No Cost Mortgage Advertisers Prey On Unsophisticated Borrowers
No cost mortgage advertisers pound the air waves spewing this mortgage lie. The no cost mortgage is a scam requiring great salesmanship, some misdirection, and an unsophisticated client.
So I’ve been railing against the no cost or no fee mortgage advertisers for years now…both on my blog and formerly on our radio show. Calling these phony lenders out to debate their ridiculous ads and their no cost mortgage business model is a lonely proposition. They usually hide in their telemarketing boiler-rooms satisfied to work for a mortgage “sweatshop” preferring not to ask to many questions of the “higher-ups”.
However, today one came out of the dark to defend his practice!
He works for Lenox Financial at the National Office…we’ll call him Mr. H. Mr. H emailed me to defend his company’s practice of selling a no cost mortgage. In case you don’t know who Lenox Financial is…they are the folks whose annoying CEO with a pronounced southern drawl claims a no closing cost mortgage is “the biggest no brainer in the history of earth”. I wrote a Lenox Financial company review just click the link to read.
What you see below is the dialog between Mr. H and myself.
—–Original Message—–
From: Mr. H [mailto:MrH @ lenoxnational.com]
Sent: Tuesday, February 06, 2007 10:58 AM
To: rkblake @ themortgageinsider.net
Subject:Your information on no cost mortgages leaves out a very important fact. If you have a loan of 200,000 at 6.5% your payment will be $1264/month (p&i). Compare that to a traditional loan with closing costs of $5000, your new loan at 205,000 at 6% will have a payment of $1229/month. It’s critical you look at the break-even on closing costs. Pretty simple to divide $5000 by the $35 you save, to break-even in 143 payments. That’s almost 12 years! What happens if you are like the average mortgage holder who refinances every 2.8 years? You never broke even on the closing costs. Who is in the better position to refinance if the rates come down below 6% again with no closing costs? What happens if you have a trusted broker who watches the market for you and calls to refinance when the market improves?
Senior Loan Officer
Lenox National Mortgage————————————
Mr. H,
(A lot of what you’ll read are indictments of business decisions made way above your pay grade, so I’m not blaming you Mr. H. with my criticism. I never blame loan officers for the unethical behavior of the “higher ups”. Try to keep an open mind, and really ask yourself the questions below. I’ve got 15 years in this industry, and if you want to have the same, thinking for yourself is an attribute to cultivate.)
There a lot of things wrong with the way Lenox Financial and many other companies advertise the no closing cost mortgage.
First, anyone who sells the no cost mortgage simultaneously sells a client into becoming a “serial refinancer” which is not looking out for the client. They are “churning” the client. It’s illegal in the investment world and it’s a violation of the broker/lender agreement in the mortgage world.
Even if it wasn’t unethical or a violation of contractual agreements, the current market with rates on the rise for a full 30 months now with no end in sight renders the whole idea moot. In all honesty, how many “watch the market and do it again” calls have you received from former clients in the last 30 months? None would be my guess. And you won’t be receiving any of those calls for years to come even if rates drop. Dropping rates would indicate recession fears and that is precipitated by home values dropping significantly. One can’t refinance out of their first no cost mortgage once their home goes “underwater”.
When the market rate in 1992 for a 30 year mortgage was 10% and eventually bottoming out at 5.125% in June 2003 ..the premise had potential. Where was Lenox in 1992, 1995, or even 2003? I didn’t hear any No Cost Mortgage radio spots in those years? So Lenox doesn’t market the idea of “serial refinancing” when it’s actually good for them. They wait until it’s bad for the mortgage consumer and then sell it like crazy?
Next, where did you get the figure of the average mortgage holder refinancing every 2.8 years? That’s a made up number to sell more no cost mortgage refinances. The average mortgage according to FNMA is held 5.7 years in the last decade down from 7 years in the previous one. The dropping average only happened because property values were climbing at unsustainable rates and folks were moving more often. Also dropping mortgage rates spurred legitimate refinancing helping to lower that average. Get real figures, not the spoon fed company line. Do a little research. Prove to yourself the are lying to you, and using you to lie to the customer.
My original article mentions the fact the radio ad verbiage is deceptive on it’s face. The phrase no cost mortgage is outlawed in California mortgage advertisements because it is so deceptive. Many folks in America as you know are astonishingly unsophisticated on financial topics, and no closing cost mortgage lenders are simply taking advantage of their financial ignorance to line their own pockets. That’s just wrong.
Lastly, I seriously doubt any company who sells the no closing cost mortgage is only bumping the rate from 6% to 6.5%. I’ve talked to many folks who’ve called your company and others with the same marketing message and the rate bump was closer to a full 1%….from say 6%-7%. And when the client yelps at the ridiculous rate, no closing cost mortgage companies harp on the fact “they waived” the costs. Your commercials don’t make it clear that there is a big cost for your no closing cost mortgage….a much, much higher rate.
With all that said, if you are going to be a loan officer… then be one. Not just some easily duped, party-line spewing, company mouthpiece. Help people make real choices about the most important financial decision they’ll ever make. Give them the respect and the truth they deserve.
Rob K. Blake
(end of email)
——————————————
So folks there it is …an inside look into a no cost salesmans attitude!
Folks don’t be fodder for the national no cost mortgage companies.
Instead learn to locate an ethical, truth-telling mortgage broker in your home town using The Mortgage Advantage mortgage shopping system.
You’ll be glad you did.
Good Luck
Author: Rob K. Blake
Published January 8, 2007
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My wife and I are victims of Bank of America’s No Fee Mortgage Plus. We were led to believe that we were saving over $6000 of closing costs. Our bank rep (who has not returned any of calls since our initial signing) mislead us to this trap.
In fact, BOFA did not pay for all the closing costs. We were classic victims of their fine print. If you feel that we have a case against BOFA, please let me know via email pmendoza39@yahoo.com.
Here’s a quick scenario of their shady business practices and lousy service…
Wednesday, April 9, 2008 - my wife calls BOFA to ensure that our property is appraised before our final date of backing out of the offer on 4/10/08. BOFA gives us their OK to proceed.
Friday, April 18, 2008 - With a declining California market, BOFA again appraises the home and let’s us know that an additional 5% is needed, since the market value has dropped. Our closing date was April 22nd.
*this was written on their addendum (which was signed). However never explained to us by our missing rep. and at the time, 2 days to come up with the additional 5%.
Present - we extended our closing date to Monday, 4/28 but a cashiers check is needed 2 days before. Which gives us 5 days to come up with the $17,500.
Why did we proceed with this? Well we had put a $10,000 good faith deposit to our escrow company (who did not want to extend our loan) and did not want to lose it. If escrow allowed us to extend, we would have gone through another lender.
If you are a victim of this and have any suggestions at this point, please contact me. We are planning to take action one way or another.
Thanks,
Phil Mendoza
April 23rd, 2008 at 6:52 pm818.915.5256
David,
I wrote a big post on COFI loans check it out below…
http://themortgageinsider.net/mortgages-refinancing/california-refinance-decision/
RKB
February 4th, 2008 at 6:11 pmwhat is truth behind cofi loans? i’ve been doing some research and can not find anything that will give an example of how they work.
February 1st, 2008 at 10:04 pmThanks a ton!
January 24th, 2008 at 11:06 amBrednan,
I’ve been watching the market today…and in the last 3 hours wholesale lenders have increased rates 3 TIMES!
The most I’ve ever seen…so the bottom was hit…at bounced off very quickly today.
If you didn’t already lock in a rate…I’m afraid tomorrow will be too late.
But as I told Jerome above…if you are refinancing to get out of an ARM, do it now as home values are dropping. If you don’t you could get stuck in your existing loan for the long haul.
Rob
January 23rd, 2008 at 5:23 pmHey guys, quick question. I am in the process of refinancing. Should I wait because mortgage rates should be falling soon or are rates as good as they’re gonna get?
January 23rd, 2008 at 4:26 pmDavid,
“The risk you take is the unknown investment return”, your words.
It’s not 10 year old thinking that says “every investment has the risk of losing the principal or it would be “at risk”. That has been known since the dawn of time and nothing “new” changes it.
You even admitted it yourself!
You know the odds of investing in ANYTHING that has a high enough return after tax, after expenses, after the interest cost of borrowed money to fund the investment…is a pie in the sky dream.
Unless you are talking about a situation like one of your past clients who had intimate knowledge about a business opportunity…but how many Joe Sixpacks have what he had?
You are not solving America’s retirement crisis if you can only help those who have rare business opportunities in their own field.
You have to go into the publicly available stock, bond, annuity, commodity, or real estate markets to help the general public.
And the rates of return in those markets DON”T warrant investment if the funds must be borrowed. On top of that, the risks in those markets are too great to use borrowed funds as well.
There are many success stories of everyday people saving routinely, investing in publicly available markets they understand, using their own money not decimating their net worth by borrowing their home equity…enough to show it works if used. You can’t blame the method, if most Americans don’t use it. You can’t call the outcome the cause. And it doing so decide a “new” way is better. The “old” way worked for the folks who used it.
I know I won’t change your mind either…but thanks for the lively debate.
RKB
January 17th, 2008 at 2:12 pmThe concept is simple, is the cost of borrowing funds more than the benefit of taking those funds and investing them? The risk you take is the unknown investment return.
But maybe you are right, being poor with a paid for home is better than trying to have a better outcome by assuming a little risk.
No mystery here, nor I am the only one with solutions and ideas that are different than the pablum being hoisted on the public by Wall Street, Banks, and Financial Planners.
Bottom line is I was were you are 10 years ago in my thinking. Then I took a look at the actual outcomes that were the result of the advice of the majority of folks like you. It is not pretty. What most folks do is blame the individuals for not being disciplined enough or not educating themselves to the need. That lets them off the hook for the advice they gave that didn’t work. Instead I have searched for alternative ways of thinking and techniques for empowering people to become financially successful. There are no guarantees that these alternative ways of saving for retirement will work. But we know that the way you are advising has failed the majority of folks because we have the data to prove it.
Once again, nice discussing this with you, not that anything I have pointed out will change your mind, just like to put out into cyberspace some alternative viewpoints.
January 17th, 2008 at 1:27 pmDavid,
My MS Finance graduate advisor used to say, “a little finance knowledge can be a very dangerous thing”.
You mention nonsensical ideas and attempt to back them up with an air of “mystery” solutions…solutions I’m sure only you have.
Finance is not a mystery. Compound interest is not a mystery. Inflation eroding buying power is not a mystery.
But muddying the water with mystery does nothing to settle the debate about home equity NOT being used for funding retirement accounts.
As I said above that was conveniently left unaddressed by your last comment where I said…
“The answer to the retirement issue is NOT to use home equity…the answer is education and routine savings and investing with earned income (not borrowed money) so you can take a risk or two and see a REAL return when and if you are right on your investment choices.”
Address that if you would…
RKB
PS: Yes I mean’t CAN”T …not can…edit post to reflect it.
January 17th, 2008 at 12:27 pmLPMI = Lender Paid Private Mortgage Insurance.
What they normally do is raise your rate above PAR (No loan margin via yield spread) and they pay a LPMI fee.
A live example: PAR is 5.375% and pays nothing. LPMI costs .875%. Lender finds the rate that allows them to pay the fee of .875% (LTV 80-85%) and a good estimate would be a rate of 5.626% would pay that fee.
So we were working with $212,500 earlier and the PMI was $74.38 per month. (PMI will drop off remember that)
$212,500 @ 5.375% over 30 years is $1,189.93 mo. + $74.38= $1,264.31
$212,500 @ 5.625% over 30 years is $1,223.26 mo.
LPMI saves you $41.05 per month until PMI drops off. Then it costs an extra $33.33 per month for the remainder of the loan.
If you make all your payments on time PMI would automatically drop off (using 78% because it will for sure then. Declining markets and such may make 80% tough going forward) after making about 63 payments.
So the remaining 297 payments you make would be $33.33 higher.
Bottom line you pay more and the lender makes more money when you do LPMI.
Short term gain… Long term loss…
Hope that helps you with your decision.
I actually agree with Rob in general on what he has said so far. From a financial standpoint it makes complete sense when you narrow your view down to the house and the mortgage.
But, each person has situations that vary and if things will get tight due to you expiriencing somewhat of a payment shock because you were only paying interest on your other loan then I understand why one would choose to try and keep the payment lower.
Many people in America live in the now and not the tomorrow. What saves you money now may cost you more in the long run.
You should just have the information to make the decisions though.
I think I can officially call your loan officer a salesman. Not a Mortgage Consultant.
January 17th, 2008 at 12:03 pmRob, I don’t sell option arms because they are inherently riskly and cost 1-1 1/2% more than a normal amortizing fixed rate mortgage.
January 17th, 2008 at 8:37 amHowever, I assume you meant to say you CAN”T make money if you borrow funds at 6% and earn 5%.
If that is what you meant to say then you are wrong. There is something called compound interest. I am sure you have heard of it. And it works to your favor even when the spread is a full point. In fact year 4 will make more than you are paying and year 7 you are in the black earning 5% and paying 6%. That is not including any tax deduction you might qualify for.
The other item you fail to understand is the effect of inflation. A dollar borrowed today and paid back 10 years from now can be worth only two thirds as much given a 3% inflation rate. Give me today’s dollars and force me to pay back in tomorrow’s devalued dollars anytime!
As to the strategy of making early mortgage payments or extra payments the Chicago Federal Reserve has published a paper outlining that strategy as a mistake and suggesting the arbitrage strategy I have suggested. Certainly there is room for disagreement on this, but you seem to make blanket statements as THE TRUTH, instead of understanding the complexity involved in finance. Anyway, check the math if you desire, but the miracle of compound interest works.
Paul -
So the truth finally comes out…Paul is banker! And in true banker form, he keeps that hidden until the very end…way to go Paul.
And spoken like a true banker, you speak of what “you deserve” and how the client can “go elsewhere” if they don’t like it.
Arrogant to the end…most bankers!
Hidden income like the banker version of yield spread premium called service release premium is as big a rip-off as yield spread premium is in the broker world.
It’s all income derived by not telling the truth… as least the brokers have to disclose their ill-gotten gains…You as a banker never do.
But since you are obviously “truth challenged” displayed by your inability to disclose at the beginning of this debate your banker identity…I’m seriously going to doubt the veracity of anything you’ve said before…and any claims of truthfulness on your part with clients.
RP -
You be served well for years to come with The Mortgage Advantage…you’ll be glad you did.
Suffice it to say, my advice is general in nature since obviously I don’t know your personal situation to advise specifically.
In general terms, and that is not to say the general advise is not valid, I’ll repeat my advise to refi with one loan to pay off the interest only first. No second or HELOC. You’ll get in at the best rate, with no PMI, and achieve the most import goal: rid yourself of the ARM with interest only payments.
If you need to, refi the cars to car loans you can pay off in 2-4 years…then you actually OWN something….and you get rid of finance charges. Paying off a car over 30 years is silly…and expensive!
These are all common sense ideas that our grandfathers knew and we all got away from.
What’s the old adage defining a recipe for disaster, “Borrowing from Peter to pay Paul”…always ends badly. Break the cycle…live within your means, pay debts off to improve your net worth.
Remember most people giving lending advice have some money to lend. I have no lending motivation, therefore, I can tell you what you won’t hear anywhere else…maybe what you don’t want to hear…but you need to hear it, to be reminded of what you already know…debt is debilitating…the antithesis of freedom.
Act accordingly….
Good Luck!
RKB
January 17th, 2008 at 12:48 amGuys,
January 16th, 2008 at 11:47 pmThanks for all in responses and opinions on my situation. To answer and clear up a few questions. Total CC pymts are $850/mo. Most are a very good rates. I made the mistake on putting a used car on one at 3.9% for life not knowing that the lenders see this as revolving credit and not auto loan. We have another car payment in the family that is $540/mo. . I also have a student loan of $200/mo.. My wife has a cash only income on $200/wk. but I know that this is not a consideration for a lender. Also the 2nd mortgage was for a 30 year fixed not a HELOC. And last a question about a LPMI, is this a good or bad thing. I am planing on getting the BUILD shopping system as I see that there are many aspects of this process that I have yet to learn.
thanks again,
RP
Rob, I would like to respond. I don’t disagree with part of your business philiosphy, but part of it is flawed IMO. I DO give clients the option of choosing a lower rate (i.e. par rate) if they are willing to pay more in origination. Key word there is choice. Everything is disclosed UPFRONT on my GFE including YSP (but I usually make SRP which doesn’t get disclosed).
Do you have an issue with SRP as well?
The way that I look at it, I deserve to not have to disclose SRP because my company is assuming more risk on the loan (we fund it ourselves). If that loan doesn’t get sold, guess what we’re buying it back. I give clients choices, if they don’t like those choices, then I suggest they go elsewhere.
I say let consumers decide for themselves if they are geting a fair deal, most are quite intelligent. My clients keep referring me to others, so apparently I’m doing something right. BTW we don’t “charge” YSP, we offer a rate and let the consumer decide if that rate is within their comfort level. Consumers in this day and age have many, many, tools to shop for a mortgage, and I encourage my borrowers to take advantage of those tools. If I am consistently offering above market rates and closing costs, I’m not going to stay in business long. No different than any other business.
January 16th, 2008 at 11:44 pmPaul,
Thanks for stopping by…the rate quoted for RP that Greg and I were discussing a few comments up…the broker was making 2.25% in YSP…are you telling my I should let that go!
Not calling that RP’s broker on the carpet for a 2.25% yield spread premium is ridiculous! And we know all of that was going into his pocket to do to the “hard closing costs” of $1900 being charge in addition….and you know being in the business too…if wrote the estimate at 2.25% yield spread premium he’ll try to get more before he locks the rate…right?
Any broker can quote a great rate …very few lock’m that way.
Plus we was an incompetent broker too…not knowing PMI is tax deductible, selling a heloc second for credit card consolidation…on an on.
Every Mortgage Insider red flag went up on that guy…not just his rate quote.
Good non-lying, competent, professional mortgage brokers DO get my respect…as a matter of fact, Paul, I tell people repeatedly here, a professional mortgage broker is the ONLY way to get a mortgage….never a bank.
Because it’s true…an ethical mortgage broker WILL beat a bank in rate, costs, and service.
But if you are a Yield Spread Premium charging mortgage broker, you’re going to get from me …all day every day.
Thanks for your 2 cents…
RKB
January 16th, 2008 at 10:58 pmRob, Greg Phillips is obviously well versed in origination as he pointed out the same flaws that I was going to allude. One thing that bothers me is that you seem to make many assumptions when giving advice to consumers. You often seem to conclude that a “crook broker” (apparently we all are) is ripping off a client by offering them xyz rate. Rob you’re a smart guy and I don’t doubt your loan IQ, but you know as well as any of us that is often times a slippery slope for you to slam a broker’s rate quote based on limited information.
All I ask is that you give some of us brokers some respect. We do good things for people and are EVERY BIT competitive as a retail banks. In fact my closing costs are typically within $500 of a retail bank and usually 1/4% to 1/2% lower on rate. If I have to lower fees/rate to beat a reatail bank or another broker, no problem, just ask! Just my two cents.
January 16th, 2008 at 9:39 pmGreg and RP,
You are right I was pulling the YSP from memory yesterday. So let me correct that…yesterday’s YSP on a 30 year conventional No-cashout refi…was 2.25%…..still a ton of Money! More than twice what a no-YSP - 1% Origination fee mortgage broker would charge!
As to the no-cashout issue…when I said “don’t use home equity to pay off unsecured debt.” I meant the first mortgage too.
Just take the 186K rolling costs…legit front end costs…and get away from the “interest only” adjustable first.
At a $250K appraised value, you’ll be able to call it a no-cashout loan and avoid PMI…and if you shop well…should get you a 5.375% rate to boot.
Throw all those extra costs, higher adjustable HELOC payments toward the $40K in debt…and they’ll be gone in no time.
Who wants to pay years and years on consumer debt…it’s just not smart.
Greg thanks for the side-by-side RP’s loan office should have done for him…but in the end just get out of the adjustable first and don’t make the mistake of adding a new adjustable rate loan to the mix.
Good Luck to both of you,
January 16th, 2008 at 4:07 pmRKB
Rob, in response to RP’s post and your answer.
One inconsistent thing you pointed out is the back end premium. It was just off enough to point out.
I checked 3 lenders with PAR rates at 5.375% on a 30 year fixed.
I think you might have missed that his loan offer was cash out. The premium without the cash out adjustment was 1.75-2.00% for an interest rate of 6.00%
The adjustment for cash out ranged from .500-.750% depending on the LTV. (likely .50% in this case at 80%)
This would mean the broker compensation ranges from 1.00-1.5%.
Another issue I see that could be a problem is RT’s ratio’s.
RT what is the minimum payment on all of your credit cards?
What is your auto loan payments?
What is your installment debt payments?
Or give us a total of all payments excluding your mortgage and give us the current balance of your mortgage.
It may be necessary for you to pay off some debt to allow your loan to be approved. NO ONE on here has the knowledge of your situation to advise you appropriately. We do not see your application to give you advice on exactly what to do. We do not have a loan application nor can we run an underwriting system to tell you exactly what you can or cannot do.
Rob’s plan may help you negotiate a better deal though. He has some links to those plans in his posts above.
Rob makes good points about PMI though. Is that 2nd mortgage a fixed rate or variable?
A 15 yr note should be .375-.50% lower than a 30 year. Just in case you wondered.
Did this loan officer give you a payment with PMI and with splitting the loans for you to compare?
I may have enough data to do this for you.
A first mortgage of $186,000 @ 6.00% is a payment of $1115.16.
A second mortgage HELOC (Traditionally Interest Only and a Variable Rate and assuming no adjustments) is $181.25 per month interest only or for the sake of comparing like terms $$202.77 over 30 years.
30 years @ a total of $1,317.93
Total repayable: $474,454.80
$213,000 is 85.20% of 250,000. I think we can cut this down to 85.00% so your PMI is less expensive. ($500.00 lower or total loan $212,500)
$212,500 @ 6.00% is a payment of $1,274.04
PMI with MGIC at 12% Coverage is around $74.38 per month.
That is a total payment of $1348.42
So the no PMI loan costs $30.49 less and that variable rate HELOC could go up not to mention they usually become due at 15 years not 30.
Sounds like your loan officer thinks they know what is best but did not do their due diligence in explaining each option to you and letting you pick.
PMI cancels automatically at 78%. You can contest it when you hit 80%. But worse case is at 78% you will no longer have that payment and one loan would be a lot less on the total repayable.
January 16th, 2008 at 3:29 pmDavid,
My position is only use debt to buy appreciating assets..if you can manage the debt and if the appreciation is virtually guaranteed. Therefore, barring the 4 years of the Depression and the 2-4 years ahead of us now…using a mortgage to buy a house is “good” use of debt.
As far as people not having enough for retirement WITHOUT borrowed funds is a problem in our country brought about from people who promote the idea one can get rich anyway….maybe though the borrowed equity in one’s home for instance.
There is no “pain-free” way or short cut to a healthy retirement account. Trying to mask low savings and investment practices of Americans by saying the home equity is the solution…is only taking the one thing they did right and soiling it too. Plus it sends the message you can have your cake and eat it too.
Finding those investments you speak of “that protect principal and still give you a rate of return ” is simply not possible. I noticed you didn’t say a “rate of return greater than your cost of borrowed funds”. If you want low risk your saddled with low returns. You can’t borrow mortgage money at 6% and then invest in a safe T-bill a 5% and make money.
The answer to the retirement issue is NOT to use home equity…the answer is education and routine savings and investing with earned income (not borrowed money) so you can take a risk or two and see a REAL return when and if you are right on your investment choices.
As you pointed out with your client, sometimes the best investment is in a business you control and understand, rather than the advice of an investment huckster (ie. stock broker, mutual fund manager, financial planner, etc.). Yes, just like in the mortgage biz, the investment biz has it’s share of con men.
As a matter of fact, there was a combined mortgage / investment scam going around not long ago ( I’m sure you David were not apart of it) where mortgage brokers were putting folks into Option ARM loans with the same idea…maxing the cashout to buy investments.
Then the mortgage broker turned financial wiz would sell them a fixed annuity as a “safe” investment. Now those folks just few years down the road are seeing the Option ARM recast, watching their rate jump, and negative am portion increase the indebtedness on there house increase. All the while they can’t touch the “investment” annuity to help offset rising mortgage payments without getting hit with an enormous “surrender” fee.
The mortgage broker / financial wiz would pocket a $6-7K on the refi and make another $18,000 on the $100,000 annuity the cashed out equity would buy.
What a Scam!
I guess you’d say these borrowers just didn’t find “trustworthy folks to guide them”…well those trustworthy financial advisors, my friend, are few and far between…
That I’m sure we can both agree on….
RKB
January 16th, 2008 at 3:26 pmRob, I couldn’t disagree more. You seem to come from the “all debt is bad debt” club. But that type of thinking is what keeps people from building real wealth. I see the side effects of this here in Florida. Retired folks, mortgage free, who watch as their retirement income is eroded through inflation and increase costs such as insurance, gas, medicine, etc. Bitter they are and with some real reasons to be bitter. After all they did what the common wisdom told them too, got rid of their debt. But nobody bothered to explain to them what they were giving up, additional wealth.
January 16th, 2008 at 2:15 pmThe ability of real estate to create wealth better than other investments is based on the leverage one can obtain using a mortgage. Equity in a home receives no interest or appreciation (the appreciation is on the real estate not on the equity). Taking that equity out of the house to use for investment purposes is not only prudent, but required in today’s environment where retirement plans are mostly self administered and self funded (sure there is a 401K match sometimes). There are many places to put money that protect principal and still give you a rate of return if you fear risk.
As to my client, he invested in a business opportunity that he had intimate knowledge of both the industry and the specific business. This is what should be done. (By the way he was concerned with his credit score dropping because of the credit card debt during this process). If you don’t have the expertise, then develop it or find trustworthy folks to guide you. If you are totally fearful, then there are investments that protect principal.
Unfortunately, the common misconceptions on what real risk is and on how to build wealth will engender lots of folks to barely making it through retirement by working at Wal Mart and complaining about taxes and costs as they rise.
Rob, I respect your challenging of Lennox and those that get people into “no fees” loans. Good luck.
David,
It’s a good question. And I know the advice NOT to pay off credit cards with home equity flies in the face of all the conventional “wisdom”.
So here goes…
1. Never trade unsecured debt for secured debt. The banks loves it when you do that…paying off unsecured credit card debt with secured home equity is doing just that and it’s big-bank propaganda.
2. Never lengthen the time to pay off a debt. The longer the debt is outstanding the more interest you’ll pay virtually independent of rate. Paying off a credit card over 30 years is not smart. Leave the debt on the credit card, you’ll be motivated to pay it off faster.
3. Equity cashed out for debt consolidation is NOT tax deductible.
4. A FNMA study done a few years ago showed 85% of those who paid of credit card debt with home equity were back in debt at the previous levels or HIGHER just 28 months after being credit card debt free.
5. Setting up the belief your house is an ATM, so rampant consumer spending now can be justified will cause problems when fast rates of appreciation reverse.
This is to name a few reasons. David, with a little creativity one may have found a better way to cover the “unexpected” medical bill which triggered your clients need in the first place.
For example, maybe he had a one of those 401K’s that would allow a 3% tax deductible loan. He could have got the debt off the credit card that way…and not in a 30 year loan.
David did your client “learn anything” from your solution? Did he setting up a medical savings account at work or individually to avoid this problem in the future? Or did he learn the “easy way out” and will therefore be more likely to use it again and again?
In the mortgage world, we originators are all brain-washed into thinking the right way to help someone is lend them more money….when really it is not.
You mentioned “the rest of the cash was placed into another business opportunity”…increasing his debt to fund investments is always wrong.
Sure you look like a hero when the investments are up…but remember 83% of those who play the stock loose. Even mutual fund managers are wrong more often than they are right. In the hot tech market of the late 90’s the S&P 500 averaged 35% annual returns and yet 88% of mutual fund managers not only did NOT make those returns, they LOST money…a negative return for their investors.
The safe way to invest is through “diversification” across markets. Stocks, bonds, gold, real estate, etc. When you take your real estate gains and put them in stocks say…you are no longer diversified…you might as well just be in stocks.
If you’ll remember back in early 2000 125% home equity borrowing was big. Real estate was climbing 12% a year, so the banks rolled out those loans to line their pockets since the risk was minimal enticing folks to borrow big time.
Folks who worked for “tech companies” were taking out these loans against their homes to buy more options on their own company’s stock. A “no-brainer” investment that will make them rich! Most of them lost their homes when the tech bubble burst. You as an originator can’t be a part of that even if the odds are slim.
Originators don’t get paid to give “good advice” they get paid when they give advice that ends in more mortgage borrowing. Don’t always do “what the client wants”, if what the client wants is to harm himself.
David, be sure you aren’t following the “standard line” when giving borrowers advice. Go out of your way to keep the borrowing to a minimum. Your clients will benefit more in the long run.
Thanks for stopping by…it was a good question.
Good Luck
January 16th, 2008 at 12:01 pmRKB
Curious what your thinking is on not using home equity for unsecured debt. I agree that is a good general rule, but there are certainly some situations where it makes sense.
For Example a client of mine had some unexpected medical bills not covered by insurance that he put on his credit card (physician made this demand minutes before the surgery was to start, but that is another story). This client does not abuse his credit cards and has a good history of paying them off. We used some home equity to pay off this debt in his refinance because his investment money was not liquid so he would have carried that credit card debt for a while. The rest of the cash-out was placed into another business opportunity. So we were able to lower his tax burden, increase his investment portfolio, and give him no credit card debt (something that was important to him) and manage his home equity properly.
That was a couple of years ago and since then the business opportunity has blossomed for him creating substantial wealth. He thanks me often for the advice and proudly tells others about the situation.
January 16th, 2008 at 9:36 amRP,
Glad you found us!
Now on your situation…
That rate of 6% is WAY too high for today’s 30 fixed conventional loan the par rate is 5.375%!
For every .25% in rate bump this Chicago broker gets you to accept he earns a 1% percent ‘kick-back” from the funding lender. At 6% today he’s making almost 3%….or more than $6000 to do your loan…what a hack!
RUN from that guy as fast as you can!
Read everything on this site about Yield Spread Premium…and find an ethical mortgage broker, hold his feet to the fire, and only pay a 1% fee with no rate bump or back-end income for him.
You can find such a broker…they are out there…use our step-by-step methodology for finding, hiring, and controlling such a broker…get a copy of The Mortgage Advantage…best money you’ll ever spend!
Also once you understand yield spread and how brokers REALLY get paid you can locate a local provider and get started. Check back daily during this process to hear our Daily Real Mortgage Rates 1 Minute audio update and know the REAL mortgage rate to see who is lying to you about rates.
That comes in handy during the locating stage and once you find a broker, the rate locking stage…you can’t get screwed…when you know what he knows!
The closing costs looked low..but that was because he left out any front-end broker compensation (since he’s making a ton with yield spread) it is about right …same for the prepaids.
Don’t worry about paying PMI…it is now tax deductible and will be for the life of your loan…and don’t use home equity to pay off unsecured debt. Never!
Do one loan…maybe you’ll get lucky and your appraisal will come back so now PMI isn’t needed..if not pay the PMI and get the tax deduction until you can prove you are below an 80% LTV…and have it removed.
Eliminating Lenox Financial or any “no cost” shyster is only the first step…next is learning how to select the “right” mortgage broker and work with him from a position of power and knowledge!
Good Job and Good Luck!
January 15th, 2008 at 11:05 pmRKB
Rob,
January 15th, 2008 at 10:36 pmWell, this is all an eyeopener for me. I am looking to refi from a “int only loan” before it adjusts. I am out of the penalty term and looking to leave. Thankfully I found this site and page as I was considering, dare I say, “lenox”(not worthy of captilization). I do have a local broker here in Chicago that is offering this:$213,000 total mortage( a $186,000 first and a $29,000 second to get around the PMI). The HELOC just seems a bit scarry to me after the “int only loan”. The rate is 6% on the 1st and 7.75% on the 2nd. Est closing cost are $1900 and the est. prepaid are $1500. These will be rolled into the loan total. Does this all sound about right and fair? I will pay the apprasial of $350 out of pocket, hoping that the apprasial comes in at $250,000 or so. One last note, Family Credit rating is around 700 each and there is a fair amount of revovling credit of $40,000 which is from employment issues that got me into the “int only loan” to start with. I thought about getting a “cash out” for 1/2 of the CC debt to get the LTV better and to write off the interest, but I’m not sure about paying it for 30 years. Please give me your feed back on this and and advice. Also, of the following fees, what can be negociated or deleted:Appr, credit report, lender insp fee,processing fee, underwriting fee, flood cert fee, title ins, and there is also a processing fee for the 2nd loan. Thanks again for your input and great site!!
RP
BTW, the employment issues are resolved and the aprox household income is $80,000/yr..
[…] No Cost Mortgage Advertisers Prey On Unsophisticated Borrowers […]
January 2nd, 2008 at 2:21 pmRandy, good advice from Rob. However, you might find yourself in a position where the equity of your home is so low that you can’t get a conforming loan. The underwriting is much more conservative now, so depending on your credit scores, and your area it might be wise to wait until your loan to value goes lower. Here in Florida, because of decreasing values we are having problems getting loans through with greater than 90% loan to value no matter what the scores!
December 14th, 2007 at 8:31 amRandy,
Thanks for the heads-up on the Lenox ads…I looked into it and I missed an alternative url to block…it’s blocked now!
As far as your refi goes…it might be a good idea to refi combining both loans as long as your heloc loan was 100% used to purchase your home and you didn’t refinance it since the purchase. If you did…the new loan would consider the consolidation refinance a ‘cash-out’ loan even though you are not putting any cash in your hand.
It could be a good idea if you have good enough credit to get an A paper, conventional loan…so you could expect par rates today…about 5.875%…lowering the rate on first as well.
A nice incentive to get it done before the end of the month is the tax deductability of the PMI which will now be charged on the new loan…making that added monthly expense you sought to avoid before even more palatable under the new law.
Good Luck with that and happy holidays!
December 13th, 2007 at 4:12 pmRKB
I appreciate the truth on LHF. I always hear their radio ads in my market and was always curious. I had searched for feedback on them before but never found this site till today. And today my curiosity has been squelched with answers.
Rob, I do want to add that you have a Lenox add up right now from Ads by Google. I even took a screen shot ad evidence.
My curiosity stems from wanting to refi my 30yr fixed and heloc that I got when I purchased my house. It was “creative financing” from Amsouth (now Regions bank) so that I could avoid PMI.
My 30yr fixed is 6% and my Heloc (like all helocs) is adjustable and currently at 7.25%. I would like to get rid of the heloc and just have one home loan.
Any ideas?
December 13th, 2007 at 2:45 pmTom T,
See everyone Tom T just admitted a 3.5% point Total Revenue per loan!
Tom you may have missed the point of this website…to steer folks away from mortgage providers like you who think a doing a loan is worth 3.5%!
Backend points are hidden revenue the client pays for with higher payments. It’s a practice we rail against here at TheMortgageInsider.net regardless if those backend points are called yield spread premium or SRP.
As I’ve have told my readers for years now….Never Trust a Bank or Any Mortgage Provider Who Operates Like a Bank!
You’ve made my point for me beautifully in your comment.
A correspondent lender folks ACTS like a bank in that the purposefully closes the loan in their own name using a line of credit to skirt the 1999 RESPA reform requiring “brokered loans” ( loans not closed in their own name) to disclose backend revenue.
Folks we could have a clearer example of why I’ve always said, “Never use a bank or company that acts like one to provide first mortgage money.”
Tom T, you should be ashamed of yourself making and then bragging about ******** the “unsophisticated” borrower who doesn’t understand your total standard profit margin of 3.5%
Those 2 backend points just cost your client at least a half a point in rate making his payment needlessly higher!
“I’ll just make my 2 points on the back end, 1 point on the front end and everyone is happy”
Hardly…everyone wouldn’t be happy if they knew you just raised their monthly payment by $100 a month for no reason other than to line your pockets with their money!
December 7th, 2007 at 11:19 amI manage a wholesale mortgage branch in MN. What’s nice for me is that I am a correspondent lender. This simply means that I have my own warehouse line to lend with, therefore I do not disclose yield spread premium on the HUD. In fact I don’t get paid yield spread premium by the lender, I get paid SRP. We typically make about 2.5 points in SRP on a loan and still beat the snot out of Lenox on rate! Oh ya, BTW Rob, I can and often do waive my origination fee for those that ask. If you don’t ask me to waive it then I won’t. I’ll just make my 2 points on the back end, 1 point on the front end and everyone is happy. You should try correspondent lending Rob, you make 3.5 points average on an FHA loan….
December 7th, 2007 at 11:02 am[…] Interesting table below - if you remove Nevada* from the top foreclosure list and slide everyone else up a position you would have a direct correlation between the top 3 foreclosure states and the top 3 mortgage fraud states. 7 of the 10 top mortgage fraud states are on the top 10 list of foreclosure states. Maybe we are literally “bailing” out the criminals rather than the poor souls depicted on 60 minutes and the nightly news that lost everything due to a slimy, fast talking mortgage brokers. […]
December 6th, 2007 at 12:26 pmBrian,
There are no and never have been any Lenox Financial Ads…I’ve restricted them in my Adsense account. However, there are ads from Ditech, LendingTree, and Countrywide that also propagate the idiotic notion one can do a mortgage or refinance for free!
David Shafer’s post above proves my point…not yours. His client showed him a GFE where Lenox was making 4 points in yield spread premium …that takes a full 1% bump in the rate….
Sounds like you have yet to really read the info. here on yield spread premium overcharging…
Also you have missed the info. on this website to keep abreast of the markets…both real estate and mortgage.
If you are selling in 12 months…you should sell NOW!
Have you not been paying any attention to the markets? You’ll lose at least 15% in the next 12 months….maybe more depending on your market.
You missed the boat…should have sold this past summer.
Why refinance at all if you are leaving in 12 months…rates are dropping so your payment should not go up…what’s the point?
Plus, should your house not be on the market right now if you want to sell in 12 months?
If your house is on the market, you can’t refi. without committing loan fraud.
You’ve got some thinking to do…
December 4th, 2007 at 11:49 amMR. BLAKE, I think it is somewhat ironic that this website has ads posted for Lenox Financial. Sure, I know why, but it is still funny. We all want to make money, don’t we? You and others on this string seem more interested in making themselves sound smart than really educating those of us not in the retail mortgage world (typical retail salespeople). The average, uneducated mortgage client will not know about yield spread premium anymore than he will know about prepaid items and “break-even” points, so using a full 1% spread is a fraudulent way to make Lenox’s business model look bad (Pot calling the kettle black,i.e. David Shafer’s comments above prove it). You will hear just as many ads and see just as many commercials from normal mortgage brokers as you do from Lenox. I am considering Lenox because I am in an adjustable rate mortgage(LIBOR, have used the savings to invest in other markets), yet have a short window (less than a yr) before I plan to sell my house (in a decent market). So, of course it makes sense to consider saving $5000 in order to secure a fixed rate in the face of instability in interest rates and to ensure that I have the ability to wait another year if I want or need to without risking a skyrocketing adjustable. My new payment? A WHOPPING $42 per month more. Anyone want to calculate that break-even point? If you were REALLY interested in helping the consumer, you would explain scenarios where this actually makes sense, because they certainly exist. Also, your points concerning rising interest rates seem a little outdated now, don’t they?
December 4th, 2007 at 11:21 amTonight I had the pleasure of speaking with Mr. Blake and I just thought I’d say thanks for the advice. For the rest of America who missed our conversation here goes…
Rob basically informed this white collar mortgage challanged worker that my wife and I got taken advantage of by a well known mortgage company we’ll call “LF”. Like most homeowners we didn’t understand all the technical mumbo jumbo or the right questions to ask. So we are stuck in a loan for 3yrs. at 9.25%.
I won’t bore you with all the details but I will say this, had I known of Rob Blake’s site 5 months ago I definately would not be stuck in this loan.
My point here is like Rob says, get educated and find yourself a mortage broker that will work for YOU and not the big banks. This site has alot of helpful information and Rob certainly knows his stuff, as I witnessed first hand tonight.
Rob you should see if www askRobBlake com is taken. I know “ask Jeeves” gets alot of traffic. People need to hear what you know!
Thanks again.
November 29th, 2007 at 6:13 pmPaul M.
I am a mortgage broker and have recently had the opportunity to see the GFE from Lennox. A client of mine initially contacted them on a refinance.
November 21st, 2007 at 12:02 pmThankfully, they screwed up the appraisal process, so he came to me next. Here is what I found. Their total compensation was in the range of 4 points on a $250,000 loan. The costs they were covering were in the $2000 range. They still charged the lender underwriting fee, the taxes/recording fees and of course pre-paid fees. I was able to cover the same fees and lower the interest rate 1/2 point and still make a fair amount from yield spread premium . After I showed him that analysis, I was able to demonstrate how a lower interest rate and using equity for the closing costs was in their best interest. So he got a loan 7/8 point lower, and I still made a fair amount for my advice.
Ok your message makes perfect sense.
And since you mentioned the stumbling giant I think they advertise a “No Closing Cost Loan” on nearly every media available. Nobody does what they can? I think that is the biggest fraud in the whole advertisement!!!
November 21st, 2007 at 10:12 amFor somebody outside of the mortgage business, this stuff could get overwhelming. Rob, thanks for making it a bit more clear. And Greg, thanks for your advice of obtaining a couple of additional quotes. That was my initial plan. I’m most certainly not going to evaluate a quote from only Lenox, especially after reading this blog!
November 21st, 2007 at 9:53 amGreat post Stephen,
You reminded me and I want to hit home…I’m not “picking on” Lenox Financial per se…but as you said…any “mass advertising” mortgage provider all fit in the bill of “deceptive” and “boiler room” including but not limited too…
Countrywide Home Loans, LendingTree, E-Loan, Ditech, Lenox Financial, Quicken Loans, AmeriSave, …and any other mortgage originating company who dupes the masses with “what they want to hear” type advertising.
Thanks for stopping by Stephen…
November 20th, 2007 at 9:50 pmMr. Blake is correct; this is a big purchase, why would you trust it into the hands of a boiler-room operation???
I’ll tell you why, because the average consumer (and yes the majority of them are average (or below)) are so consumed with “the lowest rate” or “the lowest fees” that they have totally lost the idea of common sense.
What else is a company like LENOX going to advertise? (I am a broker in NJ and know nothing about LENOX - but I do deal with these types here on the East Coast daily. In my opinion there is nothing worse then LENDING TREE) do you think LENOX and the like are going to advertise customer service? product knowledge…NO! Truthful Advertisement does not get the phone to ring, Truthful Advertisement does not allow for “the numbers game” and Truthful Advertisement does not appeal to the average consumer who thinks that the “low” in rates & fees is everything. That is it in a nutshell. The “Lenox’s” of the world essentially take uneducated know-it-alls and abuse them on a daily basis.
I have 15 years experience in the industry and my mind is boggled every time a consumer opens with the question “what is the rate” A “consumer” would rather here the lowest rate and believe, rather then pay a true mortgage professional for his or her services. I have lost more deals then I care to think about because I quoted a “real” rate and consulted with real knowledge. Even with the huge amount of losses, I have still made a wonderful living in the industry over the 15 years and have built a steady referral base as well as a great reputation.
With a blog like this and all of the information available, you would think the below average consumer would at least attempt to be average…Pardon my rant…but anyone who uses a large company because of their ability to “over advertise” gets what they deserve!
Oh by the way…If the math does not work, the “no cost loan” is a loser. It’s all in the math…and a no brainier dummies.
November 20th, 2007 at 9:41 pmGreg,
I’ve been debating Lenox loan officers, consoling previously skinned clients and answering reporters interview questions on Lenox for over 4 years now…
Trust me when I say…. I DO KNOW about Lenox Financial….
And my advice to seek a local, ethical mortgage broker VS an over-hyped, deceptive advertising, boiler-room type, charlatan company is not …nor does it need to be “borrower specific” to be spot on advice…
Getting the knowledge to locate a the right mortgage professional and put him on your team to use over and over again…is just plain good advice…no matter who you are.
Americans often think a quick phone call gets the job done…and if you’re ordering a pizza…maybe it does.
But come on folks, we’re talking about the largest financial decision you’ll make…give it the respect it deserves….find a Pro.
November 20th, 2007 at 7:13 pmNow I am starting to see the purpose of this post a little more clearly.
I do not exactly agree that Lenox as a whole company including all it’s loan officers should be painted with the bad brush. It is like saying New Century Mortgage was a bunch of crooks. Truth is I provided good services while working for them and charged below average rates and fees. I was on the retail RBC Mortgage acquisition so I did prime and sub-prime plus brokering to wholesale. Now there initial retail was crooks as they pushed prime people into sub-prime products.
Brendan, I suggest that you simply seek 1-2 more quotes to ensure you are getting a good deal.
This guys loan officer gave him a with and without closing costs option. Rob you DO NOT know his entire scenario or credit profile to make such a comment. He may have ran into an honest and genuine LO at that broker.
Sorry Rob but I think you were a little too bold and unaware of all the facts about this borrower to say he is being charged .50% higher than what he should be. I hope you understand.
November 20th, 2007 at 6:59 pmBrenden,
Why are you even considering an interest only loan? The only benefit of this loan in today’s market is more yield spread premium for Lenox.
As I said before, trying to pick between two Lenox offers is deciding between to different way to die.
Go elsewhere…find the right provider, and the right loan virtually takes care of itself…
Find the wrong provider (Lenox) and no loan is the right loan…
Rob K. Blake
November 20th, 2007 at 5:07 pmPS: Our ebook could help you with a step=by-step method for finding the right local mortgage provider…check that out. And always check the Daily Rate Watch to know the “real” rate for the day…you’ll know whose lying about rate to make more yield spread premium .
Brendan,
You ask, “What are the right questions to ask??” referring to a Lenox Financial mortgage offer…
That’s like asking, “Where should I take the bullet…the head or the chest?”
Find a local, ethical mortgage broker in your own back yard who can be a resource to you time and time again…
Rob K. Blake
The Mortgage Insider
PS: Did you listen to today’s “Daily Rate Update” on our website? Both of those rates you quoted are .5% too high…either scenario bad for you…and more yield spread premium for them!!
November 20th, 2007 at 4:57 pmI am currently evaluating a quote from a Lenox rep. I have read all of the above comments and ultimately, I need to know the right questions to ask or the mortgage consultant (at Lenox or anywhere else) is going to position their loan to me as the best of my options. Lenox quoted me for 6.875% with no closing costs on a $215,000 loan with a monthly payment of $1533.77. He also said he could do a conventional loan for 6.5% with closing costs of $4,300 and the monthly payment would be $1489.88. These payments do include escrows and P&I. They are 30 yr fixed with the first 10 years Interest Only. The break even is 97 months, right?
November 20th, 2007 at 4:42 pmThe issue is that all of the costs, fees, and rates are smokescreened. So, when you try to discuss these things with mortgage consultants, you never know what the truth is. How do you verify this? Right now, I have a quote in front of me from a Lenox rep. It is for 6.875% with no closing costs and the monthly payment is $1533.77. He also quoted me for a 6.5% rate with closing costs of $4,300 for a monthly payment of $1489.88. ???? (These payments include my escrows and P&I) What are the right questions to ask????
November 20th, 2007 at 4:39 pmYou just have to have the mathmatical knack to put it side by side. If one would agree to pay the higher payment over the lower payment then they need the apples to apples comparison!
You know what else most Mr. Refinance’s will not do….?
Swallow his pride and admit he made the wrong decision…
November 20th, 2007 at 9:40 amHey Greg…thanks for the comparison!
Your conclusion that “even if you own or hold the loan short term it is smarter to select paying closing costs one way or another” is the conclusion I’ve been screaming about to the “Lenox” crowd for years now!
Thanks for the support ..but get ready for the backlash!
They content that the “average” homeowner won’t hold the loan even the 37.99 months your compassion showed was the “break-even” point making either alternative - Cost vs. No Cost - equal.
You and I both know if you’re trying to do more “no cost” loans asking a guy, “Hey Mr. Refinance, how long did you hold the loan/home you’re currently in”….the answer will most likely be less than your 37.99 months.
But the clients answer is skewed to the short side since the clients answer is based on the most recent 10 years of unprecedented upward climb in home values coinciding with downward drops in mortgage rates.. So the “no-cost” loan huckster makes the client believe past behaviour is an indicator of future behavior…and it isa false argument…however compelling.
Once home values start dropping all over the country …the “mobile” nature of the US homeowner ceases…dead in it’s tracks….then your 37.99 months looks pretty da** good! The client wil wish he’d listened to a mortgage professional like yourself, rather than a “no cost’ call center loan rangler.
Thanks again,
November 19th, 2007 at 4:32 pmRob K. Blake
The Mortgage Insider
Another way I compare this option to consumers is by using an apples to apples approach. The cost analysis is used as well. Depending on the mortgage company and their ability to accept additional principle payments this comparison seems to also make more sense even though it is more complex.
Scenario 1: A $200,000 mortgage at 6.00% has a payment of $1199.01 on a 30 yr term.
Total exact savings monthly $131.60
————————————
This Scenario 1 also assumes you pay the closing costs out of pocket on the 6.00% mortgage. I do not feel that is what the majority of consumers would do. The majority would rather finance the closing costs. I will use $5,000 as an estimate for closing costs in scenario 2.
Scenario 2: A $205,000 mortgage at 6.00% is a payment of $1229.07 on a 30 yr term.
Total exact savings monthly $101.54
————————————
Then here is the so called “No Closing Cost”
A $200,000 mortgage at 7.00% has a payment of $1330.61 on a 30 year term.
————————————
Scenario 1: If you take the additional savings and re-invest it into the mortgage your balance would be:
Years / Principle Balance (Scenario) / Principle Balance (No CC)
1 yr $197,543.97 $197,968.38
2 yr $194,936.47 $195,789.90
3 yr $192,168.14 $193,453.93
4 yr $189,229.06 $190,949.09
So before you hit 2 years into the note you are at a lower principle balance than the loan with closing costs built into it.
Scenario 2:
Years / Principle Balance (Scenario) / Principle Balance (No CC)
1 yr $201,230.13 $197,968.38
2 yr $197,227.70 $195,789.90
3 yr $192.978.50 $193,453.93
4 yr $188,467.16 $190,949.09
Now this one makes you hit around 2.5 years.
So when you do Scenario 1 with a savings of $131.60 and you divide that into $5,000 you break even at 37.99 months
And with Scenario #2 you have to do a more extensive breakdown than the above to realize your true break even point because interest is being charged on the $5,000. So there are 2 ways to look at it.
Apples to Apples would be when your principle hits 200,000
If you just pay the standard payment then it is far to complicated to even explain to most consumers. You are keeping monthly savings but you are also paying interest on the $5,000.
So even if you own or hold the loan short term it is smarter to select paying closing costs one way or another.
“This is strictly a visual aide to assist in making a decision and is estimates. The 1% gap makes sense based on trying to acheive a rebate through use of margin/yield spread to cover $5,000 in closing costs through a lender rebate to the consumer”
November 19th, 2007 at 11:03 am[…] It really saves. Especially when all you have is a desk a pen and a list of old title leads. HAHAH “No Closing Cost” Mortgage Advertisers Prey On Unsophisticated Borrowers Theres the link go check it out and respond. […]
November 16th, 2007 at 4:09 pmI just wanted to share my seething hatred for that guy that does the Lenox financial commercials. He annoys the $%&@ out of me. I have to turn off the radio every time he comes on.
August 7th, 2007 at 11:27 amI am glad I came across this page, those Lenox Financial ads are very tempting for someone with a tight pocketbook. Thanks for opening up my eyes to a few things I didn’t realize about this market. My loan isn’t looking so bad afterall.
July 23rd, 2007 at 4:45 pmThey basically said they could get me a loan then didn’t come through. Their follow-through was terrible…didn’t return calls, didn’t follow up. I ended up blowing 495 dollars on an appraisal that was just wasted money. Just immoral people.
June 17th, 2007 at 7:33 pmGary,
Can you elaborate on your experience?
Did they “bait-n-switch” the rate? Did they promise a “low-ball” rate for the “no cost” only to raise it later?
What actually happened…you could really help others by with a few examples of how you were treated.
Thanks,
May 30th, 2007 at 11:07 amThe Mortgage Insider
DO NOT do business with Lenox Financial. My dealings were unsatisfactory, to say the least. Buyer beware, as they say. I’d recommend a reputable bank or loan company. Lenox Financial most certainly is not.
May 30th, 2007 at 10:45 amTom,
Thanks for your comments…
A few points …first, it’s Mr. Shibley…not Mr. Lenox…haha! He’s the CEO and the guy with the annoying southern twang, “aw shucks”, radio commercials telling folks more half-truths in 60 seconds than law should allow. The mortgage process is confusing enough already, but his company, commercials, and “boiler-room” telemarketing arm-twisters ramp up this confusion, then profit greatly from it.
On to your post…
The Lenox model and estimates never consider escrows…never. We’ve had former employees post here saying so.
So every Good Faith Estimate goes out ignoring escrow items altogether. And if the borrower had a prepayment penalty, adding that to the balance would be “the loan amount you come in with” and “go out with” presumably.
With that said, Lenox Financial now only has to build in the “hard closing costs”, prepaid interest, and profit into the rate bump having yield spread premium (yield spread premium) cover those amounts only. Say on average each .25 point rate bump equate to 1% yield spread premium , then Shibley will need to 4% of yield spread premium …3% for profit and 1% for costs. With their volume and their “banker” structure there’s probably more money on the table, so these numbers are conservative. With there “minimum loan amount” which they don’t advertise, over $200k a borrower must have to “qualify” for the “no cost” program, that gives $2,000 to cover the hard costs at 1% and $6,000 of pure profit…
And of course, the borrower could have had a rate of say 6% instead of the 7% Lennox provides ( 6% plus rate bump of 1%). The borrower is now paying $200 plus more every month for the life of the loan to “preserve” a few thousand dollars of equity. Plus the borrower now has a loan without escrows having to hassle with budgeting and paying their own taxes and insurance lump sum every year.
Ouch!
But your point is well made that the rate will still be much, much higher…to steal your phrase, “fleecing” for sure. If the above scenario isn’t fleecing, I don’t know what is!
They sell the rate bump as “wise use of equity” or a “who cares what we make, you’re not paying costs”…both enormous lies.
Last time I checked, the borrower makes the monthly payment so he is paying the costs by paying the higher monthly payment.
Lastly, maintaining $4-5k of home equity the “no cost” structure affords is not worth the long run trade-off of a much higher rate now that dropping home values could have a home owner trapped in their current mortgage for years to come. That $200 plus higher monthly payment turns into $12,000 in as little as 5 years! Paying $12000 over 5 years instead of rolling in say $4-5K at closing, is the most “predatory” behavior the industry has to offer.
And now even Countrywide Home Loan with their non-stop, “no cost”, TV campaign and Bank of America with their new “No Fee Mortgage Plus” program are jumping into the ranks of the “Lender Liars” with a vengeance.
I’ve always said after 15 years in this industry, mortgage brokers could rise to the head of the class leap frogging the banks and “half-truth” artists that sell “no cost” or flat fee loans, by promoting the whole truth about yield spread premium ..and committing to a “par plus one” business model.
At Integrity First Mortgage, Inc, as a Denver mortgage broker, we’ve been doing it for years and our clients love it.
I would suggest respectfully, you do the same. Your statement of making 1/2 point of yield spread premium I assume in addition to a 1 point origination fee, is certainly much better than any bank and most brokers, but why not go all the way and disavow profiting from yield spread premium on principal? You’d be surprised how disavowing what I call “double dipping” will set you even further apart from the “pack of liars”.
Thanks again for your contribution to this important issue…
May 15th, 2007 at 12:56 pmI have managed a successful mortgage company for 5+ years now. Lenox’s ads always prompt an important question. He says “you walk in with a $200,000 mortgage, you walk out with a $200,000 mortgage”. For anyone that is in the mortgage business, this probably strikes you as a little funny (and deceptive!) Mr Lenox doesn’t mention that you are going to have prpeaid interest on that $200,000 loan. And what if there is a prepayment penalty? Are they now going to jack up your rate another 1/2% to cover that? Let’s use a hypothetical example here. Let’s say (as the ad dictates) I walk into Lenox with a $200,000 mortgage. Now, let’s say that the actual payoff of that mortgage is $204,000, derived from $200,000 principal balance + $3,000 prepayment penalty + $1,000 accrued interest. Now Mr Lenox, tell me, what is the cost to me (the consumer) if I want to (as your ad dictates) walk out of your office with a $200,000 mortgage? You now have to cover (my estimates) $4,000 (i.e $204,000 balance) in addition to typical settlement charges and let’s assume I am escrowing which will eat up another est $1,500. So let’s say that actual closing costs (not to be confused with settlement charges) come in at 1.0% or $2,000. Add all of this up: $4,000 (which is added to payoff) + $1,500 (escrows) + $2,000 (closing costs)=$7,500. So that means in order for Lenox to hold true to their promise (walk in with $200,000 loan walk out with a $200,000 loan), they will need to upsell a typical market rate that someone like myself (a wholesaler) would sell to cover $7,500 in settlement charges/interest/prepay just to get to their BREAK EVEN point. Obviously Mr Lenox needs to pad his pockets, he’s not in the business to break even (who is??!!!!). So in addition to the $7,500 rate-cover upsell, the consumer is looking at yet another large upsell to create a profit margin. That’s getting fleeced my friends!!! Now do keep in mind that I have no experience with Lenox so my numbers are purely hypothetical here, not all consumers have prepayment penalties, but all consumers will have additional interest added to the principal balance of their loan. And remember the larger the loan, the more interest you will have added to the principal. I hope my point is made. If you walk out with a loan at EXACTLY the same principal balance that you walked in with, you most likely just got hosed Pal!!! Remember (this applies to you consumers that are reading this), there are honest and fair mortgage brokers (like myself and my company). Don’t assume tha