If you’re in the market for a mortgage to buy or refinance your existing home loan, there are several things you should know about the Real Estate Settlement Procedures Act (RESPA) to avoid making common mortgage mistakes. Until recently this law did very little to protect homeowners from predatory lenders and did more to help big banks. This year the laws protecting homeowners from mortgage broker abuses were changed; however, banks are still exempt. Here are several things you need to know about RESPA to avoid overpaying for your next home loan when refinancing.
Avoid Common Mortgage Mistakes
Whether you’re searching for the best refinance rates or trying to find the lowest closing costs when purchasing your home, one of the factors that determines how good of a deal you’re getting is the loan origination fee and closing costs. If you’re refinancing your home loan you’ll need to recoup these expenses before realizing any benefit from a lower payment amount. Overpaying the loan origination fee or paying junk fees at closing lengthens the amount of time it takes to recoup your expenses when mortgage refinancing and takes cash out your pocket.
What’s Wrong With RESPA?
The biggest problem with the Real Estate Settlement Procedures Act is that your bank is exempt from the law. If you’re considering bank mortgage rates for your next home loan you should know that in the 1990s the Banking Lobby spent millions of dollars lobbying Congress to be excluded from this important legislation and succeeded. Your bank is exempt from all the protections provided by RESPA and is required only to give you an Annual Percentage Rate based on a fictitious Good Faith Estimate created by the bank’s marketing department. Why would you ever trust something as important as your home loan to a lender that doesn’t have to play by the rules?
RESPA Changes For Mortgage Brokers
In 2011 the rules regarding broker compensation changed for the better. Your broker gets paid for arranging your home loan in one of two ways. The broker can charge you a loan origination fee for the work they do or accept compensation from the lender in exchange for marking up your interest rate. Prior to 2011 brokers could get paid both ways; however, today it’s only one or the other. Many brokers will try to sell you a no fee refinance instead of paying the origination fee and closing costs yourself, telling you it’s better to let the lenders pay the fees for you.
Refinance No Closing Costs
So what’s the problem with these refinance no closing costs offers anyway? The problem is what the lender paying the mortgage origination fee and closing costs does to your payment amount. Here’s an example to illustrate my point. Suppose for instance your mortgage refi is for $225,000. The broker quotes you the best refinance rates at 5 percent; however, if you opt for the no fee refinance offer your interest rate goes to 5.5%. What does this markup do to your monthly payment amount?
If your mortgage refi is for a fixed-rate, 30-year home loan at 5.5 percent your monthly payment will be $1,280. If you had the lenders best refinance rates at 5.0 percent your payment would only be $1,200 per month. That’s a difference of $960 a year you’re paying extra just to cover the origination fee and closing costs. Five short years later you’ll have paid almost $5,000 for just over three grand in fees and ten years this balloons to $9,600.
Beware Mortgage Broker Tricks
Most brokers tell you that the average homeowner only keeps their home loan for four years before mortgage refinancing again. If you do this you’ll be paying these fees all over again plus starting the amortization of your home loan from scratch. Keep in mind that your home is probably the most important purchase you’ll make during your lifetime and this isn’t a car loan we’re talking about…it’s a thirty year home loan. Don’t let a fast talking broker bait you into overpaying for next mortgage refi.
You can learn more about getting the best refinance mortgage for your next home loan without paying junk fees or unwanted markup of your interest rate by checking out my free Underground Mortgage Videos.
Here’s a quick sample to get you started slashing hundreds of dollars in unnecessary markup and junk fees from your next refi.
My name is Rob Regehr and I’m a personal finance writer with a chip on my shoulder for banks and brokers that take advantage of my friends and neighbors.
