payments. A
new fee schedule may apply in other instances, so getting a copy
of a document for reference may all of a sudden cost $20.
Because of these and other considerations, experts
say borrowers who are refinancing should research their potential
lender's practices as well as pricing. In the case of loan sales
-- when one lender sells its "servicing" right to collect payments,
cross-sell additional financial products and manage escrow accounts
to another company -- people don't really have any say in the matter.
But they can adjust their financial behavior to avoid any unfamiliar
fees or hassles.
When
you can, investigate first
The consumer should "shop several places to see what is the
best solution for them, and the best solution is not always served
by the lowest rate," says Walter Carter, executive vice president
of Advanta Corp.'s mortgage company. The Spring House, Pa.-based
lender mostly issues non-conforming, or subprime, mortgages through
telephone centers, branch offices and brokers.
"I think people need to weigh (other factors)
instead of just, 'Let's see, how low can I get my payment?'" Carter
says.
Among the first things to consider is whether
a lender plans to service the loan itself. A small lender may keep
its servicing in-house, for example, meaning any problems with a
mortgage can be taken up with a loan officer down the street. Or,
it could sell that loan "servicing-released" to a larger, national
company, which customers would deal with primarily through the telephone,
Internet or by mail.
People who prefer local help and don't want
to refinance with a company that often sells its loans can research
the likelihood of that happening early on in the hunt. The law requires
lenders to spell out what percentage of past mortgages were sold
around closing time, so they have those numbers available and should
provide them if a potential customer asks.
"This is and has always been a very sticky consumer
issue with the advent of the secondary market and the securitization
of notes. It's more likely that your loan is going to be sold than
not today," says Rick Harper, director of housing for the Consumer
Credit Counseling Service of San Francisco. "The biggest thing
that consumers need to understand is that it's the rule now, not
the exception. If you gear yourself up for it, they can handle the
frustration a little better."
Check out
those fees
Borrowers should be careful to evaluate the fees a potential
lender (or its servicer, if the company sells its loans) charges
for performing certain tasks. That's because banks have started
doing with their loans what they've done already with their checking
accounts: hitting customers with fees for services that once were
free.
"You will see a pretty wide difference in those
... but every lender that I see has a menu of its charges," Mercantile's
Gosnell says. "The industry has gone in the last several years to
more charging for things that are beyond basic servicing, such as
faxing documents, multiple copies of documents.
"It's a subject of some hostility
among borrowers, but it's just a recognition of the need to try
to cover as much overhead as possible."
At Mercantile, for example, servicing
customers pay $15 for an amortization schedule and $1 per page for
copies of their loan histories, subject to a $5 minimum. People
can figure out their amortization table and the effect of prepayments
at a number of Web locations for free, including the Bankrate.com
calculator
page and FinanCenter Inc.'s home
section.
To avoid getting nailed with fees after a loan
sale, people should be sure to keep the free documents and disclosures
they do receive rather than throw them out and end up having to
order new ones.
Another potential change involves payment methods.
Many people must switch from coupon books to statements, or vice
versa, when they change servicers. The transition means customers
used to sending in a page of their book each month -- dutifully
including an extra principal check and filling that amount in on
the line provided -- may have to adjust to the process of receiving
a monthly statement instead.
On some occasions, switching loans or loan servicers
can benefit the borrower, especially one who has changed jobs since
obtaining the original mortgage, Gosnell adds. A customer could
potentially go from getting paid on the 16th of the month and having
the mortgage payment due on the 15th to having it the other way
around, since the new company may permit him to shift the due date.
Still, problems of a more serious and expensive
nature can pop up when a consumer deals with a new mortgage company.
Borrowers who paid less than 20 percent down
to buy their homes, for instance, will likely have escrow accounts
unless they've built up 80 percent equity since then. Mortgage servicing
companies pay taxes and homeowners insurance premiums from these
accounts, but problems can pop up when people refinance or have
their loans sold around the time those bills come due. (For more
information about potential escrow woes, see the story linked at
the bottom.
Here comes
the junk mail
Customers also will have to get used to receiving even more
product solicitations than they already get through junk mail. Servicers
increasingly have turned to envelope-stuffers as a way to make more
money by drumming up additional loan or other business.
"You build brand awareness and relationships.
The challenge is to retain the customer as long as you can," says
Carter of Advanta Mortgage. "We have just converted in the last
year from coupon books to statements, and that was part of our strategy
there, bridge-building opportunities."
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