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What’s the catch w/refinancing mortgage at lower rate?

Flagship Financial Group LLC wants to refinance our home. We have VA loan & Flagship wants it. Our home, like most people, has gone down in value from what we purchased it at. Flagship has no income or employment requirement & there will be no out of pocket costs to me.
What’s the catch? What can possibly go wrong with refinancing using Flagship Financial Group?

So glad you asked. How odd that just this past week I considered refinancing my VA loan with the SAME COMPANY! I will answer your question in detail, so please stick with me. First, a little background.

I currently have a $340K loan from USAA at a fixed rate of 5.625%. This was a great rate when the prime was a 6.2% about a year and a half ago. I actually had to buy off points to get it. So, like most people with VA loans, I immediately started getting junk mail encouraging me to refinance to low rate. Flagship Financial sent me one that said “Call immediately if your rate is higher than 4.5%!” So, I called and they encouraged me to refinance to a Hybrid VA loan at 4.25% fixed for 5 years that I could then refinance back to the fixed rate at the end of the five years. WOW, I thought. That’s a monthly savings of $250. What’s not to like? Here’s the catch….

The only cost required by the VA to refinance is a funding fee of one-half of one percent of the total loan amount which may be paid in cash or included in the loan. Since my loan still has $338K, the fee required by VA would be a small $1,690 – no problem since it’s wrapped up in the loan and there’s “no out of pocket expenses.” Then I look at the fine print. The closing costs are $5,200 from Flagship, which makes their fee $3,510, over 52% higher than the cost that the VA requires. I know that they need to make a profit too, but let’s get real here. All there’s doing is pushing papers. Oh, but it gets worse. There is also a “discount fee,” which is the fee it costs to get the lowest rate. That fee is $7,000. This makes the lender fees over 83% higher than what the VA requires. If you do the math, this adds an additional $12,000 to my original $340K loan. With my $250 savings, this will take 48 months to pay off, otherwise known as four years! Moreover, since the hybrid loan will balloon to a super high rate at the end of the five years, I’ll have to refinance again to a fixed rate, which will cost me another $12,000.

So, to make a very long story short, DON’T DO IT! If you’re going to refinance through anyone, make it USAA or your current lender. Also, always stick with the fixed rate and don’t refinance unless you can lower your rate by a full percentage point. I don’t know the exact details of your loan, but “truth in lending” requires that Flagship spell out these fees when they send you the paperwork. If you can do basic math, you’ll see what I’m taking about. Just my two cents.

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