I get offers in the mail for mo’ better mortgage terms. I see Ditech, etc. commercials on TV offering better mortgage terms. I see banner ads on Yahoo for better terms.
How can I cut through the BS and the scams to come up with a real, workable plan for obtaining a better mortgage?
Some background info:
House was purchased exactly one year ago. Barely any equity is built up at this time.
We put nothing down on our house – the entire purchase price was financed. This sounds bad, but after Katrina, this area had a severe rental-units shortage, and rents spiked in a big way. I figured we had to sell out financially to get into a house with this rental market, especially with my wife pregnant with our second child.
Our credit rating, charitably, is at the low end of mediocre. There are people out there (probably lots) in worse shape credit-wise, but I wouldn’t call credit rating a feather in our cap.
So … do these great deals require awesome credit and deep equity? Or are there services out there for the borderline financially-irresponsible?
Anything below about 5.6% is going to be some sort of snakeoil trap. If you read the fine print on those fliers advertising really low rates, you’ll find things like that the teaser rate is good for a short time (I’ve seen ones where the rate is 1.99% for exactly one month, then it pops up to the LIBOR or prime rate plus some percentage, or that it’s a negative amortization loan. These are the real traps.
Just as an example of what a negative amort loan can do - let’s assume you’re buying a (for here, at least) impossibly cheap house for $450,000. Today’s rate on a normal 30-year fixed “jumbo” loan is 6.625%.
Monthly payments at 6.625% will be $2883. The payments at 1.99% will be $1661. Now, here’s where negative amortization gets ugly. If you’re paying that $1661 per month, an amount somewhere in the neighborhood of a normal payment minus your 1.99% payment will be tagged onto the loan balance - $1222 per month. In a year, you will owe nearly $15,000 more, regardless of what the value of the house has done.
Yes, you’ll have more cash in your pocket, but your loan to value ratio gets really screwed - after a year, your $450,000 home will still be worth $450,000, but the loan balance will be $465,000, and it only gets worse with time.
With regards to credit scores, the industry revised their idea of “subprime” to be anyone with a FICO score of less than 640.
I just posted this in the other thread, but I think it applies here as well
And don’t forget one of the tricks…
Let’s say you have a 150,000 mortgage and the payments are $1200/mo.
You get a letter saying they can refi you for 150,000 for only $600/mo for the same term (30 years). Most likely, what they are offering you is an interest only mortage. Sure you’ll only be paying $600/mo, but at the end of 30 years you’ll still owe $150,000 and they’ll be expecting to collect the balance now. Oh, and that $600/mo will fluctuate with the prime rate. Interest only loans (or ARMS) are designed for people that are planning to sell their house within the next few years and are willing to sacrafice equity in the house for lower payments.
I think you need to go to some people (and websites) and not let them come to you. Ask them about changing interest rates, about payment times, about principal payments. You won’t be able to lock in a rate (they’ll no doubt try to get you to) but that’s fine these days. Then go back home and plot payments over ten years under a variety of scenarios.
Different mortgages will have different levels of risk for you. Only you can tell which is best. Looking at monthly payments is probably the easiest way of comparing options.
As for your post - no one has any equity built up in a year just from paying on the house. Don’t worry about that. You didn’t say if you have an adjustable or a fixed mortgage, and, if an adjustable, how long you have before the rates change. You might be best off staying put. One thing I like about fixed rate mortgages, if you can afford them, is that you can stand pat until rates go down enough to make locking in a lower rate worthwhile. But they may not work for everyone.
Just from the advertising, I’m getting the impression that mortgage brokers are suffering as house sales decrease, and as there is less reason to refinance. But I’m in the Bay Area, which is far from normal.
Thankfully, we’ve got a fixed-rate mortgage. I absolutely won’t take on an ARM just to reduce monthly payments.
I just have got the impression that there’s bigger, better, and more sensible mortgage deals out there for the taking if I only knew where to look and how to look. One thing I was hoping for was that competition between mortgage lenders could somehow be exploited.
The most common, no frills, safe bet type mortgage for people buying their first home is the standard 30-year fixed rate at whatever the current going rate is.
Currently it seems to be about 6%.
It’s safe. You know when it will be paid off. The interest rate is locked in for the life of the loan. Very simple and straight forward.
Now assuming you already have a loan of this type, and your interest rate is at or pretty close to 6% there would really be only two circumstances where it would be smart to refinance.
The going interest rate for a 30-year fixed drops by at least .5%.
Droping from a 6% 30-year fixed to a 5.5% 30-year fixed will save you over $17,000 over the lifetime of the loan ($150k loan). Be aware however that anytime you refinance there are closing costs. These run typically 3-5% or $4,500-$7,500.
Your income increases to a point where you can afford higher payments and a shorter term.
$150k 30-year 6% fixed loan will cost you $324K over the lifetime of the loan.
$150k 20-year 6% fixed loan will cost you $258K over the lifetime of the loan.
Yes your payments will be bigger but you end up saving $66,000. If you can afford it, do it.
Any other junk mail you get promising sub-prime rates are teasers. Yes they may get you lower payments NOW but in the long run you will be paying a LOT more total on the loan.
Well the “sensible” deals out there are the fixed rate loans. And unfortunately you won’t find competing lenders with these type loans. They all stick around the national prime rate.
What they compete with are the complicated sub-prime adjustable “non-sensible” deals.
As long as your mortgage doesn’t have any early payment penalties, you can do this yourself by adding a few more bucks to the monthly payments and making a bulk payment against the principal at the end of each year. Do the math using MS Excel’s built-in amortization template (or roll your own) and do your own “refinancing”. Skip the closing costs and still get out of the mortgage early – with the power of MATH!
A friend also advised me to pay a large lump sum for my first payment and thereafter pay the principal on each payment a month early. So for July 2009, you’d pay July’s principal in June, July’s interest and August’s principal in July, and so forth. Apparently it saves quite a bit of money, as each piece of principal earns one less month worth of interest than expected, and so the payments at the end are on a much smaller overall debt. Same principle, different method, I think.
Our realtor discussed a similar plan with us when we bought the house. The problem for us is that our finances are too tight – we don’t ever have extra money to kick in to anything. Thus the desire for lower mortgage payments … if they’re our there for the taking and if they’re relatively painless to acquire.
The real killer has been homeowner’s insurance. The free market down here in Katrina-stricken territory has failed miserably, as no private insurers are writing policies down here. Insurance for a house like ours cost $1,200-1,500 in early 2005 … now it’s $5,000 through the state’s insurance clearing house. The first year’s insurance premiums were added into the price of the house, but I’ve recently had to renew out of pocket. The squeeze is on.
Yeah, all that “competing” is just marketing. It’s not offering more sensible mortgages.
It’s just coming up with terms (marketing-wise) and terms (mortgage-wise) to get you to switch your mortgage to their company, fold in the closing costs which you now have to pay back with interest, and get you sucked in with low initial rates.
One guy is offering you 2% for 3 years, and one guy is offering 3% for 2 years and blah blah blah and NONE of them make as much sense as a regular fixed rate loan over the long run.
If you need to get into these crazy re-fi’s to save your house, you gotta start looking at ways to get out as painlessly as possible. Entering into creative mortgages isn’t the answer.
If you can’t make fixed rate 30 year mortgage payments, you really can’t afford the house. You don’t want “agressively decreasing mortgage payments”. You want “aggressively decreasing outstanding principal”. The two are at odds with each other.
I’m remembering back to early 2002, a few months after 9-11. Several homeowners I knew were making these seemingly-amazing re-fi deals, taking advantage of low interest rates and all.
Maybe I’m stupid … but I bought this house and took on the less-than-comfortable mortgage payments at a bad rate with the intention of refinancing early in the mortgage. Within the first 5 years. I thought it would be easy and relatively cheap.
The homeowner’s insurance is the killer now … that’s essentially adding 30% to the monthly cost of owning this house starting next month. Our state lawmakers and Congressmen are working feverishly to pass laws that somehow bring private insurance back to Louisiana. I’m hoping the post-Katrina panic ends withint the next two years, and that upcoming legislative involvement bears fruit, and $2500/year homeowner’s insurance becomes a reality. By then, my wife will be able to return to work, and our whole financial situation improves markedly. Just gotta get through these lean years.
Yeah, I bought a house in early 2001. Rates dropped in 2002, and I refi’ed to a 15 year fixed for a similar payment.
But, I feel more lucky than anything. The things that make a lot more sense after being in your house for 5+ years are not really known to people entering into their first mortgage.
Interest only, and adjustable rate sound a lot more sensible until you realize they cost you money in the long run; they’re VERY heavily marketed.
Good luck with that. Insurance and taxes are easy to overlook or think that they’re just minor add-ons, but they can be many hundred per month.
I’ve become more financially savvy over ht elast few years ,but i’ll confess to great ignorance when I bought my house. Like I said, I feel more lucky than smart about it – it easily could have turned out worse.
It can’t hurt to look around at the sort of rates you might get. If you don’t already know your FICO score, it may be worth plunking down the 15 bucks or whatever that costs, and that’ll give you some wiggle room.
You could get a “no closing cost” mortgage (though I think the fees are rolled into the mortgage rate) or one where there are closing costs, but they’re added to the principal balance. I don’t love either of those options personally because you’re paying that few thousand over the life of the loan, and it will cost more in the long run… HOWEVER it may save you enough monthy right that it’s an OK idea.
And… don’t entirely rule out a variable rate loan. One that’s locked in for the first 3/5/7 years. Yeah, your payment will jump a lot at the end of the intro period, but it still could be the right thing for your situation (wife returning to work etc.). Plus if you do have a little extra cash to throw at the loan now and then, that reduces your payment at each adjustment. You just have to crunch the numbers (and obviously avoid anything that might negatively amortize, as others have noted).
If you are at an 8% fixed 30 right now it may be worth your time to refinace to a lower rate fixed 30. I guess it depends on your credit but it looks like the going rate is 6%.
No real need to search out a “deal” since every bank will have a similar rate on their 30-year fixed and they all use your same credit report.
Droping from 8% to 6% will save you about $200 a month on payments and $72,000 on the loan. Subtract your $3-$5 thousand in closing costs and you still come out ahead.
I needed to repair my credit and pay off a couple of high-interest cards after surrendering a vehicle that turned out to be a lemon. I took my former Bank of America mortgage to my credit union and refinanced to cover 3/4 of those debts. My monthly payment is $100 more but I don’t have to worry about that $6000 POS nor the $200/month credit card payments that stemmed from keeping that POS repaired.
My experience has been, get to know the loan officer at your local bank, the one where you do your everyday banking, or the one that has your current loan. Call them every 3-6 months or so, and check where current rates are at. Let them know this is what you are doing. Remind them that they wrote your current loan and that you called 3 months ago. Mention that you are looking into refinancing. Before you do this, go to a couple of websites of established banks, and see what they are offering. Wells-Fargo is currently advertising, online, 6.5% on a 30 year fixed conforming loan (under $417k). Use this number as a starting point. Last time I checked, the end of March, the rate I got from the loan officer was about 1/4 - 1/2 of a point below what was being advertised online.
These people get paid on getting you a loan. At least for our loans with Wells Fargo, they don’t get paid on me keeping my current loan. It’s all about a new loan. Tell them what you are looking for, but be realistic. If the reputable banks around you are offering 6.5%, don’t expect to get 5. Maybe you can get 6% with closing fees, or 6.25% with no closing fees. Maybe a 15 year is at 6 1/8%. Ask about rolling closing costs into the loan, if you are going to be in the house for a while. Ask the loan officer what they can suggest. Remember, they are salespeople selling loans.
It’s gotten to the point where if I don’t call him, my loan officer gives me a call. We chat for 5 minutes, he gives me the current rates, we talk about some of the new options and about his honeymoon. Then we go on our way.
Check out lendingtree.com It serves as a clearinghouse for mortgage lenders. My son entered his information when their local bank was jerking them around with multiple rate quotes and long, long closing times. They received 4 or 5 different quotes within 2 or 3 days. They ended up with a lender who closed in 2 weeks at a better rate than any quoted in the local area. I think it was with no points up front, but I’m not sure on that.
One thing to remember is that there aren’t really any local lenders anymore. 99% of mortgages end up being sold by the originator, so they have money available for the next loan.
