Justin Perry

Here is the short and splenda on how no closing costs mortgages work. When people hear or read "No Closing Costs," the first thing they ask is, "HOW?"

Especially in a declining interest rate environment I dont think it makes any sense (in most cases) to pay closing costs. Just like taxes and death you can always guarantee that there are costs associated with your mortgage. But you do have options. I always let my clients make the choice of whether or not they want to pay closing costs. Hold on I know what you're thinking, "Who would ever want to pay closing costs if give the choice?"

Nobody should work for free and mortgage bankers are no differant. So let's say you want to refinance your $250,000 mortgage that currently sits at 6.5%.

Today I can get you 5.25% with no closing costs, none. There are no attorney fees, no lender fees no recording fees.....nothing.

Or I can get you 5.00% with full closing costs (about $1,400).

All we are doing is making about $1,400 more on your loan at 5.25% and passing that revenue on to you in the form of a lender credit to cover all your expenses. In both examples the borrower needs to pay their own escrows and any odd days interest but that should be assumed.

The 5.25% no closing cost option would save the borrower exactly $200/month. The 5% option saves them $238/month. The difference between the two options is $38/month. But why pay $1,500 in closing costs to save an extra $38/month? The payback period on that would be 39.5 months ($1,500/38).

If you are 100% certain you will be in your house for a very long time then maybe consider paying closing costs but right now cash is king so take the $200/month savings and don't pay $.10.

Also, and this is very important, most economists and mortgage bankers alike feel strongly that we might see lower rates in the near future. So if we do end up seeing 4.75% or even 4.5% how would you feel if you just paid $1,500 to get 5%? In the no closing cost scenario you can just refi again at a better rate and still have not paid anything. This is the value that a good mortgage professional brings to the table. Get options. Figure out what best helps you achieve your long and short term financial goals and do what you are comfortable with. There is nothing wrong with paying for the lowest possible rate or even paying discount points.......I'm just not a big fan.

I leave you with this: "How would you feel if you woke up tomorrow and mortgage rates were at 6.00% and never came back down?" And like I always say, "pigs get fed and hogs get slaughtered." If you have the opportunity to refinance right now but are holding out for some rate below 5.00%.....get in the game and lock in some gains.

That is the question I have been fielding from my clients for a month now. Don't get me wrong, it's a great question. But it leads many consumers into a state of "rate lock paralysis." Many people don't want to lock a rate today out of fear that rates will be lower sometime in the near future. There are two things I say to these types of borrowers:

1. I remind them about all the clients who missed out in January of 2008 when rates hit 5.00% for only a short while. I had dozens of clients who could have saved $200, $300 and even $400 if they had refinanced down to 5.00% but they wanted to "wait for a better rate." Well, that better rate never came and it cost some of them $4,000+ in potential savings over the following 12 months.
2. Just like when you invest or even belly up to a blackjack table........take some profit! For example, if you have a mortgage rate of 6.5% right now on a $300,000 mortgage and today you can lock in an interest rate of 5.00% that is a monthly savings of $286/month! Most of the mortgage refinance deals I am doing right now come with no closing costs, none. So why not take the 5.00% and if rates drop lower we can do it again. There are no closing costs what so ever, so why not take the sure thing now and lock in the savings and still have the potential to refinance your loan again later with no closing costs.

Right now I am far too busy to spend time convincing people that saving $300/month is a good deal and they should lock. There are plenty of people who are savvy enough to understand the benefits of locking into these low mortgage rates. So if you or someone you know is just sitting there on the sidelines waiting for that magical 4.5% that the press keeps talking about, call your local mortgage banker and GET IN THE GAME.

I leave you with this thought. How would you feel if rates went back up to 6.5% tomorrow and never came back down? Pigs get fed, hogs get slaughtered. I wish everyone the best while we continue to sail in uncharted water and as always please contact me if there is anything I can do to help.

Cheers.

I am interested to hear what others in the mortgage industry are hearing from their clients about falling interest rates after they are already locked in. First of all I don't think it is wise to pay closing costs when refinancing so most my current refinances are no closing cost deals. I try to stress to my clients that when we lock a rate for them as a warehouse lender we are literally setting aside funds for them at a contracted rate. If rates go up they of course can rest assured that we will honor the original rate lock but on the flip side I stress the importance of them honoring the rate lock if by chance rates come down. Now, that being said we do have the ability to renegotiate the rate if pricing improves significantly but typically not down to the lowest market rate. For example if a borrower locks in at 6.00% and rates fall to 5.625% I could most likely get them 5.75%.

The thing that really gets me is the speculation that rates will continue to fall. Most clients appreciate and acknowledge that rates are excellent right now and if they can save money by refinancing AND pay no closing costs, why hold off for what could be/might be/and very well won't be? In other words take the sure thing. And quite frankly I can barely keep up with these types of clients so if someone wants to wait then so be it. The best example I can give of the price you pay by waiting is all the clients who said to me in January when rates fell for only a matter of hours, "I think we are going to wait for rates to drop even further." These are people who could have saved $200 with no closing costs. By "waiting" they have hypothetically lost $2400 in the last 12 months.

And now we need to give explanations to everyone who says they really need to refinance but they are going to hold off for that 4.5% rate they have been reading about and seeing in the news.

As cited by every journalist in every publication, the 4.5% story is 100% speculation. Naturally, that doesn't stop the press from covering it. When hope for homeowners gets spread in this manner, it's important to remember some facts:

1. The Treasury doesn't set mortgage rates -- Wall Street traders do. Historically, rates are based on the Supply and Demand for mortgage-backed bonds.
2. Treasury intervention doesn't guarantee low rates. That mortgage rates are up by a half-percent since last week proves it.

Zero details about the plan have been confirmed, quoting CNBC. Everything you've heard about 4.5 percent rates is a guess at this point.

Please share what you have been hearing and how you have dealt with it. I would be very interested to hear what other experts are going through.

Justin Perry

Many consumers, savvy and otherwise are a little confused as to why mortgage rates are not lower than where they are. Today you can get a 30 year fixed rate mortgage at 5.875% with no points and don't get me wrong that is a phenomenal rate historically. But if you look at where banks are borrowing at you would expect that rate to be significantly lower. This does have a lot to do with supply and demand and I don't mean the general public's demand for low mortgage rates. I am referring to Wall St's appetite for mortgage backed securities. But I will give you an easier example to consider:

Let's say you are a bank. And you can now borrow money at a true historic low rate of 1.25% which is the Fed Funds rate. You can then turn around and lend to borrowers at 5.875% so they can buy a house. That seems like a pretty hefty profit margin right? Well let's look at the other side of the coin. We are currently seeing foreclosures and mortgage defaults happening more than ever before. So if people aren't paying their mortgage, the 5.875% of nothing becomes....well....nothing.

Get to the point already Justin! Moving forward. Today the government announced a much needed bailout of mortgage giant Citi Financial. The most important thing was how they did it. The US government (in the form of your taxes) put a cap on how much Citi will lose in the future on the mortgages it holds. To be exact, Citi will lose no more than about $29 billion which was spelled out as follows:

Citigroup will assume the first $29 billion in losses. Beyond that, the government would absorb 90 percent of the remaining losses, and Citigroup 10 percent. (From this article)

This accomplishes several things. But most notably it tells Citi to "go out and lend money to consumers and let the government worry about what happens if they don't pay." Hopefully in the very near future we will see the spread between what banks borrow at and what they lend at begin to shrink. Banks now have the confidence to lend again.

I wish everyone the best in these tough times. Keep working hard and we are going to see this gigantic ship finally start to turn around. Contact me if there is anything I can do to help.

Take a look at where the fed funds rate stands today compared to years past:

Sorry I just had to post this. This was a comment I recently made on another blog.

People just don't understand reverse mortgages. Yes, THEY ARE NOT FOR EVERYONE! But what about that 75 year old couple who have maybe one or two children who are well off and just want to see their parents increase their quality of life. In most cases THE CHILDREN OR THE HEIRS OF THE ESTATE ARE THE ONES WHO RECOMMEND THE REVERSE MORTGAGE. This takes pressure off of the children to support their parents and allows the parents to supplement their fixed income. Also, before you bash this product put yourself in the position of someone 62 years or older who has their retirement in stocks that just tanked 40%+. How are you going to afford retirement?

If that did not drive the point home then consider this. What about the wealthy elderly couple who have 4 children or so. They want to see their children start families and buy houses while they are still alive. They can pull say $400,000 out of their house that is free and clear, and give each child $100,000 now rather than in 30 years when they pass away and the children themselves are reaching retirement.

I dont write reverse mortgages. But they are a great tool for the right person. Again, they are not for everyone but in the right circumstance they can be the greatest thing that ever happened to a retiree.