Mortgages: January 2018 Archives

The short answer is not only "yes" but "damned straight"

I refinanced my house, and the lender put as one of my payoffs my Acura lease that I have 3 years left, whick equals about $19,000. I told him that was a lease and not a credit card, and he said he would take it off. I'm supposed to get my money tomorrow wired to me, but when he sent me a good faith estimate to sign today the Acura lease was still there. He said I would have to take it like that cause he forgot. I'm not gonna pay $20,000 on a 3 year lease left for a 30 year fixed rate refi!!! In the end I will have paid over $40,000 for a car I will only have for 3 more years. Can he do this to me? I need the money and signed everything else??? Please help

The first thing you have to understand is that THE most important measure of whether you can likely afford a loan is your debt to income ratio. If you make $5000 per month gross and you have to pay $3000 of it in debt service that's a 60% debt to income ratio.

Debt to income ratio is total cost of housing PLUS contracted monthly outlays divided by gross monthly income. It includes student loans, car leases as well as car purchase payments - everything you have contracted to pay out on a periodic basis. They want to measure how well you can afford to make payments out of continuing income. In the email quoted above, I see warning signs of being over-extended already.

For myself, I don't like the idea of refinancing a short term debt into a long term debt. I don't like suggesting it to clients - while debt consolidation refinance can be powerfully beneficial, there are huge traps that most people fall into. The benefits only happen if you keep making the equivalent of the same payments, and only if you keep doing it longer than the consolidated debts would have lasted. If you're doing it for reasons of cash flow, the only justification is to keep yourself out of bankruptcy. This person seems to understand that debt consolidation is generally a bad thing, but wants some cash out that they really can't afford.

That is the only reason a loan officer should broach the idea of debt consolidation. Unfortunately, it happens far too often because loan officers are paid on the basis of loan size. Larger loan equals bigger paycheck. Also, all too many consumers understand only cash flow, and that cutting their payments means they apparently have more money to spend on entertainment, travel, toys, or whatever else their personal desires point them towards.

The basic challenge illustrated, however, is that in order to qualify for the loan, this person does not make enough money - or hasn't proven they make enough money - to satisfy the underwriting guidelines on debt to income ratio. In plain English, they cannot afford the loan they are contemplating. Perhaps they could afford it if they only had the home loan, but they have car payments, car leases, student loans, credit cards, and installment payments on other goods as well. All of these are contracted monthly outlays. You must continue to pay them.

(Believe me, you don't want to tell a prospective lender you want to stiff existing creditors! They don't take it well)

The homeowners nonetheless want the money. The email didn't say why, but I strongly suspect it's a desire rather than a need. So the loan officer is trying to find a way to get it to them by qualifying them for the loan. It's within the context of serving the client's perceived "needs", and yet it rarely serves client interests. There are damned few loan officers who reflexively use this kind of red flag as a reason to sit and and consider whether the client real interests are served by the loan; after all, if the answer is "no" they don't have a loan and they don't get paid. I try, and I usually find out later that they got a worse loan from someone else because they didn't want to tell me they appreciated my concern but wanted to do it anyway. Nonetheless, if loan officers supposedly have a fiduciary responsibility (and we do) it should be an obvious requirement for situations where the client may be compromising their long term ability to afford the loan. I doubt the results of the Era of Make Believe Loans would have been so devastating if consumers in this situation had some mandatory protections in the form of counseling on the effects of getting this money. This is one thing that should have been done in response to the overextension of credit to so many homeowners, and wasn't. Might have something to do with the fact that the big banks make large campaign contributions, while homeowners, not so much.

There are tricks that enable the lowering of debt to income ratio, and debt consolidation is the chief of those. It has perils for the consumer, but it does exist. By spreading the principal payments over 30 years (and usually by lowering the interest rate), debt to income ratio can be greatly lowered. This gets the loan approved, which means the consumer gets the money they want and the loan officer and their company get paid. Win-win in the present tense. All too many of these, however, sabotage that homeowner's financial future - it just takes a while for that to be apparent.

Keep in mind, the question is not "Do they owe this money?" They do. There is no question about that. Nor are their existing debts the moral responsibility of a real estate loan officer. The question is whether a way to restructure the debt exists that both qualifies this homeowner for the new loan they want, and does not unduly compromise their financial future. The question for the lender and the underwriter, however, is even more concrete: Does the new loan or loan structure comply with underwriting guidelines such that there is a reasonable expectation of future payments being made on time? That is the bottom line. If the projected monthly payments are too high, the answer to the question is "no", so people go looking for ways to lower those monthly payments and change the answer to "yes."

A $500 car payment that would have been paid off in 3 years may add only $100 or so to a real estate loan payment. If the homeowner makes $5000 per month, that cuts their debt to income ratio by about 8% right there. For a loan officer, 8% off Debt to Income Ratio is a huge amount, and I've seen situations where debt consolidation cuts 20% off a Debt to Income ratio. When 45% is the cutoff, consolidating debt can make a huge difference in a homeowner's ability to qualify. The trick is for it not to lock the consumer into a situation where a year from now they've got to have a new car to get to work because the old one disintegrated, and there's just no way they can afford it. The lender and underwriter do not care about that. They care whether the projected monthly cost of housing plus debt service is within guidelines.

I don't know by how much, but its apparent this person is in that kind of situation. They want the money, but given their other debts, they can't afford it without consolidating their other payments into the loan. The homeowners have the right to refuse, but then the lender has the right to refuse to fund the loan. It is a strict quid pro quo: cut your payments by this much (in addition to whatever other underwriting requirements there may be) and we will fund your loan. Don't, and we won't. While declining to consolidate may be the smart thing to do in many situations, most consumers decide they want whatever benefit the loan has enough that they decide to do what the lender requires. It is the homeowner's choice, but the bottom line is that if you want the loan in such a situation, then yes you have to do it.

Caveat Emptor

Somebody asked me about a deferred payment mortgage for a purchase. The long and the short of the story is that they don't have any cash to put down, and they can't qualify for the payments under any kind of reasonable debt to income ratio.

A few years ago, in the era of Make Believe Loans, we could have gotten this person a loan. It wouldn't have been the smartest thing in the world, but we could have done it. I'm confident I would have turned him off the idea back then too, as I did many others who hated me then but may now be reconsidering. Most have figured out that the loan officers who had a policy of "just shut up and get paid for putting the loan through" were not their friends after all.

Even then, however we would have to have dealt with calculating debt to income ratio, as well as the fact that purchase money loans evaluate the property on a lower of cost or market basis, where the appraisal is the "market" and the official purchase price is "cost." Since it's the lesser of the two values that is used, there is never equity at purchase in excess of whatever down payment you make, at least as far as the lender is concerned.

A paper fixed rate loans use the fixed rate of the loan for calculating front end ratio. They are permitted to use a higher rate than actual, but not a lower one. If your rate is 6%, and they use 6.25% because the rate isn't actually locked on a $300,000 thirty year fixed rate loan, the number they will use is $1847.16. This is not an arbitrary number; it's the most important measurement of whether or not you can afford the loan. The front end ratio, which is the loan payment itself, is not generally a deal breaker if it's too high, but the back end ratio, which is the loan combined with taxes, insurance, homeowner's association, and all your other monthly debt service, is a deal breaker - as well as the most important measurement of whether you can afford the loan. Those other numbers are all fixed based upon your situation. You owe what you owe, property taxes are what they are, and you only make what you make - or actually, as far as the lender is concerned you make what you can prove you make. I've written against overstating your income from the very first on this site.

Why do they use the higher number? As insurance against available rates going higher. If rates decline and you can actually lock in something better (or for a lower cost), no problems ensue. But if that payment goes up at all when you go to lock the loan, that means the file has to go through another complete underwriting. One dollar per month or ten thousand, it makes no difference. Up is up. So to avoid that, loan officers who are not complete doofuses add a quarter percent or so to the rate they expect in order to generate a "qualifying rate" and "qualifying payment" with some room for error when the loan isn't locked. That way if things do get worse, the whole process doesn't have to start all over again. (Regular readers will understand it's really about the tradeoff between rate and cost, but a higher cost for the same rate also triggers re-underwriting, albeit focused on cash to close rather than debt to income ratio)

When you move to A paper ARMs, the allowable back debt to income ratio actually goes down, usually to 38% from 45%. Not only that, but the rate used to compute the payments is usually much higher than actual. The calculations require the use of, not the initial rate on the note, but the final, fully indexed rate on the note. They use current rate for the underlying index the ARM is based upon, plus the rate margin. Say the initial loan rate is 5.25% but the underlying index is at 4.75% plus a margin of 2.25%, they will use 7% for the purposes of determining whether or not you actually qualify for the loan. In the $300,000 example above, this means they'll use $1995.91, even though the actual rate and payment is lower - and due to lower maximum debt to income ratio, the ceiling on what you can afford at a given income level will be lower. Depending upon the lender, they may even add a bit of a margin to that qualifying rate. This makes it significantly harder to qualify for an A paper hybrid ARM than a fixed rate loan, even though the rates and payments are lower, and is certainly one reason why there aren't more of these loans out there. Nonetheless, this procedure they use for qualification does mean that someone who manages to qualify should be able to afford whatever the payment eventually adjusts to.

One of the reasons subprime loans got so popular was that they stopped using this method of determining whether an applicant qualified for the loan. The subprime lenders started qualifying applicants based strictly upon the minimum initial payment, despite the fact that they knew good and well that the payment was going to adjust upwards at a known time. Even if the initial payment was "interest only" or negative amortization. They just assumed that the people would get raises, be able to refinance with increased equity, or just be able to lift themselves up by their own bootstraps, or something else equally hope based. Three strong verses of "Kumbaya" would have been about as intelligent, but it worked so long as Wile E. Coyote didn't look down. It shouldn't be a surprise to anyone that this is one of the reasons why subprime crashed so hard, especially in conjunction with stated income loans. Because this made it absurdly easy to qualify for a loan, especially a larger loan than people could really afford, subprime loans were ridiculously popular for a while, even among people who should have been able to qualify for A paper had they limited their budget to what they could afford. When the adjustments hit, it was predictable as gravity that those folks who qualified subprime couldn't make their payments. When the market values stopped rising so quickly that they supported serial refinancing, it didn't take very long for large scale problems to emerge. In the overall scheme of things, subprime loan qualification was good for real estate agents who wanted easy commission checks, irresponsible loan officers, and people with the sense to cash out of the market while things were still going crazy. For the people who applied for subprime loans, not so much.

You should want to qualify with the toughest standards you can meet, preferably A paper full documentation, and even the A paper ARM standards if you can, but this concept was a little bit difficult to get across to the people who already had their hearts set on a property that was way too expensive for them, especially when everyone else is encouraging the speculative atmosphere. It got to the point where newspapers were running articles on "What's a fair margin over index for negative amortization loans," when the correct response would have been, "RUN AWAY."

The whole situation is enough to make you understand exactly how many people outsmarted themselves in pretty much the same wise as the people pictured in this clip:

Unlike the fictional characters portrayed, however, the consequences for borrowers who get in too deep does not end when the director yells, "Cut!" You might want to bear this in mind when figuring out exactly how much loan you can really qualify for. Even the subprime lenders who survived have now figured it out, proving that even the silliest English Knight ("Ca-niggit") can learn when the pain gets bad enough.

Caveat Emptor

Original article here

Been reading some of your informative tips. I am looking at refinancing and getting a $378000 mortgage. Now in the case of having a 3 yr prepay penalty, vs paying 1.5% in points to make it a 1 yr prepay, am i right in assuming it's wiser for me to pay the points than accept a three yr prepay when i know I will sell/move within 2 yrs? Any info you can provide would be great. I'm wondering if I'm missing something here.

I think they (sic) points would cost me around $5800.

I compute 1.5 points on $378,000 as being approximately $5756.

Here in California, the maximum prepayment penalty is six months interest, and that is the industry standard nationwide for when there is a prepayment penalty. A few lenders will pro-rate it, but for the vast majority, they will charge the same penalty on the day before it expires as on day one. This is pure profit, and they're generally not going to turn down pure profit any more than most people will turn down a bonus. So if your interest rate is 6 percent, you're going to pay a 3 percent prepayment penalty if you sell or refinance before the prepayment penalty expires. For Negative Amortization loans, the prepayment penalty is based on the real rate, not whatever fake come-on "nominal" rate they told you about.

On some loans, the prepayment penalty is triggered by paying any extra money. One extra dollar and GOTCHA! But probably eighty percent of loans with prepayment penalties give you the option of paying it down a certain amount extra each year, usually 20 percent, without triggering the prepayment penalty. (That's 20% of the balance at the beginning of the year, but making a flat payment of 20% will trigger the penalty because you're also paying it down with your monthly payments).

Assuming that it is a case of you won't move in less than one year, this is equivalent to the prepayment penalty on a loan with interest rate of between 3.05% (100 percent prepayment penalty) and 3.81% (80% prepayment penalty). Since even the 1 month LIBOR was a little over 3.8 percent when I originally wrote this, it was a cut and dried case of pay the point and a half.

Of course, if there is a possibility that you will need to move in less than one year, paying these 1.5 points could well be a costly exercise in futility. I can't begin to gauge that risk without more information. But if you're in any number of professional situations ranging from the military to corporate executive, this is common.

Given that you're talking about prepayment penalties, you're likely in a subprime situation. Subprime, when I originally wrote this, had a fairly uniform rate of 1.5 points of cost equals 3/4 of a percent on the interest rate. I'm going to assume you're getting about a 6.25% rate. If you decided to buy it off via rate, you'd be looking at a 7% rate. These days, the few subprime lenders still in business are looking for "A paper" borrowers who don't realize they're "A paper" borrowers.

Let's punch in the two loans. $383,750 (balance with 1.5 points) at 6.25% gives you a payment of $2362.81. Running it out 24 months gives you a balance of $374,467. You have spent $56,708 on payments.

378,000 at 7% gives you a payment of $2514.84. Running it out 24 months gives you a balance of $370,043.00, and you've spent $60,356 on payments, while paying your balance down $7957.

Now, assume you sell the home for $X at the end of this period. The first loan saves you $3648 in interest. The second loan gives you $4424 more in your pocket in two years. The second loan, with the higher interest rate and higher payment, as opposed to the higher balance, nonetheless saves you $776 as opposed to the loan with the lower interest rate, and also leaves you more money with which to buy your next home, which means lower cost of interest on your next home loan, as well. Of course, this is subject to some pretty significantly naked assumptions as I don't know anything more about your situation. Furthermore, it assumes that your income is not marginal, and that you would qualify for both loans. It is perfectly possible that you would qualify for the lower payment, and hence the lower rate would be approved, but not be able to qualify for the higher payment associated with the higher rate (The reverse is not the case). Finally, I assumed that because you know you're going to have to move in two years, you are looking at a two or three year ARM in the first place, as opposed to a longer fixed term.

I hope this helps you. If you have any further questions, please let me know.

Caveat Emptor

Original here

This question brought someone to the site

Can I change lenders after the loan is approved?

The answer is yes, but you need to start the loan process all over again.

Actually, you can change lenders any time you want to, just like you can refinance at any time. 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. Deciding not to consummate a particular loan may also be the smartest thing you could possibly do, especially if you were significantly lowballed on the initial quote.

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 took out negative amortization loans right up to the moment the lenders did away with them and then people screamed they couldn't get them anymore. It didn't matter how much they hurt themselves - they wanted the low payments. 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. Most folks are going to 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. There's a good chance that if the lender requires a deposit, they're a lender you don't want to be doing business with in the first place.

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 good faith 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.

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

Original article 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 regular 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.

For a while, with the general loosening in underwriting requirements, this had largely gone by the wayside. One of my favorite A paper wholesalers called as I was originally writing the article, 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. With the way the investor market has changed due to recent losses, Verification of Rent (aka VOR) has become more important again, but it's one of the few things they will still consider waiving if the rest of your credit and financial picture is strong enough. You can never count on getting it waived, but if you're strong enough otherwise, it does still happen.

There are potential ways to satisfy 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 and they will usually accept that person's word.

I've seen people advocate this as an application for a stated income loan (when stated income loans were available) , 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 were relaxed when the article was originally written was 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? Finally, stated income is not available from anywhere I am aware of at this update, and new regulations actually prohibit it in a lot of situations. Even if not prohibited, there's a lot less willingness on the behalf of lenders to accept stated income loans, and when they eventually return, expect them to only allow a much lower loan to value ratio, necessitating a larger down payment than most people have, especially for a first time purchase. Plus, of course, the rate is going to be much higher, impacting your debt to income ratio and therefore, your ability to qualify for a given property. Finally, none of the various government programs to help encourage home ownership has ever accepted a loan done on a stated income basis.

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" used to be lender specific, but of late Fannie and Freddie have instituted 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 (difficult currently unless you're buying with a VA loan), 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

Original 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, 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 proprietary 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.

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

Lowlights include:

$3500 sign up fee for something that should be free, as it cuts the lender's risk factors significantly. Furthermore, as I wrote in Debunking the Money Merge Account Scam, this cost is literally never recovered, even if you keep the loan until paid off. You will pay the loan off sooner if you simply take the $3500 sign up fee and use it for a one-time direct paydown on the mortgage.

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. It posits extra payments on the order of what it would take to pay off the loan normally in ten years. In reality, if you could afford that level of payments, you'd have a ten year mortgage or a more expensive house. 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% elsewhere, 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 extra dollars or so 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 because it is true: 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

Original article here

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 whomever, 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 the executor is claiming that the estate cannot pay its bills and rarely are dead people 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.

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 we've all 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

Original article here

I went to a "direct from the providers" seminar on credit reports and credit scores.

Some of this information has changed from previous information, and some of it will change in the future. Credit Reporting, FICO scores, and related items are an evolving knowledge, as they figure out how to better predict future performance of potential borrowers.

A FICO score is nothing more or less than a prediction of the likelihood of a particular consumer having a 90 day late in the next 24 months. It is a snapshot, based upon your position and your balances as reported at the exact moment it was run.

I learned a bit more about the various other credit reports besides mortgage. They emphasize different things (naturally) and score differently. Auto scores go to 900, where mortgages range 300 to 850. Landlord tenant screens are different from a mortgage score. Revolving credit screens are different than mortgage screens. Finally, and most important, the "Consumer Screen" reports you get on yourself will always have a higher credit score than the ones mortgage providers run.

What makes up your credit score? Inquiries are 10 percent of your credit score. They only go back twelve months. Whereas I've been informed in the past that additional inquiries will get you zonked, that is not the case currently. Depending upon your length of credit history, after three to five "hard" inquiries in the last twelve months, they quit counting. A hard inquiry is done at your request for reasons of granting credit. Fewer is better. Longer history of credit means they will allow you more inquiries.

Multiple mortgage inquiries, if done within the correct time frames, still only count as one, no matter how many. Automobile inquiries also count differently than other inquiries.

Types of credit used is 10% of the weight. They're looking for a reasonable balance between types. The absolute worst type of account to have is from one of those zero interest finance companies. You know the ones, "Buy this sofa now and no payments and no interest for twelve months." People who are broke but need or want stuff now do this, and that's why the hit happens. They are deferring payment on something they can't really afford. You suffer guilt by association.

15 percent of the weight is length of credit history. How long you have had revolving accounts divided by the number of revolving accounts you have had. You have three cards that have all been going for thirty years, that's a better picture than five cards of which four are brand new. As far as the credit score is concerned, however, five years is as good as forever.

I've been telling people not to close open accounts. This is confirmed as not a good thing to do. Closing an open account can cause your credit to drop by as much as 80 points in some circumstances. If it doesn't cost you anything, don't close it.

Balances is thirty percent of your score. There are significant hits at fifty and seventy five percent of your credit limit on each card. Significantly, a small balance is a little bit better than zero, even. This is one reason you want to charge something you'd buy anyway to your credit card, just make sure you pay it off when the bill comes. Some credit cards (specifically charge cards in particular, not to mention any specific names of charge card companies where the balance is due in full every month) will report your high balance as being your limit, which can have the effect that you appear to the reporting agency as "maxed out" if you've charged something big. So make certain your credit limit is being accurately reported. If your balance is incorrectly reported, in general the only way to correct it quickly is with a letter from the provider, signed and on their letterhead, saying "Your balance as of (date)is $X"

Payment history is 35 percent of your score. This is divided into three categories: within the last 6 months, 7 to 23 months old, and 24 months or older. If you have had a delinquent credit reported within 6 months, you are getting the full impact in terms of lowering of credit score. Between 7 and 23 months is a lesser impact. Over 24 months is still less impact.

Important: DO NOT PAY OFF OLD COLLECTION ACCOUNTS! It can cause a 100 point drop in your score. Here's why. You owed $X to company A, and five years ago they sent it out for collection. Now you go back and pay it off, and the date it's marked with is TODAY. It's gone from being over two years old to being current as of now, bringing the full impact to bear once more. The one exception to this is a deletion letter. If you get a deletion letter on their letterhead signed by them saying "Please delete this account," you can make it vanish off your credit report as if it never was. Note that you may still have to pay off collection accounts, but do it as a part of escrow, where the loan is done before your credit is hit.

There are tools out there that can be used to analyze and tell you how to improve your score or how best to improve it with a given amount of money.

Bankruptcy: Three things determine what kind of credit score you'll have coming out of bankruptcy. 1) Percentage of trade lines you include in the bankruptcy. More is worse, lower is better. Including half your trade lines will not hurt you nearly so bad as including all your trade lines. 2) Number of inquiries. If you've still got one or two open lines you didn't include, you may not need more after discharge and you won't go apply for more. The poor schmuck who includes everything needs more to start a credit history, and is dinged HARD for each turndown inquiry. 3) Post bankruptcy payment history: if you included everything in the bankruptcy, you have no history until you get more credit. Can you say, "Vicious Circle," boys and girls? No payment history is even worse than a bad payment history, but any reports of delinquencies after bankruptcy hits you much harder than if you were never bankrupt and had a late.

Last individual points:

Rate on credit card does not affect FICO score.

Nor does salary, occupation, employment history, title, or employer, although time in line of work is a separate criterion for mortgage providers.

Credit Repair Services cost a lot of money for things you can do for free.

If you are disputing a medical collection (and only a medical collection) it doesn't count on your score.

Caveat Emptor

Original here

This is something that many folks don't understand about the loan market.

The labels "conforming", "jumbo" or, more accurately, "non-conforming" (and "temporary conforming" when we had it) only apply to so-called "A paper" loans, largely underwritten through Fannie Mae and Freddie Mac standards. The reasons for the labels are that they "conform" to Fannie and Freddie's requirements in all particulars, or that they conform in all respects except loan amount. But Loan to Value ratio, Debt to Income ratio, Time in Line of Work and everything else are according to the standards set down by Fannie and Freddie.

Government loans, VA and FHA, do not have conforming and Jumbo amounts. In the case of the VA loan, it's my understanding that they no longer have an explicit legal limit at all - just a limit on what lenders are willing to do given the limited nature of the guarantee. In the case of the FHA, there is a dollar limit, and it's usually even the same dollar limit at the upper bound as the temporary conforming limit. But to treat this as anything but a coincidence that saves brainwork on the part of the Department of Housing and Urban Development would be incorrect. In point of fact, the "regular" FHA limit is different from the conforming limit. Fannie and Freddie are now part of the government, but it's a different part than the FHA.

Subprime loans have none of this; only pricing and policy breakpoints, usually around $500,000, set by individual lenders.

So why is this such a big deal? You ask. Very simply, conforming loans get the best
tradeoff between rate and cost - what laymen think of as the best rates. It's an ambition worth having to have a conforming loan as opposed to anything else. The relationship between everything else varies over time, but you can expect sub-prime to have the highest rate/cost tradeoffs, while whether government beats non-conforming is time dependent. For about the past 18 months, government has been better, but back in 2003 for instance, non-conforming rates were generally lower than government - one more reason why government loans lost favor for several years. Conforming loans are also consistently available, and the government doesn't get involved. This was kind of a big deal several years ago when it could take four months for the government to process the paperwork needed for their loans. If I was told somebody wanted to buy my property with a government loan, there was quite a while there where I would have preferred another buyer.

Loans underwritten through Fannie and Freddie are also the most common sorts of loans out there, and they had the effect of standardizing the A paper market a couple decades back. When it was every lender for themselves, the standards varied by quite a bit. When they all want to sell to Fannie and Freddie, they all started using Fannie and Freddie's standards. Doing so meant they could loan the same money out several times per year, getting an origination bonus each time, rather than loan out the money and then only as it was repaid could they book the income. They could make far more money originating the loan and selling it to Fannie and Freddie than they could by actually holding it in their own portfolio. So-called "portfolio loans" still exist - large amounts of non-conforming loans end up being portfolio loans, which is one reason why they carry higher rates. When there's a ready, standardized secondary market for loan notes, and lenders can "turn" the money several times per year, they're willing to do the loans for less, which is a win for everybody.

Caveat Emptor

Original article 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 shop around, 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, albeit secured by real estate so you do get better rates. 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 pay for it via a higher rate to the consumer, either. If the loan is $50,000, $3500 is seven percent of the loan amount. If brokers try to make it up via yield spread (which is legally considered a cost even though it is not), Section 32 of the Real Estate Code limiting total broker compensation to six percent kicks in, and they cannot do it because theoretical costs exceed what they are legally allowed to make. Note that this limitation does not apply to direct lenders, as their eventual premium on the secondary market is not regulated, 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 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.

One final note for this update: Right now second mortgages are only going up to about ninety percent loan to value ratio, period. Absolutely nobody is doing them for situations with less than 10% equity. I was saying until recently that the only way to get a loan with less than ten percent down payment was a single loan with PMI, but even first mortgages above 90% of value are rare, not subject to much competition right now, and even so they will not go above 95% of value, leaving government guaranteed loans (VA and FHA) as the only way to reliably get low down payment loans. Many municipalities also have first time buyer assistance that takes the form of a second trust deed, but the budget for those programs is notoriously limited.

Caveat Emptor

Original article here

This was originally from February 2007. The situation as to what loans are available has changed quite a bit since then, but the underlying advice is and will remain sound.

Shortly after the original article, things started downhill for lenders very quickly, something I'd been predicting since before I started this website, and about as difficult to predict as gravity. This was when most would-be Wile E. Coyotes looked down, but I'd seen it coming, it was only a matter of time. The lending market having the effect it does upon the real estate market, this had the effect of removing the veneer of believability even for the gullible.

On the other hand, that was then, this is now. The one constant about the real estate market is that it changes - and it usually takes a while for people to catch on because people, especially people who aren't in the industry, think what has happened recently will continue.

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. Either one of these, combined with the costs they assume, is still far less than the closing costs of most comparable loans. 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 (more if you refinance sooner).

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 and correspondents 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

Original article here