Hi -

Have a question for the experts here.

One of the brokers here, is offering a cash back if I refinance with
them. The deal is basically that I get a higher interest loan and get
a certain cash back. Once I stay with them for four months I have the
option of refinancing again.

The cash back not only covers the extra payment I make due to higher
interest rate, but also leaves a good chunk of money in my pocket.

Is this legal?

"Abbs" writes:
Hi -

Have a question for the experts here.

One of the brokers here, is offering a cash back if I refinance with
them. The deal is basically that I get a higher interest loan and get
a certain cash back. Once I stay with them for four months I have the
option of refinancing again.

The cash back not only covers the extra payment I make due to higher
interest rate, but also leaves a good chunk of money in my pocket.

Is this legal?

Legal or not, it sounds like a bad deal.

He's undoubtedly making a better yield spread premium by getting you
to agree to the higher interest loan (that's the way rate sheets
work). And you can also be nearly certain that the resulting
commission from that higher YSP is more $ than he's offering you in
cashback.

He's selling you on the "refinance in 4 years" thing to make you think
he's paying you back for the higher payment. His smoke and mirrors
are hoping you don't consider the possibility (and historical
likelihood) that in 4 years rates are (historically) likely to be
higher such that you won't want refinance, and you'll be sitting on a
30 year loan with an interest rate higher than you might have
otherwise.

The right way to do this sort of thing is to refinance for more than
your current note is (i.e. a "cash out refi") and you can still get
the lower interest rate, and pocket the money without a goofy kickback
from a charlatan broker.

But based on this, I'd shop for someone less slimy in the mortgage
biz. Aholes like this are a dime a dozen.

--
Todd H.
http://www.toddh.net/

Actually, it is 'Refinance after 4 MONTHS' - I am guessing rates would
not fluctuate that much in 4 months, but again who knows.

OTH, I was wondering if you have two loans with say 5% and 7% - Would
the principal and interest portions of the monthly payment differ other
than proportionally? In other words if one loan's monthly payment is
say $1500 (1200 Int + 300 Principal) can another loan at higher
interest rate be $2000 (1800 Int + 200 Principal)? This way though my
payment is only $500 higher, I am also losing on my equity build up by
another $100.

Pardon my ignorance, but I heard from many that this is a sleezy style
of business. If I can get to refinance in 4 months, say for the going
current rates and still get a cash back - why is it bad? Is it
illegal? I don't want to do anything illegal... Sorry, I did not mean
to disrespect your suggestion - but it is a genuine question.

"Abbs" writes:
Actually, it is 'Refinance after 4 MONTHS' - I am guessing rates would
not fluctuate that much in 4 months, but again who knows.

OTH, I was wondering if you have two loans with say 5% and 7% - Would
the principal and interest portions of the monthly payment differ other
than proportionally? In other words if one loan's monthly payment is
say $1500 (1200 Int + 300 Principal) can another loan at higher
interest rate be $2000 (1800 Int + 200 Principal)? This way though my
payment is only $500 higher, I am also losing on my equity build up by
another $100.

Have a look at the amortization schedule.
http://ray.met.fsu.edu/~bret/amortize.html

Okay, let's look at $300615.14, 30year loan.
7% $2000 payment,
after 4 mnths you've paid down 994.30 or principal.

5% 1613.77payment
after 4 mnths you've paid down 1453.88 of principal.

So, the diff is about $460 in terms of principal.

Pardon my ignorance, but I heard from many that this is a sleezy
style of business. If I can get to refinance in 4 months, say for
the going current rates and still get a cash back - why is it bad?

It wouldn't be bad in that case necessarily, but you ARE gambling. If
you are confident that in 4 months rates aren't going to be higher,
then great. No one has that crystal ball, but there's a lot of
uncertainty in the markets right now due to current events, rates are
still historically very low, and I'm not sure I'd betting thousands of
dollars hoping things don't go up.

However, the other thing about refinancing is that ... it does cost
money. Whether they roll those costs into the new loan (for title
work, title insurance, and other sundries) or not, they're real costs
and you're paying for them somehow.

And by the way, Joe Charlatan is looking forwad to making another
yield spread premium commission on that new loan too.

Is it illegal? I don't want to do anything illegal... Sorry, I did
not mean to disrespect your suggestion - but it is a genuine
question.

Whether it's legal or not, not be a lawyer or law enforcement
professional, I don't konw. I just know as a consumer it's got plenty
of red flags in it for other reasons. If this weren't a way for this
joker to make more money, I highly doubt he'd be pushing it with you.

If you want more cash in your pocket at your original closing, shop
around with other mortgage brokers (cus your guy can always manipulate
his commissions unbeknownst to you to make it look like "a great
deal"), and compare the loan amount and rate and closing costs (don't
forget this--brokers often rape folks on these) they'll charge and see
what comes out ahead. The loan business is very competitive and it's
worth shopping around and pitting these (many of them animals) against
each other.

Best Regards,
--
Todd H.
http://www.toddh.net/