Who Else is Getting Ripped Off?
Ahhh … another “Don Rant” for a Friday.
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 monthly reduction in mortgage would take around 4 years to amortize against the fees and costs.
- The tax deductible interest will be reduced – raising overall costs by about $500/year.
- 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:
- The only cost to the consumer would be the cost of the appraisal (perhaps $350).
- All other costs and fees would be assumed by the lender.
- Then the net effect would be a serious reduction in overall costs.
The Better Solution
- 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).
- Apply income tax refunds to the mortgage in the same way (if possible).
- 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.