When refinancing booms, so do scams and screw-ups
By Michael D. Larson • Bankrate.com

Whenever rates are low, people flock to lenders to refinance their mortgages. But for inexperienced shoppers who don't watch their backs, the refi boom can turn into a bust.

Busy periods make it easier for sly mortgage lenders and brokers to mislead and take advantage of naive consumers by using any number of tricks, from quoting bogus rates over the telephone to slipping gratuitous costs into their loans. To avoid these problems -- as well as other trip-ups posed by the confusing mortgage process itself -- consumers have to brush up on their shopping skills.

Market is ripe for tricks and trip-ups
"In a refinance market, you have to be careful because a lot of people come into the industry at those times, a lot of companies come into the market, a lot of rookie originators come into the market that may not have the experience level you're comfortable with," says Chuck Johnson, vice president of production for Prism Mortgage Co. in Chicago.

"People know there's volume and there's money to be made in this business right now," he adds. "Refinancing or purchasing a home is usually the largest transaction a person is going to make in their lives and you don't want to be the guinea pig."

All lenders and brokers aren't out to fleece customers and the complexity of the home loan process -- rather than anyone's malfeasance -- takes the blame for some of the obstacles consumers face. Many trip-ups don't rise to the level of "predatory lending," either. Nevertheless, they can cost borrowers serious time and money, and guarding against them becomes even more important during the boom times.

"There's kind of a range of games that get played and they're pretty broad, from fairly benign stuff to outright fraud," says Richard Powers, president of the mortgage company at Cleveland-based Charter One Financial Inc.

Problems can pop up long before a borrower fills out any paperwork. Indeed, just finding out how much a mortgage costs can be confusing.

Be as specific as possible
Many potential customers simply call lenders up and ask, "What's your rate?" But they fail to indicate what kind of loan they need, how long of a lock period they want, how many discount points they're willing to pay, how long the rate is good for or anything else. Consumers have to specify all of these things or lenders can pretty much say whatever they want, then provide different figures when the customers come in and blame the lack of specificity.

A loan with a lock period of just 15 days, for instance, usually has a lower rate than one that a consumer can lock in for 60 days. Most consumers opt for loans with longer locks because they need more than two weeks to close. But loan officers sometimes quote rates on their shortest-lock loans over the phone or in print just to sound cheap, knowing full well that many callers will never be able to obtain those loans. Companies can provide rates that include several points to look better, even though many customers either can't or don't want to put down several thousand extra dollars at closing.

"Most of the papers, once a week or more, they'll have a list of rates by lender. But frequently you'll find the rates they put in the paper were rates that were really never available. They kind of low ball their rate," Powers says. When you come in, he adds, "they'll tell you the market has moved and the rates are now 'X.'"

Figure in the fees
Borrowers often forget to ask about fees, and don't compare lenders based on those costs. That allows companies to pad their bottom lines by adding "document preparation fees," "underwriting fees" and other miscellaneous charges to the loan at closing. Lenders don't control certain fees for services provided by third parties, such as title searches and appraisals. But they can adjust their own fees, so consumers who know to do so will negotiate.

"It's a competitive business," says Rick Harper, director of housing for the Consumer Credit Counseling Service of San Francisco. "But if they go to one-stop shopping and let somebody else handle it for them without them doing homework themselves, they could end up paying more than they need to."

Don't believe everything you read
Consumers need to watch out for advertising tricks, too. Companies have been plugging "no cost" refinance loans lately, but the tagline really means "no out-of-pocket costs at closing." Borrowers pay higher rates on these mortgages and lenders use the extra money to pay the costs themselves.

The annual percentage rate, or APR, found in advertisements can be misleading as well. Mortgage lenders don't always include all the fees they charge in the calculation that determines APR, so customers who use that figure to shop rather than an itemized breakdown of rates, points and fees may end up comparing apples to oranges.

Of course, it's difficult for borrowers to compare fees when they don't know what they are. By law, lenders and brokers don't have to give what's called the Good Faith Estimate document to customers until three days after they apply. But there's nothing preventing shoppers from asking for it before committing to anything. Reputable lenders and brokers will provide one.

Know the score
After customers apply and have their credit scores pulled by their lenders, they should ask for those too. Companies have no obligation to share them, but those scores often dictate whether borrowers get loans and how much they have to pay for them. Customers who obtain their scores can get rate quotes tailored to them, rather than receive quotes that may apply only to borrowers with better or worse credit.

"If I would say at the application stage to my broker, 'Hey, when you pull my credit report, will you tell me what my scores are?' and he said no, I think I would go somewhere else," Harper says. "Why not go with somebody who is willing to tell you? You need to know."

Last-minute maneuvers
Closer to closing, borrowers also have to watch out for counteroffers from their current mortgage servicers or lenders. When borrowers refinance their loans, their new lenders request "payoff letters" from their old lenders. These letters spell out exactly how much the old lenders are entitled to at closing and are often the only indication that a borrower is refinancing.

To avoid losing customers, lenders who are about to get the boot sometimes swoop in and offer to lower their borrowers' rates or refinance them into new loans themselves. While the offers can be competitive, they aren't always so. Plus, they usually come very late in the process. Borrowers who accept them can end up having to forfeit application fees or other monies to the lenders they planned on using.

By learning about all of these miscellaneous traps, consumers can take advantage of today's lower rates and refinance without worrying about being taken for a ride. After all, experts say, preparation is the best defense against shady lending practices.

"It comes back to education," says Harper. "If I've made five calls or I've gone to Web sites and looked and know the rates that are there, it's going to be pretty easy for me to know whether they're pulling the wool over my eyes."

-- Updated: March 26, 2003