If you are going to be in your house long term, or forever, prepaying your mortgage is a great idea if you can afford to pay extra. The best way to save money on debt is to not have it! But many people do not realize that prepaying a fixed rate loan does not reduce the monthly payment. Prepaying a loan simply shortens the term. So prepayment builds equity faster, and ends the loan sooner, so you save money by having the loan for a lesser amount of time.

Most mortgages offer the ability to prepay principal early without penalty. Early payments of part of the principal will reduce the total cost of the loan and will shorten the amount of time needed to pay off the loan. But paying an extra $250 a month, or paying off a big hunk of the mortgage all at once, will not reduce the monthly payment on a fixed rate loan.

However, on an ARM (adjustable rate mortgage) loan if you prepay some of the balance, when the interest rate adjusts the loan resets, and the new monthly payment is based on the most recent balance. But since it seems most ARM loans these days are 5 or 7 year ARMs, where the payment is fixed for many years, an interest rate change and reset may not occur at the same time as a principal pay down. And most loans it seems are fixed rate, especially with rates so low these days. Not many people are taking ARM loans now.

You can try different prepayment scenarios by using my Mortgage Payoff Calculator.

So please do pay down your loan if you can, I do. I have owned my home for 6 years, and started paying it off on a 20 year amortization instead of a 30 year right from the start. I only have 14 years left as a result! Now if I only had not bought at the height of the market….oh well.

Going dark. All salespeople have experienced this, no matter how good. You educate a potential client, you spend hours and hours with them answering questions, you create a relationship, and you truly seek to help them to earn your commission. And then it happens, they go dark. No contact. No return calls. No email reply. No nothing. It is eerie. You start to wonder what you did wrong. Did I say something wrong? Did I not return a phone call? I thought we were about to close a deal! Where did they go? Are they OK? Are they sick? Maybe they are just out of town, yes, that’s it, they are out of town. For three months? No, can’t be. After enough time you realize they went elsewhere with their business, likely to save a few dollars, and they feel guilty that they milked you for countless hours of free consultation and work only to go elsewhere to save a little. They went dark because they are too embarrassed to tell you directly that they have gone elsewhere after running you ragged.

Here is my issue, and I am obviously going to side with the salespeople since I am one: FIGURE OUT WHO YOU WANT TO WORK WITH FIRST, AND THEN USE THEM FOR HOURS AND HOURS, AND MONTHS AND MONTHS, AND MAKE THEM EARN THEIR FEE!

It is pure laziness to use a service provider only because they are professional enough to always return your calls, provide excellent information, and then only later decide that its time to shop price right before its time to commit. This problem happens so much, that if people would stop this abuse, the GDP would skyrocket 2% per quarter for a year, due to all the increased productivity by salespeople using their time for productive efforts instead of for clients who abuse them and then go dark. I’d guess I waste 15 hours a week, which is 780 hours a year, which is 19,500 hours over the 25 years I have worked as an adult. Do you have any idea how much money that 19,500 hours is worth? It’s a lot. I could retire on it.

Dear clients, a request from all service providers: Stop. Slow down. Think. Ask a lot of questions about experience, unique abilities, price, service, teamwork and background; and then make a choice. We have no problem with you going elsewhere for someone you did your research up front on and think is a better provider. But don’t go dark and go elsewhere with no explanation. Do the right thing and pick wisely up front. Then, and only then, should you start to ask a service provider questions and to do things for you.

And if you have used a service provider recently and gotten good information only to go elsewhere later, don’t go dark. Be professional, contact them and explain your actions, apologize for not deciding sooner. And if you think they deserve it, tell them you will remember them and will try and steer referrals their way in the future.

The Good Faith Estimate (GFE) is one of the worst ways to compare lenders. I must get asked for a GFE 10 times a week, and 10 times a week I try and explain that using a GFE is the wrong way to compare lenders. Below are a few reasons why:

The GFE is one of the most poorly designed forms, designed by government bureaucrats, ever conceived. There was a survey done for a large bank that found that 53% of buyers who looked at the GFE spent very little time doing so. 26% either never looked at it or don't know whether they looked at it. 49% of buyers said the GFE disclosure was too complicated, "a waste of time" or they weren't sure. Just 37% rated it useful. The form used to be a one page form for decades up until recent changes mandated by the Federal Government. Now the form is three pages, somehow with less data on more pages, and its way more confusing than before.

And the most important thing is that when comparing the loan options of different mortgage lenders, you have very few things to compare. What you should be asking is simply:

-what is the interest rate?
-what are the lender fees?

That is it. There is no need to even see a GFE. The GFE has a lot of other fees and monies on it, that are not dictated by the lender. There are fees that are controlled by a title company, or by a state/county/city (like property taxes or recordation tax). For example:

Loan Option #1
30 Year Fixed Rate, 4%
LENDER FEES:
0 points
$895 underwriting fee
$400 loan processing fee
$450 appraisal fee
OTHER:
$800 title company fees
$2,500 title insurance
$3,200 property tax escrows: 8 months at $400 a month.
$1,500 per diem interest: 30 days worth at $50 per day.
$2,000 recordation tax to the county
$11,745 total

Loan Option #2
30 Year Fixed Rate, 4%
LENDER FEES:
0 points
$895 underwriting fee
$400 loan processing fee
$450 appraisal fee
OTHER:
$750 title company fees
$2,300 title insurance
$2,400 property tax escrows: 6 months at $400 a month.
$500 per diem interest: 10 days worth at $50 per day.
$2,000 recordation tax to the county
$9,695 total

Loan Option #2 is the best one, correct? You should pick the lender offering option #2, right? Congratulations on being a smart shopper, right? No. Wrong. These two loan options are exactly the same. If you chose option #2 you chose the better salesperson, not necessarily the cheaper option or the better mortgage professional. Here is a breakdown of why:

30 Year Fixed Rate (the exact same loan type is being offered)

4% (the interest rate is the same on each option)

0 points (the cost is the same at 0 points on each option)

$895 underwriting fee (this fee is the same for each option)

$400 loan processing fee (this fee is the same for each option)

$450 appraisal fee (this fee is the same for each option)

$800 title company fees (there is a 10% variance for mistakes allowed on title fees, and this is a fee the title company controls, not the lender, the lender can fudge it down as happened in option #2, and that will help the lender make his option sound as if it were the cheapest).

$2,500 title insurance (there is a 10% variance allowed on title fees, and this is a fee the title company controls, not the lender, the lender can fudge it down as happened in option #2, and that will help the lender make his option sound as if it were the cheapest).

$3,200 property tax escrows: 8 months at $400 a month. (How many months of property taxes need to be collected to establish the escrow account is a big guesstimate, it will vary depending on what time of year you are settling, and is not one of the fees a lender is responsible to be accurate on; so you can fudge this quote downward, but it may indeed be a higher figure in reality, and the buyer will have to pay that higher figure, but you will have chosen a lender based on a fudged number).

$1,500 per diem interest: 30 days worth at $50 per day. (same concept as with the above on the property tax discussion).

$2,000 recordation tax to the county (this is a fee that most lenders have to be accurate on, and are good at being accurate on).

All you have to ask a lender is what is the rate, and what are the lender controlled fees, and that is it. That is all you need to know when deciding what lender to use. Then, when you choose a lender, you can expect a complete GFE, but realize it may not be anywhere near accurate due to the above reasons. If you really want to compare apples to apples on the loan choice, a Good Faith Estimate is not the tool to use, because the GFE has other costs in it that are not in the control of the lender. It is also a very confusing form, made more confusing in the last few years by the Feds.

Simply compare rate, appraisal fee, document preparation fees, and any other lender fees. Then always consider the experience of the individual loan officer, what type of lender you are working with (use of mortgage brokers and big banks is drastically on the decline, while use of direct lenders has been the preferred choice), what the estimated turn times are, whether or not your source was referred, and whether or not you have a general comfort level with the loan officer you have been talking to.

It seems we are doomed to repeat our mistakes. Mankind has been jumping over bushels of hundred dollar bills to reach the quarter in the corner, since the dawn of currency. I have a number of new stories every week, of consumers who look so very hard for the best deal, they overlook the fact that they may be dealing with a disreputable provider, or may not get what they expect, or may be getting a promise that won't be kept, or even worse; may be getting a price quote from someone that has no idea what they are doing. But boy do we consumers love a deal, and boy do we love to believe what we are promised.

I had a client call a few months ago and they wanted to refinance their condo. They started the conversation by grilling me on price, and I responded that I needed to know a lot of things before I could quote a price, like credit score, appraised value, debt ratios, etc. There are numerous variables that go into pricing a loan, but all they wanted to hear is what my most aggressive price was. Somehow I could not get them to slow down and hear my logic. After asking about some of the characteristics of the loan, since it was a condo, I tried to get answers to important questions that all lenders would need the answers to, like:

how many units are owned by investors versus primary residents?
how many unit owners are delinquent on dues?
does one unit owner own more than 10% of the units?
does the condo have 10% of the annual budget set aside in a reserve account?
and more…

He did not want to review these questions, he just wanted "the best price you can quote me." Then, he wanted to know if rates went down after he locked in a rate, if he could get a better deal! And also wanted to know if we'd pay the appraisal fee! Obviously this was going nowhere, and I ended the conversation, as I could not provide an accurate price quote without ALL the details. And I think if the conversation went much further, he would have been asking me if I would commit to coming to his condo once a week to clean his kitchen, mop the floors, scrub the toilets, and lend him $20. He wanted the moon, and more. This was a very unreasonable individual, I had surmised.

Then, about a month later, I saw in an email my two favorite words"

"Remember me?"

The rest of the email, from the same client I could not get answers from, went like this:

"I wanted to refinance with you a month ago, but you weren't able to quote me a low rate, and I went elsewhere. Unfortunately, my loan app fell through at the last minute with the lender I went with, because they had problems with the 11.9% of the units in the development still held by the developer. Anyway, would you accept my applications now?"

Yes, it was music to my ears. But, no, it did not make me happy. I was upset that yet another client went racing ahead to what he was sure was the "best deal" without getting all the answers he needed in advance. He jumped over a bushel of $100 bills (in this case savings of $300 a month on his mortgage with me) to get the quarter in the corner (an alleged better deal, that could not even be done, it turns out).

Had he slowed down, and let me ask all the questions I wanted to, there is one possibility, in this scenario, to get a loan through where one unit owner owns more than 10% of the units in the building. But I can't release that secret here

In the end, in our desperation to secure the last 1/8% in rate, the last $100 in closing costs reduction, and the last word in getting the best deal; we consumers tend to overlook:

service
reliability
realistic goals
and experience

I wish I could do something besides blog occasionally to remind people that they are only putting themselves in a bad position when they go for the rock bottom deal. Usually, those deals are never delivered anyway. Please be careful, ask a lot of questions, and think about other characteristics of your service providers besides price. You'll thank me.

When you buy a new home, or refinance, it can be a nervous and exciting time. And getting excited and nervous causes people to over analyze and sometimes make poor decisions. Sometimes a client will ask for a lower rate, by paying discount points. Each discount point is 1% of the loan amount, or $1,000 per $100,000 in mortgage. It sounds great to get a rate that is a half percent lower than what you hear about in the news or see online (and shopping for rates online is not accurate, see this story for more on that), but what about the costs?

You have to look at the recapture period on points. Many times points do not make sense for most of us, and the lower rate ends up only being a psychological boost, and not a financial one. It seems we always want to find a deal that is "a little bit better." If rates are 6%, we want 5.875%, or why not 5%??? But what if rates were 1.75%, would we be angling for 1.5%? Yes! It is human nature. If rates were .5%, we'd ask the lender to give it to us for free.

Below is a typical example to see what paying points gets you:

Loan option #1:
3.625%, 30 Year Fixed Rate
$500,000 purchase price
$400,000 loan amount
2 discount points = $8,000
(each 1 point is 1% of the loan amount)
400k @ 3.625% = $1824/month principal & interest payment

Loan option #2:
4.125%, 30 Year Fixed Rate
$500,000 purchase price
$400,000 loan amount
0 discount points
400k @ 4.125% = $1938/month principal & interest payment

Most people are so happy to focus on the lower rate of 3.625%, they ignore the hard analysis of the 4.125% loan offer. The points for the lower rate are an extra $8,000, but the savings are only $114/month. To spend $8,000 to save $114/month takes 70 months to recapture the cost of the points before you even save any money! That is almost 6 years. And the banks know the average time someone holds a loan is under 5 years, so on average, the banks win on points all the time. Whether people sell their house and move, or refinance, the average mortgage won't be around long enough for points to pay off.

The question should simply be one of recapture period. What am I spending, and what am I saving? So, should you spend $8,000 to save $114/month? For most of us, who seem to refinance or move before 5 years comes and goes, I'd think the higher rate is the better deal. The answer for each of us as individuals lies in doing our own analysis.

Anyone that reads my blog knows that in general I am not a fan of Interest Only (IO) loans. I have said before that an IO loan is like putting your mortgage on a credit card. But on a refinance it may make sense if you have already built a lot of equity, are more interested in savings than equity building, and know you are not going to live in the property forever so have no interest in getting the mortgage paid off.
I had a client tell me recently that they would definitely be out of their house within 5 years, and didn't think they'd have trouble selling it, so they thought a 5 year IO ARM would be perfect. I asked them the details of their loan:

1. When did you buy the home? bought it in 2007, refi in 2010, another refi in 2011
2. What is the current rate on the 1st trust mortgage? 5 year ARM at 3.25%
3. Do you have a 2nd trust/equity line, and if so at what rate? no
4. What did you originally pay for the home? $570,000
5. What do you believe the home to be realistically worth now? $600,000
6. What is the balance of the loan amount/s? $400,000
7. Is this home your primary residence, a rental property, or a vacation home? primary residence
8. What type of property is it, condo, single family detached, rowhome, 2 unit, 3 unit, or 4 unit? SFD

I gave her the following options, so she could compare:
400k new loan @ 4.125% 30 year fixed = $1938/month
400k new loan @ 3.75% 30 year fixed = $2908/month
400k new loan @ 3.25% 30 5 Year ARM = $1740/month
400k new loan @ 3.50% 5 year IO ARM = $1166/month

So you can see the IO ARM offers the lowest payment, by far. The client already had $200,000 of equity built up, and was more interested in saving the almost $600 a month the new 5 Year IO ARM offered over her current regularly amortized ARM, even though the rates are a bit higher on an IO ARM.

And that brings me to the conclusion, which is to remember that IO ARM's are not in favor in the mortgage industry. The industry got burned on IO ARM's a lot more than other loan products, and now when you get an IO ARM you will notice:

You have to qualify at the fully amortized payment, not the IO payment.

They offer lower Loan-To-Values, so you need more equity and higher appraised values to get these loans.

They come with higher rates than other ARM's.

They have higher credit score requirements.

But, if you are after savings, have a lot of equity, then the IO loan may make sense. I still believe to purchase a new home on an IO loan is like putting a house on a credit card, but if you have a 40% down payment, maybe that is OK too? Maybe you already have enough equity?

Most people are not aware that Fannie Mae and Freddie Mac have a whole chart of pricing "add-ons". Add-ons are an amount (usually expressed in points) which are added on to the "base rate" in certain situations. Each 1.00 point is 1.00% of the loan amount. Another example is that a .25 point is a .25% of the loan amount. On a $400,000 loan a .25% is $1,000.

Some examples of situations when add-ons are required:

condo loans over 75% loan-to-value
investment properties
multi-family properties (2 unit, 3 unit or 4 unit properties)
extended lock-ins beyond the standard 30-60 days
higher loan-to-values
lower credit score
and more…

Credit scores make for a good example. Over the last few years, Fannie Mae and Freddie Mac have been raising the minimum credit scores it takes to get the best rate, which results in driving up the cost of the add-ons. Recent credit score add-ons are:

• 660-679 there may be a 2.50 point add-on.
• 680-699 there may be a 2 point add-on.
• 700-719 there may be a 1 point add-on.
• 720-739 there may be a 0.50 add-on.
• 740-779 no add-on.
• 780+ there may be a reduction in points, by a 0.25 point.

Some of the other recent add-on costs are:

Condos over 75% loan-to-value (which means if you have less than 25% down) have a 0.75 add-on.

Multi-family properties are a 1.00 point add-on.

Here is one specific example: if the current 30 Year Fixed rate is 4.25% with 0 points, but you want to get a mortgage for a condo and put 20% down, the rate will be 4.25% with 0.75 points. Or, a mortgage lender can build the add-in into the interest rate, and quote 4.50% with 0 points instead of 4.25% with 0.75 points.

Or, if you want a mortgage for a condo with 10% down and you only have a 680 credit score, it may be 4.25% with 3.25 points (results from both a 2.50 point add-on for the lower credit score, and 0.75 for the condo add-on).

Or, if you want to buy a single family home with a 5% down payment, and have a 703 credit score, you may pay a 1.25 point add-on (results from both a 1.00 point add-on for the lower credit score, and 0.25 for the lower down payment of 5%).

Since this multitude of add-ons cannot be priced into an advertisement because it is too complicated, and an advertiser cannot assume what your credit score is, what type of property you are buying and what your down payment is, many rates you'll see in public may not apply to your situation.

If you follow my blog, you know that this all ends in the same advice I always give, ask a lot of questions, assume nothing, choose a lender carefully, know as much as you can about who you are dealing with, and do not shop strictly by price.

It's that time again, the time when people seem to think a government edict can control a massive market. I have gotten dozens of calls and emails that go something like this:

"I hear Ben Bernanke is pushing rates down again."

"I hear the government is pushing rates down."

"I hear rates just dropped yesterday."

The government does not control interest rates, unemployment, economic growth, etc. It certainly influences these things with policies, either foolish or positive, but it does not control them. But every time the Federal Reserve tries some monetary gimmick, the whole country acts as if the Fed sets interests rates for hundreds of banks across the country. More on that here from a previous post.

Several Wall Street Journal articles reacting to the Fed's latest moves said:

"it may help rates a little bit at the edges…."

"The new glut of refinancing will bring about oversupply, and I am not sure who is going to buy all these mortgage backed securities. Yields may have to rise to convince buyers to buy, which offsets the point of the Fed's program."

"This may drop things 10 to 20 basis points, but its not game changing…"

10 to 20 bp's is about an 1/8% in rate, don't expect interest rates to plummet any time soon. We are already at unbelievably historic lows, see this article, rates may drop a teeny bit more, but if they do keep dropping:

a. it will be due to market pressures, not Federal Reserve programs.

b. it will be setting new precedent.

And as usual, my best advice for mortgage shoppers looking at rates, don't try and be a market timer, don't expect your mortgage provider to drop you every 1/8% the market drops, no industry can continue to drop prices as the price points change. If your rate is high, say at 6%, and you get 4.125% when refinancing, it is silly to think you should be upset and argue to get 4% if rates subsequently drop to that level. The market is absolutely overwhelmed with volume and many service providers are not even able to close these refi's, I have heard some have stopped accepting new refi applications, and others are having great difficulty and contributing to the horror stories we all hear about in the mortgage industry. Don't end up a horror story statistic, get a solid referral, ask a lot of questions, provide everything the lender wants very quickly, be happy with your historically low rate, hang on tight, and good luck getting your loan closed.

A large, well known bank, who the client described as "well established with comparable rates, so we are going with them", has rejected a home buyer's loan after almost 90 days in process. The seller has already given extension after extension. Now the sellers are furious, the buyer's are literally in tears, and are asking me to take over the loan and get them to settlement in 7 days. That is impossible, no one can get a new loan done that fast. The husband told me, in tears, that he had to have this house to move into, and that he was desperate for more space for he and his growing family. This little boy should not cry just because his parents made a poor choice in mortgage lender. His parents simply need to make better choices, and not shop by price alone.

I had a Realtor who called me, who is leaving the business because it is so tough, and he wants to move on to something easier. He has one deal left in process, and says he desperately needs the money. The loan has been rejected by a large bank, for reasons that are baffling, and he wants me to step in and save the deal if I can. I checked over the numbers, and the deal seems workable to me. The Realtor, while not in tears, is very upset.

A client whose refinance loan was in process with me left for a slightly lower rate (1/8%), about one week prior to settlement. I told him he had a very difficult loan, and that I checked with 15 lenders, and only found one that would do it. He said he had to, "do what is best for his family". I tried to explain why he could not simply call just anyone, and shop by rate alone, but he did not listen. Two months later his loan was rejected, and he came back crying (literally) because he said his family needs the cash out he was aiming to get from his cash out refinance, to buy a new property. His loan was for an investment property, condo, cash out refi; all of which includes some of the most shied away from loan categories in the business. The mortgage industry does not like investor loans in general right now, is not highly fond of condos and has lots of special restrictions on them, and is hesitant to give cash out on any deal. All of this, and the borrower had very high debt ratios to boot. How the client thought beggars could be choosers I have no idea.

And last, I had a condo purchase deal where the lender did not even tell the buyer he can't use the $20,000 seller credit he had negotiated with the seller, to pay for two years of condo fees. You can only use a seller credit towards closing costs. But he heard what he wanted to hear, because the other lender supposedly had a better rate. I am not quite sure how a better rate matters when you are not going to get your mortgage approved. And I am not sure how a better rate matters when the lender clearly does not know the underwriting rules! He went with them anyway for the lower rate, even when I pointed out their important oversight. Do you think there are future problems coming? Think he'll be upset or  in tears someday soon?

I write about mortgage blow-ups at other lenders about once every few months, but I get enough material to write about them daily. It simply fascinates me that 98% of us SHOP BY PRICE ALONE, and no one asks about experience, execution, fees, turn times, organizational structure, etc. And then when problems arise, consumers have the audacity to complain to friends, and write their Congressperson, complain on opinion websites, write letters to management, scream at people, etc.

Please, please, please, do not shop by price alone. And even if you check all the other issues, do not put price first, and then put other things last. Price should be in the middle of the pack of reasons you use a particular mortgage lender. We all have about the same rates, give or take 1/8%. It is not worth the tiny margin to go with an unknown for a small variance.

There are numerous things to check when shopping for a mortgage, and there are numerous reasons to ask about them. Check this link for more.

Who is this clown? Why, it's Ben Bernanke, that's who! He just said that he was going to keep interest rates low through 2013. Thanks a lot Ben, we all appreciate it. The problem is, the general public has taken that to mean that interest rates on mortgages are going to stay low through 2013. Not so.

What Big Ben was actually saying is that he was going to keep low the interest rates that he has control over, which are only the federal funds rate and the discount rate, which have very little to do with mortgage rates.

The interest rates that he controls has to do with interest rates that are charged when one bank borrows from another, for example. That may have some trickle-down effect to mortgage rates, but the biggest effect on mortgage rates is the much larger bond market. There is more power in the bond market's little pinky than all of the Federal Reserve and Ben Bernanke's clown head.

If there are further debt downgrades in the United States, or if there is some inflationary event; trust me, interest rates are going up…Benny Bernanke be damned. The Federal Reserve cannot suppress interest rates forever.

The Federal Reserve and the clown posted on this blog don't have as much power as you think. Instead of listening to Ben speak, keep focused on the bond market.