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Do NOT give us this business
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Old 02-07-2019, 09:28 PM
bankworking bankworking is offline
Store Manager
 
Join Date: Feb 2009
Posts: 690
Default Do NOT give us this business

I get a home equity line of credit application. Basic request. Customer wants to use the equity in his house (approximately 30k) for a line of credit. It's 100% loan-to-value, so the rate is 7%, variable, despite excellent credit, income, etc.

So I call up the customer to verify we're good to proceed and order the appraisal, when he tells me that he has a change in plans. He wants to increase the home equity limit to $250,000... to pay off his existing 1st mortgage (which has a balance just about equal to that).

I go over this, in detail, with him for about a half hour.

He wants to refinance his fixed rate, 3.75% APR, 1st mortgage on his house, and replace it with a 7% APR (loan to value is still too high for a drop in the rate), variable rate line of credit.

He says he wants to do this because he wants the equity in his house to become immediately available for re-use as he pays down the balance. Which he is not planning on doing particularly fast, his intended payments being only a few hundred above the minimum on his existing mortgage.

Okay that is... a reason. Still, I can't quite get over this. 3.75% APR fixed rate. to 7% APR variable rate. On a $250,000 balance. He would, literally, be better off refinancing the home equity line of credit every single year to raise the limit as he pays down his first mortgage.

But customer insists this is what he wants.

Now this is an excellent credit customer. This gets approved without an issue, even though underwriting is also scratching their heads.

So I put together an email for the customer, basically explaining again exactly what he is trying to do. I'm not, quite, flat out saying don't do this, but I am spelling it out in detail, because if he really is going to do this refinance, I am going to document the crap out of it.

Customer gives me a call to let me know that he read over the email and yes, he wants to proceed... because he will save so much interest this way

Okay. There is something off with his reasoning. Let us find out what.

Sir. You have a 3.75% APR fixed rate. You want to refinance this to a 7% APR variable rate, with an absolute floor of 4% APR. This line of credit will NEVER be a lower rate than what you have.

But... right now he's spending about 1000 a month on interest and mortgage insurance. This will be so much less.

Sir. 7% APR is approximately $1458 a month in interest. And the rate is variable. This goes UP if the Federal reserve increases rates.

Oh. (I can tell he's finally thinking about this.) That's okay, because I'll be able to have that money back as available on the line of credit.

No, no, no, no, no!
Sir. The interest due each month does NOT become available limit to re-use when paid. That money is spent. Gone. Only the Principal balance that you pay down becomes available again for re-use.

Oh.
He's going to think about this and get back to me.


I swear, I have never worked so hard to get a customer to NOT give us his business.

Here's hoping he'll go back to the $30000 second mortgage Home Equity. That one at least isn't insane.

Last edited by bankworking; 02-07-2019 at 09:30 PM.
 

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