Mortgage Refinance: Which Lender?

As I mentioned last week, I’m doing a mortgage refinance with a lender I haven’t used before: First Internet Bank of Indiana ("First IB").

My previous two refi’s were done through National Mortgage Alliance (NMA). NMA did the jobs well both times. My last one finished in 2 weeks from application to closing.

So why change? Lower cost for the same rate and term. Is it worth it? I think so. Let me explain how I chose the lender in this post.

It Doesn’t Have to be Local

Right now 90% of the loans end up being sold to Fannie Mae or Freddie Mac. As long as the rate and fees are low, which bank does the loan origination doesn’t matter that much. It certainly doesn’t have to be local.

Small banks like NMA or First IB are just fronts for larger banks, which are in turn fronts for Fannie and Freddie.

A small bank originates the loan and sells the loan to a larger bank after the loan closes. The larger bank keeps the servicing and then sells the loan to Fannie or Freddie. Fannie and Freddie borrow from the global financial market. The government pays Fannie and Freddie for their losses. Everybody is happy! Well maybe not the government and taxpayers, after losing some $200 billion on Fannie and Freddie.

Insist On Pricing Transparency

Many lenders, including some otherwise good credit unions, still don’t quote the total cost online. They will quote a rate but you’ll have to call to get the total cost. That way they can quote different prices to different people. They can quote a low price when you are shopping, then give you a high price when you decide to pull the trigger. Classic bait and switch.

I’m not saying every lender will cheat the customers, but the opportunity is there if pricing isn’t transparent. You will more likely get a better deal if you get transparent pricing.

Rate and Closing Cost Are Equally Important

Rate and closing cost are related. You can get a low rate by paying a high closing cost. Or you can get a low closing cost by paying a high rate. A low rate by itself isn’t the whole picture. Lender A offering a lower rate with a higher closing cost isn’t necessarily giving you a better deal than lender B offering a higher rate with a lower closing cost.

When you compare offers, keep one variable constant. Because rates usually go by 0.125% increments, it’s easier to keep the rate constant and compare the total closing cost. Get two quotes from each lender: one with a higher rate but no or minimal total closing cost, another with a lower rate but a higher total closing cost. You will need these for calculating the rate versus closing cost tradeoff later.

Compare Total Cost Apples to Apples

Rates change every day, often more than once a day. You can’t compare a quote from lender A yesterday to a quote from lender B today or even one quote in the morning to another quote in the afternoon. For this reason, I only consider lenders who update quotes on their website at least daily. If you go to a lender’s site on two different days and the quotes are the same, you are not getting the most current information.

By closing cost, I mean total closing cost. That includes points, origination fee, appraisal, title, settlement, processing, recording, and whatever else they call it,  everything except:

• first month interest
• homeowners insurance
• property tax
• escrow account deposit

Although I have to bring cash to pay for these last four items at closing, they are not really a cost. Everything else should be included in the total closing cost.

Go Shopping

When I shopped for this refi, I also looked at another low cost lender AmeriSave. Like NMA, AmeriSave is an upfront mortgage lender certified by the Mortgage Professor.

I monitored the rate and total closing costs from First IB, NMA, and AmeriSave daily. Every day at around 11:00 am Eastern Time I got a quote from all three lenders. Here’s a chart showing the all-in closing cost for the loan I wanted over five days:

As you see, the cost difference was consistent. First IB was the lowest, AmeriSave a close second, NMA much higher than the other two. Of course for a different loan in a different state at different times the order can be completely different. It’s good to check the rate and total costs for your own loan.

Besides the slightly lower total closing cost, I chose First IB over AmeriSave because I don’t like how AmeriSave tries to make its rates and fees look lower than they really are.

The super low rates on the left hand of AmeriSave’s home page require a very high up front cost. You have to use the quote box on the right. Then the rates and fees they show you require a 800+ credit score. If your credit score isn’t 800 or above, you will have to change the credit score in the quote box on the results page and re-quote. The fees will go up by hundreds of dollars if your credit score is 780, then hundreds more if it’s 760.

I know of no other lender that charges more for a 780 credit score than for a 800 credit score. According to a mortgage banker by the name of MMNJ on FatWallet, the typical credit score cutoffs for the best rate and fees are 700-740. By creating finer pricing tiers, AmeriSave is able to show offers it won’t really give to many customers.

After taking into account the credit score, AmeriSave’s rate and fees are still competitive and way lower than most other places. You just have to wade through the lowball offers and get a realistic quote if your credit score isn’t 800 or above.

What You See Is What You Get?

In addition to low cost, it’s also important to be able to lock in the rate and the total closing cost you see on the website. A good offer you can’t lock is of no use to you.

In this regard, NMA is the best among the three lenders I considered. If you see a good rate at NMA’s website, apply online. If your credit score passes, you can lock the rate on the same day after you pay a $300 deposit.

AmeriSave requires an upfront payment, income documentation, and maybe completing the appraisal before you can lock the rate. When those are done, rates and fees will have changed but you’ve already paid a few hundred dollars.

First IB is somewhere in the middle. I wasn’t offered a chance to lock the rate when I submitted the online application. After I faxed paystubs and W-2, I was allowed to lock the rate but the rate went up. So I waited. I locked the rate a few days later when the rate came down. I didn’t have to pay anything before I locked.

This is part of a "How to Refinance" series of posts. Other posts in the series include:

• Mortgage Refinance: Is Your Lender Legit?
• Mortgage Refinance: Tradeoff Between Rate and Closing Cost
• Mortgage Refinance: When to Lock?
• How Much Money Does a Bank or Broker Make From a Mortgage Refinance?
• Mortgage Refinance: What If Rate Drops After You Lock?
• Mortgage Refinance: Before and After Closing