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4 July 2005
�I have heard that it
is easier to shop for a refinance than for a purchase mortgage, but I�m not
completely sure why�?�
Shopping For a
Purchase Mortgage
Borrowers purchasing a house are faced
with a closing date on which they must provide funding to complete the purchase.
This means that at some point in the process there is not enough time for the
purchaser to back out of a deal and start anew with another loan provider. Once
past that point, they are at the mercy of the loan provider.
Purchasers who
haven�t locked the price of the loan by that time are particularly vulnerable.
The loan provider promises to lock �at the market price� on the day the
purchaser elects to lock, but the market price is what the loan provider says it
is. If he cheats, too bad, the borrower is stuck.
Even if the
purchaser has locked, only the rate and points are covered. (Points are an
upfront charge expressed as a percent of the loan). Neither lender fees
expressed in dollars nor third party settlement charges are covered by locks,
and there are many ways to increase them when the borrower has no place to go.
Shopping For a
Refinance Mortgage
In contrast, the
refinancing borrower who feels badly treated by a loan provider can opt out of
the deal at any point and start again with another loan provider. Most borrowers
can refinance anytime.
Indeed, a borrower
refinancing with any lender other than his current lender can go to closing,
then exercise a right of rescission under the Truth in Lending Act. This gives
borrowers three business days to inform lenders in writing that they have
changed their minds. The lender must then return all fees and remove any liens
on their property. This right is not granted to loans used to purchase or
construct a house.
The right of
rescission was designed to protect refinancing borrowers against solicitations
by sweet-talking loan providers. It applies regardless of the kind of property
that secures the loan, so long as it is a residence, or whether or not the
refinance is �cash-out�.
The right of
rescission does not apply to refinancing with the current lender, presumably
because that lender has less incentive to deceive the borrower into taking a bad
loan. The right of rescission also does not apply if the property is a second
home or an investment, presumably because law makers felt that such borrowers
ought to stand on their own feet.
The three-day
period begins on midnight of the day in which all the required loan documents
have been disclosed and signed. If this happens on a Wednesday, the right
expires at midnight Saturday (Saturday is considered a business day). If the
papers are signed on Thursday, the right expires at midnight Monday, since
Sunday is not a business day. If the papers are signed on Thursday December 23,
2004, the right expires at midnight Tuesday because Saturday is Christmas.
Refinancing
borrowers have one other advantage. It is much easier for them than for
borrowers purchasing a house to use a no-cost mortgage shopping strategy. Under
such a strategy, the lender becomes responsible for settlement costs, so the
borrower can focus entirely on the interest rate. This simplifies shopping
enormously. Lenders who agree to pay the costs have no opportunity to raise
costs later in the process.
On refinancings,
no-cost loans are widely available because many lenders are prepared to assume
full responsibility for settlement costs. Most of the settlement costs on a
refinance are lender fees, and the third party services that generate charges
(such as appraisal or credit) are often waived. Guaranteeing settlement costs
involves little risk.
On home
purchases, in contrast, lenders will not guarantee settlement costs. Home
purchases involve a number of third party charges that lenders may have
difficulty in pricing. The only lender who will guarantee settlement costs on a
home purchase is ABN AMRO at
www.mortgage.com.
Making It as Easy
to Shop for a Purchase Mortgage as For a Refinance Mortgage
Borrowers can�t
be given the right to rescind a purchase mortgage because that would mean
rescinding the purchase. But shopping for a purchase mortgage could be made just
as easy as shopping for a refinance.
This could be done
by enacting a rule that lenders could charge borrowers up to some fixed amount,
say $1500, but have to absorb all other costs, including third party charges,
themselves. With this rule in place, mortgages would carry one price, the
interest rate, and borrowers could shop rate without worrying about other
charges. You will hear more about this idea in the months to come.
Copyright Jack
Guttentag 2005
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