What's the catch? Mortgage - APR related

In My Humble Opinion
1

We got a call today from a rep from our mortgage company. He said that we have the option of changing our fixed rate (5.25%) to a lower rate (3.25 or 3.75 - I forget which).

This is the deal:

We take the lower rate and for 5 years, we’ll save about $200 per month on our mortgage. In the 6th-10th years, the rate will change or remain stable depending on the going rates but will NEVER go up more than 1 point in a year. After the 5th year, we can refinance back to a fixed rate if we want. The mortgage company will not charge any fees for the paperwork or lawyers or any of the other necessary things to set this in motion. The paperwork is being sent out and if signed and returned quickly, can be processed and in effect for January 1. We will not have a January mortgage payment.

So the rundown:

  1. Save $1400 by not having a mortgage payment in January.
  2. Save nearly $12000 over the next 5 years.
  3. Able to refinance after those 5 years if we can find a better deal somewhere else. Even without refinancing, the most the 6th year will be is 4.75% so we’d most likely wait until the 7th year before doing anything.

My problem is that there seems to be a whole lot of good here and no bad. My experience with this kind of thing is that there’s always at least 1 bad. So, what am I missing?
If it matters, we have had this mortgage company for a while. When my boyfriend refinanced his first place in 2003 or 2004, this is the company we went with. We kept them for the new house because we like them. They’ve never given us a reason to dislike them.
Without actually seeing the documents (they’re not here yet), from your experience, what kind of nasty surprises are in store for us?

2

I forgot to mention…he said they’re offering this “great deal” because we are great customers who always pay their bills and because we’re long term customers. He said that we’re the kind of customer that gets stolen away by other mortgage companies so the offer is to keep us.

Is he buttering us up to make us feel the warm fuzzies or is it possible that this really great deal is legit just to keep good customers?

3

I’ll be watching this thread with interest, because my husband and I are great customers to the banks we deal with, too, and they still manage to screw us over regularly, not call us up and offer us a great deal that works wonderfully for us with no downside.

4

The risk is that it is still an adjustable rate mortgage and they may just you some sizable closing costs to make the switch. Judging from recent history, adjustable rate mortgages are generally bad news unless you know for a fact you will be moving before the five years is up. Rates are unusually low right now and it is a great bet that they won’t be anywhere near that low in five years. You also probably won’t be able to keep anything near 4.75% after year 7. A 1% adjustment per year can add up fast and your options will become more limited. It will also cost several thousand dollars to refinance again at the end as well so a good percentage of your savings will be taken away going in and coming out of the deal.

That isn’t to say they didn’t give you a good suggestion but don’t take them up on this specific offer. Fixed rate mortgages are being offered at very low rates right now and you should consider refinancing to one of those at well below your current rate. If you could refinance to a 15 year fixed rate mortgage, you can come close to the rate of their adjustable rate offer with no risk. Ask them about their fixed rate options and then shop around. It is easy to research on the web.

On reread, I see that they claim they won’t charge to make the switch on this offer. I would question that backwards and forwards because I don’t believe it. It costs them significant money to do this and they will try to make it back somehow.

5

The only thing I can think of is that I cannot see anything in your OP that confirms the new lower rate is fixed (for 5 years) rather than variable. If it is in fact variable, then the obvious downside is that they could increase the rate (by up to 1 percentage point each year, by the sounds of things) so that you could in fact be paying more in 3 years’ time (in the worst case scenario). If this is the deal, I am less surprised at the offer because presumably the bank thinks that rates are likely to increase in the next 5 years and they want to get you off your current fixed-rate deal. We actually had the opposite situation when we took out a mortage in January next year - the premium for the 2-year fixed rate deal (over the variable deal) was such that I felt it was best to gamble on the variable rate, on the assumption that interest rates are not going to go up by much. So far, I’m delighted with that choice :).

On the other hand, if this lower rate is in fact fixed, I cannot see the catch based on what you posted - the only thing I can think of is that although there are no fees or penalties now, there may be large fees/penalties if you do decide to refinance after the initial 5 years. You should also check whether your ability to make early repayments is affected under the new terms (if this is at all likely to be relevant). Good luck!

6

Did they say they wouldn’t charge any fees or that you wouldn’t have to pay any fees?

Subtle difference but I’ve had sales people use “No fees to pay” when they meant they were adding them to the principle of the loan.

7

Last month I refinanced my house. After paying 7 years on a 30-year 5.325% fixed-rate loan, I now have a 15-year 3.75% fixed-rate loan. I opted for fixed rates both times because I assumed rates would only rise and did not want a higher payment with it adjusts.

8

Right. Now, I’d stay away from any ARMS and go for a 15year Fixed. OP, you can likely get a lower rate on your fixed.

9

He was very specific when he said that THEY (the mortgage company) would pay all the fees associated with this.
He was also very specific that the 3.75% rate was for 5 years and that only in the 6th year would it change, either up or down depending on the market but not more than 1 per year. He said that the last 3 (or maybe 5?) years, the rate has either gone down or stayed the same but that he can’t promise it will continue to do that.

He was also very specific that the WORST it would be in 6 years is 4.75% but that depending on the rate in the 6th year, it could be much lower than that.
He didn’t say whether or not refinancing after 5 years would cost us anything other than what it normally costs to refinance.
I forgot to mention, he said something about FHA blah blah blah, you have an FHA loan blah blah blah, allowing us to offer you this new interest rate blah blah blah, chose you because you’re such good customers.

So, the gist that I got from that was that someone else gave them money (or some incentive) for giving FHA loan customers this deal and they chose us because we’re so awesome. :smiley:
Basically what it boils down to is that this place is more expensive than we were expecting - In the last 8 months, unexpected household, automobile, and medical emergencies have eaten away over $6000 in safety money and we could really use a break, preferably before the bank account is empty. Not having a mortgage payment in January and cutting the mortgage by nearly $200 per month would be a major breath of fresh air (that and the new assessed value of the house should drop our payment by about $20 per month).

So, we would really like to take advantage of this but NOT if it’s going to end up doing more damage than good.

10

Which is what I did. :wink:

.

11

Mortgage rates are pretty well at rock-bottom, they have no-where to go but up.

Look into a Fixed re-fi.

12

Ignore everything they said, because most of it is lies. They don’t give a shit about you as a customer. They’re not rewarding you for anything. They’re not paying your fees because they love you. They want you to change your mortgage because they think they’ll make more money in the long run. They don’t know, of course, but they’re willing to bet on it.

And that’s what APRs are right now, a big gamble. It’s pretty much impossible that interest rates will ever be lower than they are now, so the only question is how much they’ll go up. Maybe only a little, in which case you’ll come out ahead, maybe quite a lot, in which case maybe you’ll lose your house. Can you afford to pay 8% seven years from now? It’s not an impossible number.

Like others have said, look into a fixed rate refinance. And shop around – credit unions may offer better rates and fees than your bank.

13

Concur with what everyone else is saying.

It sounds like the bank is offering you a 5-1 ARM where it’s fixed for 5 years, and then floats.

Right now, my credit union is offering a 5/1 ARM at 3.25%. If your bank is offering 3.75%, that might be their way of covering the closing costs on the place.

I’ll be a contrarian though. I’m not actually saying RUN AWAY from the offer - depending on your situation, it might be a good idea.

Basically, only if there’s a HIGH chance you’ll be moving within the next 6 years or so, there are truly no closing costs that require you to pay out of pocket (or that get added to the principal) - AND you pay extra on the mortgage to at least equal your current principal payment (since the new loan would reset the amortization clock). You want to make sure you’ll be better off, asset-wise, in 5 years than you are now.

Also look at what the payment would adjust to after 5 years assuming worst case, then after 6 etc.

You need to know what the overall cap is - e.g. can it ever adjust to more than 10%.

The one thing I actually like about ARMs is that if you prepay some on the principal, then when it adjusts, it adjusts on the lowered principal. Even if the rate stays the same, your payment might go down a tad, which gives you an immediate cash-flow benefit. Prepaying on a fixed loan - while it saves you money in 20+ years - doesn’t help your current cash flow.

The odds of having a fixed-rate loan at 5.375% available in 6-7 years seem low (then again, I’ve been wrong before). So conceivably you could be looking at a much higher payment then, whether you refinance then or stick with that ARM.

Overall though, I don’t see a huge benefit to going with this offer. I’d actually say that you might be better off looking at a current 30-year (or less) fixed-rate loan. Do the numbers and see how that would affect your payment. You might find a 20 year loan to have almost exactly the payment you’re now paying on your current mortgage - with a 5 year faster payoff so considerable savings there.

We’re in the middle of refinancing from 5.125% to 4.25% (rates have crept up a tad since we locked in; if we locked in today it would be 4.375%). At our credit union, we could lock into a 20 year loan at 4.125%.

14

This is most likely bullshit. Yes, when you refinance, you usually wind up skipping a payment, but that’s only because you wind up making most of that payment at closing. In general, your monthly mortgage payment covers the interest for the month that just passed. When you refi, your current bank will come up with a final payment amount, that includes the principal plus the interest from the first of the current month to the date of closing. Then, your new mortgage company will want you to give them enough money to cover the interest from the date of closing to the end of the current month. So all you really “save” is the amount of principal in the monthly payment. If they claim you won’t need to come up with cash to pay that interest, they’re just tacking it onto the new loan amount, which is generally a bad idea - you’ll wind up paying at least double that over the life of the loan.

For example, say you have a mortgage at 5%, and after your Dec 1 payment your principal balance is $200,000. You want to close a refi on Dec 20. Your current mortgage will require (.05 * 20/365 * 200,000) = $547 interest, in addition to the $200,000 principal, to payoff the loan. Say your new rate is 3.5% - the new company will want (.035 * 11/365 * 200000) = $210 at closing to pay the interest from Dec 20 to Dec 31. Then your first payment will be Feb. 1, but you’re out of pocket (or had to borrow) an extra $757 at closing.

Mortgage rates really can’t go much lower. The odds are they will be higher (perhaps much higher) than that.

Bullshit, bullshit, bullshit.

I’m sorry about the troubles you’ve been having, but based on the line he’s feeding you, I’d walk away from this. Especially if he’s trying to get you to close quickly to “save” a mortgage payment. At the very least, look very, very closely at the good faith estimate (which he’s by law required to provide you) to figure out where all the money is coming from.

15

I’m signing the papers on a 15yr fixed refi at 3.25% tomorrow afternoon. Like others I am deeply suspicious of adjustable mortgages - if I want to gamble I’ll buy a $1 lottery ticket, I won’t risk my house.

Another vote for shopping around to check on best rates on a fixed refi. My broker had no-cost options (slightly higher rate but still below that 3.75% you were quoted), you can often roll the costs into the mortgage so your monthly payment is a bit more but there’s no out of pocket expenses, etc.

16

Another downside to this deal is that you are apparently counting on being able to refinance in 7 years. However, what if rates are sky-high then? When if the appraised value of the house has gone down?

This is exactly what got so many homeowners in trouble the last few years. They got all kinds of exotic mortgages (including interest-only loans), counting on being able to refinance in a few years. Then when the bottom dropped out of the housing market, their houses didn’t appraise high enough to be able to refinance. Unable to refinance, and with interest on the original loan going up, many people lost their houses to foreclosure.

So in your case, what if you can’t get a new loan? The bank could continue to raise your interest rate by a point a year, until the 10th year of the new loan, you’re paying 8.75%. And what happens then? Does it stay at that rate, or does it continue to float? Are there any limits at that point on what the interest rate can increase?

Or is the entire principal due then? :dubious:

I would never, ever, get an ARM. YMMV.

17

Not sure whether you’re “bullshitting” the prediction that it could be lower or the entire statement, but if the terms of the loan really do stipulate no more than 1 point change per year (as ours does), it is true that 4.75% is the worst-case change in the 6th year.

18

He said that it wont go higher than 5 points total and no more than 1 point in a year so the worst case scenario would be 8.75 in 10 years.
Whether or not we’d even be able to get a better rate in 7 years has been our primary concern so far.

I appreciate all the input so far. When the paperwork gets here and we can see all the details in writing, your comments will help to make the final decision.

19

Yes, he was very clear about that point. He went so far as to say that in the worst case scenario, the 7th year would be when we’d want to refinance since that’s when we would have the potential to go over where we are now.

We have no interest or intention of leaving this place in the next 5 years, or ever. We love this house.
There’s no way we can know what the 7th year will bring. The rates could be good or bad. I could be in medical school or working. He could have lost his job have been made chief engineer. We have no idea what is going to happen and that’s what worries us.

20

I was bullshitting the “it could be much lower” part. Specifically the “must”.