Get as much lender credits as possible with home purchase?

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Get as much lender credits as possible with home purchase?

Postby harikaried » Tue May 07, 2013 11:54 am

The premise is that home purchase loans are going to have higher interest rates than refinance rates anyway, so why not increase your initial home purchase loan's interest rate to get as much lender credits as possible knowing that you'll be able to refinance to a lower interest rate within a few years?

It seems like different lenders allow the credits to be used towards different items: loan-related fees (origination, underwriting, appraisal), title charges (closing, notary, title insurance), government related (recording, transfer tax), other charges (inspections), pre-paid (hazard/homeowner insurance, loan interest), escrow reserves (property tax, insurance).

So if one does enough of a rate buy-up to get more lender credits, not only does one have a no-cost purchase loan, potentially a number of upfront non-recurring closing costs like escrow reserves can be filled up. I'm not sure if it's possible to ask for a whole year of escrow reserves just to be able to use up more of the lender credits (as unused credits are typically pocketed by the bank).

I've searched and found a few comments that seem to point to lender credits being used towards principal curtailment effectively having the bank pay down your balance, but that sounds uncommon but great if one can get that.

There is a limit to how much lender credits are available though -- it seems to be either 3% or 6% of the loan amount.
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Re: Get as much lender credits as possible with home purchas

Postby harikaried » Tue May 07, 2013 4:26 pm

After thinking about this a bit more, why doesn't this happen more with refinances as well? Assuming you can get the extra lender credits to use towards principal curtailment, why not refinance often to get the lenders to pay down the balance in addition to doing a no-cost refinance?
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Re: Get as much lender credits as possible with home purchas

Postby harikaried » Wed May 08, 2013 4:33 pm

harikaried wrote:why doesn't this happen more with refinances as well?
For those also wondering, I think I found the answer on the Freddie Mac website:

No Cash-out Refinance Mortgage
http://www.freddiemac.com/sell/factshee ... ge_388.pdf

Cash Back to Borrower
  • $2,000 or two percent of the refinance mortgage amount, whichever is less.
  • Under no circumstances may cash be disbursed to the borrower (or any other payee) exceed the maximum for no cash-out refinance mortgages
  • In the event there are remaining proceeds from the no cash-out refinance mortgage after the proceeds are applied as described above:
    • The mortgage amount may be reduced, or
    • The excess amount must be applied as a principal curtailment to the new refinance mortgage at closing and must be clearly reflected on the HUD-1 form or other equivalent closing statement.

So it seems like for loan amounts over $100k, the cash back is capped at $2k which roughly covers the closing costs for a no-cost refinance.
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Re: Get as much lender credits as possible with home purchas

Postby grabiner » Wed May 08, 2013 8:54 pm

harikaried wrote:The premise is that home purchase loans are going to have higher interest rates than refinance rates anyway, so why not increase your initial home purchase loan's interest rate to get as much lender credits as possible knowing that you'll be able to refinance to a lower interest rate within a few years?


I wouldn't expect purchase loans to have higher interest rates than refinances; the risk to the lender is the same either way. Purchase loans may have higher quoted APRs because of additional fees, but that doesn't affect the rate at which interest accrues. (You, personally, may have a higher rate on a purchase loan than you expect on a refinance because you have poor credit now and will have good credit after paying your mortgage on time for two years.)

In addition, if you plan to refinance, there is an extra cost; the bank has expenses in doing a refinance, so it will only do a "no-cost" refinance if the higher interest rate makes up for the cost.
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Re: Get as much lender credits as possible with home purchas

Postby momar » Wed May 08, 2013 8:57 pm

How do you know you will be able to refinance at a lower rate in the future?
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Re: Get as much lender credits as possible with home purchas

Postby tfb » Wed May 08, 2013 8:58 pm

harikaried wrote:knowing that you'll be able to refinance to a lower interest rate within a few years

Impossible to know that. You may be stuck with that higher rate if rates stop going down.
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Re: Get as much lender credits as possible with home purchas

Postby harikaried » Thu May 09, 2013 2:04 am

momar wrote:How do you know you will be able to refinance at a lower rate in the future?
The amount of rate buy-up for the initial purchase loan will be greater because there are more costs.

AmeriSave estimated costs for a $200k purchase loan:
$2,336.00 Closing Attorney/Agent, Appraiser, Title Insurance, & Credit Reporting
$1,084.00 Government Taxes and Fees

Compare that to AmeriSave's estimated costs for a $200k refinance:
$1,446.00 Closing Attorney/Agent, Appraiser, Title Insurance, & Credit Reporting
$61.05 Government Taxes and Fees

That's a difference of $1,913 which is almost 1 point for a $200k loan. And lenders tend to lower interest rates by 1/8 of a percent for every 0.5 discount points, so it seems like one could refinance for 1/4 percent lower.

The difference is even bigger if the lender credits on the home purchase cover home inspections that could easily total around $1k for a $200k house, and that's another 0.5 point. And potentially if you use the same title/escrow company from before (maybe you tell them ahead of time :confused ), you could get a discount from them for being a repeat customer.

But the original question relates to getting as much lender credit as possible whereas the numbers just above look at getting the lender credits to match a no-cost loan. By going for even more lender credits on the purchase loan, the initial interest rate from the rate buy-up is even higher, so when switching to a no-cost refinance, the interest rate is more likely to be lower.
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Re: Get as much lender credits as possible with home purchas

Postby harikaried » Thu May 09, 2013 11:32 am

grabiner wrote:the risk to the lender is the same either way
The thing I'm not clear about is where the lender credits come from. Are these effectively through FNMA/FHLMC? The original lender makes money through origination and underwriting fees initially then recover the loan amount when selling the loan, e.g., to Freddie Mac, then continue to make money servicing the loan. The risk to the lender is the same indeed because they weren't really taking on much risk in the first place as long as they conform to the loan buyer's requirements.
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Re: Get as much lender credits as possible with home purchas

Postby harikaried » Fri May 10, 2013 11:47 am

tfb wrote:You may be stuck with that higher rate if rates stop going down.
I guess to be really explicit, after talking to 20 lenders for home purchase loans, many don't have prepayment penalties. Several told me without prompting that I could refinance right away, and this is after I asked for more lender credits. So the interest rate difference is going to be mostly the extra in the rate buy-up to cover purchase closing costs where one day you get a purchase loan with a high rate and the next day you get a "normal" no-cost refinance rate.

So I'm still pretty confused about where the money comes from if lenders are giving credits and letting people refinance right away. Are lenders really getting /that/ good of a deal from mortgage buyers?
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Re: Get as much lender credits as possible with home purchas

Postby rr2 » Fri May 10, 2013 1:03 pm

It's almost been a year since I last refinanced. At that time the best rate I could get with no closing costs was 3.5 %. I've been waiting and rates have not dropped significantly since then. Maybe that will be the lowest I can ever get. You never know.
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