I hear it every day. “What’s your interest rate?”

When I hear that question, I flash to an image of a predatory lender, grinning wildly into his phone and purring, “what do you want it to be?”

The sub-prime infection alleged to have collapse our housing industry doesn’t seem to have been a sufficient enough reason for some homeowners to learn the basics of home financing.

Therefore, expect history to repeat itself, one uninformed homeowner at a time, as they dial lenders and ask, “What’s your interest rate.”

It reminds me of my Grandfather educating me about the difference between ignorant and stupid. “Ignorance,” he said, “can be fixed. Stupidity is a birth defect.”

And before you hold up a hand and say something like, “aw…I don’t need to know this baby stuff,” remember that 1/3rd (33 percent) of Countrywide’s sub-prime portfolio is delinquent.

First, there are four parts to evaluate in a mortgage refinance and you’d better know all four of them. If you don’t, then costs can be hidden or misrepresented.

The first, of course, is the interest rate. It’s a good place to start. It doesn’t not tell the whole story. The interest rate is analogous to the title of a fairy tale. Snow White, Mother Goose, or The Wizard of Oz does not tell you everything you need to know.

Next you need to ask if there are any points. There are actually two kinds of points. Origination fee (usually 1 point) and discount points. Discount points vary. A “point” can occur in 1/8th increments of 1 percent i.e. .125, .250, .375. .500, .625, .750, .875 and 1%. To those of you who resist percentages expressed in decimal form i.e. 1/8, ¼, 3/8, ½ ,5/8, ¾, 7/8, and 1%.

Each increment is used to determine a dollar value. If your loan origination is 1%, that means it is one percent of what you are borrowing. If your loan is $100,000, that 1% origination translates into $1000. If your loan is $200,000, then your origination fee is $2000.

Loan discount works the same way but is typically any of the above increments up to around 4%. The government and lending policy makers at lenders won’t allow a typical borrower to pay more than 4% discount. Why? It results in a case of diminishing return.
For loan discount of .500 or ½ of 1 percent, your loan discount would result in $500 for the loan amount of $100,000.

Okay. Two down. Two to go.

The next area to observe is the actual closing costs. Why do so many people accept what they are told over the phone and don’t request something in writing? It is an easy way to make the largest percentage of liars drop off of your radar. If you want something in writing, they have to be able to back it up.

Get more than one written estimate from different lenders, please! Get three or four, for that matter. Only then can you get a true picture of what costs should be. If you are being told closing costs are only $599, beware. It is not accurate and in my book borders on an outright lie.

When was the last time you showed up at your job for a week without expecting to get paid? The third party fees don’t just disappear. Someone has to pay them. Three (the borrower) guesses (the borrower) as to whom (the borrower)? Those costs are hidden either in an increased loan balance or an increased interest rate. Since rates change daily, some of these lenders are playing the market. They tell you 6% on Monday and then don’t lock in your rate…hoping that the rates will drop to 5.750% on Tuesday so they can lock you in at 6%.

When I gamble, I like to go to Vegas with friends.

Three down. One to go.

Prepaids. What are they? Taxes and insurance, right? This account is also called “escrow.” This is the account that is being established to contain deposits you’ll be making in the future. To set it up properly, a certain amount of the tax and insurance costs have to be prepaid. This area also covers the daily interest you will pay when you close from the day of your closing until the end of the month. It is the only time you pay interest in advance and it is why you wind up feeling like you skip a month on your payment. Close 2/15, pay 13 days of daily interest. March 1 comes and goes and then on April 1st you pay an entire month’s interest but that month is for March…in arrears.

Why can prepaids be misleading? If someone quotes you 1 day of interest, two months of taxes at a substantially low tax rate, and a low insurance rate, then it appears to be a cheaper quote. Except that the prepaid area isn’t open to negotiation. Those fees will be the same and they will be made accurate no matter what lender you choose. So choose the one who gives you a conservatively higher quote rather than the one who gives you an eye-popping low quote. Remember, in this area of personal finance, the cheap almost always comes out expensive.

Now you know the four areas on a particular quote where a dishonest person can mislead you into thinking you’ve gotten the cheapest loan around.

Now, don’t forget in the refinance market to do your break-even analysis. It makes no sense whatsoever to pay $2000 in closing costs to save $50 a month if you plan on selling the property in two years. Two years equal 24 months multiplied by $50 is only $1200.

That’s an $800 loss since you didn’t recoup your closing costs.

Want an even better shot at getting an accurate and reliable quote? Involve a third party. Every community has dozens of non-profit organizations that are there to serve the community in any number of ways. One client of mine went to her local senator’s office for assistance.

Why go to all this bother? Once the loan is closed you are on the hook for the results. You have to make the payments and deal with the consequences.

The currency you put into your home is more than just the money. It is your own personal rate of investment into knowledge, inquiry, money, attention, and time (kimat) that determines the quality of your outcome. After all, we create our own experiences, don’t we? If we are responsible and prepared isn’t it substantially less likely that anyone can take advantage of us?

So how should you open the conversation when getting a quote? Try “I’m considering refinancing my current home.”

How can you tell if the loan officer is evaluating your refinance as a financial transaction for you rather than for him or herself?

By the questions that are asked:

What is your current rate?
How long have you been paying on this mortgage?
Is there a second mortgage? If so, are you going to leave that in place?
How long do you think you’ll live in this property?
What is the value of your home?
How much do you owe?
What is your current payment?
Do you have an escrow account?
Do you want to extend your term out to 30 years, shorten your term, or stay on your same timeline?

These basic questions and others that grow from the answers are central to evaluating if your refinance is a good idea.

If all they want to talk about is their low interest rate then chances are pretty good they don’t even know how to evaluate your proposed refinance.

What’s your rate?