Intermediate Information: June 2008 Archives

A while ago I did an article entitled Debt Consolidation Refinance - Pros and Cons. It's a good article, if I do say so myself. Nonetheless, I think there's more to say on the subject, not just from a point of view of cranking some numbers, but on a meta level as well.

The most concrete lure of debt consolidation refinance is cash flow. Specifically, lower payments. The trap is that you are spreading principal payments over a much longer time. You refinance your home to pay off your car loan. Instead of paying the car off over three or five years, now you're paying it off over thirty. Instead of having it paid off when you go to buy another car, you still owe most of what you borrowed, and unless you saved the cash in the meantime, now you're layering more debt on top of what you already owe. So instead of having a paid off $25,000 automobile that's still worth $10,000 and no debt, you now have the forgoing plus $20,000 of debt that you still owe, and you are still paying interest on, on a car that you aren't going to get any more use out of. The fact that the security is your home rather than the vehicle changes nothing except the exact terms of the loan. You added $25,000 to your balance and $20,000 of it is still there, you're still making payments on it, and you are still paying interest on it.

Low payment is one of the best ways to sucker people into doing stupid things that I know of. Maybe that explains why I'm not rich; I want to figure out whether I'm actually helping the situation, and by the time I've worked it through, the folks are off calling the guy who's selling them the Option ARM who doesn't mention downsides or what is really important. As far as I can tell, low payment is the entire advantage of renting, for crying out loud. People think in terms of cash flow while flushing their financial future down the toilet in the name of lower payments.

There is a reason why that Statement of Cash Flow is the least important of the financial statements corporations are required to file, and Wall Street only discusses cash flow when there's something wrong. Unless they've got a large proportion of clients that don't pay their bills, the Income Statement is a lot more important. Corporations don't think of their facilities only in terms of the payments on their loans. Neither should you.

When you pay off a loan, of whatever nature, you are essentially transferring money from one pocket to another. Furthermore, once you have paid it off, you are no longer paying interest - the real cost of the money - on the balance. It's only the interest charge that you are really paying and that is costing you money. Paying off principal is paying yourself. Stretching the loan term from three years to thirty does not alter the amount of principal you pay, but it does greatly increase the amount of interest you pay. Even if you cut the interest rate from 10% to 6% and get a tax deduction to boot. Paying attention to payments is for suckers. You have to be able to make your payment, as I've said before, but so long as the payment is one you can make, concentrate on the real cost of the money - interest rate - and the cost of the loan, or how much you have to spend in order to get the loan funded. Weigh this against the benefits and how long those benefits last.

If all you are paying attention to is cash flow, and you consolidate your debt because it lowers your payment so that you can spend more money, don't be surprised if you find yourself in the same situation a little while down the line. This is a real world illustration of the law of diminishing returns. Each time you do it, you dig yourself in deeper, and there is less additional spending needed to get you to the point where you have to consolidate again. You consolidate your $1500 house payment and $40,000 in debt, and your new payment is $1800. Then you consolidate that and $30,000 in debt, and your new payment is $2100. Then you consolidate that and $20,000, and your new payment is $2400. What do you do when you can't consolidate any more, and you can't afford the payments, either?

If, on the other hand, you consolidate because it lowers your cost of interest and gets you a tax break and you still keep making the same payments as before, then you're miles ahead. If you're using debt consolidation to lower your payment, you are doing it wrong. If your choices are bankruptcy or debt consolidation, well, if you've got a nice stable home loan that you're not going to need to refinance for a couple of years, I might actually consider bankruptcy, particularly if I only need to shed one or two lines of credit. Obviously, talk to bankruptcy attorney first, but once you've rolled it into your home loan, those higher costs are a part of your life for as long as you own the property and haven't paid the loan off. If you can't afford them and you're a serial consolidator, eventually you're going to get to point where you lose the property.

If you consolidate in order to cut your interest costs, and you don't roll excessive loan fees in to your balance, and you keep making the same payment as before and don't take on any more debt until the balance on your home loan is at least as low as it was before you consolidated, then you come out ahead. Way ahead. You're a little bit ahead due to the lowered costs of interest, and you're a little bit further ahead due to the tax break from interest on home loans, and after you get to the point where you were before, every payment you make without adding new debt pays off much more of your balance. In my original Debt Consolidation Refinance article, I used the example of rolling $75,000 debt into a preexisting $300,000 mortgage. It raised the minimum payment by about $400 and cut the overall minimum payment by $1100. If that minimum payment is the reason you did it, you just hosed yourself. But if you cut your overall cost of interest, and kept making the same payments, you've accelerated your payoff schedule. Make the same payments as before, and you're even in less time than it would have taken to pay the consumer credit down. Keep making those same payments after you've brought yourself even, and it can pay the entire debt load off in half the time or less that your home loan would have taken. Even if you don't make it all the way to zero before you need another car, debt consolidation can set you years ahead in just a few short months - but only after you've paid your balance down to where it was before.

In short, debt consolidation refinance is not some magic wand to get out of debt free. There are pitfalls into which the overwhelming majority of people fall, because they do it for the wrong reasons, and afterwards, they keep doing it again and again until some disaster happens and they lose the property. However, correctly handled, it can significantly enhance your financial situation.

Caveat Emptor

Loans are declined, or actually, the next thing to it, all the time. It is pretty rare for a loan to be outright rejected; I do not recall ever having had a loan outright rejected. That's a sign of a loan officer who wasn't paying attention to guidelines when the loan was submitted. What happens is that the underwriter puts conditions on it which cannot realistically be met. Documentation for more income than you make is probably the classic example of this. What usually causes this is that the underwriter finds a debt that didn't show up on the credit report and that you didn't tell your loan officer about, and so a loan with a marginal but acceptable Debt to Income Ratio became unacceptable. Or the appraisal comes in low, raising the cost or lowering the cash out due to a higher Loan to Value Ratio than the loan was priced for. Sometimes there is something that can be done about it; sometimes there isn't. If your loan officer can't think of anything to do about it, he'll tell you the loan was rejected. Sometimes they'll tell you that the quote that got you to sign up was rejected, also, but they have this other loan over here "that isn't much more expensive" that you do qualify for. Telling you that a loan was rejected is one of the best ways there is for a loan officer to do bait and switch.

Unfortunately, there really isn't anything you can do to verify that your loan was rejected, as opposed to bait and switched, or just couldn't meet underwriting guidelines. (Whether it had any chance of meeting underwriting guidelines is a subject for many more essays).

The first thing to do is realize that the fact you cannot meet guidelines for the loan that got you to sign up means that it is time to start shopping around again. That loan that got you to sign up does not exist as far as you are concerned. It's not like they are suddenly going to discover that the guidelines allow 5% higher debt to income ratio. If your loan officer is not a complete bozo, they will have gone over alternatives with the underwriter before telling you about the difficulty. If there's something they can do with a little bit more paperwork or a little more income, they're going to ask you if maybe you have the paperwork, or if you make $500 per year in some other fashion. A good loan officer told you about the loan because he believed you would qualify, but you don't. A bad loan officer told you about the loan because he thought he could use it to get you to sign up, and then pull a switcheroo on you once he had the originals of all your paperwork and control of the appraisal that you've already paid for. There really is no good way to tell for sure. In either case, you are back to square one - shopping your loan. I would also think twice about staying with the same loan provider. He's told you about one loan he couldn't do to get you to sign up. Why not two? At a minimum, I'd want a good back up loan.

So being told you don't qualify for the loan you thought you were going to get is always a sign that you need to start shopping your loan around again. That's why you don't ever give a loan officer your originals of anything. Even if somebody brings me an original, a copy is just fine and I can hand the original back. The only paperwork I need the originals of is the loan paperwork - the application I fill out and have you sign, and the disclosures associated with it.

Now I mentioned the appraisal, and you need to be careful here too, so that you don't end up paying for two appraisals. Now every time I write something about controlling the appraisal, some appraisers who want you to pay for two appraisals come on to the site and start defending their interests (i.e. $ in their pocket). Well, a good loan provider who fully intends to deliver the loan he talks about has no problem promising in writing to release the appraisal if he can't do the exact loan he talked about. Once the appraisal is released, it only costs a re-typing fee (about $100), not a whole new appraisal fee, to take your loan somewhere else. Without a release, you have to pay for a whole new appraisal - so you're out the money for two appraisals. But don't choose an loan provider because they will front money for an appraisal. I've dealt with Loan Providers Who Will Pay For Your Appraisal before. One way or another, you are paying for that appraisal. Not only are you paying for that appraisal, you are paying for the appraisal of everyone who canceled their loan, too, and a good margin on top of that.

Caveat Emptor

"what happens to your equity when the bank forecloses" was a question I got.

The answer is that most, if not all, will be dissipated by the foreclosure.

Let's say you own a home currently valued at $500,000, that you owe $200,000 on it, and that you have a 6% loan. Now, for whatever reason, you can't make the payments, and for whatever reason, you don't sell while you have the opportunity before the trustee's auction.

In California, you are going to be four months behind before the Notice of Default happens. So that is four payments of $1200. Furthermore, when you are fifteen days late you owe a 4% penalty, or $48, and when you are thirty days late, the missed payments start accruing interest. So at the point that the Notice of Default is possible, you owe $204,777.83.

From Notice of Default to Notice of Trustee's Sale is another 60 days, but before that happens, the bank is going to hit you with $10,000 to $15,000 in administrative fees for going into default. Check your contract; it's in there. Let's say $12,000, and now you owe $216,777.

Add another two months of delinquent payments, and penalties as of 15 days after. So as of the time the Auction actually happens, you owe $219,447. Furthermore, to make the auction happen, they will charge you about another $15,000. This covers the expenses of making the auction happen, of which the most noteworthy is the appraisal. At this point, you owe $234,447.

The appraisal bears special mention. Not only is there zero pressure to get a good value, the bank wants that appraisal to come in nice and low. They want the property to sell at auction, and if nobody bids 90% of the appraisal price, then they own it and have to go through the rigamarole of hiring an agent and selling it. So that appraisal is going to come in as low as is reasonable, to maximize the chance of it selling at auction. Every once in a while questions about low appraisals at trustee sales hit the site. The short answer is Microsoft Standard: "It's not a bug, it's a feature!" and from the bank's point of view, it is. So even though the property might sell for $500,000 in the normal course of things, the appraisal might come in at $440,000, meaning that someone has to bid $396,000 in order to buy the property at auction. The appraisal might be even lower, but let's say $440,000.

If someone bids $396,000 at auction (assuming they actually are able to consummate the transaction), they own the property. Less transfer costs, the bank gets maybe $380,000, of which the note is now for $234,000, and $300,000 of equity has dropped to $146,000.

But that's not usually what happens. What's usually happened is that the owners have financed it out to at least $375,000, hoping to be able to stave off foreclosure, and by similar math, they now owe roughly $425,000. How much do they get when the bank only got $380,000?

If the property doesn't sell at auction, the bank now owns it. Now they have to hire a listing agent, and offer a cooperating buyer's broker percentage, and while the listing agent looks for a buyer, the money owed keeps earning interest. Let's say the property eventually sells for $410,000, and the bank spends 7 to 8 percent of that getting it sold, so that their net is maybe $380,000. Even if you originally owed $200,000, by the time everything is said and done, you might owe $250,000 or more, leaving perhaps $120,000 coming back to the original owner.

Now, if the owners were to short-circuit the whole process by selling successfully for that same $410,000 (almost 20% less than comparable properties might sell for) before the trustee's sale happens, and if they spend that same 7.5% to get it sold, they get about $380,000, of which they'll get to keep approximately $160,000, more than it is likely they will keep under the best possible outcome if the property went to trustee's sale.

So if you cannot afford your payments, and you're looking down the road at a trustee's sale, it is usually in your best interests to get the property sold before that happens. The lenders will generally be as accommodating as they reasonably can if you ask them and keep them in touch with what is going on. They don't make money on foreclosures; they don't want to foreclose. No Thanks to California's Home Equity Sales Contract Act, once the Notice of Default hits, you are unlikely to be able to do business with investors except on an "emergency sale for 60% of value" basis (that being about what the those "Cash for houses" folks offer), so the sooner you act, the more money you will likely come away with.

Caveat Emptor

With a few lenders starting to loosen their requirements slightly in San Diego, it's becoming increasingly obvious that the bottom is behind us. However, the issue has now become, "I don't have much of a down payment. How do I buy now so I can get into something before the market goes crazy again?"

There are several programs that exist that enable buyers to lower their down payment requirements. All of them have their limitations, but if you can jump through their hoops, they remove the need to save for a huge down payment.

The first of these are VA Loans. Right now, VA loans are the magic bullet. No down payment requirement, and you can even finance closing costs up to 3% on top of the purchase price right into the loan. Furthermore, there is not only no PMI, but the VA only charges a half point to fund the loan, and that's waived with 10% or larger disability. Additionally, the conforming limit with VA loans is no longer applicable - I've had wholesalers tell me they would accept VA loans up to (potentially) $1.5 million dollars. There are no income limits, either, but you do have to qualify full documentation. However, because there's no PMI, no need to split loans, and no ongoing charges for the loan, by debt to income ratiopeople with VA loan eligibility can afford almost ten percent larger loans than people applying for FHA loans, and about twenty percent larger loans than high loan to value conventional conforming loans (Below 80% loan to value ratio, conventional loans will most likely have a lower tradeoff between rate and cost). The biggest drawback is that you have to have served in the military or be serving, something comparatively few people do as opposed to former times. San Diego is a military town, and I've only dealt with one VA loan in the last year or so. It was formerly true that FICO credit score was not considered in VA loan qualification, but this has changed in the last year or so. How low a credit score they will work with is up to individual lender policy. Some lenders want a minimum of 580, others won't talk to you unless you've got a 680. The higher their qualification standards, of course, the lower the rate/cost tradeoff they offer will typically be.

Best of all from a longer term standpoint, because there is no seller participation needed in the VA loan program, it doesn't matter whether the seller is willing to do extra things in order to get the property sold. This means you aren't constricted in which property you choose, and it does enable you to end up with a better bargain on the property of your choice.

Many locally based first time buyer programs take the form of loaning you a down payment. If you're buying a $300,000 property and the city you're buying in will loan you $60,000 for the down payment (usually in the form of a silent second), then you only need a $240,000 regular loan, which leaves you with an 80% loan to value ratio, and you are then able to qualify for a classic conforming A paper loan on your property. The drawbacks of these programs are two. First, budgetary constraints. As of a couple weeks ago, all the local municipalities were out of money for these until the new allocation comes in (usually in the fall and spring). If there's no money left in the budget when you want to apply, you're not going to get one. Second, income limits. These all have income limits, which vary with the program and municipality. Since like all other government programs you have to qualify for these via full documentation of income and proving you make enough for the payments via income tax forms, this can disqualify you or severely constrict what you qualify for, and the various municipal governments do put other strings on these programs. Nonetheless, the Cities of San Diego, El Cajon, and Santee have these programs in place, as does the County of San Diego for unincorporated areas, as well as administering the same program for Lemon Grove, Imperial Beach, Poway, and many other cities. Like VA loans, because there's no need for sellers to contribute to these financially, buyers who use these don't end up paying for it in the purchase price of their property, or by a limited selection of sellers with the wherewithal.

FHA Loans are not, in their basic form, a zero down payment program. They will only allow up to 97% of the purchase price. Furthermore, they charge a point and a half upfront and half a percent annualized per year for financing insurance. The good news is that you're still getting a very low down payment loan with comparatively low cost financing insurance. This is a government program, so you have to qualify via full documentation of income, and many properties are not eligible for FHA financing. The FHA also keeps what is functionally a blacklist, so you can find out that because your real estate agent, loan officer, etcetera contributed to fraud some time back, this particular transaction is not going to fly FHA. The FHA does allow seller paid closing costs of up to six percent, but if you think you're not going to pay for this via increased sales price, I've got some beachfront land in Florida. That means higher cost of interest, higher property taxes, and less equity if you sell or refinance. Furthermore, not every seller is going to be willing or able to work with people who want seller contribution for closing costs.

Down payment assistance programs are targeted at FHA loans, providing the 3% down payment via a reciprocal loan paid back by the seller at close of escrow, although FHA is not the only loan type they work with. Once again, not every property owner is going to be willing or able to work with these programs, and if you think the money that sellers furnish for these programs doesn't result in a higher sales price, I own a bridge in Brooklyn I'm willing to sell on very reasonable terms. More than the amount of the loan you get, because they're offering something not everyone can. You have to be careful to disclose everything to everybody in these situations, and the purchase offer and subsequent counters have to be written very carefully.

Seller carrybacks are comparatively rare right now, as few sellers have significant equity. The ones who do and want to sell are likely to be able to wait until things get better, and so most of them are. Asking for a carryback is a major request on a purchase contract, because if that seller loans you $X, those dollars are not available for them to use purchasing their next property, or whatever investment they wanted to put the money into - they're still tied up in this one. Sellers willing and able to offer a carryback can command premium pricing, even in this sort of market, because many buyers will have exactly two choices: buy this property, or don't buy anything. They are also assuming a significant risk of non-payment and ending up in second position on a non-performing debt, which can cause them to lose every dollar they have invested.

Finally, as of a few days ago, some lenders are once again willing to go 95% loan to value ratio for conventional conforming A paper loans, where before that the down payment requirements were ten to fifteen percent. There will be PMI, you are required to qualify full documentation, and the limit is the "regular" conforming limit of $417,000 as opposed to the "jumbo conforming" or "temporary" limits ($697,500 in San Diego). But once again, you can do this with basically any residential property that's not too expensive, and the seller needn't be willing and able to financially contribute to the loan. There are a lot of properties out there that FHA will not touch, no matter how helpful the seller is willing to be. As long as it's an inhabitable residential structure meeting requirements, conforming loans will potentially work - if you've got 5% down. Nor do they require that the seller be willing and able to help out. 5% down is not usually a huge amount. For example, a couple each borrowing $10,000 from retirement accounts (as allowed by the rules) has a downpayment of 5% of $400,000, which buys a pretty decent place nowadays.

As you can see, there are drawbacks to all of these, as well as advantages. You would be well advised to consider an agent who is also a loan officer, because everything from the initial offer onwards has to be carefully written to remain within the limits of what lenders will work with and will fund. More than once I've had people come to me forty-five days into a thirty day escrow where the only way to make it happen was start by renegotiating the contract. Since the sellers were completely frustrated at this point and just wanted out, needless to say it didn't happen. So there is a limit to the ability to repair incorrectly written purchase contracts. Nonetheless, these options are there, are available, and I have funded loans on them in the past. Given the current state of the market and its likely state a year or two from now, making use of them can mean that you're going to end up much better off than waiting to save that down payment. If the market appreciates in value ten to fifteen percent between now and whenever you have enough for a "normal" down payment, you definitely didn't help your cause by waiting.

Caveat Emptor

(Note: As of the time I updated this, the website of the company was off-line. I do not know why and a casual perusal of search engine results is uninformative)

If that title seems to be damning with faint praise, it's accurate. I'm not going to issue any kind of blanket endorsement for them, but they aren't as bad as I feared when I first heard about them. They are definitely not something that will actually benefit most property owners, no matter how attractive the idea is.

Here's the press release: California Company Announces 'No Mortgage Payment for 12 Months'. Basically, they are promising a period of no payments that can be as little as three months or as long as 36.

So I called and checked them out. I can't find any evidence of the sort of attitude that are present in people who make a habit of selling negative amortization loans, and no evidence of legal shenanigans either (although I'd want to do more research before selling it myself, as I may do in March 2007 when they broaden the availability to brokers).

What appears to be going on is this: You refinance for an amount of money that covers not only what you need for pay off current bills, your current mortgage, put whatever cash in your pocket, etcetera, but also the prospective payments for however many months. The payments are based upon the increased amount, of course! Also, because it's for a larger amount, and hence, underwritten based upon a higher Loan to Value Ratio, as well as possibly Debt to Income Ratio (due to the higher principal amount), it might bump you down one or more categories in the quality of loan, and there will very probably be increased costs attributed to the increased loan amount, including addditional adjustment charges and the fact that these are always cash out refinances, might bump your costs half a point or possibly even more.

The excess goes into an escrow account, administered by a third party, where it earns interest while disbursing the monthly payments to the lender. The account has to be funded with enough to pay principal and interest for however many months you want to be free from payments, of course, and if you're expecting it to earn as much interest as it is costing you, well, I have a bridge in Brooklyn you might be interested in...

It appears that you can attach one of these to basically any loan from any lender. The only requirement is that the period of fixed payments has to be at least equal to the amount of time you want free from having to make payments. This is a very different thing from period of fixed interest rates, and the person I talked to on the phone offered me a negative amortization loan to go with it. I was quite proud of myself for being polite to him after that.

While I was on the phone, I did some price comparison between what's available to me and what they offered. I gave them a scenario of an 80% loan of $280,000 for a 720 credit score on a thirty year fixed rate loan. When I originally wrote this, I had 5.75 with one point total; they were talking about 5.875 with one and a quarter to one and a half points, although they were pretty slippery about being locked into any kind of actual quote. Considered in the context of the loan I was talking about, that's about an extra $1400 up front, not considering any possible junk fees, and approximately another $440 per year for what is otherwise the same loan. But even if they inflated that at signing by some reasonably standard amount, it's better than a lot of the other loans people are being sold right now.

Yes, it's higher than what I have available. Actually, I expected the difference to be higher. They are not selling great rates at a low cost with this program. What are they selling? Freedom from responsibility! Free Money (or so people think)! No mortgage payments for a year! Let the Good Times Roll!

I've kvetched enough about negam loans, and these really aren't any different in principle, but there is a large difference of degree. The underlying loans really are no different at the root from whatever type of loan you might care to name. At least if you make the underlying loan a good one, you're not being raked over the coals for 8% when you can have less than 6.

This program is, however, taking example of the fact that many people don't think of equity as "real money." But if you wanted to do one in conjunction with a purchase, you'd have to make a down payment at least to match the deferred payments. Is that money "real" enough for you? If you sold the property instead or refinanced for the cash out to make those payments, that money would be in your pocket instead. Is that "real" enough for you?

What does it cost? from their website

5. What is the cost for 12MoDef?
MPD, Inc. will submit a demand to Escrow for the 12MoDef service fee. The fee is $995 for 12 month deferral, $1495 for 24 month deferral or $1995 for 36 month deferral. This cost is typically paid by the borrower.

So in addition to all the regular costs for the loan, and of course, setting aside the equity to make the payments, and the increased interest costs down the line due to your loan amount increasing, this costs $1000 to $2000. I keep saying this, but I was expecting worse.

I am not enamored of some of the marketing tricks they are using to sell these, either. from their website

Miller notes that for clients close to retirement age, the freedom of 12MoDef, allows them to take advantage of "maxing out" their 401K contributions as well.

This must be some new definition of "advantage" with which I was previously unacquainted. Given their logic, this being for short term additional savings just prior to retirement, you're not adding that much, due to the short term nature of the issue in investment terms, you only have only a short period to compound, and in fact, the last time I checked, NASD rules specifically prohibited a licensed investment firm accepting your money in such circumstances. Not to mention it increases your future housing cash-flow requirements by more than the increase in your monthly income might reasonably be. After hauling out a spreadsheet, I couldn't find a reasonable scenario that worked, both in the sense of expected return and being sufficiently low risk to literally "bet the farm" on.

Delay is Denial digging you in deeper. If you can't afford the payments for the house you are living in, you probably need to do something else instead.

What uses do I see for this product? Primarily 1031 Exchanges, where someone may have restricted cash flow but does have a chunk of cash, and similar investment property situations. For investors and speculators, this would be a good way to stretch you leverage, albeit at a significantly increased risk, as should be plain to everyone reading this site by now. The current market is not really right for it, but being able to use equity in properties this way in rapidly appreciating markets might certainly be a way to make more money.

Perhaps there might be other times when it would make sense as well, but I can't think of another situation where it would be something I'd make a habit of considering. Of course, if someone asks me for it, once they're released to brokers, I'm more than libertarian enough to say, "Sign this saying that you acknowledge being told about these downsides and being advised to consult a financial advisor, and certainly I'll do it for you."

Caveat Emptor

Yet that is exactly what you want them to do.

To avoid competing on price, they have all kinds of distractions they offer to make life more convenient, but not cheaper. They offer automatic payment options, the convenience of having your mortgage at your corner financial institution, biweekly payments, mortgage accelerators, and even negative amortization loans, which offer the apparent benefit of lower payments, at the price of a much higher interest rate than you would otherwise be able to get, which is the price the lender really cares about, and the one you should also.

There is always a trade-off between rate and cost for a given type of loan. That doesn't mean that different lenders won't have different trade-offs. Some are less willing to compete on price than others, so they tell you about how great their service is, how you are such a difficult loan that nobody else can do, or how easy their paperwork is, or how easy their loans are to qualify for. As a matter of fact, the lender with the easiest paperwork and loosest qualification standards will usually have the highest price trade-off, because their loans are statistically more likely to default, and therefore have to bring in a higher interest rate in order to have the same return.

Just like branding in the world of consumer products, which is also in effect for mortgages (why else would National Megabank be spending all that money for commercials? They expect to make a profit on it!), all of these little extra bells and whistles increases the price they can charge consumers for their loans, which is to say, the rate that you get, and the cost to get that rate.

So long as the terms are comparable, a loan is a loan is a loan. Provided that it has no hidden gotchas, a 5.875% thirty year fixed rate loan is exactly the same loan from National Megabank as it is from the Lender You Have Never Heard Of. No pre-payment penalty, and lower costs for the same rate? That's the lender I'll choose. It should be the same one you choose as well. It doesn't matter to me what name I make the check out to, or what address I put on the envelope. It shouldn't matter what routing symbol you put on the automatic payment, either, if that's what floats your boat. Lower rate for the same cost? Same situation. Everything else is window dressing.

(Okay, it doesn't often matter to me. There are lenders that I'll bet you've heard of where I won't place my client's loans no matter how good the price due to some issues with their lending practices. But those lenders trend heavily to be the ones with massive consumer ad campaigns that don't really try very hard for broker generated business, anyway, because brokers learn to stay away from them fast. Nor are they usually competitive on price, because they're aiming for the "consumers shopping by name recognition" market).

So how do you force lenders to compete based on price? It's actually very simple. Ignore all of the stuff that they try to distract you with, like low payments for a while or mortgage accelerators or biweekly payment programs. Those are bait, and they serve the same purpose as bait: To get you to take the hook. Think about the things that happen to the fish after it takes the hook. You don't want to be like the fish, do you? Concentrate on the type of loan, the rate, and the cost to get that loan. Here is a list of Questions You Should Ask Prospective Loan Providers. Ask all of them with every conversation you have about what is the right loan for you, and the best rate and cost they can deliver on that type of loan. After you have settled on one provider (or a primary and a back up), it is then okay to ask about the bells and whistles that lenders (and every other sales organization) love to distract you with. If you want auto-pay, or biweekly payments, or a mortgage accelerator, these are just as much in the lender's best interest to offer you as they are convenient for you to have. I wouldn't pay for them, but many people think they're nice to have, and that's fine. Just don't let them distract you from what's really important: The price of the money you're buying.

Caveat Emptor