If you have been shopping for a mortgage, chances are you have found the process to be overwhelming and confusing.  Besides the multitude of loan programs available, it can still be confusing even if you are only looking for a 30 year fixed due to the way each mortgage company quotes their rates and fees.  Unfortunately, there is no “standard” way of quoting rates and fees among lenders.  Some mortgage companies include items such as the appraisal and credit report fees in their closing costs and some don’t.  Are they being deceitful in doing so?  While some are new to the business and don’t understand how the business works, most are playing games by sounding cheaper than the rest.

So what’s the best way to shop for a mortgage?  Always request a Good Faith Estimate.  If you’re not familiar with this form, this is a standard form that mortgage companies use to disclose particulars about the loan such as the loan amount, rate, and most importantly a breakdown of the various fees and other charges such as escrows for taxes and insurance.  The GFE,as it is sometimes called, loosely mirrors HUD’s Settlement Statement, the final statement you receive at closing.  It is set up this way so that you can easily compare the fees from the original estimate to easily show discrepancies.

As you talk to each lender, be sure to ask for a complete list as well as a breakdown of their fees.  Then ask them to e-mail you a GFE.  If they can’t or won’t email an estimate, I would take them off your list.  Not only do you have the right to see an estimate from each lender, you’re doing yourself an injustice if you don’t ask for one from each.

You probably see ads all the time for “No-Cost Refinancing”, but what exactly is it and how do some lenders offer it and some don’t?  The truth is, all lenders can offer it and probably do, it’s just that some use it as a marketing gimmick.

A true no-cost refinance is one in which the lender literally picks up all of the fees, with exception to your escrows (assuming you escrow taxes and insurance) and pro-rated interest.  So you don’t pay any fees; no appraisal, no credit report, no title search, nothing.

So how does the lender do it?  Understanding this requires knowing how lenders are compensated.  Most lenders are compensated by the banks and mortgage companies to whom they sell or broker loans.  Typical compensation for a lender who wants to be competitive is .75 – 1% of the loan amount.  This means that for a $200,000 loan, the lender would be paid $1500 – 2000 for originating the loan.  Each day, lenders receive rate sheets from all of the banks and mortgage companies showing what the compensation is at different rates.  So if at 6% the lender is getting paid 1%, then at 6.125% they would be paid approximately 1.5%, and at 6.25% they would be paid approximately 2%.  As you can see, the higher the rate at which they lock you, the more they are paid.

That is where the no-cost refinance comes in.  Whereas a traditional refinance involves a locked rate based on specific closing costs, the no-cost refinance is at a higher rate with no closing costs.  The lender actually quotes you a higher rate and uses the compensation to pay for the closing costs.  Using the example above, at 6.25% the lender is getting paid $4000 by the bank or mortgage company for originating your loan.  If the total closing costs are only $1600, the lender nets $2400 compensation from your loan, and you paid nothing to do it.  Or did you?

You see, you haven’t yet, but you will.  That’s because when you choose a no-cost refinance option, you’re getting a rate that is .25-.375% higher.  So you’re basically financing the closing costs in the interest rate, something that can add up over time.  Let’s take a look at an example.  The interest on a $200,000 loan at 6% = $1000/month and a $200,000 loan at 6.25% = $1041.67.  So the difference between the traditional refinance and the no-cost refinance is $41.67 higher each month.  That means that if closing costs run $1600, you would start losing on this option after 38 months, which is the break even ($1600/41.67=38.4).

So longer term a no-cost refinance may cost more, but in times where the Fed is cutting rates and they are expected to drop, you may want to choose this option as you can refinance over and over without trying to guess the bottom.

Although the President’s “Housing and Affordability Plan” was announced on February 17th, it wasn’t until yesterday that we got the details of what it actually means to homeowners.  We are finally seeing some changes in guidelines, starting today with a major announcement by Fannie Mae.  It was announced that over the next two months, significant changes are being implemented that will loosen credit guidelines and start lending to responsible people again.  The pendulum that swung too wide and then back again, is now a little closer to the middle, where we knew it would end up but we just weren’t sure how soon.

The tightening has been taking place since last year, with the focus being on equity and credit scores, completely ignoring those who may have less than 20% equity or a credit score below 680.  But new guidelines are focusing on who has been responsible enough to keep up with payments, rather than just sticking to a “set” formula.  The focus has been on those who couldn’t keep up, so it’s good to finally see relief for those of us who have making payments on time and doing whatever we have to to keep our heads above water.

So far, only Fannie Mae has released their new guidelines so your loan must be a Fannie Mae serviced loan (contact your current lender or visit http://www.fanniemae.com/homeaffordable to find out if your loan is a Fannie loan) Some of the most important changes include:

• No PMI required on a refinance if you previously didn’t have PMI.  In other words, if your home’s value has dropped (most likely the case) and you go to refi and you now have less than 20% equity, then you won’t be required to have PMI.
• Ability to refinance a loan with an existing second mortgage where the total LTV (loan to value) is up to 105% of the value.  (Previously this was 95%)
• Relaxed credit score requirements for scores below 680.

As you can see, they are really working hard to help everyone, not just those on the brink of foreclosure.  And I believe many more changes are coming for responsible homeowners, including lower rates.  Stay tuned…