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Help!! My ARM is adjusting, and I don't have the equity to roll in closing costs!!!

I have heard this one before. A borrower buys a new home with 100% financing with all of the closing costs rolled into the loan or Down Payment Assistance Programs were utilized. Now, that ARM is adjusting and they do not have the money for closing costs.

Desperate times call for desperate measures. And although I rarely suggest this, it just might be the 'Silver Bullet' that the homeowner needs to save their home.

The No Fee Home Loan or No Fee Mortgage or No Closing Cost Loan. It can be called many things, but they are all the same thing. And don't let anyone tell you that it is a 'special in-house program only'. These have been around forever. Let me tell you how it works. But first, some facts: Fees are real. People have to get paid on a home loan. No one 'waives' fees. They simply charge those fees a different way. Ken Cook wrote a nice piece about The Truth About "No Closing Cost" Loans. A good reference for more info on this subject. Ever see those commercials on TV that say 'NO CLOSING COSTS'?!?!?! Well, there may very well be no closing costs on the settlement statement, but the borrower will pay those costs over and over again through higher interest payments. Somebody lied.

When a loan officer originates a mortgage, they can offer their clients any rate they wish, really. By that, I mean that they can offer a competitive interest rate based on their costs of that rate. Or, that loan officer can mark up the rate and earn a commission from the investor for the extra interest that will be earned on the loan. This bonus is called Yield Spread Premium(YSP). So, if a borrower qualifies for 6.5% rate, the loan officer can charge 6.75% and earn an additional 1% of the loan amount in commissions(pricing varies and commissions earned varies for each .25% increment). Well, not all loan officers work for just that 1% origination fee, so this is very normal. Brokers do it. Banks do it. Don't let anyone tell you that they offer the best rate..... they don't.

But, how can we look at this in a positive way. Let me put an interest rate of say 7.25% on the loan. I now have earned almost 3.5% of the loan amount in extra commissions. That extra commission can be used to pay the customers fees in the event that they cannot come up with the money. 3.5% of $200,000 = $7K. MORE than enough to cover all of the borrower's closing costs.

Problem solved? Not yet..... it is NOW TIME to make sure the client gets into a fixed rate. No need to try and do this over and over.

While this little 'Silver Bullet' works for a lot of folks..... there will be borrowers still too far upside down on their home. The property must appraise for the loan amount!!!

This is an example of a positive way to use YSP to the benefit of the borrower. And just might help save someone's home.

Tom Burris
DallasLoanGuy.com
A Home Loan For Every Texan

Texas Home Loans
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Posted by Tom Burris | Texas Mortgage Dallas Mortgage FHA on 08/03/2007 10:42 AM

Comments (29)

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Originally posted at: Texas Home Loan Blog: Help!! My ARM is adjusting, and I don't have the equity to roll in closing costs!!!

29 Comments on Help!! My ARM is adjusting, and I don't have the equity to roll in closing costs!!!

AUG

2007

Great post DLG! Thanks for the information that is sorely needed in this market!

Well, bless you Renee. Thanks for stopping by!!!

Tom... I agree, great information. Something that I wrote about while you were away enjoying yourself on vacation. ;o) How dare you... lol

One thing to be careful about though. Some of the bigger lenders... As PHH did and I am not sure if they still do this... but if you did a loan through them the previous year, up to a year, they will waive the title insurance. Some lenders are now eating this cost.... but it's rare. Most of what you mentioned is a ploy to get the phones to ring. It's called advertisements...

jeff belonger

Sorry Jeff.....

Are you suggesting that I read your blog before posting?!?!?!

;-)

are they really 'eating' it? Hmmmm.....

yes.... lol And eating it? With ketchup.

AUG

2007

Tom,

LOL,

Us professioanals have to compete against what I call mortgage gimmicks all day long. Great Post.

Every time I hear the song "Dirty Little Secret" I think of how many LOs handle YSP. In reality, yield spread premium can be a useful financial tool to help our borrowers. Your post is a great example of how to put that tool to work - thanks!

We used to roll negative equity into the new loan all the time in the car business, including marking up the rate to cover the negative. My office mates were shocked at how natural this was for me. Negative equity in cars is the norm. We have only recently had to deal with in in real estate....

AUG

2007

Jeff - ;-)

Gary - Yes we do.

Tom - I guess the public thinks we can live on 1%

Janet - Yes, it is ugly. Good reason to put the client in the right loan the first time.

man , what a mess some people are in.

Awesome way to compete in this market. Of course credit has to be there too - I guess that's what you call turning lemons into leomonade, eh?

Tom, Great post... Great way to educate people.. Oh by the way I did not write about this before so you don't have to read my post prior to posting yours.:-)

Tom, very detailed post with great information! And I also did not write about this before! LOL

Good post. An interesting side note.........mortgage brokers have to disclose a YSP range and it shows on the final HUD. Mortgage bankers, however, don't have to disclose the YSP and it does not appear on the final HUD at all.(In this state, at least) Yes, it can certainly be used as a tool; so the broker can give a credit and it can really come in handy.

AUG

2007

Scott: They were in a mess before.... now it is worse.

Matthew: whew!!

Kim: :-P

Seth: I am usually upfront with my clients about YSP or undisclosed SRP as we enjoy as a banker. Most people appreciate the upfront honesty

thanks for the comments everyone

and that's how it works folks!

good info...

good way to show how lenders are doing it..

and then there are the lenders showing very low rates with .25-.4 higher on the APR.... so they're backloading a bunch of fees... that's the other way!

If you have the ability to do it in the rate, it will be far less expensive over the 5-7yr short term than a high APR due to excessive bank fees

Thanks for the comment David:

I already had a wall of words here, so i really didn't want to get into comparing low fee, no fee, full fee and how it affects the rates.... or the breakeven analysis that we do to see what works for the client. This was a consumer article about how to avoid fees with a tight appraisal upon refi

I guess in a horrible situation such as this, the no cost closing loan is better than the adjustable rate mortgage.

I personally did several no-cost closing loans back in the days when interest rates were really low. No doubt I could have gotten the 3.75% adjustable rates, thank God I didnt buy into them. I finally settled to a 5.25% for 30 years (that's a no-cost loan). I believed I refinanced 3 times (again at no-cost). I was just merrily signing papers away..... down from my original loan of 8.25%....

Hi Loreena

The no cost loan has nothing to do with ARM or Fixed Rate. It is simply a higher rate in lieu of closing costs. Sometimes the closing costs are enough to blow the LTV ratio.... so we can do the 'no cost' to cure that problem.

Remember, there are STILL closing costs in the form of a higher rate. So you pay a portion of the closing costs every month in the form of a higher loan payment.

Low costs work for the scenario I described. They also work for those who plan on staying in the home a very short period of time. They are not for the long term borrower if it can be avoided.

AUG

2007

I can give you another angle on this....

Let's play what if. Leaving prepaid items and escrows OUT of the equation for a second.

$200,000 purchase,

Lender A) $1,000 in lender fees, $2,000 in origination, $2,200 in 3rd party fees 30 year fixed 6.375%

Lender B) $0 in lender fees, $0 in origination, $0 in 3rd party fees, $5,000 in discount points 30 year fixed 6.375%

So while lender B is offering a "no fee loan" it's only saving the consumer about $200. right? Isn't that kind of your contention that if the borrower wanted a "no fee" loan they would have a higher rate of interest OR have to buy that higher rate back down with discount points. So it's six of one, half dozen another.....right?

At least until tax time and the $5,000 in discount is treated as prepaid interest and eligible in the tax code for deductibility so the After Tax impact can be fairly significant. Over $1000 in real savings at a 25% tax bracket.....(keep in mind I am NOT a CPA so this is NOT tax advice but generally known and publicly available information about the tax code....always consult a CPA for tax advice :) )

I love the tool of putting all of the fees on the discount line.

Unfortunately, in my example, the client doesnt have the $5K nor is there room in the appraisal to roll it in.

I am not a CPA either. LOL

wel.......one man's 'tool' is another man's strategy. Being the lover of paying taxes that you are, Tom, I'm sure option A suits you best :P

Thanks for the great informtion. Your market is lucky to have this as an information resource.

OCT

2007

Ken, I realize that B of A offers the "no fee" loan but you must admit that when Joe Borrower sees that advertisement he's not thinking that its just lender fees, origination and 3rd party fees that he wont be paying. He is under the impression that there will be no additional costs above the amount being borrowed. That's how the product is marketed to the public. I think the average borrower would be a bit surprised when they see the GFE for their "no fee" loan and there is a $5000 line item for discount points.

OCT

2007

Ken,

I think what Tom is saying that there will be no discount fees. He will use the higher yieldspread to pay the fees. Think about it, as the broker, you would not charge origination / processing / application / etc. because you are making more on the back end.

Then you would have to broker credit to pay the title fees. I'm not sure that the lender would let you do that for escrows however.

This would work great for that file that is really tight and $5,000 would make all the difference. The borrower would just have to be made to understand why their interest rate is so much higher.

Great post Tom! I will definitely keep this mind from now on. It's something that I have always known in the back of my mind, but have never put to use.

Thank you Katie

NOV

2007

I have done this many times on purchases also.

SEP

2008

I am unable to refinance my ARM that is going to start adjusting next month because my home will not appraise at enough to cover what I owe by about $10,000. Are there any options other than coming up with the $10,000 because I can't. Thanks

Hi Linda.

Send me an email if you wish. There are 2 possibilities. (not options) These are possibilities. And one possibility may never materialize.

Do you have 1 lien? or more?

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