Recently in Beginner's Information Category
The question that inspired this was
can a mortgage company use the flood insurance claim money towards homeowners mortgage loans?
This is equally applicable to every other form of insurance on your home - earthquake, regular homeowner's insurance, and any others that you may have or require.
The short answer is yes.
The reason that the lender requires being added to every policy of insurance you have on your home is so they have a claim on the policy proceeds. Let's say you buy a $500,000 home for nothing down, and the value of the structure is $150,000 while the value of the land is $350,000. Let's say the house burns down next week. If they weren't on there as beneficiary, you could theoretically take that check for $150,000 and split, leaving them with a $500,000 loan that they're maybe going to net $270,000 for by selling the property that secured it - after all the time for foreclosure, et al, which means they're out all those costs plus thousands of dollars in interest. If you're a lender, you're going to suffer this loss once at most before you decide not to trust anybody.
On the other hand, the lender doesn't want the property or a partial repayment. They want the loan repaid in full. What they're going to do is sit on any funds they get and make certain they're used to rebuild, unless they have some reason to believe that rebuilding is a bad risk. Banks don't throw good money after bad, so if this is the case, they're going to keep the money. On the other hand, if you've been keeping your payments up, they're going to want you to rebuild. Their taking custody of the money is a way to make certain that you do.
No, I'm not turning into a country western singer. Just got a search for "no closing costs no points loan cheapest rates loan". The visit (to this article) lasted less than a full second. The obvious implication was that it wasn't what that person was looking for.
As I have said before on many occasions, cheapest rates or lowest rates do not go with no points or no closing costs loans. Period. One of these things does not go with the others. Rate and total cost of the loan are always a tradeoff.
This is not to say that one loan with no closing costs may not be cheaper than another loan with no closing costs. The point is that there will be lower rates available with some closing costs, progressively more as you get higher closing costs. Then if you start paying points, there will be still lower rates available. There is a reason why they are paying all of your closing costs - you're choosing a loan with a higher rate than you otherwise could have gotten.
No cost loans can be and often are the smart thing to do. Because they are the only loans where there are no costs to recover, they are the only loan that can possibly put you ahead from day one. Consider the zero cost loan as a baseline, and compute what lower rates will cost you in closing costs. Consider: If the zero cost loan is 6.75 percent at $270,000, your new balance should be $270,000. If you can get 6.5 at par with closing costs of $3500, your new balance is $273,500. Your monthly interest in the first instance is $1518.75 to start. Your interest charges in the second case are 1481.46. The lower rate cost you $3500, but saves you 37.29 per month. Divide the cost by the savings, and you break even in the ninety-fourth month - not quite eight years. So in this example, if you think you're likely to refinance or sell within eight years, you'll be ahead with the zero cost loan.
If the loan has a fixed period of less than the breakeven time, you also know that the costs are not a good investment. If this loan were only fixed for five or seven years, well even if you decide to hang onto the loan after it adjusts, the rates go to precisely the same rate after adjustment. If you haven't broken even by then, you never will.
So whereas a true zero cost is often the best and smartest way to go, it will never be the lowest rate available.
Hello, I've been reading your website for awhile now, and have found it very helpful as I'm learning to navigate this crazy loan process! I had a question I was wondering if you could write about/answer.
We currently have a mortgage and a secondary line of credit on our condo (we didn't have a down payment, so we had to do it like this). We have been here one year, and the home values in our complex have gone up about $70,000 - $100,000 in that time period. (We live in Southern California.)
Recently we got a notice in the mail telling us that they can reduce our monthly payments ("by as much as $1,500!)" if we refinance with them. Frankly, it sounds way too good to be true, and I have a feeling they're not really telling us the truth in this notice. But it did raise a question in my mind: would it be wise to attempt to refinance, in the hopes that our higher valued home would allow us to refinance with only one mortgage, instead of two? I'm not even sure if that's possible...I'm having a hard time understanding how refinancing works. I should mention that we are currently in an interest-only loan, with no prepayment penalties. Our first loan is 4.75%, and our secondary line of credit is 6.375%.
Any help would be greatly appreciated.
Your feelings that they aren't telling the whole truth are justified.
Refinancing is the process of replacing one loan for another on the same piece of property. The idea is that the terms of the new loan are more advantageous to you than the terms of the existing loan. There are three main issues that you need to be aware of, however. The first is that there are always costs associated with doing the new loan. The second is that there may be a prepayment penalty to get out of the existing loan. The third is to make certain the terms you are moving to are enough better, for your purposes, than the existing terms to justify the costs associated with the first and second issues.
You state that you're in California, which is where I work. Realistic costs of doing the loan are about $3500 with everything that is necessary. This doesn't include origination, to pay the loan provider for the work they do on the loan, or discount, to pay for a rate the lender might otherwise not offer. I explain those costs, the difference between them, and many of the games lenders play in my article on The California Mortgage Loan Disclosure Statement (MLDS) Part I. There will also be the possibility of you having to come up with some prepaid items, explained in The California Mortgage Loan Disclosure Statement (MLDS) Part II.
Note that not every loan has points. I actually think that, given most client's refinancing habits, it's usually better to pay for a loan's cost, and the loan provider's compensation, through Yield Spread. Yield spread can be thought of as negative discount points, and discount points can be thought of as negative yield spread. Discount points are a fee charged by the lender to give you a rate lower than you would otherwise have gotten. Yield Spread is a premium paid by the lender for accepting a rate higher that you would otherwise have gotten, and can be used to pay the loan provider and/or loan costs. Each situation must be considered upon its own merits, of course.
Now, let's take a look at your specific situation. Your current first mortgage is at 4.75% interest only. You don't mention what sort of loan this is (updated via email: it's a 5/1 Interest Only ARM), but there is no such thing as a thirty year fixed rate interest only loan. At most they are interest only for a certain period, usually five years, before they begin to amortize over the remaining twenty-five. On the other hand, you said you bought one year ago, and that rate didn't exist on thirty year fixed rate loans then and it doesn't exist now. (Via later email, the first mortgage is a 5/1 Interest Only ARM). Your second loan is a line of credit at 6.375. I'm also guessing that either you, or the person who sold to you, paid a good chunk of change in discount points to buy the rate down, and I'm hoping it wasn't you.
Now, there's no way that this is a loan that's going to serve you indefinitely at that rate. There hasn't been a 30 year fixed rate loan comparable to that available since Spring of 2004, with any lender I know of, no matter how many points you paid. So what you have is at most a hybrid ARM (Yes, 5/1 Interest Only). No worries; I love hybrid ARMs. They are the only loans I consider for my own property in most circumstances. But they do have one weakness. There is likely to come a time when it is in your best interest to refinance, because after the fixed period the rate on them adjusts every so often, based upon a stated index plus a contractual margin, and the sum of these two is likely to be significantly higher than the rate for refinancing into another hybrid ARM.
Now what are they offering you? They're talking about cutting your payment by $1500 or more. But there just aren't any rates that much lower than yours available. Nothing even vaguely close. I don't think I could get you a 4.75% rate, even fully amortized, right now. So how are they going to cut your payment?
The only hypothesis I can come up with that is not contradicted by available evidence is that they are offering you a loan with a negative amortization payment. I explain those in these articles:
Option ARM and Pick a Pay - Negative Amortization Loans and Negative Amortization Loans - More Unfortunate Details
There is more information on marketing games with this loan type in these articles: Games Lenders Play (Part II) and Games Lenders Play (Part IV).
Finally, there are a few more issues that may not be relevant to everyone in these articles: Regulators Toughen Negative Amortization Loans? and Negative Amortization Loan Issues on Investment Property
One thing to understand is that when lenders are sending out advertising, they are not looking for Truth, Justice, and the American Way. They're looking to get paid for doing a loan, and most lenders will do anything to get you to call, and then to get you start a loan. The Creative Fiction on many Good Faith Estimates and Mortgage Loan Disclosure Statements is only the start of this. If you find a loan provider who will pass up loans that they could otherwise talk you into because it doesn't put you into a better situation, keep their contact information in a very safe place, because you've found a treasure more valuable than anything Indiana Jones ever discovered. A valuable treasure that you can and should nonetheless share with friends, family, and anybody you come into contact with because you want them to stay in business for the next time you need them. Most lenders and loan providers could care less if they are killing you financially - what they care about is that they get paid. A negative amortization loan pays between three and four points of yield spread. Assuming your loan is $300,000, they would be paid between $9000 and $12000 not counting any other fees they charge you for putting you into a loan where the real rate is at least 1.5 percent higher than the rate you're paying now, and month to month variable. Warms the cockles of your heart, right? Didn't think so.
In short, they're offering you a teaser no better than a Nigerian 419 scam for most people in your situation. My advice is not to do anything unless you're coming up on the end of your fixed period, in which case you need to talk with someone else, who might have your interests somewhere closer to their heart than the Andromeda Galaxy.
I was approached by these folks a few weeks ago via email.
I attempted to get them to write up the experience themselves (and I would still like you to if you're reading this), but I wanted to write something about this before I completely forgot about it. This whole exchange is indicative of games loan providers play in order to make money.
I'm going to sketch this out chronological to the extent possible. What happened was Mr. and Ms. A got a postcard in the mail quoting low payments for their loan amount. They thought it looked great, and called the loan provider. The loan provider talked about these great payments on a loan that looked fairly real, and quoted an APR of 6.18. He told them that this was a great loan, and compared it to a 5/1 ARM in such a way that that was what they thought they were getting. No worries, because they were going to be transferred by his company in two to three years.
They asked my opinion about another item having to do with the loan, and something about what they said sounded funky to me.
Well, i believe what I'm getting is called a 5/1 ARM. Each month i have the 4 options of minimum payment, interest only payment, 30 yr payment, or 15 yr payment. (payments respectively would be either $A, $B, $C, or $D)
The minimum payment stays the same for every 12 months, then increases by about $90 each subsequent yr. I know minimum is not ideal, but i live in an area with high appreciation, and because of the ridiculous value of property in the area, & the school system in this county, it continues to appreciate regardless of trends elsewhere.
I'm told the loan comes standard with 3 yr prepay. I can pay the points I mentioned to make it a 1 yr, but it doesn't affect my interest rate coming down. That's at about 6.18%
Well, the part about property appreciating regardless of trends elsewhere is just plain wishful thinking. There is nowhere that is insulated from economic conditions. Nonetheless, it's not what we're talking about here. Does this loan sound like something I keep writing about?
Here's what I sent back:
That particular loan is actually a Negative amortization loan. I explain those here (same link as last paragraph - ed).
They are not wholly without redeeming qualities, but they are something to be done with a trembling hand and much looking over your shoulder. At the current rate, expect $725 to get added to your balance the first month - and rates are rising, so this is likely to accelerate, and your underlying rate is completely variable on a month to month basis. Even if they don't rise and you make the minimum payments, you will owe approximately $X after two years - an increase of $18,620 in your balance! Will it be an issue if you owe $18,600 more when you go to sell it? I think it likely that the answer is yes, but it's your call.
A 5/1 is something entirely different. It is a "A Paper" Thirty year loan with the interest rate fixed for the first five years, then adjusting once per year based upon either LIBOR or US Treasury rates, not COFI or MTA. As A paper, there is not an embedded pre-payment penalty. Right now, in California, I have them at about 6.25 no cost no points no prepay, or 6.5 interest only, and truly fixed for five years.
Furthermore, there was another issue with the loan quote:
If I do the math, the first payment gives a principal balance of $X+2000, the second payment gives a principal balance of $X, The third gets $X+500 and the fourth $X+1300. If these are the numbers your loan provider gave you, which of these numbers is correct? Any of them? Unless you're paying the 1.5 points out of pocket, your loan provider should give you a quote which adds them to the amount you are borrowing. Did they do this, or did they pretend it was going away by magic?
oooh. sounding scary. So i left them a mssg asking which it was, a negative amortization loan, or a 5/1 ARM. I also asked for more info as I was sent spreadsheet which is missing some info. I am fwding the spreadsheet if you don't mind the attachment.
Well the loan provider had named the spreadsheet "2005_Pay_Option_Work_Sheet.xls" Pay Option is one of those "friendly sounding" names for a negative amortization loan. Well, I knew before what kind of scum bucket this loan provider was before I opened it, but doing so was confirmation, good enough to convict in court except that what he did isn't illegal, only immoral and unethical. Yep, it had all of the characteristics of a negative amortization loan as prepared by the worst kind of financial predator. Three or four payment options, including minimum, interest only, and 30 year amortized? Check. Prepayment penalty if you made any other payments (The so-called "one extra dollar" prepayment penalty I talk about here, which is not necessarily characteristic of negative amortization loans but certainly seems to occur there more than anywhere else). Check. Yearly minimum payment increases of about 7.5 of base minimum payment%? Check. Complete lack of disclosure that if you make the minimum payment your balance increases by hundreds of dollars per month? Check. About a 5 percentage point absolute spread between nominal rate and APR? Check. Complete failure to disclose payment based upon a "nominal" (in name only) rate of 1%? Check. Failure to disclose that the real rate was month to month variable from day one? Check. Failure to disclose that the index it was based on had risen in recent months and that unless said index went back down, the real rate would be rising? Check. Failure to include real and known closing costs in your loan quote? Check. That last is kind of minor as compared to everything else, but I'd be upset in a major way if it was the only thing wrong he did.
I sent Ms. A an email which said, in part:
"Option ARM" is a common, friendly sounding name for what is still a negative amortization loan. Everything about this loan, from the fact that it has a "payment cap" which is unrelated to a rate cap, screams negative amortization loan.
The 5/1 is a different loan provided for comparison, as the sheet tells you, and is a better loan for almost all purposes, as the second column of the comparison tells you. A 3/1 might have a slightly lower rate, or it might not. Ditto any of the 2 or three year subprime variants.
Intro period is telling you the period it is fixed rate for.
MTA loans are based upon a moving average of the treasury rate over the last twelve months. Since they've been going up, your real rate is likely to increase as some older and lower rates drop out of the computation in upcoming months.
Pay attention to the two footnotes on the payment options. "deferred interest" is characteristic of negative amortization.
(Name redacted for publication). They are not the only such company, but the translation into real english of their name must be "watch out for our piranha"
These loans are very commonly pushed because most people "buy" loans based upon payment, making them very easy loans to sell because unless you understand the drawbacks, you will think this is the greatest loan since sliced bread. These are up to forty percent of all new loans in the last year in some areas (including here), and are likely to contribute to a crash in housing values soon.
There are sharks and wolves out there, as this illustrates. Why people who would never buy a toaster oven without checking at least two vendors will sign up for a mortgage without shopping around is beyond me, but people do it. This is a trap that can be very hard to avoid unless you know what's going on, but if you talk to a few loan officers, and and go back and forth, chances become much better that you'll be saved by one of Jaws' competitors telling you what's really going on. Other, competing loan providers deal with this stuff every day. After a very short time, we get to the point where we can recognize it in our sleep. But we can't alert you to these kind of issues if you don't give us the chance.
Luckily, these folks gave me the chance.
They were in another state, and so I didn't get any business out of my good deed, but that's okay. I got this article. And now, you folks can read about it, and be forewarned.
It may not come as a shock to you, but loan officers, along with many other salesfolk, speak a different language than the rest of the population. What will probably annoy you, however, is the number of times they'll say something that sounds like a phrase out of English, but really is from Salesgoodspeakian, a bizarre tongue in which the true meanings must be learned by osmosis from the particular subculture's dialect, while intending to communicate something entirely different to the poor schmuck who, after all, doesn't understand salesgoodspeakian.
This post is intended partially as humor, partially as education. I'm going to start it with a few of the most common ones, and update it by adding more and reposting from time to time. If you've got a good one, either with or without translation (and whether from one of my fields or not), please send it to me along with the context, if appropriate (danmelson at). Even if you don't have a translation, I'm pretty good at major dialects of salesgoodspeakian. It is to be noted that these phrases are not red flags, but more in the nature of yellow flags. If they just occur on a stand-alone basis, it's something that's likely to proceed from yellow to a red flag, particularly with repeated yellows. On the other hand, if the person uttering them proceeds to issue a clarification in plain English, issues an amplification rendering the translation void, or translates and explains the salesgoodspeakian, it's possible you've just been given a real world green flag that this is an ethical person. For instance, my absolute favorite loan to do is a true zero cost to the consumer A paper loan (and no prepayment penalty!), which I usually explain as "Nothing added to your mortgage. You've just got to do the paperwork with me, and come up with the money for the appraisal, which will be returned to you when the loan funds". And it's also possible you've been given a reinforced red because they lied.
And yes, I've had clients who came to me report every one of these. Some of the translations are a little exaggerated to make the point, but the spirit remains the same.
The salesgoodspeakian to English phrasebook:
"Stress free loans" two percent higher than you'd qualify for with better documentation and a little more work and less greed on the loan officer's behalf.
"Won't cost you anything out of your pocket" - Six points and $5000 in well-padded closing costs added to your mortgage loan balance, though.
"Thirty Year Loan" fixed for the first two, if they're feeling generous that day, but it does have a thirty year amortization. With five year prepayment penalty of course!
"How does a 1% rate sound?" Like you're a misleading weasel trying to get me to do a loan that digs me in deeper every month with a three year prepayment penalty that keeps me trapped even after I figure it out (See Negative Amortization Loans)
"Industry standard" - Everybody else at this company does it that way, too, because the boss says to, and I don't know any better. (This is very much the "G" rated translation. Please note that there are industry standards - things that pretty much every company in the industry does. Some of these standards need to change, some just are, and some are actually beneficial).
"Everybody knows there's 2% origination fee." Actually, everybody knows no such thing. But if I told you about it in the first place, you might have gone with somebody honest.
"Brokers can charge you anything they want" - so can I, but brokers have to disclose their compensation and I don't.
Found on the same billboard:
"Rates as low as 4%!" on an "adjusts every month" loan that's going to 6% next month and who knows what thereafter. With five points. While I have you on the phone, let's sign you up for it.
"No Points!" we've got no points loans. Not on the loan we quoted above. I'm really so terribly sorry you misunderstood. Now, about that 4% loan, what's your name?
"Low Fees!" compared to the multimillion dollar Oil For Food bribes, $23,000 is low. Now about that 4% loan, what's your social?
"Easy paperwork" but the start rate goes to 6% for the first month, adjusting to 8% next month. Still five points. Not for the rate we quoted above. I'm really so terribly sorry you misunderstood. Now, about that 4% loan, when can you come in to sign?
mortgage humor real estate—
i was sold a bad home mortage who do you talk to
That was a search I got the other day. The answer depends upon where you are in the process.
If you've just applied, not yet signed the actual loan papers, go talk to another loan provider. It's not like you're committed to the company, and it's not like it never happens. Even the most ethical loan provider loses loans between application and funding. It happens. Go make certain that you are getting the best loan for you. In order to do this, you need to actually discuss your situation with several loan officers - and I mean really discuss it. Ask the hard questions. I've got a list of questions here. Apply for a back up loan, in case you are lied to.
If you've signed the final papers but are in the recission period, contact the escrow company and rescind in writing. Walk it in, don't rely upon a fax or registered letter. Mind you, if it's the last day and after closing time, a faxed recission before midnight will prevent it from taking place - if the escrow company actually gets it. Faxes go astray. This is one reason why you want to contact the escrow company, who is paid to be a neutral third party. I've heard stories of people who supposedly contacted the loan provider and it somehow "got lost" and the loan got funded. Bad situation to be in, and the legal presumption is not in your favor. Now you've got to prove that you sent the recission in time, and that they should have known not to fund your loan. This is hard.
The most common time to realize you've "been had" before the loan funds is right when you get the final loan documents to sign. That's always the moment of truth, and there are few legal protections in advance of that moment. Many people think that the federal Good Faith Estimate or California Mortgage Loan Disclosure Statement mean more than they do, when the fact is that there are very few regulations upon the accuracy of either document, and unethical loan providers are adept at not running afoul of them. And if you trusted that provider and didn't apply for a backup loan and now you are likely to lose the deposit you put down, well the provider is the scumbag, but the person in the mirror helped put you into this situation.
If your loan is already funded, you can contact your state's Department of Real Estate and your lawyer, but odds are extremely poor of those folks being able to do anything that changes the situation. There basically have to have been major rules broken to invalidate the contract, and those unethical providers who pull this garbage are adept at not breaking those few rules which really will land them in trouble. I've had a fair number brought to me to see if I could tell them how to fix it, and the form response is, "If your lawyer and the Department of Real Estate can't help you, all I can do is take the situation today as a starting point and see if selling or refinancing from this point forward put you in a better situation." In other words, the only way to reliably fix the problem is another (hopefully better) loan, or if that won't help, selling the property. The lender is not going to amend the contract because you've got a bad deal. The seller is not going to say, "Oh, I'm so sorry that you had a bad experience!" and restore you to where you were before you bought. This is why you need to make certain that what you're getting is a good deal before you are stuck with it. I'm trying to produce the knowledge that makes this possible here, but you still need to sit down and really talk the matter over with several professionals, and make the effort to find out if a proposed deal is real or nonsense. I am sorry to report that there is no easy way to do this, but you might want to start with these five articles of mine.
If you go in alert with your eyes open and do your homework, you can avert the vast majority of problems before they affect you. If you are one of those who won't do this, then you will be placing yourself in one of three categories: Those with an unreasonable amount of pure dumb luck, those poor schmoes who've been had but know better now, or those poor schmoes who've been had and don't realize it.
Racial Gap in Loans Is High in California.
I can give a variety of reasons for this.
First off, especially in Los Angeles but to a lesser extent throughout the state, there is a huge "Spanish speaking only" community. When you limit yourself to speakers of a language which isn't the nation's primary business tongue, you limit your ability to find loan officers who will treat you honestly and fairly and find you the best possible loan. I speak reasonable spanish myself, but not nearly enough to do a loan.
Second, those who speak spanish only are ripe pickings for unscrupulous loan officers and real estate agents. Because they do not understand english, the language the regulations are written in, they have less understanding of what is a complicated and confusing process for anyone who is not a practicing professional. In fact, I can name a lot of alleged professionals who speak english and are nonetheless limited in the comprehension of the process to judge by the evidence.
Third, those who speak spanish only have a lesser understanding of their rights under the law, and since the vast majority of all loan documents are in english (a few lenders are starting to generate a few documents in spanish, but not every document, and it will never be the main copy of anything), they have a lesser understanding of what they are agreeing to.
Gee, I hope the preceding helps the "Spanish only" lobby of separatists understand what they're setting up for the people whose benefit they are allegedly advocating.
But more importantly than all of the preceding, real estate and loans are "sales connection" businesses. Because most people do not shop for homes or home loans in a rational fashion. "I can't be rational! This is far too important for that!" Seems silly, but it's true. People buy or do business with you because you have made them more comfortable, or because they think you can do something nobody else can or will for them. They do business because they connect with you on some level, not because what you're offering is the best thing out there.
Identity politics exacerbates this. There are agents out there (often but not always necessarily of the same ethnicity) whose niche market is "black folks", or "spanish speakers" or "Koreans". Some people will do business just because youre the same, or because they feel some kind of cultural connection. Others will do business because you helped their brother, or friend, whether said brother was the toughest deal in creation or the easiest thing you ever did. And if you brother had to do something, or had something happen, it's only normal it should happen to you, too - right? One of the standard phrases in the sales lexicon is "My you were tough, but we got it done! How about some referrals." This by itself is not evil. But if you've taken advantage of someone as if they were a tough loan when in fact they were not and could have gotten a better deal from someone else, you're lining your pocket at your client's expense. Everybody deserves to get paid for a job well done. But when my contacts in the escrow and title business tell me about people who only serve this ethnic market or that ethnic market who have six percent state of California limits on their compensation externally applied to every single loan they do, or how these people consistently have a sales compensation a full percent above the market, that tells me something: that these alleged professionals are taking undue advantage of their target market. Many of these people they are targeting literally have no way of knowing there is something better out there. Are their tactics illegal? No. Unethical? In at least some cases. Taking advantage of client ignorance? Definitely.
The process of purchasing, selling, or refinancing real estate is byzantine, with rules and regulations that get more complex every year. The average citizen has difficulty understanding the things that may be relevant to their particular transaction (I've had to explain to lawyers how they got taken in their previous transaction). To most people, the whole thing is like some immensely complicated magical ritual. Place the proper documents at the foot of the underwriting god, dance three time sunwise and four times widdershins round the appraisal every day for a fortnight, pray with the high priests of insurance, and you get your house.
It has elements in common, I will admit. But the processes of real estate sales and real estate loans are coldly, brutally, logical once you understand them. Unfortunately, the odds of understanding are stacked even further against those who are apart from the majority of society. Those who are concerned with minorities having inferior loans would have more success in connecting the people to the mainstream of society than in considering further burdensome anti-discrimination legislation.
This is something I probably should have covered quite some time ago, as it's part and parcel of the system that's abused. Here are sample rates from one A paper lender, picked at random, that were in effect a few days ago. These are Fannie and Freddie conforming 30 year fixed rate mortgages with full documentation of the loan. The first number is the cost for a 15 day lock, the second for a 30 day lock, and the third for a 45 day lock. A positive number means it costs that number of discount points to get the rate. A negative number means that the lender will pay that many discount points for a loan done on those terms. Now, I want to make the point that these are wholesale rates, but I didn't feel like translating them to retail. I don't work for free any more than anyone else, nor does any other loan provider.
As you should notice throughout, there is a 0.25 spread in costs between locking in any particular rate for 15 days as opposed to 30, or 30 days as opposed to 45. This is because it costs them money to have the money standing around doing nothing waiting for your loan to fund. The difference in costs between a 15 day lock and a 45 day lock at the same rate is half a point. For most people, the column you want to pay attention to is the thirty day column. Two weeks from a standing start is not enough to do a refinance, and even a purchase is iffy. But you want a rate locked in when you start the process, or you really have no idea whether it will be available when you get to the end of the process. Indeed, many providers work on a "promise the moon and wait and hope" basis, hoping the rates will drop. That's why you want a written guarantee of a rate at a given price on a given loan type.
Now this is a fairly broad spread rate sheet, as the company is willing to take clients through a large range. On the other hand, at a 5/8ths point hit for 1/8th percent rate below 5.875, they are telling you that they really would prefer to keep their customer's rates locked in for 30 years above that. On the other hand, since most people dispose of their old loans about every two years, most folks shouldn't want to pay those costs, which will take much more than two years to recoup from the lower rate. It's much the same phenomenon as insurance companies guarding against adverse selection (only those folks who have major health problems buying health insurance, for example).
Which loan is the best for you? Don't know without more specifics. It depends on approximate loan amount, your life plans, your proclivities, and your financial situation.
But the devil is in the details, and one of the most common devils is details is a provider forgetting the adjustments. Adjustments generally mean that the loan will be more costly than the basic rate/cost tradeoff outlined above, so "forgetting" to post the adjustments on a Mortgage Loan Disclosure Statement is one of the easiest and most effective ways to lie in order to make your loan look more attractive by comparison. Since most providers don't guarantee their estimates, they can do this with basic impunity, but make no mistake - they know what the price is really going to be. If they won't guarantee their estimates, ask them why not. Here are the possibly applicable adjustments for this category:
Loan amount under $60,000: half a point
Loan amount $60k up to $100k: quarter of a point
cash out loan, 70-80% LTV: half a point
cash out loan, 80-90% LTV: three quarters of a point
Investment property 50-75% LTV: one and a half points
Investment property 75-80% LTV: two points
Investment property 80-90% LTV: two and a half points
No Impounds fee: quarter point
2 units 90-95% LTV: half a point
Manufactured home: three quarters of a point (they also have an absolute maximum CLTV of 80%)
80/15/5 quarter of a point
75/20/5 quarter of a point
Interest only one and one eighths points
if CLTV over 90%: additional quarter point
97 percent of purchase price financed: three quarters of a point
100 percent of purchase price financed: one and a half points
2/1 Buydown two and a half points
Stated income FICO 680-699: half a point
Stated income FICO 700+: quarter of a point
(actually, these are small hits for stated income, indicating to me that I can likely do better elsewhere for a full documentation client!)
So let's see. If you are doing a cash out to 75 percent loan stated income and have a credit score of 690, you add one point to the costs listed above.
If you have an investment property duplex at 90 percent LTV, you would add three points (investment property loans are relatively expensive, as you can see, and it isn't restricted to this lender. They are riskier loans)
Doing 100% financing on a $50,000 home: Two points.
One hopes you get the idea. To leave these out is a tempting omission for the less ethical providers. Just because they are left out does not mean you won't pay them. You will. Usually they will spring them on you with the final closing documents and hope you don't notice. Surprise!
(Between this profession and being a controller for twelve years, people should not wonder why I think that's one of the ugliest words in the language).
Indeed, during my six weeks at the Company Which Shall Remain Nameless, I had no fewer than three screaming arguments with my supervisor over telling prospective clients the truth about adjustments. They didn't want me to. I have this thing about telling clients the truth as best I know it.
Why do they do this? At signup, you have little emotional buy-in. At final loan docs, you are signing so much stuff that even a marginally skilled person who's trying to distract you will be successful a lot of the time. The industry statistics say that over fifty percent literally never notice, at least until much later, after the transaction is irrevocable. And somewhere around eighty five percent of those who do just want the process to be over so badly that they will sign anyway, not to mention the fact that in the case of a purchse, they probably don't have any choice at that point. They need the loan to get the house, without which they lose the deposit, and there is no more time remaining in the contract with which to go out and get another loan. In order to combat this, do the smart thing, and apply for that back-up loan at the beginning. With two loans ready to go, your bargaining position is much enhanced, and the odds are much better that one of them will honor the original quote or something similar. If you can't find a backup loan provider, an alternate tactic is to find someone who will guarantee their loan quotes in writing, but very few will. A quote that is not guaranteed is so much hot air. They might intend to deliver, but the reason they won't guarantee it is usually that they don't intend to deliver it.
Got a search engine hit for
do I make a big down payment on a home or should make a lump sum payment after the mortgage
It's very hard to construct a scenario where using it as "purchase money" doesn't come out ahead. Not to say it can't be done, but it's highly unusual.
Here's the basic rule: You're allowed tax deductibility of the acquisition indebtedness, amortized, plus up to a $100,000 Home Equity Loan. For many years, the universal practice has been to deduct all of the interest on a "cash out" loan even though it's not permitted by a strict reading of the rules. That is now changing, and the IRS has served notice that they are going to be scrutinizing mortgage indebtedness to compare it to acquisition indebtedness, and disallowing anything over what they figure is the amortized amount of purchase indebtedness. For example, if you originally bought your property for $120,000 in 1991, and your original loans totaled $108,000, sixteen years later you might persuade the IRS that your deductible balance is about $85,000, as ten percent loans were common then. But if your property is now worth $500,000 and you've "cashed out" to $400,000, the IRS is likely to prove supremely skeptical of that deduction.
The other reason not to use your down payment money for a down payment is to save it for repairs and upgrades. There's only so many places that the money might possibly come from, and your own pocket heads the list. Cash back from the seller not disclosed to the lender is fraud, and if you do disclose cash back to the lender, you've defeated the only rational purpose for it, because they will treat the purchase price as being the official price less the cash back. You're not legally getting any extra net cash from the seller. Period. If you put the money down and then try to refinance it out, the refinance becomes a "cash out" refinance - the least favorable of the three types of real estate loan. Unless the rates have gone down or your equity situation has improved, you'll get better rates on a purchase money loan, not to mention not spending the second set of closing costs for the refinance because you only did the purchase money loan. So if you need the money for repairs or to make the property livable, you're probably going to want to keep it in your checking account rather than using it as a down payment.
On the other hand, the search question postulates that you'll use the money to pay down what you owe, whether immediately at purchase or later on. After you put the money down, you'll have an improved equity situation, which means that you are likely to get a better price on the loan - a better rate-cost trade-off if you put the money down. Not guaranteed, but it is highly likely. If it's the difference between 100% financing and 99% financing, most lenders treat 99% financing the same as 100%. But if it's the difference between 100% financing and 95% financing, you're likely to get a better loan, or more likely a better set of two loans. Which means you either spent less in costs, got a better rate, or some trade-off of the two. Less money spent equals more money in your pocket, or more money for the down payment, which translates as more equity. Better rate means lowered cost of interest. The fact that it's on less money also means lowered minimum payments, although you shouldn't be shopping loans based upon payment. More importantly, you don't pay interest on money you don't owe. If your balance is $10,000 lower on a 6% loan, that's $600 less interest per year - $50 real savings per month.
If for some reason you want to pay extra, and you're holding on to the money so your minimum payment will be higher, don't. Most loans allow you to pay at least a certain amount extra, and if you're one of those unfortunates with a "first dollar" prepayment penalty, I have to ask, "Why?" There are sometimes reasons to accept a so called "80 percent" pre-payment penalty. There's never a reason to accept a "first dollar" penalty. Not to mention that your lump sum will get hit with the penalty anyway, where if you used it as a down payment, it wouldn't.
Finally, I should note that there are arguments against paying off your mortgage faster. Paying extra on your mortgage does sabotage the gain you get from leverage. You could typically take the money and invest elsewhere at a higher rate of return. Psychologically, however, there's a peace of mind to be had from not owing money, or not owing so much money. The only sane way to define wealth is by how long you could live a lifestyle comfortable to you if you stopped working right now, and if you don't owe as much money, that time frame that determines your real wealth is obviously longer.
The point is this: There are arguments to be made on both sides, and the circumstances can be altered by the specifics of your situation. My default conclusion remains that if your mind is made up that you're using a certain amount of money to reduce debt on the property, either from necessity or because you want to, then you might as well use it in the form of purchase money down payment.
Here's another advertisement that I've gotten in the mail:
"Pick a Pay, Any Pay!' The Revolutionary Option ARM!"
"Start rates as low as 1%!"
Loan amount $100,000 Payment $321.64
Could this help save you money?
Let's see, given the real rate on these, there is negative amortization of about $500 to start with per month on the $300,000 loan, compounded over the three years the pre-payment penalty is in effect. Cost me $19,000 to "save" this money - even if the underlying rate doesn't rise. Not counting what it costs to do the loan. Or I refinance out of it and pay a pre-payment penalty of about $9200.
Doesn't matter the friendly sounding name you give it. An option ARM is a Pick-a-pay is a negative amortization loan.
What this guy (in this case) is hoping is that you'll be so enticed by this "low payment" that you won't ask questions. These are easy loans to sell to people who don't understand them, and impossible to those who do unless you're the person it's really designed for. Indeed, many prospective clients do not want the problems with this loan explained to them. It's like they've chosen to be insulated from reality for a time.
But this is no surgical anaesthetic. Most folks are going to want to be homeowners for the rest of their lives, and unless your income has increased commensurate with your loan balance (and prospective interest rate increases) I guarantee you that the pain will go on for quite a long time after the time of "affordable low payments". I'd rather not shoot myself in the foot in the first place.
You could also lower your monthly payments. Free yourself from high interest rate credit cards and debts with a loan that could reduce your monthly payments by hundreds of dollars and leave you with enough cash to buy a car, remodel, or pay property taxes. And don't forget that mortgage interest is usually tax deductible. So you could save more at tax time.
This is all true - and only a part of the story. Remember that the easiest way to lie is to tell the truth - just not all of it. What they're selling you is the seductive "cash now - pay later". This was how you probably got into the situation they're talking about. What most people do is then take the money out and spend it, and then when the payments get to be too much, refinance again. What are you going to do when the overall payments get larger (again) next time. What are you going to do when there's no more equity? What are you going to do when you can't afford the payments?
The consolidation refinance can be a real financial lifesaver, if you do it right, have a plan, stick to it, and pay everything off, or at least pay your mortgage down below where it was before you go acquiring more debt. Fiscal responsibility is not what they're selling here.
You've earned a 30-day break from payments!
By rolling it into your mortgage, where you pay points and fees on it and the loan provider gets a bigger commmission because of it. There is no such thing as a free lunch! You'll be better off if you stop looking for it. The bank is never going to give you one day that is free from interest, much less thirty. And because you don't make a payment now, you will be paying more later. Probably much more.
You're probably going to see a lot of recurring themes when I do these quasi-fiskings. That's because the lenders and real estate agents and everybody else keeps advertising the same misleading nonsense over and over and over again, they just say it in slightly different ways. As far as I am concerned, anybody who sends out one of these ridiculous things deserves to have their name engraved on my personal blacklist of people I will never do business with. I hope for your sake that you feel the same way.