Mortgages: February 2007 Archives

Not very long ago, a woman who was impressed by my website called because she wanted to get pre-qualified for a loan. "Great!" I told her, and proceeded to ask about her income and her monthly obligations and everything else, and came up with a figure of about $220,000 that she could realistically afford. If you're familiar with San Diego, you know that that's a 1 bedroom condo, or maybe a small two bedroom in a not so wonderful area of town. With a Mortgage Credit Certificate, it got to maybe $260,000. If she bought somewhere there was a Locally based first time buyer program, that would add whatever the amount of the program was, but the only one with money actually in the budget was a place she didn't want to live. If we went so far as to go interest only, we might have boosted the base loan amount as high as $300,000. Severe fixers might be had for $350,000 or so - and she had the literature for a brand new $700,000 development. She had her upgrades and drapery all picked out, too. So I tried to be gentle in pointing out that the property appeared to be a bit more than she could afford.



Was she grateful? Heck no! She then asked, "How am I supposed to afford a house with that?" She was spitting mad! She acted like I was personally standing there saying "None Shall Pass!" (about a minute and a half in). "Well, if you won't qualify me for a house, I'll go find someone who will!"



I'm sure she did find someone to tell her she could have a $700,000 loan if she wanted it. Put negative amortization together with Stated Income or NINA, and there are any number of people out there who will not only keep their mouths shut about the consequences to you, but aid and abet you in staying ignorant about those consequences - at least until they've got their $25,000 commission check. And you know, I can do that loan also, if you don't mind that real interest rate adds $100,000 to what you owe over the course of three years and the payment all of a sudden adjusts to over four times what you can afford, and you lose the property and your credit is ruined for at least ten years. Not to mention the fact that rarely do people allow the mortgage payment to go south on its own.



There is no conspiracy keeping you away from home ownership. There is no smoke filled back room deal setting the price of properties such as the one she wanted out of her reach. Lest you be unaware, here in Southern California, we haven't been building enough new housing for the people who want to live here for thirty years now. Those desirable properties are highly priced because they are scarce, and the prices are where they are because that's where the supply of such properties balances the number of people who want them badly enough to pay those prices. Notice that I did not say, "The number of people who can afford those prices," or "The number of people who can afford those payments." This is intentional. If you want them bad enough, there are lots of loans out there, and lenders eager to make them, such that you can have that dream house - for a while. But the way financing works is like the laws of physics. Specifically, like gravity. It's there, all the time, pulling away, and there is no analog to the ground that holds us up. Think of it as an very tall elevator shaft going both directions from where you start. This month's interest is gravity, pulling you down. What you're paying is like the upward thrust of a rocket, pushing you up. When you make an investment (and a property is an investment), you want to go up, but if pull down is more than thrust up, you start going down instead. Furthermore, we are talking in terms of acceleration, not just velocity. If down is more than up next month, too, you're now going down even faster. And so on and so forth.



But the elevator shaft is never infinite going down, and now ask yourself what happens when you're going down, at a speed you've been building up for months and months, and the elevator shaft ends? I've noticed that they usually don't show Wile E. Coyote's impact any more, but what just happened to you makes the time he got caught under the anvil, the lit cannon, and the huge falling rock look like a love tap.



Real estate agents don't set prices. The market does that in accordance with supply and demand. In southern California, there's twenty million plus people demanding housing and not enough being built. You want to change this, take it up with politicians. All buyers agents can do is try and find the best bargain out there, while listing agents are trying to get the most possible money.



Your budget is your budget. You make what you make. You spend what you spend. Your savings is what you have saved plus what it has made. You can afford more for a home if you make more, spend less, save your money, and invest it effectively. If you don't do these things, you can't afford as much. Indeed, most people kill their budget voluntarily, by spending more than they need to. But it isn't my opinion that matters. All of these are cold hard numbers. You know what you make, you know what you spend. If you could do better, that's something for you and your family to work with. All a loan officer can do is work with the numbers as they are.



These numbers give the payments you can afford and your down payment. The rates are what they are. The variations in available rates are smaller than most people think. Actually, the largest difference in rates and their associated costs is how much the loan providers want to make for doing your loan. Not the only difference, but the largest one. The second largest difference is in finding the loan program that is the best fit. When you put all of these factors together, if you come up with variations of more than half a percent for the same loan at the same cost, then I will bet money that either the higher quote wants to gouge you badly, the lower rate is not quoting something they can really deliver, or possibly both. The point is this: If someone working with real numbers says that you can afford $X, I'll bet money that any pre-qualification or pre-approval you get that's more than about 5% different should set alarm bells ringing.



So now let's revisit Ms. Eyes Bigger Than Her Wallet. She thinks all she has to do is say "Abracadabra!" and the whole thing will work out. But the interest rate is what it is, which means the monthly cost to have that loan is fixed - if she didn't bump it up by wanting something she can't afford. That lender is run by some pretty smart people, who understand all of this extremely well. They have the assistance of some very sharp lawyers in writing those loan contracts. One thing I can absolutely guarantee is that if they don't get their money - all of their money - you will be even unhappier than they are. The upshot is that the vast majority of the people who think they're solving their problems with a wave of some magical wand and the phrase, "Abracadabra!" are in fact doing something Unforgivable to their own financial future, roughly equivalent to pointing that magic wand at their own finances and mangling the pronunciation to "Avada Kedavra"



Caveat Emptor

Article UPDATED here

All too often, these days, I have to tell desperate people who've found me on the internet some bad news.



Nobody can match the rates they've got at a price worth doing.



This is just a sample of what I've seen:

I bought a house in DELETED in Aug 04. It was my first house, and I was pumped about it. Now, it's become a liability. I want to leave soon, and pursue an (advanced degree). I've been extensively preparing for my (test), and I expect to qualify for some 'almost top-tier' schools out east. So what do I do with my house? Bad market = hard for me to sell.



I am looking to rent my house out. The largest hurdle comes from the fact that DELETED has very low rents, and very high housing prices. To give you an idea, a typical 4-plex has a yearly NOI of around 5% of the total property cost. Yeah, a 5% return. My mortgage (I'll detail it later) costs $1500/month (PITI). Market rent is about $1k-$1200/mo. I looked at other mortgages, but it seems to me that most brokers are a waste of oxygen. You say what you need, and then they offer you a loan that makes them the most commission. I had a few people try to talk me into a Neg AM/option ARM loan. I did some math... Total waste of money. What I need is something to lower my payment while I hedge my position.



Rents are increasing, and I believe that the market will be less of a buyers market in a few years. I am working with a mentor and put together a Lease to Own deal, which may solve my issues, but I would like a Plan B.



My house is worth no less than $268k (zillow estimate, I think it's low. $275k would be better) I owe ~$253k



I have an 80/20. The 80 is 5.125% interest only for 5 years, then goes ARM on me. The 20 is a HELOC currently at 10.125%. My FICO is between 750-775. The property is located at DELETED. It is a normal detached house. This would only be a refinance for a few years, until I can sell the property in a better market, but if a locked option presents itself, I would continue to rent that place forever! I don't need any cash out money, but I will take any available, because I am getting around 10% return on my Funds.

Now this particular person makes some errors in his thinking and in the email, but they're forgivable in non-professionals. The meat of the matter is that he, like so many, cannot afford the current payments under the new circumstances.



This guy has a 5.125% interest only loan. Last I checked (a few days ago) I could just barely do that with one lender for something north of four points, and could not do 5.00 at all. Even if adding roughly $15,000 to his loan amount was worth keeping the same interest rate a little longer, just the fact of adding $15,000 to his loan is going to raise his payments.



In this case, like so many, there literally is no loan I can do for this person that's worth the cost of doing it. I could cut his payment for a while with a negative amortization loan, but only at the cost of raising his real interest rate about 3%, which means it's really costing him about $6000 per year extra, while sticking him with a prepayment penalty in the area of $8,000. A classic case of pay me now, keep paying me, and pay me later, too. Well, I couldn't do that to anyone, much less someone wearing the uniform in times of war, as this man is. Even if this guy had been in California, I would have told him the same thing I did: There's no loan out there right now that will help him in the classical sense of the word help. What he needs is cash flow and time. A negative amortization loan would provide that, but at a much higher cost later - too steep for me to believe it's worth paying. A lower interest rate or longer amortization or even interest only might help some people, but none of those options make sense for someone who has already got 5.125% interest only. I can tie 5.125 by adding over four points plus closing costs to his loan, but I don't need to consult my rate sheets or get out the calculator to know that adding $15,000 to break even on the interest rate is not going to really help him.



Now, this is not to say that refinancing into a higher rate is never justified. If it was going to do something he needed it to do and it makes sense in other ways, yes, I can see it. For instance, if he was going bankrupt due to some bills, but consolidation will prevent that from happening, it might be the lesser of two evils. But that doesn't appear to be the case.



Now when his loan hits it's first adjustment, chances are pretty much 100% that I'll be able to do something worth the cost of doing it. But that adjustment would be to roughly 7.25% if it happened right now. Whatever it is, the way that rate adjustments work is underlying index plus a set margin, determined by your contract. Lenders think of hybrid ARMs as teaser rates; they're always offering rates less than the index plus the margin to start with. Which is one reason to be careful with hybrid ARMs. I love them, I do them for myself; but they will go up when they adjust.



This man is only one of millions out there in similar situations. I can't speak to his specifics, but there were lots of people who bought with loans such that they could only afford the payment interest only or worse. The fact of the matter is that they were poorly advised, or not advised at all if they kept everything quiet and never told the person who might have warned them. They probably should not have bought the property they did, but somebody talked them into it. In most cases, it was someone with a fiduciary responsibility to them who should have known better.



I don't have a problem with interest only loans as purchase money. I do have a problem with negative amortization loans as purchase money for a primary residence. Interest only, though, can be okay if they can afford the fully amortized payment but choose not to. For instance, this gentleman could have afforded more, but was getting a better return on his money elsewhere. Sophisticated user and all that. He knew the risks going in, and chose to take them.



However fantastic an investment real estate is, however, it is not a risk free investment, and sometimes the bet does go sour. Members of the real estate profession were doing all they could to push rapidly appreciating prices, and members of the loan profession were doing everything in their power to aid and abet. Both groups were pushing past results to illustrate future performance, and I saw or heard the phrase, "nobody loses money on real estate," so often and in so many places I stopped getting angry at it for a while. Both groups were pushing people into bigger and bigger loans for bigger and bigger properties, and more and stronger bidding wars, and rationalizing it on any basis that happened to be convenient and hadn't been debunked in the client's presence within the last fifteen minutes.



Once again, I'm embarrassed by members of my professions, and not just for their avaricious advice to the unwary, but also for their limited understanding of economics and markets. Trusted professionals are supposed to know better. People with fiduciary relationships are supposed to know better. People earning thousands of dollars more for their "expertise" per transaction should definitely know better.



So what do you do if your payment goes up, and the best rates available to you don't help the situation enough?



Sell for what you can get.



Right now, this is a really rotten thing. Many markets are in the tank completely. If you don't have to sell, you shouldn't be in the market when there's thirty sellers per buyer. That being said, if you can't make the payment, selling is the least bad alternative available to you. Even a short sale is not as bad as being foreclosed upon, and if you don't make the payments somehow, foreclosure is going to happen. It's only a question of when. You want to have sold before that happens.



There are a very few exceptions. But pretending that you are one of them when you're not is a good way to take a very bad situation and make it worse. The first rule of getting out of holes is to stop digging, and denial digs deeper.



Please, if you're in a hole, don't keep digging.



Caveat Emptor

Article UPDATED here

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 canceled 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

UPDATED Article here

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

UPDATED article here

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. But I found their information elsewhere. 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 or 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

UPDATED here

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

This question brought someone to my site:

If my house is going into foreclosure but the house is also in probate, can the lender actually go forward with the foreclosure sale while the house is in probate?

The short answer is yes.



The Trust Deed (or Mortgage Note) that was signed by the now deceased undefined gives a security interest in the property to that lender in exchange for money. The lender lived up to their end of the bargain. That security interest is valid until the loan is paid off. It is not removed by the death of the person that signed over the security interest.



Probate takes an absolute minimum of nine months. During this time, the court will likely allow those members of your family to continue to live there, but they will not likely approve disposition of the asset except in an emergency, and that emergency is going to cost your heirs money for the courts, and money for the disposition. On the other hand, the lender still needs to get paid according to the terms of the contract, and they are entitled to foreclose if the terms are not being met. I'm not a lawyer, but I've never heard of an estate being permitted to declare bankruptcy, which some living folks use to temporarily stave off foreclosure, almost always to their eventual major detriment. Since your executor is claiming that your estate cannot pay its bills and rarely are you earning any more money, declaring bankruptcy would seem like an open and shut case of "the creditors get all of the assets and your heirs get nothing." Probably not what anybody who's part of the situation wants.



There are simple steps possible to avoid probate for major assets. A trust is probably the most flexible of these, in that the trust owns the asset and the successor trustee takes over the management and within the limits of the trust, does what needs to be done without the courts getting involved. Flexible, much cheaper than getting a probate court involved, and your heirs get control right away. But it requires planning ahead (which many people are loath to do, being in denial about the idea of death) and an upfront investment.



Given the fact that there is a loan and a Trust Deed against the property, somebody is going to have to make those payments until the loan is paid off, whether by outright payoff, refinancing, or sale. Given that in the absence of a trust, your heirs probably are not going to have access to any liquid wealth you left either as it is also locked up in probate, the odds are that your heirs are either going to have to come up with the cash out of pocket, or the property is going to be foreclosed upon.



Now there are some good options. If your heirs are wealthy and have the cash, perhaps some one or combination of them will make the payments in the interim if it's been agreed they will be compensated later. Not likely, I'll admit, and they're likely to drive a bargain for larger eventual replacement. In some instances, the probate judge may agree to taking out a Home Equity Line Of Credit (HELOC) to make the payments, but somebody's going to have to be able to qualify to make the payments, and a dead person is not on the list of options, which means somebody still living is going to have to do it. The rates on these are typically horrendous, and cost a lot more than a little bit of planning.



Another excellent option is life insurance. Life insurance passes (usually) tax free on death outside of probate to a named beneficiary. Therefore, it's available pretty much right away to pay bills and stuff. It's also leveraged money, so a few dollars now buys more dollars when you need them. The difficulty is that you've got to have it beforehand. There's that planning thing rearing it's ugly head again, and the upfront investment of the premium dollars for the life insurance policy. Finally, any money created by this becomes the property of those beneficiaries, and there is no way to compel them to spend the money on bills of the estate. If the beneficiary is the estate, well, the money is locked up in probate again, and you've got to get the probate judge to agree with doing the necessary.



Another option is the named beneficiary Transfer on Death feature of most investment accounts. These also transfer outside of probate to named beneficiaries. Problem is, they require the investment of those dollars beforehand, and they also require that you keep the beneficiaries current, and all of this requires, once again, planning. The money also becomes the property of the beneficiaries, just like life insurance, and if there's no named beneficiary, it gets locked up in probate.



There is no free, no-planning-necessary, magic bullet. I strongly suspect it's all part of the various Lawyers Full Employment Acts, but you've got to take the system as it exists. At the very least, you've got to do some planning ahead, and an upfront investment is probably going to return itself several times over. Remember, everyone is going to die sometime - I know of precisely zero exceptions thus far in the history of the world. Denial of this simple fact simply digs you in deeper, and puts your heirs in line to have to lose or waste a major portion of what you would have left covering for your deficiency, as is evidenced by the person who asked this question.



Caveat Emptor.

UPDATED here

Second Trust Deeds are something few real estate loan officers really understand well, mostly because the good ones don't make much money on them. Predatory lending laws in most states, limiting total compensation and total expenses to a given percentage of the loan amount, mean that brokers usually can't make enough to pay their expenses unless there's a first trust deed involved as well. Direct lenders can, because neither the premium they receive on the secondary market nor the interest rate is usually restricted. As a result, many direct lenders can get away with highly inflated rates on second mortgages. Most of the people who approach them won't know any better. I've lost count of the number of fourteen and sixteen percent rates I've seen, when eleven is a rotten rate for a sub-prime borrower. But if you will look, second mortgages can be found at surprisingly low rates and surprisingly low cost. If you've got decent credit and a verifiable source of income, fixed rate Home Equity Loans can be had under 8%, and variable rate Home Equity Lines of Credit can be found for 8 to 8.25%. Even sub-prime borrowers can usually find something around 11% if they'll look a little bit.



Second (and Third) Mortgages come in two basic flavors. If you get the proceeds all at once, they are typically fixed rate Home Equity Loans. These are essentially traditional loans. There are also Home Equity Lines of Credit, where you are approved for up to a certain amount, and you can take distributions any time during a draw period that varies from five to ten years in length. These work more like credit cards: You pay interest only on the the outstanding balance at any given time. If you pay it down during the draw period, you can then take it out again.



Once upon a time, both products typically had all of the closing costs that first mortgages did. In the last few years, this has changed, largely driven by competition from credit unions, and I always suspected that second mortgages was why the banking industry was lobbying for restricting credit union membership a few years ago.



There are also two styles of obtaining a second mortgage. "Stand Alone" Second Trust Deeds are done on their own; when they are done in conjunction with a First Trust Deed, they are called "Piggyback" loans. With their popularization as a way of avoiding Private Mortgage Insurance (PMI) on low down payment purchases, pretty much every lender in my database does piggyback seconds. However, only about half will do stand alone seconds. With the regulations the way they are, even the higher interest rates are not attractive enough to get them to do the loan, because it takes basically the same amount of work.



Because "piggybacks" are done in conjunction with first mortgages, everybody wants them and everybody does them. Additional lender charges can be small to non-existent. They benefit from having the first done at the same time, and since all that work has already been done for the first, the additional work is kind of minimal. Whether they're a broker or direct lender, they make enough on the first that they don't have to charge as much for a second.



Good "stand alones" are harder to find. For instance, here in California, predatory lending laws limit both total broker compensation and total costs of the loan to six percent, but it still costs about $3500 to do the loan unless the lender relaxes one or more of the traditional requirements. For brokers, this means that they can't jack the rate up to pay for the costs of the loan. If the loan is $50,000, $3500 is seven percent of the loan amount. If brokers try to make it up via yield spread, Section 32 limiting total broker compensation to six percent kicks in, and they cannot do it. Note that this limitation does not apply to direct lenders, as their eventual premium on the secondary market is not covered, and the amount of interest they receive if they hold the note is only subject to very weak governance rules. Upshot: Stand alone second mortgages, unlike first mortgages, are a very hard area for brokers to compete well in. I've got a couple internet based lenders for higher loan amounts (about $75,000 and up), but for smaller loans than that I will usually tell folks straight up that credit unions are likely to give a better deal than I can. For first mortgages, or firsts with piggyback seconds, that situation is reversed.



In some certain situations, due to the low cost of doing second mortgages, I can actually get a client a better loan by doing a purchase money loan under a program traditionally associated with stand alone second trust deeds. With some credit unions and major lenders offering them at 8% or even under, and up to $500,000 with minimal paperwork requirements and low to zero closing costs to the client, it can be a good way to get someone who cannot qualify full documentation anyway enough money a loan for a low end property, particularly if they are making a substantial down payment. If you're buying a $150,000 one bedroom condo, avoiding the $3500 to $4000 for closing costs associated with a first mortgage can cut your effective interest rate for a loan you keep two to three years by about one percent.



Caveat Emptor

UPDATED here

Hello Mr. Melson,
Let me start off by saying that I am a big fan of your "Searchlight Crusade" website. I happened upon it a while back after I had already purchased my house. I've found a lot of useful information and I try to refer my friends and family to your site when they ask me home-buying/mortgage questions.

I am emailing you because I am considering a refinance. Just a little background info: I purchased a 3bedroom/2bath 1183 sq ft home in DELETED for $323,000 in Nov 2004. I am a DELETED with a credit score of 801. My wife is a part time DELETED with a credit score of 814.

I put no money down. I have my mortgage split into two loans (80/20). My first mortgage is $259K interest only with a rate of 5.375 fixed for 5 years with a payment of $1157.42. My second loan is about $64K HELOC interest only with what seems to be a monthly adjustable rate with my payments now close to $600. Both loans do not have a prepayment penalty. I've only been paying the interest every month. We plan to stay in the home for at least another three years (we are from out of state and might move back there when my son goes to high school - he's currently in the 5th grade). There is a possibility we might stay in DELETED at which point we're likely to stay in the house.

I was thinking about refinancing my HELOC so that the rate would be fixed. I spoke with my lender and I was offered a 15 yr loan with a fixed rate of 7.5% with a payment "around $600" with a prepayment penalty before 5 years.

Based on recent sales, my house is worth about $350K. Because of this I was told I could not refinance both loans into one.

Do you think it would be worth it to refinance. If so, what type of loan should I do? Or should I figure out if I'm staying in DELETED or moving back?

Any advice would be greatly appreciated.

I would love to give you my business if you know of anything that will work in my situation.

My first reaction was that there is no way anyone should accept a HELOC with a five year pre-payment penalty such as described.

You are going to need to refinance your first in November 2009 if not sooner. When that happens, there are going to be issues with subordination which are likely to cause you to want to pay your new second off, especially as the lender you mention has a policy of no subordinations.

This is an excellent question. Truthfully, an 8.00 or 8.25 percent Home Equity Loan (usually 30 year amortization, with the balance due at the end of 15 years in a balloon payment) will likely do better for you. Now my calculator says that a 30 due in 15 at 7.5 will have a fully amortized payment of $447.50, while a 15 year payoff is $593.29. Don't accept approximate payments, even as a quote - exact numbers tell you far too much about what's really going on. Also, you are and should remain at or below 95% Comprehensive Loan to Value (CLTV), which makes a difference on rate.

Some seconds have smaller penalties, so that may modify the answer. For instance, one lender I do a fair amount of business with has a very low closing cost second with a $500 prepayment penalty, in effect for three years. The cost to buy it off? $500. However, the standard prepayment penalty would be 80% of six months interest, or about $1920. Assuming you refinance in exactly three years, that boosts your effective rate by one full percent.

Now I'm happy to do whatever "stand alone" seconds come my way, a "stand alone" second trust deed being one where the primary mortgage is not being refinanced at the same time, as opposed to a "piggyback" where there is both a first and a second trust deed. However, the truth is that the best source for "stand alone" second mortgages is usually a credit union. I've got a couple of internet based lenders that are very competitive for high dollar value seconds, but for stand alone seconds below $75,000, credit unions rule. It was more cost effective to do our second with my wife's credit union than to do it myself. Just has to do with the mechanics of how brokers are set up and the way that most second trust deed lenders work.

Now you do have to be able to make those payments. But what you should really be paying attention to is the total cost of the money. How much in closing costs you have to pay to get the loan done, plus how much the loan is going to cost you in interest every month. It was only a couple of years ago that most traditional lenders would charge the same closing costs for a stand alone second that they would for a primary mortgage. For a $64,000 second, that $3500 in closing costs is almost 5.5% before you get to the actual interest charge - the equivalent of a 1.8% surcharge to the rate, assuming you kept it three years. You're better off taking a 9.5% rate that carries no closing costs than you are with an 8% rate that carries traditional ones, and that's not even considering the fact that you still owe most, if not all of that extra $3500, when you go to sell your house or refinance.

The situation, luckily for borrowers, has changed. Many lenders have very low cost stand-alone second trust deed programs, whether you are looking for a fixed rate home equity loan (HEL) or a flexible Home Equity Line of Credit (HELOC). The rates are higher than first trust deed loans, but the requirements are lower. Because the rates are higher, lenders are competing for these loans, with credit unions leading the charge. If there's a first mortgage involved, things are different. Most credit unions don't really have the resources to handle first trust deeds, with dollar values having appreciated the way they have. So they partner with major commercial banks, becoming essentially dedicated brokers for first mortgages, while competing ever harder for second mortgages in their own right. Nonetheless, because lenders want second trust deed loans, the result of their competing with each other has been a drastic drop in closing costs for second trust deeds over the past few years.

Caveat Emptor

UPDATED here