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Balancing act: Why is refinancing a mortgage so expensive?

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I'm in the process of refinancing the mortgage on my home. Again.

Yes, we refinanced just a couple of years ago. But rates have been so good lately that I decided to check with a mortgage broker friend of mine to see if it would make sense to do it again.

He said it would, so here we are.

Because I have a friend to help me, I have found the refinance process to be fairly low-stress. But the same can't be said for everyone.

Which brings us to this week's question from Wendy. She is in the process of refinancing from a 30-year mortgage she secured in 2004 to a 15-year mortgage. And the question she asks is one that I'm sure has crossed many minds in the last few months.

"I realize folks need to make money to stay in business, but why can't mortgage companies simply convert existing mortgages and have the client pay some kind of flat fee, say $800 or $1,000 for processing? Why does there have to be a refinance with an appraisal and a title search and all those other expensive things?" Wendy asks.

For an explanation, I turned to my friend, Christian Oliphant, who is owner and principal lending manager for Princeton Mortgage in Cottonwood Heights.

Christian points out that the company to which you make your mortgage payment every month is the servicer of your loan, but it might not actually "own" the loan. Companies often package billions of dollars of mortgage loans and sell them to investors.

The company that gets your check has a contract with the investors to collect the money and "service" the loan. But the investor who owns your "note" is expecting a certain amount of interest in return for that note he owns on the collateral of your property. (If you've ever looked at one of those EXTREMELY scary amortization tables, you know we're talking about thousands of dollars here!)

What this means is, if someone wants to change the rate or length of a mortgage, the main reason a refinance is necessary is because a new note has to be written with the new terms.

"So with a new note and new terms, the individual has to qualify under the new terms of the agreement," Christian says. "That is why all the costs are necessary, is because it is a brand new loan with new terms. The servicer who may or may not own the note/loan you want to refinance just can't change the terms of the loan without having the borrower go through a qualification process."

Part of that qualification process involves getting the home appraised to show equity, and the collateral and title work is done to show the new lender there are no liens against the property.

"As for an appraisal, it's looking backwards in the market," Christian says. "They used to be good for six months, but now they're only good for about 90 days, because the market is changing so fast."

In other words, Wendy, refinancing is "like starting all over again, just as if you purchased the home again," he says.

"If the servicer of your loan has the ability to requalify you based on the new terms of your loan then you would still have to go through the refinance process with them, and all of the costs associated would apply, because technically you're starting over. In a refinance there are many parties involved to make a transaction work. That is why it is hard to avoid all of the costs."

So, Wendy, I agree that it would be nice if the process for refinancing could be easier — and less expensive! But the way the industry is structured, this is probably how it's going to be.

Of course, the structure of the industry didn't necessarily serve this country all that well over the last year or so. But that's a topic for another column!

If you have a comment or question regarding personal finance, send it to gkratz@desnews.com or to the Deseret News, P.O. Box 1257, Salt Lake City, UT 84110.

E-MAIL: gkratz@desnews.com