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Do NOT give us this business
  #1  
Old 02-07-2019, 09:28 PM
bankworking bankworking is offline
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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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  #2  
Old 02-07-2019, 09:32 PM
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MadMike MadMike is offline
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Wow, up until you mentioned the 4% floor, I thought maybe he was gambling on the rates going lower than what he was currently paying. I can't even being to wrap my head around this. Then again, when I was in the process of buying a house, I insisted on a fixed rate. I avoided anything with a variable rate like the plague.
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  #3  
Old 02-07-2019, 09:38 PM
bankworking bankworking is offline
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Quote:
Quoth MadMike View Post
Wow, up until you mentioned the 4% floor, I thought maybe he was gambling on the rates going lower than what he was currently paying. I can't even being to wrap my head around this. Then again, when I was in the process of buying a house, I insisted on a fixed rate. I avoided anything with a variable rate like the plague.
Really wouldn't matter if we had a 0% floor.
The 7% variable rate is based on the Federal Prime rate, (currently 5.5% APR) plus 1.5%.

The Federal prime rate is 3% above the rate that the Federal reserve lends to banks.

So, when the Prime rate was at 3.25% (all time low), the lending rate was 0.25%.

Even if the federal reserve made lending rates 0%, a Prime + 1.5% rate would still be 4.5% APR.

Not saying that someone won't someday change how Prime is determined, but basically, this loan would never go under 4.5% APR, floor or not. The floor is really more of an possibility with lower margin loans, (only offered at lower loan-to-values).
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  #4  
Old 02-08-2019, 01:25 PM
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Ghel Ghel is offline
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Wow. With a 3.75% fixed rate, you'd have to be an idiot to change that loan. I don't expect we'll see mortgage rates like that again for a LOOONG time.
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  #5  
Old 02-08-2019, 02:47 PM
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Rosco the Iroc Rosco the Iroc is offline
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I bet he invests in pumpkin futures around Oct 28 to sell on Nov 5th.
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  #6  
Old 02-08-2019, 03:12 PM
nutraxfornerves nutraxfornerves is offline
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Quote:
Quoth Ghel View Post
Wow. With a 3.75% fixed rate, you'd have to be an idiot to change that loan. I don't expect we'll see mortgage rates like that again for a LOOONG time.
I did a re-fi when things were rock bottom and got 2.75 fixed.

Due to some particular circumstances, I’ve recently had to answer all my phone calls to be sure I don’t miss important ones. I get a fair number of “terrific mortgage deals but you must act today!!!” Funny how they tend to hang up immediately when I ask if they can beat my current rate.
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  #7  
Old 02-08-2019, 04:28 PM
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taxguykarl taxguykarl is offline
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Quote:
Quoth nutraxfornerves View Post
I did a re-fi when things were rock bottom and got 2.75 fixed.
I would need to find a 10 year fixed at that rate to match our current payments.
I've been consistently paying an extra $100 to principal each pay day (bi-weekly). That payment comes off the final payment. After all these years of that regimen, we now have 11 years left on our mortgage.
I'm still waiting for a mortgage telemarketer to come even close......
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  #8  
Old 02-08-2019, 05:07 PM
Jetfire Jetfire is offline
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I bought my condo about 8 years ago when 35 year mortgages were available in Canada and I locked in that rate. After 5 years, I refinanced it (or whatever it is you do), and locked in a lower rate. Kept my payment the same and knocked literally an extra 5 years off the mortgage. So after 8 years I now have 22 years left on my originally 35 year mortgage.

In a couple of years when I go to renegotiate it, I doubt I'll get as good a deal, but I should be in good standing regardless.

And while I am a mathie, compounding interest rates just never make much sense to me without sitting down and working it all out. But even at a glance I know 3.4% is a hell of a lot less than 7% and it's a rate I wouldn't budge from unless you were forcing me (possibly literally, with a bulldozer...)
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  #9  
Old 02-08-2019, 10:24 PM
bankworking bankworking is offline
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Quote:
Quoth Jetfire View Post
... But even at a glance I know 3.4% is a hell of a lot less than 7% and it's a rate I wouldn't budge from unless you were forcing me (possibly literally, with a bulldozer...)
Yeah, you can't beat rates like he has with 1st mortgages right now, let alone a Home Equity. I have never had a customer so convinced that a higher rate was somehow better...


He changed the request today. Went back to the $30,000 second mortgage HELOC, leaving his first mortgage alone. Thank goodness. 7% APR on new money isn't so bad, though I am making triple sure he understands the concept of variable rate.

Last edited by EricKei; 02-09-2019 at 09:27 AM. Reason: We just read it, thanks.
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  #10  
Old 02-09-2019, 01:17 AM
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Argabarga Argabarga is offline
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Some people are just destined to never have any money......
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