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3 days to cancel mortgage app

By Holden Lewis ·
Tuesday, August 17, 2010
Posted: 8 am ET

Regulators want to give you the right to cancel a mortgage application within three days and get a refund of the fees you paid.

The little-noticed proposal was included in a 930-page document that the Federal Reserve published Monday in the Federal Register. Here's the proposal; it's a 6.9-megabyte PDF file.

The Fed's Proustian tome is a catch-all document that finalizes some rules proposed a year or more ago, clarifies a few regs, proposes some new ones, and revises some rules to correspond with the new Dodd-Frank financial reform law. Among other things, the Fed instituted a rule, set down in Dodd-Frank, that bans mortgage brokers from charging fees to borrowers while also receiving rate-based commissions from lenders.

For consumers, the most far-reaching provision is the Fed's proposal to institute what would be a three-day shopping period, in which consumers could apply with two or more lenders, pay various fees, and then cancel all but one of the applications and get most of their money back.

The Fed's document reads:

For closed-end loans secured by real property or a dwelling, the proposal would require a creditor to:

  • Refund any appraisal or other fees paid by the consumer (other than a credit report fee), if the consumer decides not to proceed with a closed-end mortgage transaction within three business days of receiving the early disclosures (fees imposed after this three-day period would not be refundable); and
  • Disclose the right to a refund of fees to consumers before they apply for a closed-end mortgage loan.

That's at the top of Page 6, if you're consulting the original document.

The proposal means you would be able to apply with multiple lenders within three days and pay fees for a credit report, an appraisal and maybe rate lock. Then you could decide which loan to proceed with, and cancel the other applications. The lender would refund all fees except for the credit reports.

The Fed makes it clear (pages 38-39) that it's making this proposal so it will be cheaper and easier for consumers to comparison-shop: "Mortgage loans are complex transactions, and thus the proposal would allow consumers time to review the terms of the loan and decide whether to go forward  without feeling financially committed due to having paid an application fee."

This will inconvenience borrowers who are in a hurry. Lenders won't hire appraisers until at least three days after application. That will slow things down. The Fed acknowledges this, and says that the freedom to shop outweighs the inconvenience of delaying an appraisal by a few days.

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Debra James
August 18, 2010 at 3:55 pm

@ Ken, sorry I didn't see your post earlier. Here's some rounded number information about my situation (the principal and interest amounts are for the first payment, and the amounts would change over the life of the loan):

Current loan:

$300,000 balance, 27.5 years remaining, 4.875% rate, $1651 payment; $434 principal, $1217 interest

15-year refinance:

$3800 closing costs, 4.25% rate, $2256 payment; $1038 principal, $1218 interest. I would not roll closing costs into mortgage, but pay for them upfront. Closing costs consist mostly of prepaid interest, and I don't believe I should pay 15 years of interest on an interest charge. The current pathetically low savings account rates don't warrant me keeping that money in the bank vs. not paying those costs upfront.

Self-imposed 15-year mortgage:

$1651 + 605 = $2256; $1038 principal, $1218 interest. The remaining 11.5 payments vs. 15 year mortgage equals $25944. If I subtract the amount of the $3800 closing costs of the 15 year mortgage, I would pay an extra $22144. That's not chump change, but if I divide that amount over 15 years, that equals $123 per month.

However, if instead I add $99 to the payment I would finish paying the mortgage in 15 years; $1137 principal, $1218 interest.

I am definitely not a financial whiz, but I just don't see enough of a benefit of getting a new mortgage. For less than $100 more than the bank quoted 15-year mortgage payment, I could finish paying the mortgage at the same.

Conversely, starting next August, if I make an annual lump-sum payment of $8448 (that's the $704 monthly extra amount x 12), I'd be done with the mortgage just two months later than the 15-year mortgage. Plus, I would have the opportunity to earn some paltry interest on this money in a 12-month CD before I make the annual payment.

I have stated in other posts that I would jump on a refinance in a heartbeat if the interest rate I was offered was 4% or less with no points (I won't pay points, because there is no tax break if I use my existing lender, and you already know I won't roll them into the mortgage). Also, not tying myself to a more expensive mortgage does give me some flexibility, but I am thinking more in the way of doing other investments as opposed to being cash-strapped and can't make the payment.

People pay off their mortgages early for different reasons, and I have heard arguments for and against this train of thought. Some people advise that an affordable mortgage shouldn't be paid off early, but instead use the extra money to invest. Others say there is no specific dollar amount for peace of mind knowing that you don't have a mortgage payment. I like the comfort of having liquid money and investments, but I also can relish the idea of being mortgage-free. Since I am not fully sure which way I want to go, I think I will not get the new mortgage. My plan right now is to buy a $10,000 CD, and make the annual payment as I previously mentioned. If I find an investment that will give me a guaranteed return that is more than my 4.875% mortgage (this is a simplified statement, I am not going to do all of the calculation involving tax deductions for mortgage interest or tax assessments for interest earned) then I will stop making the extra payment, and divert the money into the investment.

So, I hope this gives you more insight into why I have decided to forgo the refinancing for now.

Debra James
August 18, 2010 at 1:55 pm

The banker did not do the mortgage payment comparison for me; he just emphasized the new rate. I am sure he gets a commission for every mortgage application. I used the mortgage calculator here on to get my findings. I know that I don't have to go through with the re-finance, and I probably won't, but I just wanted to share my experience with others who may be considering to refinance to a shorter term mortgage. Your motivation for refinancing may be different from another person's, but my advice is to check your options, ask for a payment comparison, and use the tools available like the online payment calculators.

Holden Lewis
August 18, 2010 at 1:04 pm

Debra might have her own answer, but I assume the benefit of keeping the current loan is that it provides more flexibility. If she's short on cash one month and can't afford to make a 15-year payment with her current loan, she can make a 30-year payment. With a refinanced 15-year loan, she doesn't have that option.

Ken Knodel
August 18, 2010 at 12:32 pm

are the costs of the refinance rolled into the new 15 year mortgage, if so, I don't understand why Debra wouldn't do the refinance if she would have her mortgage paid off 11 months quicker. How much money is 11 months payments? Is Debra making exactly the same Principal and Interest payment on both mortgages each month if she accelerates payment on her present mortgage to match the monthly payment of the 15 year?

Holden Lewis
August 17, 2010 at 2:40 pm

Very interesting, Debra. It's disappointing that you made your discovery after you already had paid the fee. I will be even more disappointed if you tell me that it wasn't the lender who told you that you could accelerate the payoff by increasing your payments, but you found out instead from your own research.

Please keep in mind that the fee you paid is a sunk cost. That's a business term for money that you have spent and you can't get back. Because the money already has been spent, it shouldn't influence future decisions. In other words, you've already paid the mortgage fee, and you won't get it back. So it shouldn't influence your decision whether to refinance. If you would rather stick with your current loan, and make extra payments when you can, then do that. You don't have to refinance, just because you paid the fee.

Debra James
August 17, 2010 at 2:10 pm

I just recently submitted a mortgage application for a refinance. I was initially enticed by the low interest rate for a 15 year vs. my 30 year rate. However, after doing some more numbers crunching, I figured out that I could pay off my mortgage in 15 years, 11 months, if I just increased my existing payment to the amount I'd pay for the 15 year mortgage. I wanted to cancel my mortgage application, but I know the fee is non-refundable; the only way to get it back is if I am denied the mortgage. I thought that I had done some good research before submitting the application, and I know that people need to be paid for their time, but I think that only $25-50 should be non-refundable within the 3-day cooling off period. After that, consumers are on the hook for the whole amount if they decide to back out.

Jorge Rivera
August 17, 2010 at 12:17 pm

I appreciate the intentions, but don't consumers already shop around for the best loan products, originator and services?

As a previous Mortgage Loan Orginator, I would encourage them to shop around and would match any fees and costs in order to earn their business. Also, from the time of the BOOM, many loan companies were covering the fees for credit reports and only collecting on them once the deal closed. If it didn't close then, they walked away with nothing out of pocket for the application.

So, this will work in favor of lenders as well, because I feel now more of them will begin to charge up front for application fees, credit reporting fees, etc. where I still see many of them not doing so.

This will mean more $$ upfront for the consumer as well, if the lenders begin charging application fees.

What about the mindset of the consumer having invested money into a loan application already. Won't this psychologically effect their probability of seeking elsewhere and having to expend more money just to compare value.

I will be happily expecting how this changes the initial handshake between lenders and consumers when applying for mortgages.