Mortgages: June 2009 Archives
I've heard this story, in all of its variations, at least hundreds of times.
Someone will send me an email and say "They told me not to make my loan payment because I was going to skip one. So I spent the money on something else. Now they're telling me they can't fund my loan and I can't come up with the cash to make this month's payment!"
First off, engrave this into your soul: You will never skip a mortgage payment. The interest accrues every month and it must be paid every month. What many loan providers do is plan to add an amount equal to your monthly interest charges to your loan balance. This gives the illusion of skipping that payment, but you not only made the payment, you're now paying interest on the extra amount you borrowed.
I never tell people not to make their loan payment. At most I will tell them to wait a few days to give the loan a chance to fund. This lets them know it is still a concern, still an item they need to stay on top of. This way, if there's a funding issue they still have the ability to make their payment. I'm pretty certain I've never had a funding issue like that, but I'm also certain if I said anything different, the universe would bite both me and my next client. The universe is hostile and you always want a Plan B (and Plan C if practical).
Here's how it works: At the end of every month, you've got a fifteen day grace period to make your payment (i.e. by the 15th of the following month) before any penalties begin. So if your new loan was funded any time prior to the 16th, everything is at least under control. If you pretend you're skipping a month's payment, you've just added an amount equal to the principle you pay in six months back into your loan (on top of all the other closing costs if you didn't pay them in with cash out of your bank account)
So quite predictably what happens is at the end of every month there is a massive wave of loan fundings to take advantage of this as unscrupulous loan officers pretend this month is free. Escrow gets so busy at that time of month that things get lost in the shuffle quite often. It's for this reason that I prefer to avoid funding loans in the last two or three business days of a month. If you're not trying to pretend your client is skipping a payment that they aren't skipping, things become much easier.
Let's say we fund your loan on the 28th of the month. Actually, this works anytime between the first of the month and the 15th of the next month, but the last few days of the month is typical. You can pay for the interest due in cash or by rolling it into your new mortgage. Either way will get the job done. It depends upon which is more important to you: having the cash from pretending you didn't need to make a payment, or not losing about six months worth of principle payments. By paying this interest, in either case you are covering the payment that would be due for that month.
Here's where it gets a little tricky, but not much. If you fund on the first of a new month or before, the interest paid is for the ending month, and the new loan starts accruing interest immediately. There will be a payment due at the end of that month. If you fund from the second to the fifteenth of the new month, the new loan needs to cover the interest for two months (either by rolling it into your balance, paying it cash, or some combination). In this case, the new loan (or cash you put into the deal) covers the ending month and the new month just beginning. It's also for twice as much money, by the way. This is why some very unscrupulous loan officers can advertise "Skip two payments!" even though there is never a single second on any loan when it is not accruing interest.
As long as everything goes well enough for the new loan to fund by the 15th of the new month, everything is at least under control. Yeah, you might have chosen to roll all the costs into the new loan but that's okay as long as you go into it with your eyes open having made a conscious choice.
But what happens if they tell you "Don't worry about your loan payment!" and then it doesn't fund? (or doesn't fund in time!)
Well, problems. If you're fifteen days late on your mortgage, expect to get hit with a penalty of at least 4% and more likely 6%. Work out the interest rate, and you'll see the interest rate on payments late that sixteenth of the month is 96 to 144 percent!
If that were all there were, that would be bad enough but livable. Usually it puts people a full month behind on their old mortgage. That noise you just heard was your credit score being nuked. I have seen a single 30 day late make a difference of 150 points on the Fair-Issacsson (FICO) model. Plus if you think you had difficulty qualifying for a prime mortgage before, wait until you see what happens after you've got a thirty day late! This usually ends up becoming what subprime calls a "rolling thirty" for several months until you get the extra money from some other source, but A paper doesn't have a "rolling thirty" category - every single one of those late payments hits you again as yet another late payment within the past 24 months.
Then there's the problem of where you've going to get the money to replace what you've spent because you were told you didn't have to make a payment this month. It's not coming out of some hyperspatial vortex. My clients would have to get it from somewhere. What if they really don't have it?
This sorry little charade that many loan providers play even has an ultimate downside. There is no need to skip a month's payment. You, the client, will get full and complete credit for any cash you put into the transaction or your loan. It may take a little while to get back to you, but you will get it. In the meantime, however, it may spell difficulty for your cash flow. You made that payment but your old lender hasn't yet credited it (or it cannot be confirmed that you made the payment)? You will get the money back when the accounting all finalizes. The reason we tell people they might want to hold off is that quite often it takes a few days between mailing the check off and the time that the old lender admits that they got it. You can't close the old loan off unless you pay the full amount the old lender is asking for right now. If you can't close the old loan off, you can't fund the new loan. Escrow has to pay the loan off in full by the old lender's payoff demand. If more money comes in later, the old lender needs to send it back to you when it does.
So if someone ever tells you not to make your loan payment, ask them if what they really mean is to wait. Because if they really mean "Don't make your loan payment this month": they are risking an awful lot of potentially bad consequences to you, the borrower, if they can't actually fund your new loan. And judging by the amount of email I've had on this subject, it really does happen pretty much every day to someone.
Caveat Emptor
Article UPDATED here
Really.
I know that most people who read this are replying "no kidding" but it's amazing how many of those people do not understand it.
I got an email yesterday that said, basically, "Help me! I bought with a prepayment penalty and my payment is too high. I've got a 100% loan at 7.125% and a three year prepayment penalty, and I need to drop my payment by at least $500 per month!" As I explained, the only honest responses that really solve this problem have to do with increasing the income, decreasing the other outgo, or, as a last resort, getting rid of the property, because he's not going to get a loan like that. They don't exist. They never did, really, but negative amortization loans allowed people to fool themselves into believing they existed.
Things are better now than they usually are. There is a temporary set of loan programs in effect right now to help you if your only problem is the fact that values are down. Fannie Mae and Freddie Mac have a set of programs that allow up to 105% financing with no PMI, providing you meed the other criteria - chief among which is your debt to income ratio falls within acceptable bounds. In other words, you can afford the loan, you just can't afford adjustable interest rates. But the guy referenced above is stuck in a negative amortization loan because it was the only way to afford the property he wanted. He treated it like a fairy godmother waving her wand, and didn't ask what happens on the 12th stroke of midnight when the loan recasts.
Anytime you are signing up for anything other than a fully amortized loan at a fixed rate of interest, you should ask "What happens next?" What happens when the initial period of lowered payments ends? Because each and every one of these loans has a boosted payment when that happens, and many, like negative amortization loans, are adding thousands of dollars onto the balance of your loan whenever you make that special low payment they're so proud of! So in three years, when the loan recasts, you owe about 10% more than you did to start with, and a shorter amortization period means your payments go up even more to reflect that. If you couldn't afford the loan originally, how are you going to afford it later?
Real Estate Mortgage Loans are something you've got to get right in the first place. Lenders often allow a higher loan to value ratio for purchase money loans than anything else. Put into plain english, if you bought with a loan for ninety percent of the value of the property, I might not be able to refinance it at all, anymore. If Fannie or Freddie own your current loan, then we can likely refinance you under restrictions noted above, but most of the rotten loans were with Alt A or subprime lenders, not Fannie or Freddie. Second, there are closing costs in every loan. Closing costs are around $3000 or so, not counting origination and any discount you may decide to pay to get a lower rate. You can pay these costs out of pocket, you can pay them through yield spread (and equivalent things) by accepting a higher rate - making it harder for a refinance to get you a lower rate - or you can roll those costs into your balance, meaning that the loan to value ratio gets worse. Even a few dollars over a given level's cut off goes to the next higher level, getting worse pricing. If you were at 86.2 percent loan to value and you go to 87.2 percent, we've still got a ninety percent loan. But if you were at 89.1 and you go to 90.1 (or even 90.001), that puts you into the 95% loan to value bracket, with higher pricing and I've only got one or two lenders who will of do it at all, even purchase money. Unless your current loan is with Fannie or Freddie, I can't think of anyone right now who'll do a 95% bracket refinance loan at all. Not to mention that the appraisal may not come in and there's nothing your loan officer can do about it. So if you start with a bad loan, the practical result may be that you cannot fix it by refinancing because lenders won't do it.
So before you sign on the dotted line, make sure you understand all the nuts and bolts of your loan. Keep asking the question "What happens later?" If you don't understand it, or it is too complex, get some disinterested professional advice. Chances are that something is going on that's going to be bad for you later on. Lenders don't want to compete on price, and they know most people choose loans based upon payment, and they know how to play all of the games with payment and interest rate to make their loan appear good to the casual public
Ask the hard questions before you sign up. Unfortunately, with new lending environment the best realistically possible answers aren't as good as I'd like, but the answers that prospective loan providers give are still instructive if you pay attention.
Caveat Emptor
Article UPDATED here
The Book on Mortgages Everyone Should Have
What Consumers Need To Know About Mortgages
The Book on Buying Real Estate Everyone Should Have
What Consumers Need To Know About Buying Real Estate
Buy My Science Fiction and Fantasy Novels!
Dan Melson Amazon Author Page
Dan Melson Author Page Books2Read
Links to free samples here
The Man From Empire
Man From Empire Books2Read link
A Guardian From Earth
Guardian From Earth Books2Read link
Empire and Earth
Empire and Earth Books2Read link
Working The Trenches
Working the Trenches Books2Read link
Rediscovery 4 novel set
Rediscovery 4 novel set Books2Read link
Preparing The Ground
Preparing the Ground Books2Read link
Building the People
Building the People Books2Read link
Setting The Board
Setting The Board Books2Read link
Moving The Pieces
Moving The Pieces Books2Read link
The Invention of Motherhood
Invention of Motherhood Books2Read link
The Price of Power
Price of Power Books2Read link
The End Of Childhood
The End of Childhood Books2Read link
The Fountains of Aescalon
The Fountains of Aescalon Books2Read link
The Monad Trap
The Monad Trap Books2Read link
The Gates To Faerie
The Gates To Faerie Books2Read link
Gifts Of The Mother
Gifts Of The Mother Books2Read link
C'mon! I need to pay for this website! If you want to buy or sell Real Estate in San Diego County, or get a loan anywhere in California, contact me! I cover San Diego County in person and all of California via internet, phone, fax, and overnight mail. If you want a loan or need a real estate agent
Professional Contact Information
Questions regarding this website:
dm (at) searchlight crusade (dot) net
(Eliminate the spaces and change parentheticals to the symbols, of course)
Essay Requests
If you don't see an answer to your question, please consider asking me via email. I'll bet money you're not the only one who wants to know!
Requests for reprint rights, same email: dm (at) searchlight crusade (dot) net!
Add this site to Technorati Favorites
Subscribe to Searchlight Crusade
My Links
-
Heavy Lifters
- Instapundit
- Hot Air
- Wizbang
- Victor Davis Hanson
- Q and O L Places I get to as often as I can
- Soldier's Angels
- The Anchoress
- Argghhh!
- Armies of Liberation R
- Asymmetrical Information
- Belmont Club
- Tim Blair
- Eject! Eject! Eject!
- Jihad Watch
- Michelle Malkin
- Neo-neocon
- Powerline
- Protein Wisdom
- Real Clear Politics
- Mark Steyn
- Strategy Page
- Vodkapundit
- Volokh Conspiracy Personal Finance, Economics and Business Sites
- Bloodhound Blog
- Financial Rounds
- Free Money Financea> Other sites I've linked and visit
- Ace of Spades
- Ann Althouse
- The Anti Idiotarian Rottweiler
- Atlas Shrugs
- Professor Bainbridge
- Baldilocks
- Beldar
- Blackfive
- Classical Values
- Coyote Blog
- Daily Pundit
- Drudge Report
- IMAO
- The Jawa Report
- Just One Minute
- Libertarian Leanings
- Liberty Papers
- Normblog
- Patterico's Pontifications
- Right Wing Nut House
- Samizdata
- SCOTUS Blog
- Stop the ACLU
- Unalienable Right Consumer and Research Sites
- Better Business Bureau
- Consumer Reports
- NASD Home
- California Department of Real Estate
- California Licensee Lookup
- California Department of Insurance
- National Association of Insurance Commissioners (NAIC)
- Do Not Call Homepage
- IRS Charities Search
- Internet Fraud Complaint Center
- SEC Home Page
- Stop Mortgage Fraud
- Report Mortgage Fraud Debunking Many so-called Real Estate Gurus
- John T. Reed Worthwhile Web Comics
- Sluggy Freelance
- Day by Day It is site policy to list the main page of every site I reference. Sometimes the real world intervenes and I haven't gotten to it yet, or one falls through the cracks on a long post with multiple references. It is also site policy to list the main page of every site that lists this one on their equivalent roll, as well as the main page of all sites that are members of any of the same groups this site is a member of. Please send me an email with a link to the main page of your site if I've overlooked you (dm at the domain name). For the clue-challenged, note that it is a requirement for your link to appear on every page of your site, just like mine does, and I will not link to spam sites.