The Good Faith Estimate (GFE) is one of the worst ways to compare lenders. I must get asked for a GFE 10 times a week, and 10 times a week I try and explain that using a GFE is the wrong way to compare lenders. Below are a few reasons why:

The GFE is one of the most poorly designed forms, designed by government bureaucrats, ever conceived. There was a survey done for a large bank that found that 53% of buyers who looked at the GFE spent very little time doing so. 26% either never looked at it or don't know whether they looked at it. 49% of buyers said the GFE disclosure was too complicated, "a waste of time" or they weren't sure. Just 37% rated it useful. The form used to be a one page form for decades up until recent changes mandated by the Federal Government. Now the form is three pages, somehow with less data on more pages, and its way more confusing than before.

And the most important thing is that when comparing the loan options of different mortgage lenders, you have very few things to compare. What you should be asking is simply:

-what is the interest rate?
-what are the lender fees?

That is it. There is no need to even see a GFE. The GFE has a lot of other fees and monies on it, that are not dictated by the lender. There are fees that are controlled by a title company, or by a state/county/city (like property taxes or recordation tax). For example:

Loan Option #1
30 Year Fixed Rate, 4%
LENDER FEES:
0 points
$895 underwriting fee
$400 loan processing fee
$450 appraisal fee
OTHER:
$800 title company fees
$2,500 title insurance
$3,200 property tax escrows: 8 months at $400 a month.
$1,500 per diem interest: 30 days worth at $50 per day.
$2,000 recordation tax to the county
$11,745 total

Loan Option #2
30 Year Fixed Rate, 4%
LENDER FEES:
0 points
$895 underwriting fee
$400 loan processing fee
$450 appraisal fee
OTHER:
$750 title company fees
$2,300 title insurance
$2,400 property tax escrows: 6 months at $400 a month.
$500 per diem interest: 10 days worth at $50 per day.
$2,000 recordation tax to the county
$9,695 total

Loan Option #2 is the best one, correct? You should pick the lender offering option #2, right? Congratulations on being a smart shopper, right? No. Wrong. These two loan options are exactly the same. If you chose option #2 you chose the better salesperson, not necessarily the cheaper option or the better mortgage professional. Here is a breakdown of why:

30 Year Fixed Rate (the exact same loan type is being offered)

4% (the interest rate is the same on each option)

0 points (the cost is the same at 0 points on each option)

$895 underwriting fee (this fee is the same for each option)

$400 loan processing fee (this fee is the same for each option)

$450 appraisal fee (this fee is the same for each option)

$800 title company fees (there is a 10% variance for mistakes allowed on title fees, and this is a fee the title company controls, not the lender, the lender can fudge it down as happened in option #2, and that will help the lender make his option sound as if it were the cheapest).

$2,500 title insurance (there is a 10% variance allowed on title fees, and this is a fee the title company controls, not the lender, the lender can fudge it down as happened in option #2, and that will help the lender make his option sound as if it were the cheapest).

$3,200 property tax escrows: 8 months at $400 a month. (How many months of property taxes need to be collected to establish the escrow account is a big guesstimate, it will vary depending on what time of year you are settling, and is not one of the fees a lender is responsible to be accurate on; so you can fudge this quote downward, but it may indeed be a higher figure in reality, and the buyer will have to pay that higher figure, but you will have chosen a lender based on a fudged number).

$1,500 per diem interest: 30 days worth at $50 per day. (same concept as with the above on the property tax discussion).

$2,000 recordation tax to the county (this is a fee that most lenders have to be accurate on, and are good at being accurate on).

All you have to ask a lender is what is the rate, and what are the lender controlled fees, and that is it. That is all you need to know when deciding what lender to use. Then, when you choose a lender, you can expect a complete GFE, but realize it may not be anywhere near accurate due to the above reasons. If you really want to compare apples to apples on the loan choice, a Good Faith Estimate is not the tool to use, because the GFE has other costs in it that are not in the control of the lender. It is also a very confusing form, made more confusing in the last few years by the Feds.

Simply compare rate, appraisal fee, document preparation fees, and any other lender fees. Then always consider the experience of the individual loan officer, what type of lender you are working with (use of mortgage brokers and big banks is drastically on the decline, while use of direct lenders has been the preferred choice), what the estimated turn times are, whether or not your source was referred, and whether or not you have a general comfort level with the loan officer you have been talking to.

I had a potential client approach me about a possible refinance. They said they had been getting fliers and phone calls saying they were eligible for low, low rates for a refinancing. Hmmmm, low, low rates? She said she thought she was unable to refinance. I asked two questions and knew she was unable to refinance. She had no equity in order to refinance, and a crazy story!

When people say you can do something, maybe they just want to see if you can do something. I'll cut and paste the whole conversation, you may find it interesting and helpful the next time you get a flier in the mail or a cold call. Bottom line: stop shopping by price alone, get a referral, do research, and ask a lot of questions. Clearly the people this person was hearing from were simply marketers, cold callers, fleas on a dog trying to work a hot refi market, and they'll close their doors when the easy money goes away. Below is the email we exchanged, it does not take long to see this person cannot refinance. Read it and learn, marketing is marketing, nothing else:

Let me ask you some questions and I'll see if I can help:

1. When did you buy the home? July 2006…it was part of a CRAZY mortgage lending scam and the three of them, a dirty appraiser, real estate agent and lender are all in prison now. So basically I was the typical "Sub-primer" that shouldn't have gotten a 100% financing on a stated income loan, but I did.

2. What is the current rate on the 1st trust mortgage? I was able to get both loans modified after years of writing letters. The loan for $115k was at 11%!! and is now STILL 11%, but they "forgave" $100,000 of it so I am only paying interest on $25,000, but I am not allowed to pay it off for a while?? Complicated. The other loan I had modified to 5%. So TOTAL, my mortgage rate a month is just under $2400 (which is being paid by my renters in there at the moment) My original mortgage payments before I wrote letters and got the loans modified was $4100 a month!

3. What did you originally pay for the home? $575,000..after I found out the appraiser inflated the rate by almost $75,000 and they all pocketed the difference in escrow

4. What do you believe the home to be realistically worth now? The property tax people have it at $460,000, but I think its closer to $500,000.

5. What is the balance of the loan amount/s? I have zero equity…well, maybe negative equity.

6. Is this home your primary residence, a rental property, or a vacation home? It was forced to become a rental property so I wouldn't go into foreclosure. I originally was planning on living in it, fixing it up a bit and flipping it, when the height of the real estate boom was happening and everyone was doing it. I bought at the peak right before the bubble burst unfortunately.

7. What type of property is it, condo, single family detached, rowhome, 2 unit, 3 unit, or 4 unit? It is a really tiny log cabin style bungalow built in 1922 and it hasn't changed since. It is cute to rent, but if someone bought the property it is DEFINITELY a "tear down". The entire property is pretty much worth just land value and is surrounded by multi-million dollar homes and duplexes. The area is zoned for a duplex as well. If I were able to find a developer to take this place off my hands and make a little money I would. The deal is, I went through SO much hell to NOT become a statistic and to not go into foreclosure when this mess happened. I am determined to make money off this property after everything I went through. Now I am just sitting on it. I have been getting letters in the mail and random phone calls saying that I am prequalified to refi the place, so I thought it was at least worth looking into it. If there is ANYTHING you can do I would be forever grateful. Thanks!

Rates are still very, very low by any measure, even though they have gone up some in the past few months. Although we went through a refinance boom in 2010, there are still plenty of people who want to refinance. Many of them still can, and some cannot. Why can't they?

One of the most common things I hear when I talk to someone who wants to refinance who cannot qualify is, "I will save money by refinancing, I am paying the higher payments now, so why won't the bank let me refinance to a lower payment?" It's simple, a bank (many times a new and different bank) is analyzing what it sees as new risk and a new client. Why should this bank take on a new loan, even if it benefits the borrower, when they think there is repayment risk?

Even if its the same bank that has the loan now that you are talking to about a refinance, if they see an unqualified borrower, they cannot approve the loan since its does not meet Fannie Mae/Freddie Mac standards. Without meeting Fannie Mae/Freddie Mac standards they'd have an unsalable loan on their hands, that would not fit Fannie Mae/Freddie Mac guidelines. If you cannot sell a loan into the Fannie Mae/Freddie Mac secondary market, there is no point in doing the loan, because very few banks hold their own loans. Almost all loans are sold off as mortgage backed securities in the secondary market.

Some clients who want to refinance are stunned they cannot do so when:

-they do not currently have a job.
-their debt ratios are too high.
-their credit scores are sub par.
-their house does not appraise to show any equity.

While all these scenarios are a shame, and these are the people that really need to save money, the bank's position will be, "why should we take on this new risk, and take the risk off of the hands of some other bank that currently has it."

I had a potential client who stated, "Please understand that the house is worth $1,000,000 approximately and that I am asking to refinance a mortgage for $215,000. If this has to become an aggravation for me in terms of documents, statements, questions, etc. I’d rather stay with my current mortgage."

He got his wish. He had been self employed for only 1 year and did not want to answer any questions at all about his assets, credit or income. And the bottom line is that Fannie Mae and Freddie Mac require a borrower to be self-employed for at least 2 years before they'll even consider your income in qualifying for a mortgage. When he had bought his home, he was salaried, but later started his own business. When he contacted me to refinance he only had 1 year under his belt in his new company, and did not want to answer any questions nor provide documents about his income. His statement, which I have heard numerous times before, was, "I am making a higher payment now, of course I'll make the lower payment, what does the rest matter?" Well, Fannie Mae and Freddie Mac says, "the rest matters". And whomever holds the gold makes the rules.

Unfortunately banks and Fannie Mae and Freddie Mac have gone from closing their eyes to making loans in the boom times between 1998-2006, and now underwrite mortgage loans with incredible scrutiny. In fact, it is not going out on a limb to say they use way too much scrutiny. But I will side with the banks on this one, and agree that if someone is unqualified, and appears to be a repayment risk, why should they make the loan?

Some people call me about taking some equity out of their home, this is called a "cash out" refinance. Lately, people have been calling me about putting "cash in" to their refinance to pay the loan down. With property values having fallen in some markets, instead of giving up on refinancing some people should consider paying the loan down by paying some of the principal down at settlement.

It seems these days putting cash into your house may get you a better return than stocks! Freddie Mac says 33% of all homeowners who refinanced a mortgage in the 3rd quarter of this year paid down at least a portion of the original loan. This figure was up from 23% in the second quarter. Freddie Mac began keeping track of these stats in 1985, and they show the "cash-in" share of refinancing activity was the highest since they started tracking these numbers 25 years ago.

Not only is paying down your loan a sign of a real estate market that has gone down in many areas, it is likely a sign of the fiscal times. People seem to feel they have taken on a lot of debt, and its time to pay it down. So "cashing in" may be a wise economic move, or it may just make you feel better to owe less money. Either way, talk through the savings, closing costs and the potential returns on paying down principal with an experienced mortgage professional, it may make sense for you!

I had clients who applied for a refinance almost 4 months ago. Interest rates dropped for quite a bit of that time period, and it seemed like once a month they were asking me for a better deal than I had originally locked them in at. Getting a better deal is fine, steamrolling everybody in your path to pick up each 1/8% rate drop is another.

There are many problems created when you continue to switch your loan/lender. First, most banks will not drop the rate from their original lock-in, so you have to switch to a new lender to get a better deal. That is a problem because each lender will pay hedging fees and commitment fees to lock-in the original loan, so when you take the loan elsewhere, you are costing the original bank a lot of money. That ultimately will catch up with all of us, the consumer, the mortgage broker, and the bank. Ultimately as banks see higher and higher “runoff”, they will price the losses from people who lock-in and do not close with them into their interest rates. Then, we will all pay higher rates as a result of the people that constantly want to switch for a better deal.

Second, each time you switch to a new lender to get a better deal, a new appraisal has to be performed. Each bank will only work with an appraisal done by an appraiser from its own appraisal management company. So when you switch banks, you typically cannot take the appraisal from the first bank over to the second bank. And spending at least $400 for each appraisal can get expensive.

Third, each time you switch banks you are also redoing paperwork, that gets tedious.

Last, you may also find that as you gleefully switch lenders looking for a better deal, you may shoot yourself in the foot. The last client I had that was so focused on every dime, ultimately switched to a lender right as interest rates had popped up. So now we are almost back to square one where rates originally were when we started months ago. And the client has spent two appraisal fees, three months, a few sets of paperwork, and a lot of hassle and emotional stress trying to get a refinance done.

I have another client who started out at one interest rate, which we inflated slightly higher to build in the closing costs on a refinance, and at the day of settlement they decided to have their financial advisor review the numbers, who decided that they should take a lower interest rate and pay their own closing costs out-of-pocket instead of building them into a higher rate. I had to get the lender to extend the original lock-in to allow for all the changes needed to rework the numbers at the lower rate and the higher closing costs. Unfortunately, by the time we were ready to go to closing the 2nd time, the original appraisal had expired. Then we needed a new appraisal. The client was so upset at the thought of spending another $400 for a second appraisal, that they shot the messenger, “me”, and decided to go elsewhere for their financing.

There ultimately is a point when you have to stop jumping over $100 bills to get to the quarter in the corner of the room. If you are refinancing and saving good money and are happy with the numbers, carry through with it, don't over analyze it, get your mortgage contact documents as soon as possible, don't delay the appraisal, go to closing ASAP, and be thankful to all parties involved. Don't attempt to make your transaction perfect to the penny, or get the rock-bottom rate.

The banking industry is an absolute mess right now, it is very difficult to operate at all, let alone efficiently. Go for a good deal, but don't get too greedy and start making last minute requests or constant demands for a lower rate. You may end up with nothing at all…or something that is not what you expected.

What is HAMP? It is the "Home Affordable Modification Program". But what is it actually? It is the current administration's attempt at a federally backed refinance to help people who may not fit the traditional underwriting parameters, for example those homeowners that have no equity or are underwater. In March 2009, banks were authorized to begin modifications under the plan immediately.

It was originally touted by the administration that the $75 billion program would help 3-4 million distressed homeowners. But, and this is a total surprise, it has suffered from mismanagement according to independent analysis by the GAO (Government Accounting Office) and the Treasury Department's Inspector-General. I didn't see that coming.

To date the HAMP program has seen well over a half million mortgage assistance applicants rejected, compared with 350,000 accepted. That is a 41% approval rating, not very good, huh? And 350,000 is about 10% of the total the administration estimated they'd help, not very good, huh?

Now I am not sure, cuz I am just a poor, country mortgage broker, and my lil' ole' calculator does not go that high, but I believe that $75 billion spread out over 350,000 loans is $214,285.71 for each loan. Wow, that sure sounds costly. I hope they plan on helping a whole lotta more folks with this money. At $214,285.71 each loan, they probably could have paid down, or paid off a lot of those loans!

And anyone that has gotten a HAMP loan can attest as to what an agonizing process its been. We all have heard of a process afflicted by lost documents, repeated requests for documents already sent in, delays, lack of transparency, lack of feedback, slow, inept and a generally chaotic process.

And now the rumor mill is churning, saying that maybe HAMP was not set up so much to help individuals, as it was to help banks! Even if numerous HAMP borrowers default (which is happening) maybe HAMP was only supposed to stop massive foreclosures, at a time when banks could not have handled it. Who cares if teeny, tiny little individuals are helped in the long run or not, right?

I have heard other bloggers call this “extend and pretend”, in other words, the program was setup to extend distressed homeowners time in the home, pretend it was helping things, and ultimately kick the can down the road. So maybe taxpayers have bailed out banks, again, not even knowing they did it! Maybe HAMP was all about the US Treasury and the administration, bailing out their bank friends? Helping the taxpayer, whether it worked or not, was secondary? So didn't the taxpayers just help pay for the banks do something that the banks would have had to pay to do ON THEIR OWN anyway?

This reminds me of when the government told us Wachovia Bank had to be bailed out, and the US Government was brokering (i.e. forcing) a deal between Citibank and Wachovia, and it turned out Wachovia could cut a better deal for itself with Wells Fargo! So how necessary was the deal in the first place?! Should we always question government's motives when they spend our money? If your child came and asked you for $1,000, wouldn't you want to know what it was going towards, and why?

Am I being too much of a conspiracy theorist? I don't know. I report, you decide.

Sometimes people just can't squeeze it all in. Right now, it is hard for banks to fit all the business they have through their systems. Now, I am the first one to pile on the banks for their bureaucracy and inefficiencies. However, in the case of any business, when you suddenly get an onslaught of 10 times the business that you normally get (that is a 1000% increase folks!) no one will be able to handle that efficiently.

So anyone that wants a mortgage right now will need to be patient. Banks will prioritize purchase loans over refinance loans, since the purchase loans have contractual deadlines.

And for all of the people getting a refinance right now who want to complain about how long it takes, please think about how your performance would be effected if you had a 1000% increase in your business, whatever that business may be. Right now refinance applicants need to kick back, wait, turn in whatever paperwork is requested, and look for the call that says it is all finally over and settlement is ready to happen. Complaining about it only makes it worse, and will not speed up the process.

The most important things to remember is a high volume refi mortgage market are:

-deal with someone reputable, that you trust, have worked with before, or were referred to.

-make sure your interest rate is locked-in for a long enough period to cover the loan processing time frame, which for a refi is usually going to require a 45 or a 60 day lock-in.

-turn in all paperwork immediately, DO NOT DELAY.

-when the appraiser contacts you to gain access to your property to do the appraisal inspection, drop everything and get them in the home right away!

-consider working with a mortgage broker, a small bank or a mortgage banker, since large banks are notoriously taking the longest time to underwrite loans, by a wide margin.

I know it sounds like a hurry up and and wait situation, and it is. But, if a bank will take 40-45 days or more to process, underwrite, approve and prepare closing documents, why give them an excuse to miss the lock-in deadlines? Then they may tell you that since the lock-in deadline is past, you now must pay a higher rate. So…keep pushing the ball back in their court, and "hurry up, and wait."

Having an existing home equity or 2nd trust line can cause a problem when refinancing your mortgage. Unless you are closing the equity line/2nd trust and paying it off by wrapping it into the new loan amount, keeping your equity line/2nd trust could cause a problem in several ways. To keep your equity line/2nd trust when refinancing you have to get what is called a "subordination agreement."

A subordination agreement is something that shows the equity line/2nd trust lender will 'subordinate', or stay in 2nd trust position, when the 1st trust refinance takes place.

When a 1st trust is paid off, the 2nd trust automatically goes into 1st trust position. Of course the new lender who is paying off the existing 1st trust will mandate that they retain 1st trust position. Hence, the need for the 'subordination agreement' which shows the 2nd trust lender will stay in 2nd trust position.

It is all boilerplate paperwork, and is not a problem in theory. But in practice the real problem is timing, because banks are so backlogged and they have no real economic incentive to execute quickly and efficiently. Most lenders who hold an equity line will charge a small fee, $100 for example, to process a subordination agreement, which barely covers their overhead to process the paperwork required to do the subordination agreement.

And a subordination agreement is not simply preparation of one document. When am equity line/2nd trust lender agrees to subordinate, they underwrite an entire file, look at the appraisal, the 1st trust lenders approval, and all the credit characteristics that they would look at as if they were making the loan for the first time. As a result, there is quite a bit of work that goes into subordinating an existing equity line/2nd trust, so the process is not only expensive but it is cumbersome. Hence, it takes a while.

When you factor in that on top of that there is no way that an existing equity line/2nd trust lender can pile on a bunch of fees or points to give them economic incentive to perform quickly, they usually end up performing slowly.

I know that people cherish their equity lines/2nd trusts to have access to emergency money, as well as for home renovation projects. But many times they can cause problems in the refinance process. If an equity line has a zero balance, sometimes it is easier to close it out and not have it hinder the refinance process, and go back at a later date and apply for another one.

There is also the simple fact that with declining housing values of the past several years in many markets, people do not have the equity that they used to have in their homes when they first got the equity line/2nd trust, and as a result that equity line may cause a loan-to-value that is too high for a bank to approve a refinance.

It is good to ask a lender that you are refinancing with a lot of questions related to these topics if you have an equity line or 2nd trust. You may be going down a path that could be painful, and end up causing problems with you getting your refinance.

Those “no cost” refinance deals, while real, are a bit misleading. They are usually advertised on cable TV or radio, and are short on details. What they don’t tell you is that they charge a higher rate for a "no closing cost" refi. So the costs are essentially built into the rate. If market rates are 4.75% w/ 0 points (and with necessary costs being charged) you may end up with 5.125% w/ 0 points and 0 costs on a "no cost" refi, for example. While there are literally no "closing costs" paid directly by the consumer, there is a "cost" actually.

So its a bit gimmicky. But for some people, those currently with higher rates like 6.25% and up, it may make sense to take a higher rate and pay no closing costs. But most people want the lower rate. It is a program more designed to make the phone ring, then they switch you into something else after they tell you the catch (if they tell you the catch).

To me, it is all about recapture period. If I can recapture my closing costs within 10 months, for example, measuring my monthly savings against the closing costs ($3500 in costs to title company, lender, appraiser, etc, for example, versus $350 a month in monthly savings, is a 10 month recapture period), and I believe I will own the house for 5 years from the date of the refi, I'd opt for the lower rate and paying the closing costs. However, if I was going to move in 2 years, and it took me 14 months to recapture my costs, I may take the higher rate and the "no closing cost" deal.

As usual, it is imperative to ask a lot of questions before making a commitment, especially after briefly seeing a short commercial making grand claims.

Cash out refinancing, where you borrow above what you owe on your existing mortgage, is many times a better way to go than getting an equity line. Equity lines are usually adjustable rate mortgages based on Prime Rate, which is currently very low. But:

-Prime Rate can spike with a lot of volatility.
-Prime Rate equity lines are "interest only", so you are not paying down the principal. You may as well put your new kitchen or bathroom on a credit card, and never pay it off.

So if I can, I prefer to counsel people to do a cash out refinance of their entire mortgage.

However, the problem is that loan-to-value's have gotten stricter (i.e. lower), so a cash out refinance has gotten harder to get these days with appraisals seemingly flat to dropping (depending on the area). The current loan-to-values (LTV) are:

-Conforming Loans, which go up to $417,000, you can still go to 80% LTV, but will get a little better rate at 75% LTV and lower.

-Conforming-Jumbo loans, which go from $417,001 to $729,750 (in high cost areas) are limited to 60% LTV. This new category of loan was created by Congress to stimulate the purchase of homes, so the cashing out of homes has a very restrictive (i.e. low) LTV.

-Jumbo loans, over $729,750, are usually limited to 75%, or less.

-And on FHA loans you can borrow up to 85% LTV.

-And to compare, most equity lines cap out at 80% LTV.

Here is an examples:

Your house is worth $500,000 and you owe $300,000 on the current mortgage. On a new cash out refinance mortgage you can get up to 80% LTV since this would be a Conforming loan, or up to a $400,000 new loan amount, which yields you $100,000 cash out (less after you subtract closing costs). Or, you can leave the existing $300,000 loan in tact, and you can get a $100,000 equity line.

So you can see how you really need a lot of equity before you can pull some equity out in a cash out refinance.