Fees rise as refinancing rolls

For homeowners considering refinancing, the recent one-half of a percentage point reduction in interest rates should help keep mortgage rates low - but is unlikely to push them down any further, experts say.

The reason, according to Phil Colling, an economist with the Mortgage Bankers Association (MBA) in Washington, is that the Fed action - as helpful as it was - affected mainly short-term interest rates, not long-term rates, which are the primary rates linked to the US housing market.

In fact, if the purpose of this rate cut - to rev up the economy - is realized, then long-term rates could even be nudged up months from now, Mr. Colling says.

Still, for now, the latest rate reduction is seen as having a positive ripple effect throughout the economy, helping many borrowers, including those taking out personal loans, car loans, and quite likely some home-equity loans. And the psychological impact of a low-interest economy is seen as helping many of those who are considering refinancing to do so now, before long-term rates edge back upward.

Currently, 30-year, fixed-rate mortgages are at their lowest levels in nearly 40 years, running about 6.03 percent, according to the MBA.

Still, rates will likely trend higher as the economy slowly rebounds, although "not significantly higher," says Colling.

So anyone considering refinancing still has time to take advantage of the low rates, he says.

Roughly half of the $4.8 trillion real estate market in the United States has been refinanced since the current boom in refinancing began in the late 1990s, Colling says.

So far this year, more than $1.1 trillion in property has been refinanced. Last year, more than $1.4 trillion was refinanced.

For anyone contemplating refinancing, it is important to make certain that your total transaction costs - all closing costs - will actually pay off for you in terms of lower expenses over time, says Brad Scriber, housing coordinator for the Consumer Federation of America (CFA), in Washington.

A lower interest rate, attractive as it may seem, may not by itself be enough to get your actual costs down in a refinancing, Mr. Scriber says.

What homeowners need to do, says Scriber, is consider all the points and fees they have to pay to refinance their mortgage and then determine how many years it will take to recoup those fees. (A "point" is a one-time charge, typically 1 percent of the value of the mortgage. In return, the borrower receives a lower interest rate. Some lenders charge multiple points.)

Unfortunately, many homeowners seeking refinancing are clobbered with excessive fees when they go to close on their new mortgage.

"I call them 'junk' fees, and they can sometimes get into the $2,000 to $2,500 range," James Nutter Jr., president and chief executive of James B. Nutter Co., a mortgage banker in Kansas City, Mo., told the Associated Press.

Loan officers will tell clients, "these are standard fees; everyone charges them." But "that's not the case," Nutter said.

Clients have to know what's in their closing costs - and whether or not they are being charged excessive fees, he added.

The problem, according to Scriber of the CFA, is that the estimate of expenses given clients before going to closing does not always match the real closing costs. Unfortunately, many consumers simply sign on the dotted line - and incur unusually large transaction costs as a result.

The Department of Housing and Urban Development is currently revising disclosure rules in an effort to give consumers more accurate information on refinancing costs. But until the new rules are announced, consumers must do their own monitoring - and comparison shopping, Scriber says. (HUD offers information on closing costs on its website at www.hud.gov.)

Typically, there are four main fees for closing - an application fee, a processing fee, an underrating fee, and document charges.

Some charges are unavoidable, such as appraisal and title searches, plus recording fees.

Still, fees can vary sharply among lenders, Nutter notes. A credit report, for example, may cost a company $15 to get. But what are they charging the borrower - $15, or much more?

If prospective fees seem unreasonable, remember that a borrower has the right to cancel a home-equity loan or a refinanced mortgage package within three days of closing, unless the loan comes from a state agency, or the loan is a closed-end refinanced mortgage from the same lender as the loan you are refinancing, Scriber notes.

Finally, says Scriber, look out for "deceptive or abusive" practices, such as financed-credit insurance (you can get cheaper insurance through a life insurance policy); debt-cancellation agreements, balloon payments, prepayment penalties, mandatory arbitration clauses, or negative amortization. Negative amortization is a payment schedule that doesn't lower your balance due.