When It Makes Sense to Take a 3% HIGHER Rate (More Often Than You Think)
MY BORROWER WAS BANKRUPT – WITH $160,000 OF CREDIT CARD DEBT
When I first got into the mortgage business in 1994, a borrower came to me with $160,000 of credit and auto debt and a $160,000 mortgage.
He had never missed a payment, but his credit card debt was growing by $500 every month.
This is because he had $5,000 per month of consumer debt payments he could not afford to make.
His $160,000 mortgage was a 7-year ARM at 6%, and he did not want to give up that rate because it was so low at the time and because he and his wife were determined to pay off their mortgage and have a free and clear home.
But, I showed him that refinancing into a 3% higher rate was an absolute no-brainer! Using a cash-out refinance to consolidate debt is a powerful financial strategy to streamline your finances and pay off your debt faster!
By paying off all of his consumer debt, he reduced his total debt payments by over $3,600 per month.
He increased his mortgage to $340,000 to ensure he had enough cash to pay off all consumer debt, to cover closing costs, and to do some bathroom repairs he could not afford previously.
SIDEBAR #1: WHY I REMEMBER: I remember this deal so vividly because it was one of my first deals, because I have told this story about 900 times, and because it made so much sense for the poor borrower who was in an extreme state of stress.
SIDEBAR #2: BEFORE CREDIT SCORES: This was before “credit scores” were established. Because it was so obvious that this guy was just opening up new cards to pay off old cards and because ALL of his cards were maxed out, his credit score would have been extremely low, making it very hard for him to get mortgage financing in today’s world.
SIDEBAR #3: GOT IN TROUBLE FOR BEING HONEST: I “brokered” this loan to a lender called Headlands Mortgage, and they overpaid me by $3,500 when the loan closed. I of course sent the overage back to them immediately, and the owner of the broker shop where I worked was very upset with me for being so honest – which immediately told me much about our industry. 😊
“BUT – I WANT TO PAY OFF MY HOUSE, SO I DON’T WANT TO START OVER!”
This is the refrain every loan officer hears when they propose a cash-out refinance or even a rate and term refinance into a lower rate.
And every competent loan officer says this in response: IF YOU APPLY YOUR SAVINGS TO YOUR PRINCIPAL, YOU WILL PAY DOWN YOUR LOAN MUCH FASTER THAN YOU WOULD HAVE IF YOU HAD NEVER REFINANCED.
The gentleman in the above story is a great example, as he was able to apply $2,900 extra to his principal every month and thus pay off his loan 8 years sooner than he otherwise would have.
CASH-OUT LOANS MAKE SENSE!
The entire point of this blog is that cash-out loans in higher interest rate environments often make far more sense than most borrowers realize.
This is especially the case now with credit card rates at 20% again, car loans at 11%, and equity lines at 9%.
Further, credit card balances are hitting record highs again, and the average car payment is now a whopping $800 per month.
This is something agents might want to share in their newsletters to past clients, as it is most definitely something we will share in ours.
FIRST REPUBLIC BANK – NOW PART OF JPMORGAN CHASE
As most readers probably know, First Republic (FR) was “purchased” by JPMorgan Chase today, and it appears to be business as usual within the bank (per our own FR banker and other sources).
Ironically, while many regional banks are being forced to increase their deposit rates to retain depositors, the largest banks like Chase, Wells, B of A, and Citi do not have to do so because so many depositors are moving to those banks, irrespective of the deposit rates they offer, out of safety concerns.
Hence, FR’s “cost of funds” may have effectively just gone way down (now that they are part of Chase), and that could put them back in the driver’s seat if they are allowed to operate independently while still taking advantage of Chase’s low cost of funds.
Founder | JVM Lending
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