Refinance roulette can send clients spinning out of control

Financial advisers whose clients are calling and saying, “Hey, I see that rates have fallen 1% below my current rate; shouldn't I refinance?” may have to remind them that though a 1% drop is considered enough reason to refinance, the homeowner still has to pay closing costs, and if they are planning to move soon, they may leave the home before they reach the break-even point

Financial advisers whose clients are calling and saying, “Hey, I see that rates have fallen 1% below my current rate; shouldn’t I refinance?” may have to remind them that though a 1% drop is considered enough reason to refinance, the homeowner still has to pay closing costs, and if they are planning to move soon, they may leave the home before they reach the break-even point.

In fact, there are many aspects that advisers should help them consider before they sign on the dotted line.

The American Institute of Certified Public Accountants’ National CPA Financial Literacy Commission advises looking closely at the numbers: Just because a client has always had a 30-year fixed-rate mortgage is no reason to continue with it.

REFI DEPENDS ON EQUITY

Older homeowners, instead, may be able to transition to a 10- or 15-year mortgage. If they can handle higher monthly payments, they can save in the long run and own their homes outright more quickly than they had expected.

Thrivent Financial Bank advises financial professionals to check all the numbers before homeowners even talk to banks. For example, before clients get all worked up about lower rates, advisers should remind them that if they have less than 10% equity in their homes, they may have to pay extra fees to refinance.

“Appraisal is a big deal,” said Tracey Daniels, an attorney with Hartman & Craven LLP. “Houses are not worth what they were. You might not get the appraisal you need.”

Even for those planning to stay in their homes long-term, other costs and roadblocks can eat away at any savings or make refinancing impossible.

If the bank doesn’t like the numbers, the client won’t get a refinancing. Ms. Daniels advises making sure that lenders are working with appraisers familiar with the client’s geographic area and market.

Condominiums and similar developments can present special problems for owners, she said. If the sponsor stills own a large percentage of the units — 70%, for example — lenders may be fearful that the sponsor could default, leaving the development on the hook for 70% of the common charges.

And don’t forget taxes, said Michael L. Moskowitz, a certified public accountant who is president of Equity Now, a direct mortgage lender.

New York City has a 1.8% mortgage tax, but there is no mortgage tax in New Jersey. So a refinancing that makes sense in one area may not make sense in another.

Even if it looks as if a refinancing is advisable, there is a lot to do before homeowners can start paying a lower rate.

“The mortgage industry has changed in the past few years,” said Neil B. Garfinkel, an attorney with Abrams Garfinkel Margolis Bergson LLP.

When clients start to shop, he said, they have to provide complete documentation so a loan officer can tell them what products are appropriate.

“W-2 forms, two to three years of tax returns — basically, anything that paints a financial picture. The days of “no income stated’ forms are long gone; you have to prove you can afford the loan,” Mr. Garfinkel said.

He suggested that advisers help clients shop around to make sure that they are working with a serious lender. “Go with your gut,” Mr. Garfinkel said.

“You can tell if someone knows what they’re doing,” he said. “If you hear they can get a refi in 24 hours with minimal information, that’s not a good sign.”

Mr. Moskowitz agrees.

“If something seems too good to be true, it is. If someone is very low, don’t walk away — run away,” Mr. Moskowitz said.

Preparation can raise the odds of having a good experience, he said. Advisers and clients should “have a reasonable idea” of what the house is worth before calling a lender, Mr. Moskowitz said.

He said advisers should make sure that the clients know the amount of their monthly mortgage and tax payments, as well as their escrow status. Helping clients calculate their loan-to-value ratios will help them compare rates.

Even if the first lender looks good, Mr. Moskowitz recommends getting estimates from at least three lenders.

And clients shouldn’t pay fees until they receive their disclosures, he said.

CHECK LENDER’S REP

Mark Dallal, a vice president at J.I. Kislak Mortgage also cautions eager homeowners against paying fees upfront, relevant to getting a commitment.

“Overall, look at the reputation of the lender,” he said.

“What is their history? Are they stable? What are their service times? How quickly can they commit to a refi? Do they know where the current rates are?” Mr. Dallal said.

Finally, he counsels patience, noting that the refinancing process can run 30 to 45 days, and in today’s busy mortgage market, some lenders take even longer.