February 13, 2013

The process of deciding whether or not to refinance a mortgage in order to lower costs involves 4-steps:

• Step 1: Select the Preferred Type of New Mortgage.

• Step 2: Find the Best Available Price on That Mortgage.

• Step 3: Determine Whether the Cost of The New Mortgage Will Be Lower Than the Cost of Retaining the Current Mortgage.

• Step 4: Find a Way to Prevent Being Overcharged After Committing to the Transaction.

 Because borrowers navigating these steps must access multiple sources of information, many of which are unreliable if not biased,  it is hardly surprising that many bad decisions are made. The most important of the bad decisions are those not to refinance by many who would profit from doing so. I have written about this several time, most recently in Saving Money on Your Mortgage in 2013: Unexploited Refinance Opportunities. Among those who do refinance, the most common mistakes are in selecting the wrong type of new mortgage, and over-paying for them.

Common Approaches to Step 1: Borrowers usually select the type of new mortgage they prefer, from among the multiple versions of adjustable-rate and fixed rate products that are available, before the refinance process begins – for example, they decide they want to replace their current 30-year FRM with another 30-year FRM. This means that their selection ignores price relationships between the different mortgage types. Sometimes this approach makes sense, but all too often it doesn’t. 

Common Approaches to Step 2: Borrowers price the new mortgage in a variety of ways. Some use prices reported by the media, which are not adjusted for the specifics of individual transactions, and will therefore be correct only by accident. Others use quotes from loan officers or mortgage brokers, which may also be incomplete and in many cases have a downward bias designed to induce shoppers to become clients. Borrowers who price their transaction on-line increase their chances of getting an accurate price, but not by much because few sites ask for the detailed information required to price accurately. (More shoppers complete short questionnaires than long ones.) The few sites that price accurately are multi-lender sites, see How Effectively Can You Shop at Multi-Lender Web Sites?

Common Approaches to Step 3: Comparing the cost of the current mortgage with that of the new mortgage is not difficult when the old mortgage rate is 6% and the new rate about 3%, but when the spread is much smaller, as it will be for those who have already refinanced at least once, the challenge is greater. Some borrowers concoct their own schemes for answering this question, which (based on the ones I see) are almost certain to be wrong. Using an on-line calculator raises the probability of getting it right to roughly 50%. This is based on my recent investigation of the first 10 refinance calculators that came up on Google, 5 of which were seriously flawed. See Do Internet-Based Refinance Calculators Tell You the Truth?

Common Approaches to Step 4: Few borrowers know how to protect themselves against over-charges after they have committed to the transaction. One common approach is to place oneself in the hands of a recommended loan officer or mortgage broker, in the hope of fair treatment. Sometimes this works, often it doesn’t. Those more cynical try to protect themselves by price shopping among multiple loan providers. This works even less often, because no loan provider can be held to a price quote, and the one with the lowest quote is usually the biggest liar. The borrowers who do best shop the few multi-lender web sites that post prices received directly from lenders, without intermediation by loan officers.

What has been conspicuously missing in the marketplace has been one reliable information source supporting all four steps in the refinance process, but that is no longer the case. Prospective refinance borrowers can now find this facility on my site. This is how it works: 

Prospective borrowers input the information we need to calculate the costs of each type of new mortgage over the period they expect to have the mortgage. This allows them to select the type of new mortgage that will minimize their cost (Step 1). 

The prices used in calculating the costs of each type of mortgage are the lowest of those we receive from the certified lenders who post their prices with us (Step 2).  

Prospective borrowers also input the information we need to calculate the costs of retaining their existing mortgage. This allows borrowers to compare the costs of the different new mortgages with the cost of retaining the old one (Step 3). 

Our lenders post their prices directly with us, without loan officer intermediation. This eliminates the potential for pricing gamesmanship by intermediaries after borrowers have committed themselves (Step 4). 

In sum, borrowers effectively confront all four refinance steps at the same time and at the same place. To try it, go to Single Integrated Refinance Process.