3.75 vs 4.00

User Forum Topic
Submitted by Sean19 on April 22, 2016 - 7:32pm

Hello,

I was offered 2 loans at 4.00% interest rate with 5% down and closing costs + misc funds coming in at around $15,000.

I was then offered a loan at 3.75% interest rate with 3% down but closing cost and other total close to $15,000 as well.

The loan value would be ~$200,000. I can put down $10,000 no problem. I feel like this loan company is asking me to put down only $6,000 (3%) and then taking that other percent in origination fees or closing cost that is about $4,000. I feel like it would be better for me to put that towards the principal so I can get rid of mortgage insurance quicker. Any advantage to the loan at %3.75 that I am not seeing.

Submitted by gzz on April 23, 2016 - 3:29pm.

Lower rate but more PMI/costs is no deal.

Your goal should be to minimize all non-principal/tax costs the first three years. So add them all up and take what's better.

Don't eat out, don't get new furniture, do everything you can to pay in enough to stop paying PMI. You also should not assume "I hit 20% equity, no more PMI!"

In fact it is a pain to get PMI taken off of a loan, and it is easier to refi to a new loan when you hit 20% equity.

Then, once you have your house, push hard to make extra payments to hit that 20% asap. The refi has a double benefit (1) no PMI payments (2) the rate spread over the 10 Year Treasury itself goes down because a 20% down loan is more attractive than a 5% down loan.

This is what I did, and when I finally did my refi, my monthly payment went from 2450 to 1950. That's $6000 a year less in housing costs going forward for decades. The refi itself was no-cost, they even did the appraisal for no charge.

Submitted by HLS on April 24, 2016 - 3:48pm.

Sean,
If you want to contact me and provide your EXACT details of each I will be happy to explain them for you.
I'm a Realtor & Mortgage Broker and have helped dozens of Piggington readers.

Some of your closing costs are not going to change regardless of which loan you get.
It's easy to get confused by the numbers.
$15,000 needed for a 3% down $200K loan doesn't sound right.

Is the 3.75% an FHA loan ?
Is the 4.00% not FHA ?

with an FHA loan you may have mortgage insurance for 30 years. DO NOT assume that you will be able to refi to a lower rate and have it removed in the future as rates could be much higher and it may not make sense.

Without more info I do not know what you qualify for but 4.00% is not a great rate today if your mid credit score is above 740, even with 5% down.

Without EXACT information, NOBODY can answer your question and many suggestions offered here will attempt to be helpful but in reality be bad advice.

Submitted by HLS on April 24, 2016 - 4:06pm.

gzz wrote:
Lower rate but more PMI/costs is no deal.

This is what I did, and when I finally did my refi, my monthly payment went from 2450 to 1950. That's $6000 a year less in housing costs going forward for decades.

It's nice 'that's what you did' and it worked out for you but' it's poor advice. What if rates go up ?

OP didn't mention more PMI.

If you only compare your monthly payment amounts when you refi you don't understand the benefit of a refi and your savings may not be as much as you think.

A true NO COST loan includes the appraisal cost, did that surprise you ?

Nobody should ever have a drop of 20% in their payment.
unless your rate dropped 1%-2% which would mean that you should have refinanced multiple times all the way down.

Your $6000 a year savings doesn't sound right.

Submitted by harvey on April 25, 2016 - 4:26am.

HLS wrote:
A true NO COST loan includes the appraisal cost, did that surprise you ?

"No cost" mortgages simply do not exist.

It is a misleading term, at best.

Submitted by HLS on April 25, 2016 - 6:48am.

When a loan has NO COST to the borrower what would you call it ?
There's nothing misleading about it.

Submitted by no_such_reality on April 25, 2016 - 7:28am.

No cash out of pocket.

Whether it's YSP or buried into the new principal, there's money being sucked somewhere.

Submitted by HLS on April 25, 2016 - 8:16am.

I'm not here to argue with you.
Balance added to the principal is not a no cost loan.

You apparently don't understand what you're talking about.
I know your intentions are good and that you think you know what you're talking about, but you don't.

If you have advised anybody not to get a NO COST loan which would lower their rate .25% or more,
your ignorant, foolish advice could cost them $10,000-$30,000 or more over the life of their loan if they listened to you. (Depending on their balance and interest savings)

If you'd like to explain it to me, I'll be happy to listen. Feel free to contact me if you'd like.
(I can also offer a clear, honest explanation but I doubt you want one)

The epitomy of ignorance & foolishness is someone who can qualify to refi with a no cost loan that is at least .25% below their current rate but decides not to because they are bothered that someone is making money.
It's that simple.
There is no recovery period to figure out.

**There is no reason not to refi to a lower rate at no cost if one can qualify**
I've heard more than 50 different objections from some very intelligent people. They were all wrong.
After an explanation they saw the light.

Stubborness is costing many people a lot of money.

Submitted by poorgradstudent on April 25, 2016 - 9:13am.

gzz wrote:

In fact it is a pain to get PMI taken off of a loan, and it is easier to refi to a new loan when you hit 20% equity.

This is so true. I actually thought our loan originator would be more willing to work with us when we hit 20% equity, but their response was they don't even consider it until the loan has existed for 2 years. So we refinanced at a 0.25% lower rate instead. More work on our end to gather and sign the documents again, but getting rid of PMI is saving us thousands of dollars a year.

Submitted by HLS on April 25, 2016 - 9:36am.

It is still a bit complicated to get PMI removed.
Loan originator has nothing to do with it.
The PMI is a 3rd party insurer.

Refinancing to save .25% was worth it and better for you.
If you can afford it, keep making your original loan payment on your previous loan and you could shave several years off of your mortgage term. More money will go to principal each month, less to interest.
The guaranteed compounded savings is huge.

For FNMA/FREDDIE
A 20% reduction of your original loan balance you usually need to jump through hoops and pay for an appraisal.

At 22% reduction of your original loan amount it is supposed to be removed automatically (regardless of property value) but some insurers have a minimum time period, (i.e. 2 years)

Because there was a time that "real estate never went down"
the guidelines stated that removing PMI was based on the reduction of your original loan balance; so it was possible with property value declines to be upside down on the value of your property but still get PMI removed.

Recent FHA loans may never have MIP removed, it will stick with the loan until paid off up to 30 years.

Submitted by NotCranky on April 25, 2016 - 10:10am.

Break even point does matter if you are going to stay in the home for a long time. The lower interest rate of a loan with "costs" could be a thing of value over the "no cost" loan.

Paying extra principal on the original loan ,the "no cost" refi, or a standard fees lower interest rate refinance is going to save money in all three cases. Nothing special about the "no cost" loan there.

We shouldn't act like no cost means free.

Submitted by HLS on April 25, 2016 - 11:14am.

Blogstar wrote:
Break even point does matter if you are going to stay in the home for a long time. The lower interest rate of a loan with "costs" could be a thing of value over the "no cost" loan.

Paying extra principal on the original loan ,the "no cost" refi, or a standard fees lower interest rate refinance is going to save money in all three cases. Nothing special about the "no cost" loan there.

We shouldn't act like no cost means free.

******No cost DOES mean free.

The comment made was that there is no such thing as a no cost loan.
THERE ARE LOANS AVAILABLE WITH NO COST.
I've done hundreds of them for borrowers and explained them clearly. Didn't cost them one penny.
No addition to principal balance, no hidden fees or costs.
There is no break even point or recovery period with a no cost loan. You benefit from day 1 with a lower rate.

If you want an even lower rate loan with costs you can get one too.
A loan with costs could save more in the long run,but many people consider neither a refi with costs or without because they are confused.

30yr loans that have a cost usually have a TRUE break even period of at least 4-5 years but very few people know how to figure the true savings properly.
(You don't just divide the loan cost by the monthly savings)
Payments are a combination of principal & interest
and there is the time value of money.

Anybody who paid any costs for a loan over the last 8 years or so probably wasted their money.

Intelligent, savvy borrowers refinanced multiple times all the way down the past few years and some pocketed thousands of dollars in the process and they are still on track to pay their loan off at the same time as their original loan was scheduled to be paid off.

There are many people who are confused, stubborn or foolish who will end up paying tens of thousands of dollars in extra interest because they just don't get it.

BTW,
you are wrong that a lower rate refi is going to save money in all 3 cases. That's not always true.

Submitted by NotCranky on April 25, 2016 - 11:36am.

HLS wrote:
Blogstar wrote:
Break even point does matter if you are going to stay in the home for a long time. The lower interest rate of a loan with "costs" could be a thing of value over the "no cost" loan.

Paying extra principal on the original loan ,the "no cost" refi, or a standard fees lower interest rate refinance is going to save money in all three cases. Nothing special about the "no cost" loan there.

We shouldn't act like no cost means free.

******No cost DOES mean free.

The comment made was that there is no such thing as a no cost loan.
THERE ARE LOANS AVAILABLE WITH NO COST.
I've done hundreds of them for borrowers and explained them clearly. Didn't cost them one penny.
No addition to principal balance, no hidden fees or costs.
There is no break even point or recovery period with a no cost loan. You benefit from day 1 with a lower rate.

If you want an even lower rate loan with costs you can get one too.
A loan with costs could save more in the long run,but many people consider neither a refi with costs or without because they are confused.

30yr loans that have a cost usually have a TRUE break even period of at least 4-5 years but very few people know how to figure the true savings properly.
(You don't just divide the loan cost by the monthly savings)
Payments are a combination of principal & interest
and there is the time value of money.

Anybody who paid any costs for a loan over the last 8 years or so probably wasted their money.

Intelligent, savvy borrowers refinanced multiple times all the way down the past few years and some pocketed thousands of dollars in the process and they are still on track to pay their loan off at the same time as their original loan was scheduled to be paid off.

There are many people who are confused, stubborn or foolish who will end up paying tens of thousands of dollars in extra interest because they just don't get it.

BTW,
you are wrong that a lower rate refi is going to save money in all 3 cases. That's not always true.

I didn't say a lower rate was going to save money in all three cases I said paying principal does. It is not free if you pay a higher rate for the "no cost".

Submitted by HLS on April 25, 2016 - 11:55am.

Idiotic semantics..

When you are offered something FREE, at NO COST, zero, zilch, nada, rien, niente, gratis....

Keep telling yourself (and insisting) that it's not free because if you paid something you could get even more.

You're right. You win. Pass the word. Tell everybody that you know......

Submitted by bewildering on April 25, 2016 - 12:31pm.

HLS wrote:
Idiotic semantics..

When you are offered something FREE, at NO COST, zero, zilch, nada, rien, niente, gratis....

Keep telling yourself (and insisting) that it's not free because if you paid something you could get even more.

You're right. You win. Pass the word. Tell everybody that you know......

Yep. I had 2 no cost refi's In fact, I was given money to move to a lower rate.

The 1st was 4.625% to 4%. The appraisal came in too low to remove my PMI, but the new PMI payment was much reduced.

The 2nd refi was from 4% to 3.625%. PMI was completely removed and I got my supplemental property tax paid, and received a nice amount.

Both refis happened within 15 months of buying with 10% down.

In CA there is no disadvantage to this strategy as your property tax bill does not change with a refi.

Submitted by HLS on April 25, 2016 - 1:11pm.

Bewildering,
You get it. Congratulations.

Just understand that if you only make your regular payment on your current 3.625% loan, you are adding approx 15 payments to the payoff date of your original purchase loan.

By adjusting your monthly payment slightly, you can stay on track and pay your existing loan off 15 months sooner, still a huge savings over your original payment amount.

Going from 4.625% to 3.625% and eliminating PMI is a nice huge bonus.
Your PMI probably dropped because you were between 80.00% and 85% rather than the 90%. The premium is lower below 85%

Submitted by NotCranky on April 25, 2016 - 5:27pm.

It's not idiotic semantics. You have to look at the same rate environment not the current one against a previous one. It's not free compared to the current rate environment or else HLS doesn't get paid and he gives the best rate possible for the specific client. Thats what matters when you are shopping the loan and possibly having to or wanting to live with it for a long time, like 5 years or more. How often does HLS not get paid anything for loans he originates? Not too often. Hence, no cost equals free loans doesn't add up.

Submitted by bearishgurl on April 25, 2016 - 6:45pm.

Blogstar wrote:
It's not idiotic semantics. You have to look at the same rate environment not the current one against a previous one. It's not free compared to the current rate environment or else HLS doesn't get paid and he gives the best rate possible for the specific client. Thats what matters when you are shopping the loan and possibly having to or wanting to live with it for a long time, like 5 years or more. How often does HLS not get paid anything for loans he originates? Not too often. Hence, no cost equals free loans doesn't add up.
Blogstar, do you expect someone in HLS's profession to "work for free?" The "system" is set up to compensate mortgage loan officers/brokers/agents for their hard work in bringing a client in and finding the best program for their needs, processing all the documentation for a mortgage and even originating some first and subsequent trust deed mortgages. The vast majority of borrowers can't do any of this on their own, and, in any case, are not licensed as a RE broker/salesperson, nor have any kind of a lending designation on their license. Even when there "direct lenders" and mortgage loan officers working for the "Big Banks" in portfolio lending (15+ years ago), these people still got paid even on mortgages which are "no cost" to the borrower. If they were actual employees, they got salary and bonuses. If they were a mortgage banker, they got paid through the loan originator.

As long as HLS and his brethren aren't attempting to originate NINA loans, falsify loan applications and, in general, deal in exotic instruments which are difficult, if not impossible for Joe and Jane 6p Borrower to understand, I'm all for more (highly qualified and principled, of course) people in this profession.

In most cases, the "system" isn't set up for reward Joe6p, the borrower, for taking out a new mortgage. It can, however, allow him do it for "no cost" to him.

As it should be.

Submitted by NotCranky on April 25, 2016 - 8:02pm.

No I don't expect him to work for free but it isn't a free loan if he doesn't do it for free. He does it for free and there are no costs, that's the only way you get a free loan.

Submitted by harvey on April 26, 2016 - 5:20am.

Still going on about "no cost" loans?

A typical loan or refi will have at least a couple thousand dollars in fees. People are involved who need to be paid: appraisers, escrow companies, etc. These are up front costs - there's no other word for it.

The costs can be paid up front or financed.

The costs of the loan should be laid out very clearly to the borrower. There are laws that are intended to ensure this happens.

Claiming that no cost mortgages exist by using clumsy semantic gymnastics is just plain deceitful.

We've been through this before, on another thread. Same response from HLS: lots of verbiage talking around the basic facts and insulting terms like "idiotic."

There are pros/cons of financing the costs vs. not financing the costs. I would steer clear of any lender that claims that there are no costs.

Submitted by scaredyclassic on April 26, 2016 - 7:13am.

Cost is a funny word. Kind of like free, plus shipping and handling.

If I can get the same product at a lower rate but I pay nothing upfront out of pocket, to get either one, are both loans free, or does the higher rate "cost" anything?

Submitted by HLS on April 26, 2016 - 8:11am.

Better advice is to steer clear of the ignorant.

The point of contention is not whether a loan with costs is better than a no cost loan, it is whether no cost loans exist.

No cost loans do exist. Every loan rate has a cost or credit associated with it.
A no cost loan to the borrower occurs when the credit from the lender covers all 3rd party fees.

It is free to the borrower, i.e. NO COST.
If you start with a $400,000 loan, you end up with a $400,000 loan and nothing is added anyplace else.

If you want a lower rate you are welcome to pay costs.
I've never said that a no cost loan comes at the lowest rate possible.

I looked up the definition of FREE to make sure I understood what it meant, and it said COSTING NOTHING.
So I will stick with my assertion that a no cost loan IS a free loan.

To say that a no cost loan doesn't exist IS wrong
(and it's idiotic)

I also looked up the definition of idiotic which referred me to stupid, which is defined as "unable to think clearly"
I think my use of the word is accurate.
******************************
To understand the power of compounding and don't think it's worth it to refinance to only save .25%.....

Saving .25% on a $400,000 loan can save you $37,000 in interest AND it can be done at no cost**
Saving .50% on the same loan can save you $72,000

**You can also pay $$ to get your loan and you might save even more.

Submitted by harvey on April 26, 2016 - 8:43am.

I love it when car dealers have sales where there is no sales tax.

How do they convince the government to not collect taxes?

Submitted by Coronita on April 26, 2016 - 9:01am.

Man, people really like to argue of semantics on this blog. Perhpas the better way to call the "no cost loans" is "no out of pocket cost loans".

And yes, there are benefits to getting one. If your loan rate is .25% or higher than a new "no out of pocket cost loan", refinancing will save a you a lot over the course of the 30 year loan in interest if you are early on in the loan. In many cases, refinancing to a 30 year also includes a cash back rebate, so in that case there almost isn't a break even point. You break even almost immediately.

The math can be confusing for most people whixh is why i suspect some will make blanket statements about it one way or the other. If you want the spreadsheets to see this, I can dig up my old Google doc sheets.

Or just ask a loan person to grind through it with you. Real numbers don't lie. And it depends on your particular situation, particularly how far along are you with your existing loan, and if that makes a difference, how loan you pthink you are going to stay where you are.

But it's been awhile for me. I paid off my 15year loan on my primary in December 2015 so I don't have a loan...well not until I buy another place.

Submitted by NotCranky on April 26, 2016 - 9:22am.

You've got a no cost free house FLU, congrats!

Submitted by HLS on April 26, 2016 - 9:23am.

FLU,
I know you get it, I think.
You're exactly right that the real numbers don't lie AND there are different ways to benefit from a refi.

When you are going to a lower rate at no cost, there is no break even point you benefit from day one compared to your previous rate.

If you want to compare what the additional savings would be at .125% or .25% lower if you did pay to get the loan, I suppose you could create a spreadsheet and get confused but I can explain it simply in about 5 seconds.

If you want to pay for a loan and get a lower rate,
the payback period to break even is usually 5 to 7 years.
Each .125% has a different spread and not everybody qualifies at the same rate.

Sadly,
another problem is that most 'loan people' don't understand the details nor can they explain the
true net benefits and options in refinancing.
Pathetic but true.

Most loan people only grasp 2 things:
a)How much they are going to make on your loan
b)How much your payment will be
They are incapable of discussing anything beyond these 2 points. They can't grind through it with you.

There is nothing in the education & testing requirements that a licensed, regulated loan officer needs to be capable of explaining different options and the various net benefits. As a result, there's a lot of misinformation out there.

Submitted by NotCranky on April 26, 2016 - 10:16am.

OR they could just read this:

http://www.thetruthaboutmortgage.com/no-...

Submitted by plm on April 26, 2016 - 10:48am.

I don't understand why HLS is getting beat up so much. The article mentioned that some bad lenders can do unscrupulous things such as roll the fees into the mortgage.

Not the case when I refinanced a few times with HLS. And no costs that can be explained by this:

https://www.youtube.com/watch?v=3WNlWyFgLCg

Everything was explained clearly with options on getting so much money back at a certain rate or paying more to get a better rate.

And afterwards, I did all the painful math and it really was a no cost loan.

Personally I think no cost loans are great in that it allows additional refinancing as rates go down.

Submitted by NotCranky on April 26, 2016 - 10:55am.

Are rates likely to go down now?

Submitted by plm on April 26, 2016 - 11:04am.

Actually, it seems like they are lower now than my current 3 percent, 15 year fixed. But I guess it may be not be low enough to have the fees covered so it doesn't make sense to refinance.

I usually get a call to refinance when it makes sense. Last time was at 2.75 but I was too slow to take advantage before rates went back up.

No more refinancing for me though. I'm thinking of just paying off the mortgage.

Submitted by Coronita on April 26, 2016 - 11:09am.

Yeah, I don't quite get what the issue is. If you want to refinance, you can either get a loan with no out of pocket payments with rate X or if you want to pay closing costs and points, you can get rate Y where Y is less than X.

There's nothing deceptive about this.

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