How To Avoid A Ripoff Refinance And Shady Lenders

Certified Mortgage Advisor
NMLS 1701021
Published 
November 18, 2020

No ripoff refinance and shady lenders

We're talking about how to avoid a ripoff refinance and shady lenders. So interest rates are crazy low right now. And what is easy to do is get into a bad refinance. Something that doesn't benefit you well.

What you'll learn

Number one, shady stuff lenders do and trust me, they do some shady stuff here. Also how to make sure you're not getting ripped off, I'll show you a tool that you can use. Then finally, how to get out of a refinance both before. And after closing in case you made a decision that maybe you want to back out of.

Shady stuff lenders do

So first let's talk through some examples of what lenders do that can be shady and doesn't actually contribute to you having a successful refinance. The whole point of a refinance is for you to save money in the long run, and the problem with a lot of lenders is they just want to make money.

Frankly, they're not as interested in if it's a good deal for you or not. So it's not illegal. It's just something that can benefit the lender, but possibly not benefit you.

When rates are low, lenders strike

So when rates are low lender, Love refinances. Refinances are so much easier for lenders to do, and they're cheaper for lenders to do since they can get them done quicker.

So refinances are incredibly profitable for lenders. So when rates become low, lenders use that as a tool, a marketing tool to say, Hey, rates are low. It's lower than what you have right now. And you want to go ahead and refinance, but there are so many more things that go into that decision than just a rate.

ADs

What they'll do is they'll use ads and you've probably seen these ads or, lenders coming out and they'll say, we'll give you 1.75% on this loan. And, you're advertising these crazy low-interest rates. While they might exist, They just include so many extra costs and fees that it doesn't really make sense for you to move forward with that kind of refinance.

Letters in the mail

Also, you might get letters in the mail. So maybe you got a letter in the mail. If you have a current mortgage right now that says you're pre-approved for this specific amount, you can save this amount of money on your interest payment and are on your mortgage. And they're all basing.

This is off, off of tax and county information and estimates not actually what you're approved for. And so often they'll use interest rates to flash in front of you just to get you hooked in. And then they're going to try to sell you on working with them. All right. And again, not bad, not illegal necessary. Might not be the best option for you. You have some other options that can be really great.

Pressure: We have to lock now

Something that you might hear a lender says is we have to lock now interest rates are changing. They might go up. We have to lock this in. And that is a pressuring tactic. So the only reason somebody would say this is pressuring now when we're advising clients very often, we can say, yeah, there's a possibility that interest rates could go up, but never should your loan officer pressure you into locking so that you work with them. You have full control to be able to shop your rate and do whatever you'd like with a refinance that doesn't feel pressured into doing that.

Say no to: Pay the application fee now

Something that you also might see is you need to pay the application fee so we can get this started. Something along that line. Some lenders charge an application fee, which I think is incredibly dumb and an application fee is something that would be charged upfront. If your lender is starting an application fee, just go to another lender. You don't need to pay an application fee at all. Most lenders don't charge an application fee. There's no point in paying an upfront fee just to work with somebody it's ridiculous. Personally, that's what I think I'm also an instant pre-approval.

Carthage marketing

So a pre-approval without you submitting an application and the information and documentation is worth nothing, but you'll see companies waving that around waving the word preapproval around it's the thing that's going to get you into the door. What'd they use this word for is they want to make the process seem easier and have less friction. So you're more willing to work with them.

So if a lender can have an app where you can go enter a couple of pieces of information, they say you're pre-approved then automatically you're saying it's just going to be easier to go with this company instead of shopping around and doing the whole process with everybody else.

In reality, you're going to have to go through the same process with this lender that pre-approved you based on an internet five questions on that or a letter that they sent to you. But they're just trying to use this as a marketing technique to make the process seem easier. So you're more willing to work with.

Point Stuffing

Something huge that lenders do in a refinance is point stuffing. A point a discount point is 1% of your loan amount, and what this will do is that it's actually prepaid interest that buys down your interest rate. So maybe you'd be offered a 3% interest rate with no points.

You could pay maybe one point, so 1% of your loan amount, and that's going to drop that may be down to 2.875%. So the math doesn't always work like that to one, but basically, they're prepaying interest. Now what lenders will often do is they'll advertise an extremely low-interest rate, like this 1.75%, but in very fine print, or sometimes not in fine print, which is illegal. It might say, three points.

Three points is a lot of money. If we're talking about an average 200, $250,000 loan, that is an incredible amount of money just to get that lower interest rate and often is not worth it.

Possibly lower rate/ payment, but could wipe out your equity

Then also this is really big to watch out for is our refinance might save you money monthly and it might have a lower interest rate, and immediately we assume it saves me money monthly, and it has a lower interest rate. It must be a good deal, but it's not because what it actually can do is wipe out your equity because a refinance still has closing costs.

$5,700 Average closing cost

The average closing cost that you're going to see on a refinance throughout the US is about $5,700, and that's gonna include everything from your appraisal. It's your title, taxes, and insurance. If those need to be paid and recording fees and different things like that. So that's the average cost that you'll find on a reef. Most of the time people don't pay that upfront. They have it put into their loan.

Protect and save yourself

You've been working for quite a long time to pay off your loan already. You've been working hard to pay down your mortgage, and if you're going to increase your loan amount by $5,700 or more or less, then you really want to make sure that you're getting an incredible amount of monthly savings or a long-term from that refinance. But often leaders don't really talk about that with you, and they're not really concerned about it because that doesn't affect them. So you have to make sure that you're protecting yourself through this.

Big lender point stuffing

Now let's run through an example of how you can see some of this point stuffing a little bit and how you can check to see if you're getting a good deal.

An example

So I have an example here from a really big lender. So let's look at this 30 years fixed loan. They're offering a rate of 2.99% and we're not going to focus on the APR right now. That's a different type of metric that we're not concerned about. So 2.99% APR, and at the bottom, they had this little toggle here. It wasn't all shown at first, but I had to click on it to see the legal disclosures, which I'm sure they have a compliance team, but that feels a little shady to me.

Check little details

I don't know how complaint that is to hide the legal disclosures, but it's basically saying, here's the payments $842 a month for the cost of 1.75 points due at closing and the loans evaluation of 74%. So they're basically saying this is with 25% down and it's 1.75 points.

Small points, big difference

So these small little details are huge because you see these rates being advertised. You don't know how much is being put down or how much is in equity. So if this was a refinance, this would be an inequity, not necessarily a down payment, but they don't tell you all this as prominent as the other information, they want to bring your attention in with the rate and they don't tell you about 1.75 points. 1.75 points. $2,625 extra just in points added into your loan amount. That's $2,625 worth of payments that you've already been making over how many years that's immediately going to be wiped away.

How to see the ripoff? Compare!

Now, how do we actually see what the average rate is and make sure we're not getting ripped off? What we can do is we can compare. That scenario with this big lender with what's happening in the average market.

Check not just the Ads, take your time to shop around

In Ohio, most lenders are averaging 2.875 with the same thing, same 25% down decent credit score. And they're only charging 0.5 points. So that's only $750 worth of cost. So if we go back to this first. We could either get a 2.99 with $2,625 in cost or a 2.875 with $750 in cost. It's very clear that the most cost savings you have both an upfront cost and interest rate are by shopping around and figuring out what other lenders are offering other than just what's being advertised.

So what can you do?

Like we've heard all of this, our lenders can be doing what to watch out for. What can you actually do?

CFPB Rate Checker

The first thing is, look at the CFPB is rate checker. So it's the consumer financial protection bureau. In CFPB, you can go ahead and enter some information about your loan and it will show you what average lenders are quoting in that market. So you can see, if you're getting quoted a 3.75 with a scenario, then maybe you should shop around a little bit more because most lenders are quoting 2.875, and the same thing. If a lender is quoting a 2% then maybe I might have some concerns. I want to do a little bit more digging because most lenders are doing a 2.875.

Proactive than reactive

So CFPB rate tracker also, instead of just responding to lenders that reach out to you, I would want to be more proactive than reactive. So if you're getting mailers, are you getting calls or emails, think about that company is spending money on advertising.

Don't pay their ads

That advertising money is being paid for through other people's interest rates. So normally the companies that advertise a lot tend to have higher rates. Cause they have to pay for that marketing somehow. So instead of responding to the advertisements that come in, it might be more beneficial for you to reach out to somebody because then you know that this, there's a higher chance that they're not going to be predatory or scummy in their lending practices if you're reaching out to them.

Compare and ask questions

Also, shop with a couple of different lenders and ask questions. I think it's really good to get through. One from a big lender, one from a local credit union, and one from a local mortgage broker. It's going to give you a really nice spread of different loan options.

Understand the refinance "break even"

Also, you want to understand the breakeven, so you want to understand what's your monthly savings and then what's your total costs as well. If it costs you $6,000 to do the refinance, even if you're putting it back into your loan, figure out what is your monthly savings. If we save $60 a month, it's going to take us about a hundred months to break even. That's not a super great deal. So make sure you understand what your breakeven is because if you refinance before your breakeven period, there was no point in you doing a refinance, you lost money.

You can ALWAYS back out or change lenders

Then here's the big thing you can always back out before and sometimes after a refinance. So this is how it works. So let's say that you applied on a particular date, so that is when you first started the refinance. Taking you all the way to the closing table. When you sign final documents, this might take somewhere around 30 days. Anywhere through that 30 days, you can change lenders. You can back out whenever you want.

Closing is the only thing that binds you with the lender

There's nothing binding you to a loan, to refinance, to a specific lender until you sign at the closing table. At any point in time, you can back out and change lenders.

No refund for appraisal

The only thing you're going to want to watch for is if you did an appraisal, you're probably not going to be able to get a refund for your appraisal. Because that's going to be paid for upfront to a separate third-party appraiser, you can back out any time during that period.

Right of rescission

Now, refinances have a really interesting thing called a "Right of Rescission". A right of rescission basically says, after you sign up the closing table, you have three days.

Rescind: Three days allowed

So you have three days that you're allowed to legally back out of that refinance. So let's say you signed and closed on your refinance yesterday. You paid the money that you needed for your refinance. Let's say it was maybe a thousand dollars to refinance out-of-pocket costs. You can cancel that deal for up to three days after closing, you just have to contact the lender. Usually, you have to do it in writing to be able to rescind your loan. So this is incredible because you're allowed to sit with that refinance for a couple of days before it actually gets funded.

Why three days?

So after this three-day period, that's when the lender is then going to fund the loans. That's when they're going to send the money to pay off your current loan and provide you with the new one, but you have this period of time and this period of time to be able to back out of the loan if you want to.

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