Who Else is Getting Ripped Off?

Ahhh … another “Don Rant” for a Friday.

The Rant

Someone I know has a 6% mortgage and responded to an online ad for refinancing and lower interest rate. Seems like a good thing … the “filing fee” of $350 “ish” was paid and the paper work went through and the new rate is 3.625% … still sounds good? PAH!

The Rip Off!

The total original loan was less than $95k and is about 4 years old. The “closing costs” paid by the consumer are/were $3800 and the monthly payment was only reduced by about $100/mo. The new mortgage would be 25 years, thus reducing the life by only 1 year and resetting the “start date” of the note – do the math???

The Math

  1. The monthly reduction in mortgage would take around 4 years to amortize against the fees and costs.
  2. The tax deductible interest will be reduced – raising overall costs by about $500/year.
  3. Over the “life of the mortgage” this will cost more and not less.

The BIG Issue

The big issue here is that any note under $100k has little or no “marketable” value to a lender and so the consumer will wind up paying all fees. There is not a way around this and so the best advice is to just pay it off as it is. There is a huge difference in how easy it is for a lender to sell a note for a larger amount. If, as an example, the note in question was $900k instead of $90k, the scenario would be more like:

  1. The only cost to the consumer would be the cost of the appraisal (perhaps $350).
  2. All other costs and fees would be assumed by the lender.
  3. Then the net effect would be a serious reduction in overall costs.

The Better Solution

  1. First thing is to pay the $3800 to the current mortgage in a separate check labeled “apply to principal balance” (check the proper wording for your mortgage company).
  2. Apply income tax refunds to the mortgage in the same way (if possible).
  3. Make additional payments to the principal on a monthly basis (separate check with the annotation of “apply to principal balance”).

In any case, that deal is/was undone and won't be moving forward. The loan officer should have told this person that it was not a good deal and explained why it wasn't AND never should have done the paperwork.

If you know someone with a small mortgage at a high rate, then make sure they don't fall into that same trap. There is no deal.

 

If you