February 2007 Archives


Once we figure out when we are going to be ready to buy, how early is too soon to get a buyer's agent and start looking.


You are ready for a Buyer's Agent when you are ready to act on it if your agent finds you something that meets enough of your criteria. By act, I mean put in an offer and consummate the purchase. If you're not ready to act, you are just wasting everyone's time. If you are ready and willing to act, then there's no reason to wait.

If you are not willing to act, you're engaging in mental onanism. Kind of like fantasy stock market traders. Doesn't matter how well you do, it's not real. As Sir Sidney Poitier once observed, it produces nothing. If you don't understand the difference between playing with real money and playing with meaningless number scores, get a guardian. It frustrates the agent and wastes the time that they might spend prospecting for you, and productive agents have to be jealous of their time. If you waste their best efforts when you aren't ready to act, don't be surprised if you're not their top priority when you are. You avoid this trap by not approaching them until you are at least willing to act.

It does no good to store up "prospects for later." Good stuff doesn't last for months. It probably won't last for weeks. It may not last to the end of the day. It only lasts until one person who is willing to act discovers it. If you're not willing to act right then, you are wasting your time.

Markets change over time. The market today where I am is a very different market than two months ago, which was different from two months before that, and also different from the market as it's going to be two months from now. This is one of the many reasons why attitude is worth more than experience in an agent, but it also means that market research you do now is worthless a few months from now. The markets vary not just with macroeconomic factors, but also with time of year. The upshot is that the market today is different than it will be in two months, different than it will be in late summer, and is already different than it was a few months ago. You try to look at your fifteen to twenty-five properties today with an eye towards buying in six months, you are doing worse than wasting your time. You are actually confusing yourself with data that is very likely to be outdated by the time you go to apply it.

Furthermore, there's a well-known comedy schtick routine in the industry: Q: How often does the deal of the century happen in real estate? A: About once a week. The point of the matter is that if you are looking for a property that's a real bargain, they aren't that hard to find. The more difficult skill is recognizing them when you see them. The average buyer is looking for something that is both perfect and a bargain - and the intersection of those two sets is pretty universally null. The reason the current owners spent all that time, effort, and money fixing them up is because they expect that effort to be handsomely rewarded by buyers who don't understand the economics involved.

You probably want to talk to someone who does loans before you talk to a buyer's agent. Find out from them what real rates are that can really be done for you. This, together with how much you make, gives you your budget. It may change, going down if rates rise or up if they fall, but this way you know how much you can afford to spend. I have said this many times, but it's a good idea to repeat it: Shop by purchase price, not by payment. If you shop by payment, you are laying yourself open to all kinds of games by unscrupulous lenders and agents looking for quick, easy sales. Of course, if you find somebody who does both, that's fine, as long as they pass the tests you'd administer to both. Among which, of course, are Questions You Should Ask Prospective Loan Providers and being willing to work on a non-exclusive buyer's agent basis.

Caveat Emptor

First, I just got engaged, and my fiancee and I have been discussing what we want in a house after we get married. It will be the first house for both of us. She spent the last two years living with her parents to pay down her credit card debt.

So she doesn't have a current rental history. Given that she makes more than I do, if we purchase together, my understanding is she will be the primary borrower. Thanks to your site, I've figured out what I can afford without her, and it isn't what we are looking for.

My questions are:

1. Are lenders going to be reluctant to loan to us if she doesn't have a recent rental history? If so, how much time would a lender require.

2. Once we figure out when we are going to be ready to buy, how early is too soon to get a buyer's agent and start looking?


Yes, lenders are more reluctant to lend to you with insufficient rental history. What they are looking for there is a verifiable history of making payments for housing.

Used to be, A paper lenders wanted two years history of making housing payments on time, and might have waived it down to twelve months in some cases. Sub-prime generally wanted the same two years, but it's pretty easy to get it waived down to one year, and occasionally possible to get it way down. Three months in one loan I did about two years ago. All the way down to zero? Probably not.

However, with the general loosening in underwriting requirements, this has largely gone by the wayside. One of my favorite A paper wholesalers just called (on President's Day!), and I asked him about Verification of Rent, and he said "We just don't require it any more unless there's something fishy about the situation." Basically, it's up to the underwriter and whether they make it a requirement for the loan. You can never count on getting it waived, but it's no longer a huge obstacle.

Now, there are potential ways around the requirement, even if they're being a stickler. If your fiancee has been paying rent to her folks, it's likely that the lender will accept cancelled checks for six to twelve months as evidence that she has been paying rent. In the case of family situations like this, they want to see real solid evidence of the rent payments being made on time, they want to see that the checks were written and cashed at appropriate times, and they will not, generally speaking, accept a family member's word for it unsupported by paperwork. When you're renting an apartment or something from an unrelated third party, that third party has no particular motivation to paint your situation as being better than it is.

I've seen people advocate this as an application for a stated income loan, where you qualify as a lone individual, but state your income as being enough to qualify for the property and necessary loan that you want. The thinking goes that combined, you make the money, and it's only the fact of some "obnoxious administrative rules" that you can't use her income to qualify. That much is true enough, and that such rules are relaxed now is one thing in their favor. However, it's still lying on a mortgage application (i.e. fraud), and that lender can make life very sticky for you if they should desire to. For one thing, you are de facto using her income to qualify for the loan without giving them a chance to scrutinize her credit record. For another, it's very possible that stating enough income is something the underwriter will challenge (which will happen if you go over the 75th percentile for your occupation), at which point you're not going to get the loan. I wouldn't want to do it without notifying the lender's representative in writing as to what was going on, and it's unlikely that they would approve and fund a loan under such circumstances, but doing otherwise is fraud. I'm sure everyone is all excited by the prospect of doing business with a loan provider who's "only a little bit crooked," right?

Now there is one issue I haven't dealt with that relates to all of this: Payment shock. The idea behind payment shock is that you're used to living on so much money, and people (in the aggregate) strongly tend towards living the same lifestyle over time. Payment shock becomes an issue when your new payments for housing (loan, taxes, insurance, etcetera) are a certain percentage more than you are used to paying for that same thing (rent, in your case). How much more varies from lender to lender and even according to circumstances. For instance, many sub-prime lenders will take into account all of the bills you are paying off in a refinance. Exactly what percentage increase triggers the "payment shock" is lender specific. I've seen it be as low as 25% and as high as fifty. Nor does every lender have payment shock guidelines.

When payment shock is a factor, they are going to require you to have some cash reserves somewhere. Typically, it's two to three months PITI, or principal, interest, taxes and insurance, on your new loan. It generally needs to be in checking, savings, non-restricted investment accounts - some form where you can get to it, not IRAs and 401s, which have restrictions on access. This needs to be left over after your down payment, closing costs, etcetera. So even though you are not making a down payment on the property, you can need to have the money to do so available to you.

Payment shock is one of those things that can make a situation look fishy. If you are trying to avoid payment shock requirements and state that you are paying an amount of rent that is clearly above market rates, they will want to verify it. Can you say, "Out of the frying pan and into the fire?"

Caveat Emptor

Cheap Lender Owned Fixer on Great Lot!



General: Urban East County, 3 bedroom 1.5 bath. Asking price between $350,000 and $375,000. I think you might get it for $340,000.



Why you should be interested: Lender owned fixer in established desirable neighborhood!



Selling Points: Sits on a great lot with street access front and back! Nice back yard and covered pati on the side! 2 minutes to freeway, but quiet neighborhood with great schools!



Why I think it's a potential bargain: Fix it up a little, and 3 BR properties in the neighborhood are selling for $460-490. If you want to live there, plenty of room to expand!



Obvious caveats: Kitchen looks like something out of the early 1950s. Laundry set up is weird. Some drywall needs repair.



Why it hasn't sold already: Most folks won't look past the dated facade.



If you keep it ten years and it averages only 5% annual average appreciation per year: Based upon a purchase price of $340,000, the property would be worth approximately $550,000. If you held it those ten years before selling, you would net about $260,000 in your pocket (not including increased value from updates!), assuming zero down payment. As opposed to renting the $1900 per month most comparable currently available rental and investing the difference at 10% per year tax free, you would be approximately $200,000 ahead of the renter, after the expenses of selling.



Fact you should be aware of: Just that the neighborhood is fifty years old.



Obvious way to enhance value or appeal of property: Update the kitchen and bathrooms, fix the drywall.



This property does not appear to be eligible for a first time buyer Mortgage Credit Certificate provided your family income is not more than $82,800 or $96,600. Ask me for more details, on this or any other property.



I'm a buyer's Realtor®. I find places like this that can be gotten at bargain prices. I save you money while getting paid out of the listing agent's commission, not costing you a penny. Nor are these the only ones I find. In order to protect everyone's best interests, I require a Non-Exclusive Buyer's Agent Agreement. This is a standard California Association of Realtors form that leaves you are free to work with other agents, but if I find the property you want, I'm the agent you'll use. That's fair.



Contact me: Action Realty 619-449-0723, ask for Dan or email danmelson (at) danmelson (dot) com. Ask me to find a bargain that fits you!

The Best Loan Right NOW



5.875% 30 Year fixed rate loan, 0.6 total points, and NO PREPAYMENT PENALTIES!. Assuming a $400,000 loan, Payment $2366, APR 5.947! This is not an Option ARM! This is a thirty year fixed rate loan. The payment and interest rate will stay the same on this loan until it is paid off! 30 year fixed rate loans as low as 5.25%! Zero points and zero closing costs loans also available!



Best 5/1 Loan tradeoff: 5.625% 1 total point. Assuming $400,000 loan, payment of $2303, APR 5.721. 5/1 ARM loans available as low as 5.00%! This is not an Option ARM! This is a real loan with a real payment that actually pays your loan down, and the rate is fixed for five years!



These are actual retail rates at actual costs available to real people!



No points and zero cost loans also available!



All of the above loans are on approved credit, not all borrowers will qualify, based upon an 80% loan to value and a median credit score on a full documentation loan. Rates subject to change until rate lock.



I always guarantee the loan type, rate, and total cost as soon as I have enough information from you to lock the loan (subject to underwriting approval of the loan). I pay any difference, not you. If your loan provider doesn't do this, you need a new loan provider!



Interest only, stated income, bad credit and other options also available. If you need a mortgage, chances are I can do it faster and on better terms than you'll actually get from anyone else in the business.



100% financing a specialty.



Please ask me about first time buyer programs, including the Mortgage Credit Certificate, which gives you a tax credit for mortgage interest, and can be combined with either of the above loans!



Call me. EZ Home Loans at 619-449-0070, ask for Dan. Or email me: danmelson (at) danmelson (dot) com

This question brought someone to the site



Can I change lenders after the loan is approved?





The answer is yes, if you don't mind starting the loan process all over again.



Actually, you can change lenders any time you want to. It may be expensive, it may be counter-productive, and it may or may not be an intelligent choice, but it is your choice. It's not like the lender can do anything about it.



There can be external factors that prevent you from doing so. If you owe $500,000 on a property that has fallen in value to $450,000, you're not going to be able to refinance on any kind of decent terms unless you pay that loan down. If your credit is no longer as good as when you last got a loan, if your monthly bills are too high a proportion of your income, or any of a couple dozen other possible reasons, you won't be able to obtain financing as good as your current loan. This doesn't mean that you cannot legally decide to take something less advantageous. People voluntarily take out negative amortization loans all the time, no matter how much they hurt themselves with them. It's all tied up in the freedom thing, even if it does mean you're free to make mistakes.



Just because you are free to change lenders, does not mean that there will not be consequences. That's also part of the freedom to make your own mistakes. It can be very expensive to change lenders. You are basically back to square one when you change lenders, a fact many loan providers make rapacious use of when they pull a bait and switch routine. I add that in the vast majority of these cases, that bait and switch was planned with malice aforethought, as you know if you're a regular here.



When you decide to begin the process over, you may or may not have to do everything over. If you're at a direct lender, there's no alternative. You have to do the loan paperwork all over. Credit Report and everything else, application and all the disclosures. If you did some work ahead of time so that you're the one who controls the appraisal, you may not have to pay for a new appraisal, but most folks have to get a new appraisal. If you put down a deposit with the lender, you're likely to lose it. They did all of this work, and they're not getting paid for a funded loan. It's rare that lenders will refund deposits. That's why they require them, to commit you to the loan and prevent you from changing your mind. Mind you, the consequences of agreeing to a bad loan are usually much worse than losing the deposit, but people are silly about cash deposits.



When you change lenders even though you're staying with the same broker, the consequences are much smaller. Since the application, etcetera, should have all been done in the broker's name, the loan officer has to begin the underwriting process all over, but the basic paperwork is pretty much the same. They have to give you new copies of the required paperwork reflecting the new loan, but that's it. On the other hand, if there's something underhanded going on, it's almost certainly the doing of the loan officer, so staying with the same brokerage is likely to be perpetuating the problem. This applies to direct lenders as well.



There is always a moment of truth in every loan, when the final loan papers are presented. If they do not reflect what you were led to believe in order to get you to sign up, you probably shouldn't sign them. Many people do sign loan documents that amount to shooting themselves in the head financially. Refusing to sign can cost you money, make no mistake. But agreeing to bad loans will usually cost you more. Nor are you legally committed to that lender until, well, at least after you sign the note, and not completely until the loan is funded and recorded.



It is comparatively rare that you should sign loan papers if the loan you are agreeing to is not what you were lead to expect. There is no "Get Out of Contracts Free" card in the real world, and once that loan is funded, you are bound to all of the terms of the contract, and this includes not only high potential costs and rates, but prepayment penalties and everything else.



With that said, I should talk about one reasonably common exception: Purchase money loans. The escrow period in purchases runs only so many days, and you have to have everything done during that period, or the deposit you made to hold the property is at risk. It's still usually a good idea to negotiate an extension on your purchase escrow rather than agree to a bad loan or even a less good loan, but there are cases where it can be smarter to sign the loan documents now and refinance later.



Now, for refinancing your primary residence, just because you sign documents does not mean you are stuck. There is a federally mandated three day right of rescission when you refinance your primary residence. It's not a good idea to sign just because you can rescind later; that three days is gone before most people are realize it. The rescission period is a last chance to avoid disaster, and signing loan documents can commit you to paying certain costs and fees even if you later rescind. Better not to sign in the first place if you find a problem, and you should always look for problems before you sign.



Just because you signed and the loan funded does not commit you to it for ever and ever. You are always legally free to refinance or sell. There may be prepayment penalties, and you won't get the costs you paid to get the loan you are replacing loan back, but if you're at nine percent interest rate and you can have six on terms as good or better, it's likely to be worth going through the paperwork and paying any prepayment penalty. The math may say otherwise in specific cases, but that is once again a matter of specific situation versus broad rule. Prepayment penalties don't mean you cannot refinance, they only raise the opportunity costs of doing so. Lenders put them into contracts because they not only raise that opportunity cost, they also provide a good boost to their profit if you do jump over that raised bar.



So you can change lenders at any time. There may be reasons not to do so, but that doesn't mean you cannot do it. In every situation, the answer as to whether you should is in your contract and in the math, and it may take a good amount of informed professional judgment to help you make the choice, but that choice is always yours.



Caveat Emptor


Hi Dan,

Your blogsite is great; I stumbled on it and find you very credible and knowledgeable.

I have two questions for you, if you are looking for things to write about:

1) What are your views on the DELETED area? That market is so high, and I wonder if it will follow the pattern that San Diego sets for price adjustments in the market this year. I'm looking to relocate there from San Diego, so I've started researching that market. And I thought San Diego was expensive... the DELETED area is unreal.

2) As a law student, I've had five professors mention that it's a good idea to get a broker's license in order to represent ourselves as our own buyer's agent when buying our homes (if we can ever afford to with those huge students loans to pay off!). The upside is getting back the buyer's agent commission as a sort of "rebate." To support this, a couple of professors framed the issue as roughly: "most agents you would work with only have a high school degree and a few real estate courses under their belt... and could know nothing about property law. Do it yourself, control your own contract, save a lot of money." What do you think about attorneys who get real estate licenses to represent themselves, having lots of knowledge about legal issues and contracts, but no practical experience and training?

Have a great weekend!


In theory, it's a really great idea.

In practice, unless you're out there in the market all of the time, learning all of the tricks that get played or attempted, learning what the market is actually like, etcetera, you will fall into that group of persons known by the technical description "sucker."

Some lawyers apply for their broker's license and use it constantly. Those folks do fine. They know that being an agent is not just about that subset of lawyer functions that agents are allowed to perform, and if they learn about the rest of the business and keep their finger on the pulse, they are formidable.

Those who just use it to do their own occasional transactions, on the other hand... Let's just say I've had to explain to lawyers who took that kind of professorial advice exactly how they got "taken" more than once. Loans are also the same license, but there probably isn't enough money in the average loan to interest the kind of lawyer that does well in the real estate market, and what clue do they have who are likely to be the best lenders who give the best rate for a given client if they won't spend the time learning the loan market? Truth be told, they can make more money with the same time representing those who've been raked over the coals than they can working their own transactions.

The lawyers that the good agents know about and go to when there's a question or a problem? They strongly tend to use agents and brokers for their own transactions. My last boss did half a dozen transactions in the year I worked for him, for one of the best regarded real estate lawyers in town.

Your professor appears to me to be making a "does not follow" error. By the logic of "not much education", he'd be fixing a car himself, rather than using a professional mechanic. Once upon a time I was a pretty fair amateur mechanic. I haven't done more than an oil change in twenty years. I know better.

The real problem here is confusing general education and specific expertise.

In order to be a good agent, you have to spend time constantly keeping up with the state of the market. If you think a given property is worth less than it is, no transaction. If you think it's worth more, your client is wasting money. The questions I keep asking myself have to do with the utility of this one specific property for one specific client, and at what point, in my estimation, they're better off just walking away from the negotiations.

It's true that some agents are just barely high school graduates. Others have MBAs. More important than level of education, more important than how much business they do, more important even than experience, is attitude. Just as important as attitude is market knowledge. And right up there with both of them is negotiating skill in the context of real estate. None of these three skills is certified by a law degree, passing the bar, or anything else.

The result? Lawyers who work at real estate make formidable agents and brokers. Lawyers who get their broker's license because they think they're going to save themselves money by doing their own transaction are lawyers who represent themselves. And we've all heard about lawyers who represent themselves having a fool for a client. The amounts at stake in real estate are large enough that items which are small differences relative to the size of the entire transaction are nonetheless, significant amounts of money. Getting paid all of a three percent cooperating broker's concession can end up costing you ten percent easily. And that is in addition to the costs of doing real estate (MLS access, agent keys, licensing fees, etcetera) and the economic costs of the other money you could be making if you were doing what you're really trained for.

Caveat Emptor

I thought I'd share this with you as an example of the sort of mind set to beware. This is a real email I received a few days ago, with identifying information redacted





I found you through the DELETED web site and I thought you might appreciate the following idea for GENERATING MORE REFINANCE BUSINESS:



What would happen if you sent the following email to your email list of former and prospective clients?



====================================



Subject: OWN YOUR HOME FREE AND CLEAR IN 8-11 YEARS



Dear (former or prospective client):



We recently found an interesting 23 minute video on the web that shows you how to Bring MORE MONEY into your Life, OWN YOUR HOME FREE AND CLEAR IN 8-11 YEARS - instead of 30 years, AND SAVE 66% in Total Mortgage Interest. The video is about a computer program called the DELETED (May be a propreitary name). You can view this video by copying either of the addresses below into your browser and press "Enter":



CLICK --> (DELETED!) <-- CLICK



(Please Note: Your default video player will play the video, and your browser will stay blank.)



If you like the idea of bringing more money into your life, if would like to own your home FREE AND CLEAR in 8-11 years - instead of 30 years, and if you would like to save about 66% in total mortgage interest, get back to me at (123) 456-7890. We can make it happen for you.



Best regards,



(They had the gall to sign my name to this abomination!)





Here's WHAT YOU GET OUT OF THIS as a mortgage broker:



If your client wants to go ahead, a HELOC (DM: Home Equity Line of Credit) is required to implement the program, so they will need YOU to arrange an "Advanced" (Home Equity) Line of Credit for them (earning you a fully disclosed HELOC fee). Plus, you will Earn a $900 to $1500 fully disclosed commission for each DELETED you arrange, depending on your cumulative sales of the DELETED Program. All you do is help your client save tens of thousands of dollars (or more) in mortgage interest. They can also pay off credit card and other debts more quickly at the lower (HELOC) interest rate, and be guided step-by-step to become DEBT FREE.



This MMA program is a great RELATIONSHIP BUILDER. It will stimulate discussion with your clients and get you MORE REFINANCE BUSINESS.



....................................................





As an alternative, if you don't want to send out special emails like this, you certainly talk with people every day who decide NOT to refinance, or NOT to refinance with you. What if you were to ask "one more question"?



FOR EXAMPLE: "By the way, if you don't want to refinance, I know of a way you can bring more money into your life AND own your home FREE AND CLEAR in 8-11 years - instead of 30 years, and save about 66% in total mortgage interest, WITHOUT REFINANCING. Would you like to know HOW to do this? (Yes/No)







(If yes): "Point your browser to DELETED. This will play a 23 minute video that explains how the DELETED works. Will you watch the video? As soon as you've watched it, call me, OK?"



....................................................



Some clients should not have a HELOC because they do not have the financial discipline to handle easy access to credit responsibly. The factor of financial discipline could be part of your discussion with the client.



In any event, the above email gets you into direct contact with clients you would otherwise NOT connect with, without bringing up the subject of refinancing their loan. This allows you to assess and attempt to meet the client's needs in a perceived context of genuine service.



Sounds good? Get back to me at DELETED for more information and to get started!



Best regards - for increasing prosperity all around,



NAME AND CONTACT DELETED TO PROTECT THE GUILTY





Offer some brokers a way to make money, and they won't care if it hoses their clients. Others just won't examine the program, because it looks like it helps clients while it makes them money, although in fact it does not help clients.



Now their web video wouldn't run, and I wasn't going to lower my computer's security settings for SPAM. But I found their information elsewhere. It's an accelerator program combined with a debt consolidation program. It didn't take much work.



Lowlights include



$3500 sign up fee for something that should be free, as it cuts the lender's risk factors significantly.



Multi-level marketing scheme. I sign up other folks to sell it, I get paid for their production. Now there is nothing intrinsically wrong with multi-level marketing, but it does serve to inflate costs. Sometimes it is less expensive than retailer's inventory carrying costs and marketing costs, but for financial services it is a dead give away that something is not right here because there are no inventory costs, and they're certainly spending enough money on marketing - $900 to $1500 commission plus over-rides per program sold. What a beautiful idea, to get the suckers to pay for your marketing!



Unrealistically low mortgage balances, and outrageously high assumptions of extras payments under the program. This has the effect of magnifying the apparent benefits. In reality, your average total benefits will be half a months interest savings on anything deposited. So if you deposit your entire $5000 paycheck and you have a $2000 mortgage payment, that's about half a months interest on $3000. At 6%, that's about $7.50 per month gain. Certainly not worth all the hoopla, is it? Definitely not worth thousands of dollars in sign up fees, not to mention the costs of that Home Equity Line of Credit. Considering the costs involved, you'd do better to ignore the program (which has a monthly cost of more than that), and just send the lender $10 extra per month. As a matter of fact, most of the increased benefits these programs claim has to do with the bank retaining a certain amount that they claim you just end up not spending - and I can do better than 6%, even net of taxes, with that money if I invest it elsewhere. If you can't do better than 6%, just add whatever you want to your regular monthly payments when you send your lender their money, and ask them to apply it to principal. You will come out ahead. Not to mention I don't have to take out a second or refinance to get money out of investment accounts if I decide to do something else with it!



And that's the real kicker. There is no benefit to these programs that mortgage consumers cannot do cheaper or better themselves. The real benefits obtained by these programs are comparatively small, and in no way justify sign up expenses of hundreds to thousands of dollars, or monthly fees above $1 or so. Don't waste your money. If your lender will give you one of these for free, that's one way to get five to ten dollars extra applied to your loan principal per month. If they want to charge you, don't waste your money on the sign up or the monthly fees. Instead, add whatever the program's fees are to whatever amount you would ordinarily pay, and you'll be ahead of the game.



I keep saying this, but mortgage lenders do not want to compete on price, so they will try offering all kinds of bells and whistles that might appear to be neat stuff but are really a distraction from what's really important. Some very big names are trying to use these to sell much higher rates than people would otherwise be able to get, by distracting people with this shiny new toy of Mortgage Accelerator Programs that don't make nearly the difference that some folks say they do. Take your time and do the math. If you can save a fraction of a percent on the interest rate, or even just cut your closing costs by a thousand dollars because the other lender's trade-off between rate and cost is a little better, you'll be better off going to the other lender. Mortgage Accelerator Programs like this are an expensive waste of your money,



Caveat Emptor



Looking for advise on Neg. Am. loans.

I live in DELETED and I recently went into an office with a buddy asking about a refi and cash out loan on my existing homes in order to help with cash flow. I briefly talked to the broker who was trying to close two loans for my buddy. He said yeah I could probably get you a similar loan 1% or so and cut your payments in half. You'll need to refi in 3 years or so.

I Left my old job ( Sales ) and I am in my first development project subdividing 2 lots in to 4 with custom homes on each. Time line has dragged on dramatically ( approaching 2 years ) and budgeted money is running thin. Should start building within next few months and complete with in 15-18 months. Should make good profit.

In addition I own two SFR's and I have 549K loan on primary and 297K on non owner. Each appraises over 800K.

To help with purchase of the other properties and need of cash flow I also exercised LOC's of 150K and 90K on these properties so total mortgage debt is :

* $ 1,087,550 payments of $6152
* new loans proposed are 650K primary and 595K non owner for total of :
* $ 1,245,000 payments of $3442 saving $2710 per month.
* terms 40 yr : 1.25% on 650K
* terms 40 yr : 1.75% on 595K

* Question are :

1. What should the fees be on these type of loans ?
2. It looks like little over 27K, is that high, seems like it ? Isn't the broker getting kicked a high commission on the back ?
3. Should there be prepayment penalties ? I'm/ /being told can only sell after the first year and cannot refi for 3 years.
4. What index should this be based on ? Think he said one that is constantly moving ?
5. Approximately how much is being added to the principle each year ?
6. Should I be allowed to make extra principle payments each month or at my discretion without incurring penalty ?
7. *** Should I do these loans ? What are the main things I should ask for and stand firm on ?
8. Am I being duped ?

Thanks for any advise. The broker has avoided specifics for the month and now sent an email saying docs should be ready tomorrow and location of Escrow office. When I asked what the specifics were, penalties, stipulations and what would be added to each principle per year ? and if he could get me something in writing he said " When you came into my office, we sat down and went over each program. If you'd like, you can call me and I'll be glad to explain exactly what your loans are going to be. There aren't different scenario's. You told me what you wanted and I got it for you at the price/payment you wanted. "

Coincidently, my buddy was called day before his docs were ready, they were sent to his house the next day with a Notary to sign on spot. While looking over he noticed things they discussed had changed and called him on it, he said take it or leave it, and he opted to leave it.

Seems odd to hear nothing and be avoided on questions other than its what we discussed in the office which was very brief and non specific. Now he's ready for me to sign. Really concerned about fees, penalties and addition to principle.


Answers to your questions:

1. Closing costs on NegAm loans are about the same as any other loan. $3500 as a rule of thumb, perhaps a little more because your loans are bigger (so title and escrow cost more, appraisal is a little more). Even if you're adding impound accounts and paying 30 days of interest, I can't see closing costs of $27k.

2. Yes, $27 k is too high. But every dollar they can skim is a dollar in their pocket, and since what you are looking for is a low payment, it doesn't make much difference to the payments, so they figure you'll sign. As I've said before, these loans are a way for them to appear to compete on price without really competing on price.

3. I do not know of any negative amortization loan where the pre-payment penalty can be bought off completely. It's built in to every single one I've ever found. I occasionally use that as a come-back while I'm throwing the idiots who wholesale these out of my office; "You say you've got something worth my time, and then you tell me about these POS loans that everybody else is pushing for all they are worth. Were you lying, or do you have one without a pre-payment penalty?" To date, nobody has said yes. The prepayment penalty he quotes, is one of the less bad ones, but I'll bet, sight unseen, that he boosted your margin above index rate to buy it down. The best one I've got, the penalty is "soft", waived if you actually sell the property.

4. Negative Amortization loans are pretty much all based upon COFI, COSI, or MTA. All of them are moving rates that change slightly every month. I do know of one where the underlying rate is fixed for three years, but the minimum payments are higher, and it wasn't exactly a great rate when I was told about it some time ago (6.9% plus adds that depend upon the situation)

5. That depends upon the underlying rate, which is your index plus a set margin. Most of them are sitting in the range of 7.75 to 8.25%. (I initially assumed 8%, but it was 8.4) 8.4% times your total balance is about $104,500 of interest per year. Less your payments of about $41,300 adds roughly $63,200 per year to your balances, not including compounding or shifts in the index. Incidentally, you are not saving money on the real cost. You're simply deferring part of the cost until later and allowing it to compound. Comparable "A paper" rates on 30 year fixed might be about 6.25 and 6.5% respectively, or about $80,000 per year of interest, which would save you about $2000 per month in the real cost of the money, interest.

6. The reason they're called Option ARMS or Pick a Pay by some people is that you get a choice of four payment options every month. Nominal, interest only, 30 year amortization, and 15 year amortization. Depending upon the lender and the product, the prepayment penalty can be either "first dollar" (i.e. pay anything other than one of the four payment options and gotcha!) or 20% (you're allowed to pay down 20% of the principal each year without triggering the penalty).

7. I advise very strongly against these on your primary residence, and on investment property there are usually better alternatives. However, you're kind of in mid-leap, and from what you say, it seems like you have a cash flow problem. You're committed, and there may not be a better alternative to doing a negative amortization loan. If your project doesn't work out, you've got serious issues, and you can't not start at this point.

8. It does appear likely from where I sit that there are much better bargains out there. I avoid these loans like the plague on humanity that they are, but if you've got a valid reason why they are the least bad alternative for you (and it seems like you might, with your impacted cash flow situation), chances are excellent that I can do something better. I don't know enough about your situation to make any type of guarantees, but if you're not in an emergency situation where you need the money within the next three weeks, I suggest you shop your loans around. This place is making about 3.75% on your loans, or $46,500 for the two loans, plus junk fees. These loans aren't that tough. Whereas the important thing to you is not how much they are making but the bottom line to you, I suspect that you can find other folks willing to do both loans for considerably less, by giving you a rate that doesn't add nearly so much to the underlying index (Wall Street, and therefore the lenders pay based upon the margin, which is quite simply the addition to the underlying index that you agree to pay in your contract). Furthermore, good loan officers live on specific numbers. I'm delighted to discuss exactly the loan I'm going to deliver to my clients once I have shopped it around and know what that loans terms are. Every loan I lock has a Guarantee attached to it: These are your terms, or I pay the difference. The upshot is, I strongly suspect you can find someone who will deliver a better loan cheaper, whether you stay with a Negative Amortization loan like I suspect you will, or go with something with a better rate fixed for a longer period.

Caveat Emptor

The Best Loan Right NOW



5.875% 30 Year fixed rate loan, 0.6 total points, and NO PREPAYMENT PENALTIES!. Assuming a $400,000 loan, Payment $2366, APR 5.947! This is not an Option ARM! This is a thirty year fixed rate loan. The payment and interest rate will stay the same on this loan until it is paid off! 30 year fixed rate loans as low as 5.25%! Zero points and zero closing costs loans also available!



Best 5/1 Loan tradeoff: 5.625% 0.9 total points. Assuming $400,000 loan, payment of $2303, APR 5.721. 5/1 ARM loans available as low as 5.125%! This is not an Option ARM! This is a real loan with a real payment that actually pays your loan down, and the rate is fixed for five years!



These are actual retail rates at actual costs available to real people!



No points and zero cost loans also available!



All of the above loans are on approved credit, not all borrowers will qualify, based upon an 80% loan to value and a median credit score on a full documentation loan. Rates subject to change until rate lock.



I always guarantee the loan type, rate, and total cost as soon as I have enough information from you to lock the loan (subject to underwriting approval of the loan). I pay any difference, not you. If your loan provider doesn't do this, you need a new loan provider!



Interest only, stated income, bad credit and other options also available. If you need a mortgage, chances are I can do it faster and on better terms than you'll actually get from anyone else in the business.



100% financing a specialty.



Please ask me about first time buyer programs, including the Mortgage Credit Certificate, which gives you a tax credit for mortgage interest, and can be combined with either of the above loans!



Call me. EZ Home Loans at 619-449-0070, ask for Dan. Or email me: danmelson (at) danmelson (dot) com

The Best Loan Right NOW



5.875% 30 Year fixed rate loan, 0.6 total points, and NO PREPAYMENT PENALTIES!. Assuming a $400,000 loan, Payment $2366, APR 5.947! This is not an Option ARM! This is a thirty year fixed rate loan. The payment and interest rate will stay the same on this loan until it is paid off! 30 year fixed rate loans as low as 5.375%! Zero points and zero closing costs loans also available!



Best 5/1 Loan tradeoff: 5.625% 0.9 total points. Assuming $400,000 loan, payment of $2303, APR 5.721. 5/1 ARM loans available as low as 5.00%! This is not an Option ARM! This is a real loan with a real payment that actually pays your loan down, and the rate is fixed for five years!



These are actual retail rates at actual costs available to real people!



No points and zero cost loans also available!



All of the above loans are on approved credit, not all borrowers will qualify, based upon an 80% loan to value and a median credit score on a full documentation loan. Rates subject to change until rate lock.



I always guarantee the loan type, rate, and total cost as soon as I have enough information from you to lock the loan (subject to underwriting approval of the loan). I pay any difference, not you. If your loan provider doesn't do this, you need a new loan provider!



Interest only, stated income, bad credit and other options also available. If you need a mortgage, chances are I can do it faster and on better terms than you'll actually get from anyone else in the business.



100% financing a specialty.



Please ask me about first time buyer programs, including the Mortgage Credit Certificate, which gives you a tax credit for mortgage interest, and can be combined with either of the above loans!



Call me. EZ Home Loans at 619-449-0070, ask for Dan. Or email me: danmelson (at) danmelson (dot) com

The Best Loan Right NOW



5.875% 30 Year fixed rate loan, 0.6 total points, and NO PREPAYMENT PENALTIES!. Assuming a $400,000 loan, Payment $2366, APR 5.947! This is not an Option ARM! This is a thirty year fixed rate loan. The payment and interest rate will stay the same on this loan until it is paid off! 30 year fixed rate loans as low as 5.375%! Zero points and zero closing costs loans also available!



Best 5/1 Loan tradeoff: 5.625% 0.9 total points. Assuming $400,000 loan, payment of $2303, APR 5.721. 5/1 ARM loans available as low as 5.00%! This is not an Option ARM! This is a real loan with a real payment that actually pays your loan down, and the rate is fixed for five years!



These are actual retail rates at actual costs available to real people!



No points and zero cost loans also available!



If you compare to last week's rates, these rates are higher.



All of the above loans are on approved credit, not all borrowers will qualify, based upon an 80% loan to value and a median credit score on a full documentation loan. Rates subject to change until rate lock.



I always guarantee the loan type, rate, and total cost as soon as I have enough information from you to lock the loan (subject to underwriting approval of the loan). I pay any difference, not you. If your loan provider doesn't do this, you need a new loan provider!



Interest only, stated income, bad credit and other options also available. If you need a mortgage, chances are I can do it faster and on better terms than you'll actually get from anyone else in the business.



100% financing a specialty.



Please ask me about first time buyer programs, including the Mortgage Credit Certificate, which gives you a tax credit for mortgage interest, and can be combined with either of the above loans!



Call me. EZ Home Loans at 619-449-0070, ask for Dan. Or email me: danmelson (at) danmelson (dot) com

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