refinancing again with negative points..

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Submitted by teaboy on September 14, 2011 - 8:31am

I'll probably never be rich because I get nervous whenever I think I've found a free lunch...

Anyway, I'm thinking of refinancing my current mortgage (30-year fixed @ 4.25% with 29 years left) to a new 30-year fixed @ 4.25%.

Why? Because by doing so (according to absolutemortgageco.com) the new mortgage would come with -2.873 points (-$12k), meaning that I would receive a credit of $7k from the refinance, after all closing cost.

Assuming there's no clause preventing it, I'd then do this every 6 months (while rates are low enough, which could be for a few years yet).

Am I a genius, or what?

tb

Submitted by all on September 14, 2011 - 9:03am.

Keep in mind that your new mortgage will have new 30y term - you will pay additional $25K in 2042 if you go full term. Also, the credit usually cannot exceed the closing cost and it can't be applied to the principal balance. It will cover the lender's and 3rd party fees (which you would not have to pay for without refinance, so that is no real benefit for you). You can use it to cover the interest due at closing and to fund the escrow account if you decide to pay your property taxes and insurance through an impound account.

Or you could refinance into 4% at no cost and save $100/month.

Submitted by UCGal on September 14, 2011 - 9:18am.

Darn. There is no free or negative cost mortgage for me. My unAmerican plan of paying off my mortgage aggressively puts my balance too low to get the benefits...

Seems like a good time to refi for a lot of folks, though.

Submitted by AK on September 14, 2011 - 11:22am.

It helps to be wary of a free lunch, generally speaking :)

From what I've seen those generous negative points deals appear suddenly after a major change in interest rates, then disappear just as suddenly. So even if the par rate stays low, you may not be able to get a negative points deal like this again.

I'd check with a reputable mortgage broker as well as direct lenders. Some people here have recommended Sheldon.

Submitted by arv on September 14, 2011 - 11:50am.

Following similar strategy and I am able to refinance two times with negative points receiving around 3K and reducing rate at the same time. The only way to receive funds was opening an impound account with lender.

Not sure if there is a clause which can limit refinance frequently to leverage current mortgage environment this way.

Submitted by treehugger on September 15, 2011 - 11:53am.

I just got off the phone with the guy from absolute mortgage and he said it wasn't worth it for me to refi! I currently have 4.375 from a refi I completed last November! Who are you talking too I think I like their rhetoric better....I used Sheldon both to buy and refi last year. I shopped it out last year at my refi and Sheldon beat any of the internet scams I was getting excited about. I suppose I should see if Sheldon thinks I should refi again? I feel bad calling Sheldon 'cause I am high maintenance and he is soooo tolerant. I think that is why I like to work my way through the internet shisters first.

Submitted by arv on September 15, 2011 - 12:42pm.

I did talk to absolute mortgage guy he didn't say that refinance is not worth in my case (may be because I didn't ask) I am also on 4.375%. I think it all depends upon how much is your current balance so that rebate can cover the closing cost can leave some thing for you to keep. I did last refinance through Amerisave. They are fine but one needs to be familiar with refinancing and keep communicating with them. I think Sheldon is being recommended here earlier. How to reach him? I am thinking of getting quote from him in future.

Submitted by UCGal on September 16, 2011 - 8:06am.

arv wrote:
I did talk to absolute mortgage guy he didn't say that refinance is not worth in my case (may be because I didn't ask) I am also on 4.375%. I think it all depends upon how much is your current balance so that rebate can cover the closing cost can leave some thing for you to keep. I did last refinance through Amerisave. They are fine but one needs to be familiar with refinancing and keep communicating with them. I think Sheldon is being recommended here earlier. How to reach him? I am thinking of getting quote from him in future.

http://www.homeloansheldon.com/

Submitted by teaboy on February 3, 2012 - 4:39pm.

arv wrote:
Following similar strategy and I am able to refinance two times with negative points receiving around 3K and reducing rate at the same time. The only way to receive funds was opening an impound account with lender.

Not sure if there is a clause which can limit refinance frequently to leverage current mortgage environment this way.

OK guys n gals, so I'm back again trying to get my head around this free lunch I've found. Arv, I think you and I are onto a winner here.

In October I refinanced and *effectively* made $3k profit from it. I also refinanced from a 30-year to 15-year fix at a lower rate but the loan duration and interest rate on the loan were not of concern to me, as I am intending to refinance again as soon as I can (every ~3 months ad infinitum).
Here are the rough numbers on the refinance:
$403k (mortgage payoff to original mortgage)
$403k- (new mortgage loan)
$5k- (net lender credit)
$2k (fixed closing costs: appraisal, title, fees, etc)
$4k (prepaid and escrow items: interest for partial first month, property tax escrow) – note: I don’t consider these true “costs”.
$1k- (cash required from me at closing)

So, I refinance, pay $1k upfront, then a few days after my original mortgage is paid off, I receive a check from my original mortgage servicer for ~$3.5k for the escrow I had with them, plus ~$0.5k left over from the mortgage payoff (which they presumably overestimated to ensure they get enough payoff money to cover additional interest if payoff is delayed).
Therefore, my net profits from the refinance are: $3.5k + $0.5k - $1k = $3k.

I just did it again in January, refinancing back from a 15-year to a 30-year and got $4k back this time. Again, the loan duration and interest rate on the loan were not of (material) concern to me, as I am intending to refinance again as soon as I can (every ~3 months ad infinitum).

If I can do this 3 more times this year, I’ll have netted ~$16k. tax free.

Known risks/issues include:
1. I’m continually effectively adding on 3-4 months onto the life of my mortgage every time I refinance – I realize this but my net wealth increases with each refinance. That’s all I care about. I have savings and investments elsewhere.
2. Rates might start increasing materially – in which case I might just have to decide to stop my merry refinancing dance.

Does anyone else have thoughts on this? Who is losing out here? Is it the purchaser of the mortgage asset (Freddie/Fannie), who was expecting a nice 30-year income stream only to have me pay it off after 3 months?
Have I really found a free lunch or am I missing something and actually on a riding for a hiding?

tb

Submitted by EconProf on February 3, 2012 - 6:00pm.

I believe you are taking advantage of the generally falling interest rate environment of late. It makes sense for the lender and the borrower only because prevailing rates have fallen of late. Today's 10-year bond rate really popped up due to good unemployment numbers, so the game may already be over.

Submitted by teaboy on February 3, 2012 - 6:45pm.

EconProf, what do I care about (non-material changes to) interest rates?
If I refinance 4 times in 1 year and in that time rates go up from 3.5% to 5.5%, I would net $16k from the refinancing (tax free) and would be paying and extra $8k (2% * $400k, tax deductible) per year in interest.

Highly simplified, I know. But, am I missing something?

tb

Submitted by EconProf on February 3, 2012 - 7:37pm.

You've been able to do it only in a falling interest rate environment, and yes, it looks like a smart move so far. I am only suggesting that with rates now leveling off or going up, it will no longer be feasible.

Submitted by SD Realtor on February 3, 2012 - 7:51pm.

What you are missing is that you need to count all of the interest you paid prior to each and every refinance. You don't seem to be counting that cost.

However if you simply count that interest as paying rent then yes, you are not doing badly.

The selloff in the bond market was pretty substantial today.

In order to gain any measure of whether your plan is successful or not we have to know how long you would own the home

Submitted by teaboy on February 3, 2012 - 10:59pm.

SD Realtor wrote:
...if you simply count that interest as paying rent then yes, you are not doing badly.

SDR, of course I count that as equivalent to rent. I need to live somewhere.. :-)

SD Realtor wrote:
In order to gain any measure of whether your plan is successful or not we have to know how long you would own the home

Maybe. But it's so difficult to know what might happen. If I had to guess:
~5% chance we'll be here 30+ years
~15% chance we'll be here 11-29 years
~40% chance we'll be here 5-10 years
~40% chance we'll be here <5 years

so, let's call it ~9 years.

EconProf wrote:
You've been able to do it only in a falling interest rate environment...with rates now leveling off or going up, it will no longer be feasible.

EconProf, I'm not sure I follow. Are you saying that I wont be able to refinance and get a ~$6k net lender credit when rates are level or going up? I dont understand why this would be.

Submitted by arv on February 4, 2012 - 1:56am.

teaboy, it is good to see some one else is using this approach to get some money out of home. I have done this successfully a number of times with net 25k getting in rebates since last year.

My latest is around 6800 cash back on the closing which happened today.

This approach works in falling interest rate environment with out much risk. In rising interest rate environment one has to take a risk of getting locked into higher interest rate.

I also consider interest payments as rent payments (as teaboy mentioned) and thinking that I am buying a home a year later with reduced price.

My latest is 20 year refinancing. Last year when I bought home it was 30 year 4.875. Now I am at 20 year with payment increased only by $250 per month compared to first financing and top of that I made 25K tax free with refinancing. Even if I may not able to refinance to lower rate in future I am fine with this payment.

Like any other investment this may not work for every one. So one has to make choice to use it or not. In my case it happened that I able to use and make it for me so far.

Submitted by arv on February 4, 2012 - 1:59am.

teaboy, it is good to see some one else is using this approach to get some money out of home. I have done this successfully a number of times with 25k getting in rebates since last year.

My latest is around 6800 cash back on the closing which happened today.

This approach works in falling interest rate environment with out much risk. In rising interest rate environment one has to take a risk of getting locked into higher interest rate.

I also consider interest payments as rent payments (as teaboy mentioned) and thinking that I am buying a home a year later with reduced price.

My latest is 20 year refinancing. Last year when I bought home it was 30 year 4.875. Now I am at 20 year with payment increased only by $250 per month compared to first financing and top of that I made 25K tax free with refinancing. Even if I may not able to refinance to lower rate in future I am fine with this payment.

Like any other investment this may not work for every one. So one has to make choice to use it or not. In my case it happened that I able to use and make it work for me so far.

Submitted by EconProf on February 4, 2012 - 8:46am.

Teaboy, looks like you (and others) have made good money by refinancing and "capturing" the gain resulting from the falling interest rate environment.
If I understand correctly what you have done, (and I am only relying in this thread as I have not read any other analyses of this strategy), you are resetting your long-term contract to repay a loan with each drop in prevailing interest rates.
A loan is a promise to pay a flow of funds for a certain period of time, at a fixed (in this case) interest rate. Once the loan has closed, at the then-prevailing market rate, the lender and borrower are both committed. What if, one month later, prevailing interest rates jump? You are locked in at a comparably good interest rate so you are indifferent. But the lender will kick himself because he could have waited a month and gotten much higher monthly payments for as long as 29 years, 11 months. The borrower will contratulate himself for his foresight and accumen.
Of course, if rates drop, the feelings are reversed.
If they drop enough, however, the borrower can refi at a lower rate and pay off the previous lender. That lender will not get to keep the nice premium (over new prevailing rates) that he had hoped to keep. The borrower can capture the gain via "negative points", which the new lender will pay to get the loan done. My guess is you could forego the negative points and instead get an even lower rate. The transaction costs for all sides are apparently exceeded by the gain from the lower rate for 30 more years. So a new loan is worthwhile for both the borrower and the new lender. The previous lender kind of gets shafted, but that's the result of not correctly predicting future interest rates.
None of this would be possible in a stable or increasing interest rate environment, which I have been predicting, wrongly so far, for a long time.

This looks to be an interesting strategy, and I'm surprised we haven't seen much about it in the national media.

Submitted by bearishgurl on February 4, 2012 - 9:55am.

EconProf wrote:
...This looks to be an interesting strategy, and I'm surprised we haven't seen much about it in the national media.

EconProf, I think the reason these techniques are not highly publicized is that they are rare. How many property owners right now CAN be "serial refinancers." First, their CREDIT has to be good enough to do so, they can't have too much open consumer debt or student loans and they need an appropriate steady flowing income (W-2 preferred). Secondly, their mortgages cannot have prepayment penalties or other provisions to keep them in it for a period of time (6th mos?).

I just don't see a current tsunami of "mainstream owners" being able to do this every few months, even if they wanted to.

Submitted by teaboy on February 6, 2012 - 11:44am.

arv wrote:
My latest is around 6800 cash back on the closing which happened today.

Arv,
6800 "cash back" sounds high. Is this net of all lender fees (“origination” fees, etc), and other fixed closing costs (appraisal, title, other fees, etc)? If so, how did you achieve this?
My understanding is you cannot receive actual cash back from the closing (as that would make it a “cash out” refinance), so the net credit you receive has to be less than the other items the borrower must fund at closing (i.e. the initial deposit for you escrow account, and the daily interest charge for the period between closing date and the first month’s new mortgage payment)
As such, it’s my understanding that, for me, the greatest net credit I can get from each refinance is ~$4k.

EconProf wrote:
Teaboy, looks like you (and others) have made good money by refinancing and "capturing" the gain resulting from the falling interest rate environment.

EconProf,
In a falling interest rate environment, as in my previous 3 refinances, I have received both a net credit plus a lower interest rate. This is a win-win.
In a rising interest rate environment, one would receive a net credit plus a higher interest rate. This is a win-lose.
However, what I am proposing is that even in a (not too steep) rising interest rate environment, the former “win” (net credit) would outweigh the latter “lose” (higher interest rate).
No-one can predict rates. From a practical point of view, also, I realize that it is most likely that I will not remain in my current house for 15-years, and so cannot reasonably expect to be able to take full advantage of a 15 or 30-year mortgage.

No-one can predict rates, but if we assume that they follow a sine wave over time, assume inflation at ~3%, etc, would be the equation to model the expected profit/loss from my hypothesis?
Is there a math wiz in the house?

tb

Submitted by arv on February 6, 2012 - 10:12pm.

teaboy,
property taxes + hazard insurance renewal + impound account helped to consume the rebate. So it all depends time of refinancing and loan amount and property taxes.

Submitted by moneymaker on February 6, 2012 - 10:18pm.

Your MIP could be changing from a 5 year to a life of the loan. I think serial refi'ing is probably about as profitable as serial gambling, the house will always win, unless you walk away. Is that you're strategy?

Submitted by teaboy on February 7, 2012 - 11:15am.

moneymaker wrote:
Your MIP could be changing from a 5 year to a life of the loan.

Regarding MIP, my mortgage is <80% LTV, so this is not relevant.

moneymaker wrote:
I think serial refi'ing is probably about as profitable as serial gambling, the house will always win, unless you walk away. Is that you're strategy?

Yes, of course I can walk away. I would continue refinancing and pulling out ~$16k/year while it made sense, then if/when rates are high enough to justify it, I'd use the saved cash to pay down or pay off the mortgage.

Again, it is most likely that I will not remain in my current house for 15+ years, and so cannot reasonably expect to be able to take full advantage of a 15 or 30-year mortgage.

Submitted by Former SD resident on April 18, 2012 - 6:44am.

Can anyone recommend their broker? I'm in North Carolina so I can't use HLS.

Submitted by ljinvestor on April 18, 2012 - 9:33am.

Former SD- Why not use PenFed.org They have a 5/5 ARM at 3% and will cover your closing costs up to $10k. The rate can only increase by a max of 2% every 5yrs with lifetime max adjustment of 5%. So worst case scenario your rate would be 5% yrs 6-10 and hopefully you will be back in SD way before 10yrs.

I have used Penfed a couple of times and pretty easy to deal with. Guessing with rates so low that refi would currently take 60-90 days.

Submitted by Former SD resident on April 18, 2012 - 10:06am.

Do you have to be a member of PenFed to get those rates? Also, tried calling Absolute Mortage and they are not licensed in NC. Does anyone have any names for me? Thanks

Submitted by all on April 18, 2012 - 10:59am.

aimloan.com?

Submitted by ljinvestor on April 18, 2012 - 11:06am.

I was also going to recommend aimloan.com as I have had positive experiences with them on investment property loans and they can do business in NC.

You mentioned $265k loan balance and if you have great credit scores and LTV of 80% or less then you aimloan is currently showing 4% on 30yr with only a couple hundred dollars closing costs

For Penfed you have to be a member but you can join an association for $15-$20 to qualify.

Submitted by Former SD resident on April 18, 2012 - 11:31am.

has anyone used goodmortgage.com? saw them on the mortgageprofessors.com website, so far they have the best rate of 3.99% with 4K credit, but they have mixed reviews online. trying to follow the advice of if sounds too good to be true it is, but then again HLS said it may be possible to get 3.875% no cost loan.

Submitted by Former SD resident on April 18, 2012 - 11:34am.

or amerisave? currently offering 4% with $3430 credit

Submitted by briansd1 on April 18, 2012 - 12:06pm.

I have used ING Direct.

http://www.ingdirect.com/welcomehome/

Submitted by HLS on April 18, 2012 - 12:12pm.

Former SD resident wrote:
or amerisave? currently offering 4% with $3430 credit

Understand that the $3430 credit may be needed to cover your closing costs. Make sure that you understand the hard costs and what will be left over.

You are on the right track. I told you that the quote you received yesterday was ripoff-ridiculous. ;-)

Also realize that pricing does change daily (up or down) but you still should be able to get 4.00% or less at zero cost and still possibly get additional credit.

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