Refinance - too good to be true?

Question

Hey BP nation:Here's my situation. I bought a Homepath SFH early this summer and have since rehabbed it and rented it out. At the time, we understood that the property offered the then 10% down Homepath program. Turns out, a few months later, the bank I got the loan through cannot sell that note to FNMA because it apparently "didnt qualify", even though FNMA signed the contract under those terms. Now, the bank is holding this note that they cannot sell. They have offered to do a refinance for me at a lower rate and no costs. It seems like a good deal, but I've never refinanced before since this is my first purchase of a property anyways.I have 3 questions:1) In a general sense, are there any disadvantages to refinancing that I should be aware of? 2) Related to my scenario, is there something that my lender is not telling me? The bank says they'll cover all refinance costs and give me a lower rate. Seems too good to be true. 3) I just got another property under contract, which needs to close by the end of the month. Since my lender was quite insistent to refinance, they had sent over an appraiser a couple weeks ago. So I'm assuming the refi may happen quite soon. I'm wondering if there may be any potential issues with completing a purchase while a refi is also going on? Or should I try to post-pone the refi even though an appraisal was already done?

Albert Bui · Answer

Why do you think its strange O'brian ?The lender most likely has a YSP or yield spread premium in the rate that they are quoting you. This YSP is probably the same amount of the closing costs which is about 3200 dollars including the appraisal.When a lender says there are no closing costs you have to ask yourself ... in which way is he/she structuring the deal to have no cost because one way or another the buyer will be paying for it either through a higher rate (with YSP built in to pay for closing through a slightly higher rate), financed you a new higher loan amount, or in cash up front or at close (your mortgage payment you're bringing in).There is a big difference between:- no closing costs - means you dont bring in the non reocurring closing costs of the transaction but may still pay for prorated interest, taxes, and insurance- no closing, and no interest costs - means the non reoccurring closing costs of the transaction are paid and the prorated interest costs are covered as well but you may still bring in taxes and insurance- no cash to close - you just get docs and sign and bring no money to closeThe above can be accomplished through YSP (lender credit & higher rate), financed through your loan, or paid in cash by you the borrower.Thoughts? questions? let me know, hope that helped.Whether the refinance is good for you or not depends on your current terms on this property prior to the refinance and if you'd like to obtain a cash out refinance on your property and obtain your capital again.

O'brian R. · Answer

Thanks for the comments Shaun WeekesTo answer you questions Shaun, the appraisal was paid for by the bank and the appraiser actually came into the house. I'm going forward with the refinance and reviewing all the docs closely, they are covering all the fees. The only thing I'm bringing to the table is my next monthly mortgage payment (PITI), which is a tad lower because of the reduced rate they're also getting me. The scenario is still strange to me, but I can't complain since I'm getting a benefit out of it.

O'brian R. · Answer

Thanks @Albert Bui for the great explanation. As an update, refinance has been completed. Had minimal cost to bring to the table...your "No closing" costs scenario.

Elizabeth Colegrove · Answer

Most banks don't want to keep the note. So the reason they are doing all this is so they can sell it :) So the too good to be true part was them holding it. Otherwise it looks like this "issue" has turned into a good thing. The bank "fixing" their mistakes has "positive" consequences for you.

Jeff Trevarthen · Answer

Remember, the banks make money when a transaction happens. This means they make money on doing your loan again, and they'll make money when they sell the loan. Potentially, this could be a good deal for you. Maybe you can get your cash back out? ;)

Shaun Weekes · Answer

Hello O'brien,If the bank is telling you that no fees are included in this loan then it seems like a grea deal. Typically a refinance is going to cost you anywhere from 3 - 4k and even more depending on the loan amount. The best thing for you to do is to ask for an estimated HUD which will detail all fees included in the transaction. If no additional fees are on that HUD then you're good. If there are fees then they're not telling you the whole truth.Did the appraiser come into your home or just do a drive by? Did you have to pay for the appraisal? When you bought the home did you have an impound account ( taxes and insurance ) Is the bank going to do this with or without taxes and insurance? These are a lot of questions that you should ask the lender and yourself to see where they're coming from. I'm not sure why they haven't sold the loan but some banks do hold on to some paper and that's not a bad thing. However they're answer seems a little weird. I hope this helps :)