How to Spot a Refinance Rip-Off

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Mortgage mania has truly arrived, to the point where rate talk is all the buzz at dinner parties. Forget tech stocks — the barber now offers tips on how to get the best refinance deal. Homeowners check rate hot lines daily and are deluged by e-mail from mortgage firms. The quotes were disappointing last week, when procrastinators lamented a surge in the average 30-year fixed rate to 6.15% from 5.98%. But rates remain near 40-year lows. There is a real frenzy: a record $1.3 trillion of mortgages will be refinanced this year.

Good news? Sure. But as falling interest rates have pulled waves of homeowners into the refi game, an overburdened mortgage industry has been strafing them with costly errors, including miscalculated escrow payments, unneeded credit insurance and omitted special-offer discounts. Borrowers, reveling in their lower monthly payments, blithely absorb the overcharges. There's no good estimate of the total cost. But anecdotal evidence is pervasive.

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Josh Silver, a bank-lending activist, recently refinanced his home in the Washington area, and while his $300 monthly savings pleased him, errors in his closing documents sent him into a rage. There was a $400 overcharge for property-tax and homeowner's-insurance escrow. The bank "forgot" a $200 credit promised to him when he signed up for automatic debit payments. And at closing, he was asked to sign off on an insurance policy to pay his mortgage should he die — the cost of which had been written into his settlement papers.

Jay Brinkmann, who also lives near Washington, almost got burned when his bank omitted a $750 closing-cost credit that had been promised to him as an existing bank customer. "They didn't leave it out on purpose," surmises Brinkmann, who has a Ph.D. in finance and bases his conclusion on the fact that his title and appraisal charges were off by $200 from what he expected, but this time in his favor.

The sheer crush of activity is what makes this refinance wave different from most others, leading harried bankers to make the kinds of mistakes that those of us lacking Ph.D.s rarely catch. More than ever, it's important to work with someone you trust — a mortgage broker, or possibly a lawyer to represent you — or do your own due diligence before settlement day.

Some things you can't do anything about. When I refinanced last year, the bank lost paperwork and charged me $150 in "departmental searches" to duplicate what it had lost. My protest got me nowhere. I could have taken my business elsewhere — at the risk of losing my low rate.

Closing-cost errors (and shenanigans) are a familiar issue with regulators. The Federal Deposit Insurance Corp. examined 2,031 banks in 1996 and found that 1,528 had violated some portion of the Real Estate Settlement Procedures Act, which requires lenders to fully disclose their fees. respa is under constant review: in the works now are proposals to require lender fees to be within 10% of an initial good-faith estimate, and to provide borrowers with a copy of their "HUD-1" final-cost document sooner than one day before closing, as is currently required. In fact, the HUD-1 often isn't delivered until signing day. Here's what you can do:

INSIST ON A TIMELY HUD-1. Most lenders will give it to you early if they can. Compare the final closing costs with those in your good-faith estimate, which you should have got when you applied for the loan. Ask for an explanation if the two differ greatly.

CHECK YOUR APR. That's the annual percentage rate you'll pay when certain fees are factored in. If it's higher than what you were promised, the bank may have slipped in an origination fee or given you a higher interest rate.

QUESTION YOUR ESCROW PAYMENT. The amount should be based on the time between closing and the due date of property taxes. Some lenders plug in 12 months, requiring you to come up with more cash, and then rebate the difference at year-end. You can also save cash at closing by asking that escrow payments to date be applied to the new mortgage.

ASK EARLY IN THE PROCESS FOR THE "REISSUE" RATE ON TITLE INSURANCE. In a refi, odds are very low that someone will emerge with a claim on your property. the insurance premium should reflect that lower risk, saving you $200 or more — and giving you something extra to crow about on saturday night.