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 harvey on May 2, 2016 - 12:18am.

LOL, babbling on this forum doesn't take any mental effort - it's actually the opposite, a mental escape.

Spreadsheets and calculations are work. It was my job. It still is occasionally. I'm still intellectually curious but I'm not gonna do unpaid tedious calculation work to prove a point to somebody who I think already gets it.

You don't need a spreadsheet or "real numbers" to understand the basic tradeoff. Higher up front fees, lower rate. Lower or negative fees, higher rate. Fees are a short term gain, rate is a long term gain. Over time, long term wins. If rates change, then the numbers change, but not the basic tradeoff. And nobody can predict rate changes.

That's it. If you don't get it I'm not going to try and spell it out with numbers because I know you can and probably do get it.

I'm not curious about the numbers at all in this mundane financial question. I'm curious about people. Like how smart people aren't at all suspicious when somebody pays you to take their product.

(The answer is in this very post.)

Human behavior is far more interesting than numbers.

Submitted by Coronita on May 2, 2016 - 1:43am.

I'm going to be like BG and do this cut up your quote and comment on everything....

harvey wrote:

You don't need a spreadsheet or "real numbers" to understand the basic tradeoff. Higher up front fees, lower rate. Lower or negative fees, higher rate.

I agree with this...I don't think anyone disagrees with this

Quote:

Fees are a short term gain, rate is a long term gain. Over time, long term wins. If rates change, then the numbers change, but not the basic tradeoff. And nobody can predict rate changes.

This is where people disagree. Again, back to where I said "it depends". Let's consider the two practice scenarios for a homeowner

Scenario 1: You are buying a home. You need to get a loan for this home.
Should you (a) take out a no (out of pocket) cost loan or should you (b) pay points/cost and get a slightly lower rate loan. What is the best decision?

Scenario 2: You already have a loan on an existing property. Rates for a no-cost-loan fall below 0.25 or more below your original loan. Should you refinance? If so, should pay points/cost to lower the rate even further.

In the case of Scenario (1), there's really no "for sure" right way of doing this. You might make and educated guess, and the stars might align with your guess, but it's a crapshoot at best.

1a) On one hand, you could take out a no-cost-loan, and then rates move up, and you won't be able to refinance. In this scenario, if you kept the house for 30 years, overall, you pay more total interest (assuming paying points/closing costs lower your rate, which it does).

1b) On the other hand, if you paid points and cost, and then rates fall flat on your face and a no-cost-loan rate ends up being much lower than your loan you take out with points and costs, then you just wasted your money paying points and costs. In this scenario, if you don't refinance, you end up paying more total interest by staying in your original loan that refinance to a low cost loan. But if you did refinance, than the points/cost you paid on the original loan to get a lower rate was useless.

Also, since you brought up present value....

In scenario you paid for points/cost to get a lower rate
a) you are giving up opportunity cost of present day dollars for the amount you paid in points/cost to invest in higher return.
b) You don't know if you will stay with the entire 30 year loan. If you sell your home or refinance again, your total interest savings from buying down your loan up to ending the loan might be less than the points/cost you paid to lower that rate.

In the scenario you took out a no-cost loan.
a) There the opportunity cost of paying slightly more each month, versus investing better/worse than giving up a lump sum today (as points/cost)

In appear there's really no clear cut "right" way to do this. "How right" you are in picking depends on how rates moved to your guess and how well you do with your investments of upfront money you would have to pay for points/cost and how long you actually kept that loan (for example, you sell the home or refinance). Since none of us can predict how interest rates will move nor how our investments do, we make an educated guess based on an opinion (supported by our individual interpretations of the what will happen to loan rates and how our individual investments will do).

In Scenario 2, regardless of which kind of loan you took out originally, if rates fall significantly below what your original loan, in the very least you should refinance into something lower than your original loan rate,
if cost(if any)+total interest of old loan is more than cost(if any)+total interest of new loan. a no-cost-loan has immediate benefit compared to your original loan (no matter what kind of loan it was).... You might be able to pay more points/cost to lower your rate even further, but then again, you run into the same possible scenarios as described above with your first loan, in which there might not be a benefit to doing this because of the other factors.

Submitted by FlyerInHi on May 2, 2016 - 5:50am.

flu, maybe you're making things too complicated.

The decision to refinance is separate from the loan product your want to select. Decide if refinancing makes sense, then select from alternative products.

All the talk of "no cost" is just salesmanship and confuse things.

Rates kept on moving down. The right decision from the beginning was to go adjustable.

Submitted by no_such_reality on May 2, 2016 - 7:08am.

I'm still waiting on the no costs costs in th new disclosures.

Overall you're all over complicating it. Th analysis is simple long term versus short term is relatively moot and you don't need to worry about all the options out there.

All you need is what your current loan and financial situation is and what the one loan being proposed with what it will cost you in cash today (or rebate). HLS comp for it is a nice to know but irrelevant as you aren't paying him directly (unless you negotiate to do that and then IMHO you're bucking the whole industry)

The real key though is we currently are living in a bit of a mortgage bizarro world. There's a lot of money out there looking for a home. So yes, they will pay you, thousands to take their 30 year mortgage at 3.75% because their alternative is 2.6% on a treasury. Or some other person taking the 3.5% or riskier person taking the same 3.75%

If you keep their loan more than a short period, they come ahead compared to you having their cheaper loan, but you're still better off than you were.and you would have had to shell out money to get the lower loan.

So just get used to being a cow getting milked, that's how the industry has relegated you.

Submitted by harvey on May 2, 2016 - 7:39am.

FlyerInHi wrote:

The decision to refinance is separate from the loan product your want to select. Decide if refinancing makes sense, then select from alternative products.

Exactly. The first choice is whether to play at all, the second choice is to find the bet with the best odds.

If rates have dropped more than half a point or so, any refi bet will have very favorable odds, but some have better odds than others.

All this agonizing over whether rates will go up or down or whether someone picked the right bet in the past is irrelevant.

At the craps table, any bet can win and and any bet can lose. But some bets have much better odds than others. Previous rolls of the dice don't change the odds. Even if the bet with the better odds loses multiple times, it doesn't change the odds of the table.

And yet people who understand this logic clearly do not always apply it in their own decisions.

https://en.wikipedia.org/wiki/Loss_aversion

Submitted by scaredyclassic on May 2, 2016 - 8:11am.

My dad believed in betting on a hot roller

Submitted by Coronita on May 2, 2016 - 9:55am.

harvey wrote:
FlyerInHi wrote:

The decision to refinance is separate from the loan product your want to select. Decide if refinancing makes sense, then select from alternative products.

Exactly. The first choice is whether to play at all, the second choice is to find the bet with the best odds.

If rates have dropped more than half a point or so, any refi bet will have very favorable odds, but some have better odds than others.

All this agonizing over whether rates will go up or down or whether someone picked the right bet in the past is irrelevant.

At the craps table, any bet can win and and any bet can lose. But some bets have much better odds than others. Previous rolls of the dice don't change the odds. Even if the bet with the better odds loses multiple times, it doesn't change the odds of the table.

And yet people who understand this logic clearly do not always apply it in their own decisions.

https://en.wikipedia.org/wiki/Loss_aversion

Now you are sounding to be in agreement eith wjat i was assertinf all along. It depends...

So Harvey, the entire rathole you took us down on this thread was your argument that no cost loans are ALWAYS worse than loans when you pay for the cost up front. Are you now saying that isn't the case?
Since we are playing arm chair quarterback in which we did have a period of 5-6 years of declining rates, are you stilling arguing it would have made sense to pay point and costs along the way down?

I think we might be agreement that either bet is a bet. But it's still not clear to me if you still think people would have been better off paying costs up front during the past 5-6 years when we had a rate decline. So what is your position on this?

Submitted by Coronita on May 2, 2016 - 9:57am.

FlyerInHi wrote:
flu, maybe you're making things too complicated.

The decision to refinance is separate from the loan product your want to select. Decide if refinancing makes sense, then select from alternative products.

All the talk of "no cost" is just salesmanship and confuse things.

Rates kept on moving down. The right decision from the beginning was to go adjustable.

No briansd, you are making this thread more complicated by interjecting into this thread without following the entire thread. But that ok, I don't mind.

Submitted by FlyerInHi on May 2, 2016 - 10:49am.

Flu, I think you're saying that "no cost" loans are better because they allow you to refinance again and again, guilt free (loss avoidance. You're not "throwing away" out of pocket fees. That's the marketing angle.

But past is past. Make decisions based on what you know today.

Submitted by bearishgurl on May 2, 2016 - 11:21am.

FlyerInHi wrote:
Flu, I think you're saying that "no cost" loans are better because they allow you to refinance again and again, guilt free (loss avoidance. You're not "throwing away" out of pocket fees. That's the marketing angle.

But past is past. Make decisions based on what you know today.

In response to the italicized portion, maybe so. But a person who is a "serial refinancer" is still starting over again at 30 years every single time they refinance ... that is, unless they choose a 15-year loan (with much higher payments). However, the vast majority of refinancers do so for the express purpose of lowering their monthly payments (thereby increasing monthly cash flow).

Submitted by harvey on May 2, 2016 - 11:30am.

flu wrote:
So Harvey, the entire rathole you took us down on this thread was your argument that no cost loans are ALWAYS worse than loans when you pay for the cost up front. Are you now saying that isn't the case?

I never said that "no cost" loans are always "worse."

My assertion is that the term "no cost" is misleading and that I would be suspicions of taking advice from someone emphasizing a product with a deliberately misleading name.

And even if you are getting a square deal, the tradeoff with "no cost" loans favors the short term horizon. If you plan to keep a property for many years, in general paying down the rate will likely give one a better outcome.

I don't care about anyone's personal anecdotes to the contrary. Math tells us to never hit on a hard 17. Just because have done so and still won doesn't change a thing.

Submitted by no_such_reality on May 2, 2016 - 12:39pm.

Using flu's spreadsheet, and a 2.5% discount rate and the prior 1.5 point spread from the $400K loan ( applied to Flu's loan for example), his lowest total discounted cost would be to pay the points and current payment. Basically adding 50% to his present value savings over current by paying up front.

We get the following NPVs.

Existing Loan 1 run to completion:
NPV cost $576K.

Loan 2 with current payment:
NPV cost $557K. $19K net savings.

Loan 2 with 30 year payment:

NPV cost $566K. Still better than current (provided he's not paying $10K to do it. ;-) )

Loan 3 (not on sheet), pay the 1.5 pts spread in HLS example, drop rate to 3.5% 30 yr standard amort payment instead of loan 2.
NPV cost $557K. That amount includes the $7500 paid up front to close. Note, roll the points in and the NPV remains the same.

Loan 3 with the $7500 (1.5 pts) rolled in and current payment (overpayment):
NPV cost $550K

Loan 3 with the $7500 (1.5 pts) up front and current payment (overpayment):

NPV cost $547K (ugh dropped a minus sign, corrected)

Submitted by Coronita on May 2, 2016 - 1:10pm.

bearishgurl wrote:
FlyerInHi wrote:
Flu, I think you're saying that "no cost" loans are better because they allow you to refinance again and again, guilt free (loss avoidance. You're not "throwing away" out of pocket fees. That's the marketing angle.

But past is past. Make decisions based on what you know today.

In response to the italicized portion, maybe so. But a person who is a "serial refinancer" is still starting over again at 30 years every single time they refinance ... that is, unless they choose a 15-year loan (with much higher payments). However, the vast majority of refinancers do so for the express purpose of lowering their monthly payments (thereby increasing monthly cash flow).

God, I am not saying no cost loans are always better. I am saying it depends on your situation which depends heavily on whether you want/can pay more up front or want to pay over the long term, and use more of your upfront cash for something else.

Sheesh.

Submitted by an on May 2, 2016 - 3:14pm.

FlyerInHi wrote:
Flu, I think you're saying that "no cost" loans are better because they allow you to refinance again and again, guilt free (loss avoidance. You're not "throwing away" out of pocket fees. That's the marketing angle.

But past is past. Make decisions based on what you know today.


Do you have a crystal ball i can borrow?

Submitted by bearishgurl on May 2, 2016 - 5:41pm.

flu wrote:
bearishgurl wrote:
FlyerInHi wrote:
Flu, I think you're saying that "no cost" loans are better because they allow you to refinance again and again, guilt free (loss avoidance. You're not "throwing away" out of pocket fees. That's the marketing angle.

But past is past. Make decisions based on what you know today.

In response to the italicized portion, maybe so. But a person who is a "serial refinancer" is still starting over again at 30 years every single time they refinance ... that is, unless they choose a 15-year loan (with much higher payments). However, the vast majority of refinancers do so for the express purpose of lowering their monthly payments (thereby increasing monthly cash flow).

God, I am not saying no cost loans are always better. I am saying it depends on your situation which depends heavily on whether you want/can pay more up front or want to pay over the long term, and use more of your upfront cash for something else.

Sheesh.

I agree that if they truly come at "no cost" to the consumer, than they are "better" for most people who won't hold the property for the long term (meaning 12+ years).

How much the broker does or doesn't make for procuring, preparing, processing and submitting a borrower's mortgage loan app and supporting docs and placing their rate lock is immaterial because there is nothing the consumer can change about this system. As of April 1, 2011, an independent mortgage broker's lender-paid compensation has been based upon loan amount only, NOT terms ... as it was in the past. This provision was put in place to keep this group of brokers from being tempted to put unsophisticated borrowers in mortgage programs they have no business being in for the sole purpose of earning a higher YSP.

The new rule is known as the Loan Originator Compensation amendment to Regulation Z, part of a strengthened Truth in Lending Act passed by Congress in 2008. Designed to prevent consumers from being steered into high-cost, risky loans, it covers how a loan originator — or any person or company that arranges, obtains and/or negotiates a mortgage for a client — is paid.

Under the new rule, a lender can no longer pay a loan originator a lucrative rebate known as a yield-spread premium, which is tied to the rate or terms of the mortgage. Banks and other lenders can continue to pay commissions to brokers, but these payments must now be based solely on the loan amount.

In the past, the higher the interest rate and points, the more money a broker stood to earn....

(emphasis mine)

http://www.nytimes.com/2011/02/20/reales...

A borrower either wants to work with a mortgage broker who will shop the best loan for their circumstances ... or they don't. A borrower can't have it both ways, i.e. all of the above highly specialized services for "free" (to make them look good on paper to an underwriter), plus expect a kickback on closing costs (or zero closing costs) while also expecting their broker who did all the work for them to make little or nothing.

There are very few institutional lenders anymore. And even their mortgage loan officers get paid by the institutions relative to their production. A mortgage borrower also has far fewer choices today on the types of mortgages actually available on the open market and the terms under which they can get them. If a borrower doesn't like how the new "system" works, they are always free to pay cash for their RE purchase :=]

Submitted by livinincali on May 3, 2016 - 5:49am.

AN wrote:
FlyerInHi wrote:
Flu, I think you're saying that "no cost" loans are better because they allow you to refinance again and again, guilt free (loss avoidance. You're not "throwing away" out of pocket fees. That's the marketing angle.

But past is past. Make decisions based on what you know today.


Do you have a crystal ball i can borrow?

It's probably safe to assume that secular trend of steadily lower and lower rates from the early 1980's until now is coming to an end. Not that rates will rise significantly from here but mid 2's maybe 2 is probably the lower limit. It might make sense to pay a little bit for a lower rate now where as in the past 30 years it probably didn't. Of course you didn't necessarily know that at the time.

Submitted by scaredyclassic on May 3, 2016 - 6:50am.

it's just too painful to pay extra cash for a discount you might have gotten free in the next couple months, regardless of the math involved. refi with a rebate just feels better.

I did a refi at the for now bottom in early 2013, and if that really is the bottom, yeah, I should've paid tax deductible money to get it even a little lower instead of taking a large rebate. yet i dot feel nearly as bad about that possibility of lost gain as I would had i written a large check and rates kept chugging downward, even if the potential gain exceeded the potential loss.

. the problem is it's just very very difficult to write a check at the time of the refi, and very very easy to accept money, esp. when you can look at a graph and see the trend is down, down down. . i think the psychology of the sales pitch of no cost to refi is just too compelling, even if you crunch various scenarios, plan to stay a long time, and have thought about options...

im not saying it's a bad pitch. I'm acknowledging its tremendous power, even among the somewhat analytical.

the psychologists tell us that humans are wired much more strongly to have an aversion to losing money than to feel pleasure at gaining money, even if the math says take a risk. we hate losing stuff. it's probably wired into us evolutionarily. a bird in the hand is worth two in the bush, if you're trying to survive as a proto human on the african savannah plain. or in the jungle of the refi market.

Submitted by harvey on May 3, 2016 - 8:41am.

Kahneman is a good read.

Submitted by an on May 3, 2016 - 9:11am.

livinincali wrote:
AN wrote:
FlyerInHi wrote:
Flu, I think you're saying that "no cost" loans are better because they allow you to refinance again and again, guilt free (loss avoidance. You're not "throwing away" out of pocket fees. That's the marketing angle.

But past is past. Make decisions based on what you know today.


Do you have a crystal ball i can borrow?

It's probably safe to assume that secular trend of steadily lower and lower rates from the early 1980's until now is coming to an end. Not that rates will rise significantly from here but mid 2's maybe 2 is probably the lower limit. It might make sense to pay a little bit for a lower rate now where as in the past 30 years it probably didn't. Of course you didn't necessarily know that at the time.


That's exactly what I thought 8 years ago when it was at 4.75% and I paid dearly to get it down to 4.5%. I had the same think you just laid out. I stop trying to time the bottom. Also, at 1/8%, we're talking about $13k over 30 years, which isn't big enough of a saving to take the risk by paying ~$2500 for. IMHO.
This isn't considering what inflation look like over the next 30 years. $2500 is today $, while the $13k saving is over 30 years. If we experience another 70s/80s high inflation period, then the saving isn't all that big.

Submitted by NotCranky on May 3, 2016 - 1:00pm.
Submitted by an on May 3, 2016 - 4:06pm.

Blogstar wrote:
Crystal ball?
http://www.freddiemac.com/news/blog/sean_becketti/20160104_housing_sector.html

Exactly. In 2008, fed fund rate was at near 0%, mortgage rate was @ 5%, lowest in at least 28 years base on that chart (since it only goes back to 1980), but I'm sure it's lowest in >30 years. So, base on all those parameters, would you have guess rate would have dropped from 5% to 3.5% in the next 8 years? Hind sight is 20/20. Which is why I said my crystal is broken.

Submitted by FlyerInHi on May 3, 2016 - 5:02pm.

When the stimulus was signed into law in 2009, lots of people were so convinced that there would be hyperinflation, skyrocketing rates, dollar debasement. Ron Paul was leading the charge.

Respected economists looked at the capacity overhang and consumer pullback. They predicted no calamity and asked for even more stimulus to help the economy recover faster. Bernanke asked for fiscal help. Of course, the economists were correct.

I went with adjustable on my San Diego place.

Today, China is flooding the maket with trillions of dollars. Some of that money will end up in US mortgages. So I think we'll have a couple more years of low rates which will be good for housing.

Submitted by livinincali on May 4, 2016 - 5:57am.

FlyerInHi wrote:

So I think we'll have a couple more years of low rates which will be good for housing.

We could have a really long period of low rates. That's probably good for the housing market to a degree but it isn't as good as the previous 3 decades of continually falling rates.

Submitted by FlyerInHi on May 4, 2016 - 9:57am.

I didn't want to go out too much on a limb. I think we will have a long period of low rates because there is too much capacity. Vietnam, Burma, then Africa will be the new China producing cheap stuff.

Europe and Japan are paralysed. Brexit is a risk. We have dysfunctions and can't drive world growth alone. Brazil and Russia are imploding.

Maybe China will be able to engineer a consumer economy pivot.

What better time to build infrastructure? The USA should really go out on an infrastructure binge to help growth.

Submitted by livinincali on May 4, 2016 - 11:15am.

FlyerInHi wrote:

What better time to build infrastructure? The USA should really go out on an infrastructure binge to help growth.

Well as long as it's useful infrastructure and doesn't involve massively overpaying for it. Of course we like to spend billions on building high speed train tracks from Madera to Fresno County. China likes to build empty cities and Japan builds bridges to nowhere. Productive infrastructure investment sure. Governments figuring out what's productive, not so much.

Submitted by no_such_reality on May 10, 2016 - 2:03pm.

30 year rates drifting down?

Submitted by bewildering on May 10, 2016 - 2:17pm.
Submitted by Balboa on May 10, 2016 - 7:21pm.

Does anyone actually get this lowest daily rate? Right this moment we are filling out a loan docs and the stated rate is 4%. We do need a bit of special handling because we have shortened contingencies and may do a 21-day close. But we also have 20% down on a conforming loan with 800+ credit scores. Seems like we'd be good candidates for the best rate possible...

Submitted by bewildering on May 10, 2016 - 10:09pm.

Balboa wrote:
Does anyone actually get this lowest daily rate? Right this moment we are filling out a loan docs and the stated rate is 4%. We do need a bit of special handling because we have shortened contingencies and may do a 21-day close. But we also have 20% down on a conforming loan with 800+ credit scores. Seems like we'd be good candidates for the best rate possible...

Yes. People get these rates. But the rate depends when you got your quote, what you are buying, your income, and your lender.

I got my nice rates through some random bank suggested by Zillow. My existing lender quoted me 0.5% higher than the online place.

Submitted by HLS on May 10, 2016 - 11:53pm.

Balboa wrote:
Does anyone actually get this lowest daily rate? Right this moment we are filling out a loan docs and the stated rate is 4%. We do need a bit of special handling because we have shortened contingencies and may do a 21-day close. But we also have 20% down on a conforming loan with 800+ credit scores. Seems like we'd be good candidates for the best rate possible...

Absolutely!
Something doesn't sound right about your rate today,
Depending on loan amount, today's rate at no cost
to you for a purchase loan was around 3.50%
(and lower with a cost)
Going to 4.00% should be a HUGE credit to you.
Are you dealing with a bank/direct lender ??

And who decided you should have
'shortened contingencies' ???

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