Lenders have odd ways of pricing mortgages. For example, one of the country's largest lenders charges nothing to lock a mortgage rate for 15 days, .5 a point for 30 to 45 days, and a full point for a 60-90 day lock on a purchase mortgage. However, the same lender will lock a refinance for 90 days at no charge. While you might think that's just great and sign up, you should be asking two questions:
- What is the rate for purchases? The particular lender used in this example charges .125% higher for refinances than it does for purchases. That translates to about one full point in mortgage fees.
- Why should a refinance take 90 days? In fact, it should go faster than a purchase because there is no contract to analyze, no inspections to order, no seller concerns to address.
Mortgage loans for purchases get priority
Mortgage lenders devote more of their resources to purchases because purchases come with deadlines. They don't want to get people angry by causing them to lose homes or resort to a hotel stay because their closing is delayed. In addition, real estate agents can influence their clients' choice of lenders so it does not pay to get a reputation for slowing a sale.
As a result, refinance transactions are pushed to the back burner; underwriters, processors and financiers get purchases done first and then refis only if they have time left over. In essence, the 90-day timeline is a cushion for the lenders to work refis into their schedules.
Some lenders buy time…at your expense!
This 90-day cushion puts refinancing borrowers at a disadvantage in a two ways:
- Every extra month it takes for your refinance to close is a month that you pay higher mortgage rates, which could end up costing hundreds over the life of a loan.
- Lenders that charge high refinance fees are making you pay for their lack of efficiency; if they want to take three months to complete a refinance, they should bear the cost.
Ask the right questions about your mortgage
A mortgage quote is only part of the equation: good service by a lender can save you cash while poor service can cost you a lot of money. Ask for both mortgage rates on purchases and refinances, even if you know for sure you are refinancing. Ask about locking costs and how long a refinance takes to complete. The lender that can complete your loan in 30 days, and not charge you for 90 days, may be offering a better home refinance deal than the one with the lowest advertized rate.