Avoiding Refinancing Traps

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Refinancing might make sense, but homework is essential

^By PATRICIA LAMIELL= ^AP Business Writer=

NEW YORK (AP) With mortgage rates at 30-year lows, many homeowners are considering whether to refinance, hoping to save money or shorten the duration of their loans.

But the process can be riddled with unnecessary fees and hidden costs, which is why mortgage professionals urge homeowners do some homework.

"Mortgages are an important transaction, and people don't do it that often," said Christopher Weimar, president of Loan Search, an online mortgage brokerage firm in Upper Montclair, N.J. "It's easy to be taken advantage of."

If you've decided to refinance, the experts say your first call should be to the lender that presently holds your mortgage, unless that company doesn't also originate loans. The current mortgage holder has all your financial data and an appraisal of the property.

To keep your business, the lender may be willing to lower the interest rate on the loan or restructure it without charging you full closing costs. This is almost always cheaper than starting over with a new lender.

The mortgage business is lively enough, however, that some lenders are happy to send you elsewhere. Homeowners in this situation should do as much research as they can.

Keith Gumbinger, a vice president at HSH Associates, a financial publisher based in Butler, N.J., advises refinancers who aren't under the gun to close on a purchase to "be as ruthless as you feel."

Two primary considerations are the rate and duration of the loan.

Some newspaper advertisements can be misleading by listing rates for which almost no borrower will qualify, or low rates that are accompanied by hidden fees.

"Rate bumping is a big problem," said Richard Lesser, a mortgage banker with National Wholesale Lending Group in Little Ferry, N.J. "Some of these guys will quote rates that don't exist."

The best way to ferret out rate bumping or hidden costs is to ask a lot of questions, and to get everything you're told in writing.

When it comes to loan duration, a common mistake is for someone with 20 years left on a 30-year mortgage to refinance back out to 30 years, Gumbinger said. Ten years worth of equity payments are lost.

By contrast, swapping a 30-year loan for a 15-year loan may not lower monthly payments but it can save thousands of dollars in interest costs over the life of the loan, Gumbinger said.

Since long-term rates are so low well below 7 percent for both 30- and 15-year loans many homeowners with variable-rate mortgages may want to switch to a longer-term fixed rate.

But if you don't plan to be in the home for an extended period of time, you might be better off with a variable-rate mortgage or one that resets in 5, 7 or 10 years, said Jody Cooper, a loan originator for Norwest Mortgage in Aspen, Colo.

Once you've settled on a loan duration and interest rate, it's time to consider fees.

Mortgage shoppers "really have to be very persistent in determining what fees a lender is going to charge them," said Weimar. "Frequently when you're dealing with salespeople, they are not too forthcoming with information, particularly if you don't ask them the right questions."

Closing costs, for example, can vary from zero to 3 percent or more of the loan value. These are designed to reimburse the lender for such things as a title search and appraisal, a credit check, attorneys fees, tax research or flood certification. Banks aren't supposed to make extra money on them, Lesser noted.

To compensate for that, some lenders may charge origination fees, which can be as high as 1 percent of the loan, just to start the mortgage process. This may or may not be refundable if the loan doesn't go through.

Tax service fees, usually around $100, reimburse the lender for signing up for a service that informs them any time over the life of the loan whether any tax liens are placed on the property.

A lender may charge a commitment fee when it commits to writing the mortgage, or a lock-in fee to guarantee a certain rate for 30, 45 or 60 days.

Fees can add up to several thousand dollars, and many borrowers don't know how much they'll be paying until they go to closing.

While consumers should be educated about what they're buying, they should not assume they have unlimited bargaining power with the lender.

"Lenders aren't exactly starving for business," Gumbinger said.

Also, homeowners shouldn't try to time their refinancing to exactly coincide with the bottom of the market. That's risky, even for the titans of Wall Street.

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(Copyright 1998 by The Associated Press. All Rights Reserved.)