I bought my home at the end of 2009. Even though I expected housing prices to fall, my family was growing and I needed to either move to another rental or buy. Did not want to hassle with another rental, so I bit the bullet and bought a brand new house taking out a 30-year fixed FHA loan at 5% APR.
As interest rates continued to plummet, I have been entertaining the idea of refinancing. I could not refinance to a conventional mortgage, and refinancing an FHA loan turned to be tricky: with the refinanced FHA loan I would pay higher mortgage insurance (due to a recent rule change), so interest rates needed to fall far enough to result in any savings. I eventually used the FHA streamline refinancing to lower my interest rate from 5% to 3.875% APR. I’ll explain how the process worked and describe a couple of caveats to help those interested in refinancing.
First, if you’re not familiar with FHA loans, here is a quick primer. FHA loans are backed by federal government (Federal Housing Administration). You get an FHA loan form a regular bank. Not all banks specialize in FHA loans, but many do. If you default on the loan, the federal government will cover the bank’s losses. For a potential borrower, an FHA loan may or may not make sense. The main advantage is that it requires a smaller down payment (currently 3.5%, compared to a typical 20% for a conventional loan). An FHA loan comes with the price, though: you will pay additional fees for loan origination and may need to pay higher (and longer) mortgage insurance (PMI). So if you can — and are willing to — come up with the required down payment for a conventional loan, the FHA option would make little (if any) sense; otherwise, it’s probably the only way to go.
Now, back to refinancing. At the time of falling real estate prices, unless you have enough equity, there are not that many refinancing options. The good news for the FHA mortgage holders is that they can use FHA streamline, which greatly simplifies the process: there is no appraisal, no equity requirements, no extensive credit check, no income verification. The basic prerequisites for FHA streamline include an informal employment check (you are expected to be employed or self-employed) and more or less reasonable FICO score. Federal government requires that your monthly payments after FHA streamline refinancing were sufficiently lower (about $100 or so for a typical loan) than the original payments (see FHA Streamline Loan Requirements).
If you are a potential target for FHA streamline, you may be getting postcards with ads proposing very appealing rates. Make sure you read small print and understand the limitations: most do not guarantee these rates or apply them to variable interest loans.
One day, I got a postcard from American Financial Network, Inc (or AFN) with the ad promising FHA streamline refinancing to a 30-year fixed loan with sufficiently low interest. The postcard looked similar to this one:
I called the number, talked to an AFN representative, and liked what I heard. After dealing with a couple of other refinancing organizations, I was genuinely impressed with AFN’s representatives and process. People were nice, friendly, and straight. The process was very efficient. There was one BUT, though (more on this later).
On the initial call, an AFN representative explained how the process worked and what to expect. I don’t remember now if I verbally provided the info for the initial estimate or if I sent the paperwork, but in a day or so, I got an offer for streamline refinancing to a fixed 30-year loan at 3.875% APR with no fees and no points. I was a bit suspicious about the no fees part, so I asked to confirm and was told that there would be no fees.
The process took about a week with most of paperwork handled over e-mail. I received the final papers, signed and sent them using a prepaid carrier service. A notary public came to my house to go over documentation and signing. Unlike my experience with the original mortgage issued by Wells Fargo, none of the paperwork were lost and I did not have to redo anything. It was a very pleasant experience. Within a month of closing, American Financial Network sold my mortgage to U.S. Bank, as it was expected (there was a chance for the loan to be refinanced with Wells Fargo, but it did not materialize). I don’t really care whether my mortgage stayed with Wells Fargo or moved to any other financial institution. I have no issues with U.S. Bank thus far.
Now, remember how I mentioned that I had been promised that there would be no fees for refinancing. Nevertheless, I noticed a few fees in the settlement statement. I called my broker and asked about the fees. The broker said that the federal government required them to disclose “typical” fees, but these were only included for reference. He claimed that the government did not permit finance charges for FHA streamline loan refinancing, and the “fees” that appeared in the statement were offset by a credit (there was in fact a line item showing credit). I did not give this much thought, but three months later, when I showed my settlement statement to my accountant during tax preparation, I found out that I was actually charged a loan origination fee in the amount of $1,195. According to my accountant, this fee was not offset by any credits.
I sent an email to the broker at American Financial Network, who had handled my refinancing, asking to explain the discrepancy, but didn’t get a response. So I assume, that my accountant was correct. Now, I don’t really mind the fee. If I were told about the fee in advance, I would still go ahead. But I’m quite upset that I was not told the truth. Another possibility could be that the “no points, no fees” refinancing actually meant no out-of-pocket fees (i.e. there would be a fee, but it would be bundled with the new mortgage). If this were the case, I would classify it as deception, because for a typical consumer, there is a difference between no fees whatsoever and no out-of-pocket fees. I repeatedly asked my broker how much my refinancing would cost, and always received the answer that it would cost nothing. Now, maybe the answer meant nothing out-of-pocket, but this was not what I asked.
Anyway, I’m not sure if I take this issue further (e.g. file an FTC complaint for deceptive advertising), but in the meantime, here are some suggestions that may help you avoid your mortgage refinancing mistakes and missteps:
- When you get a quote, ask exactly how much it would cost overall, not just out-of-pocket. Ask for a confirmation in writing (e.g. via email).
- It was helpful to learn the exact amount of my monthly payment after refinancing and compare it with the current payment. However, this was a bit misleading, since my new payment was essentially adjusted for a longer term (I have already been paying for 2 years out of 30 of my original loan, so the new 30-year loan essentially extended my mortgage to 32 years). I don’t know if it’s possible, but I would ask to compare original payment with the hypothetical payment after refinancing adjusted for the remainder of the original term. Even if this would not be the actual term of the refinanced mortgage, these numbers would offer a more accurate comparison.
- The total amount saved over the lifetime of the mortgage was helpful (in my case, it was about $90K); make sure you get it.
- Keep all paperwork, names, contact info, and communication.
- It could be helpful to go over the draft of the settlement statement with your account before you sign up.
Best of luck.
P.S. If you are savvy in accounting, below is a copy of my settlement statement (with personal info removed). See if you can figure how much my refinancing fee was.
UPDATE (3/28/2012): One day after publishing this post, I received a phone call from the broker at American Financial Network, Inc. He said that he had received my email and ran my case by someone on the accounting side. They did not find any discrepancies except that I could get $500 cash if federal regulation allowed cash-out refinancing (which apparently it does not). He tried to explain how the numbers worked, but the explanation still made little sense. I asked the gentleman to send me the explanation via email, so I could include it in the post (or try to make sense out of it after seeing it in writing). He promised to get back to me. A few hours later, I got a phone call from another person, who claimed to be in charge of verification of my settlement. He said that after checking the numbers one more time, he found a discrepancy in the amount of $2,017.18. According to this gentleman, this was a human error caused by similarities of a couple of numbers. He apologized and promised to issue me a check within 72 hours. A day or so later, someone else called to verify my address and delivery preferences. Yesterday, I got the check via certified mail.