Financial Samurai

There are many benefits of being unemployed. Getting the respect of mortgage bankers is not one of them. I’ve been fortunate over the past 10 years to refinance multiple properties, multiple times. Economic Armageddon and easy monetary policy by the Fed is literally saving me hundreds of thousands of dollars in interest expense. To experience a recovery in stocks and real estate while not having to give up lower payments is rewarding. This disconnect will eventually lead to another asset class implosion, but we’re still a long ways away.

I’ve been sitting on a refinance high after finishing my loan modification with Bank of America this past January. They contacted me out of the blue asking if I wanted to lower my 30-year fixed rate for my vacation property down to 4.25% from 5.875% for no charge. 4.25% is not the best rate, but beggars can’t be choosers given the secondary market for condotel mortgages is still closed. The process took a total of 2.5 weeks and closed without a hitch, unlike my epic primary home mortgage refinance in the Spring of 2012.

With the 10-year yield inching back over 2%, I was not expecting to refinance my primary home mortgage rate of 2.625% so soon. So it was with great surprise that a Citimortgage officer cold called me asking whether I’d like to refinance my 5/1 jumbo ARM down to 2.375%! Banks are now giving up more margins to win business as competition heats up.

The move from 2.625% down to 2.375% is only a 0.25% decrease. Normally I wouldn’t waste my time for anything less than a 0.5% reduction. However, Citibank was offering to pay for all closing costs so I figured why not. I’ve been through this song and dance so many times I’m willing to bear potentially 100 days of frustration to save some money. Refi as many times as possible. As an unemployed person, every dollar counts!

MORTGAGE HEAD FAKE Read more…

You know what’s better than successfully refinancing your mortgage at a lower rate? Getting a free loan modification at a lower rate without all the paperwork, hassle and fees. A loan modification is when the bank contacts you and basically says, “Hey good looking! Do you want some free money? If so, you’re in luck!”

My loan modification opportunity came out of the blue right around Christmas time. Bank of America sent me a FedEX envelope with a single sheet of paper that read, “This offer is exclusively available to you through Bank of America, for a limited time only.” I honestly thought the letter was junk mail until I looked a little closer to see all my account details included.

For the past two years, I’ve been pinging Bank of America to see if they would lower my vacation property mortgage from what’s now considered a sky high 5.875% 30-year fixed rate to something lower. I’ve refinanced my other mortgages multiple times, but this was the stubborn one. The condotel mortgage secondary market dried up after the crisis, therefore refinancing at a lower rate became impossible. We should all refinance as many times as it takes to save money.

If you are not aware, most banks sell their loans to the secondary market (mortgage backed securities) as a way to hedge out risk and capitalize on profits. The secondary mortgage market actually helps the end consumer by allowing banks to lend more at lower rates. Unfortunately, once a bank run comes, it takes a while for the secondary market to thaw.

Since Bank of America wasn’t able to sell my loan in the secondary market, they figured why do anything to lower my rate given that’s what we agreed upon. I hadn’t missed a payment, so as far as they were concerned I was a good customer. BoA had the capability to lower my rate, but they didn’t have the willingness. Fair enough.

So how did I successfully manage to reduce my 30-year fixed mortgage from 5.875% down to 4.25% for free and within two weeks to boot? What’s more, this is my second free loan modification. The first one happened five years ago with Citibank when they decided to lower my then 5/1 ARM 3.625% rate down to 3.125%. Let me explain how to win the mortgage lottery.

HOW TO GET A LOAN MODIFICATION Read more…

Rental properties in Stockholm, Sweden

In a previous article, I discuss why it’s important to refinance your mortgage before leaving your job. No job = no recurring income = high risk = no mortgage refinance for you! You won’t even have the ability to compromise and pay a higher lower rate than if you did have a job. When you lose your W2 income, you turn invisible to the banks. Think, “You are dead to me.”

The other important refinancing situation to consider is when you are planning to turn your primary property into a rental or vacation property. You might have outgrown your existing property, but don’t want to sell given you believe real estate is a great long term wealth builder. Perhaps your company is relocating you for a better opportunity and you plan to return one day. Finally, maybe you’ve been forced to downsize and have no choice but to become an accidental landlord.

Whatever the case may be, always, always, always refinance your rental property before it becomes a rental property! If you don’t, you may miss an opportunity to save thousands of dollars in interest costs. This article will explain to you why rental property mortgages are higher than primary property mortgages by a common spread of 0.5% up to 1.5%.

The Difference Between Primary And Rental Mortgages By The Bank

Primary Mortgage: The primary mortgage is underwritten based on the assumption that your day job income + other alternative incomes will be around so that you can comfortably pay every month. Your W2 income viability is the ANCHOR that propels a bank to move forward and give you a new mortgage. After assessing your W2 income will the bank then account for your alternative income streams if needed.

The most important ratio your bank will look at is your debt to income ratio. They ratio they are generally looking for is roughly 33% or lower. That said, my recent loan modification required just a D/E ratio of 42% or less. Each bank is different. The number one goal for the bank is to earn a consistent spread over the life of the loan.

Rental Mortgage: Your rental property mortgage is underwritten based on the assumption of the feasibility in collecting rental income. The bank then looks at your W2 income to arrive at your total income. W2 income is preferred, however underwriters try to match income sources with the types of mortgages they are lending. The main issue is the viability of your income streams.

If you are refinancing an existing rental property, you’ve got to come up with a lease and rental history. No lease and a sketchy rental history full of missed payments will probably end your rental property mortgage refinance. Rental property mortgages often require a 30% or more downpayment compared with your typical 20% downpayment for a primary residence.

Risk Reward: It’s all about risk assessment for a bank. From the bank’s point of view, they are making a default assumption that you as the landlord require rental income to pay the mortgage. Even if you have a huge salary and lots of money saved in the bank with the existing institution, the mortgage underwriter does not put as much weight as the rental history of the property. For rental mortgages, they are essentially making a derivative bet.

Last Property Standing: In a housing downturn, the first properties to go are vacation homes followed by rental properties. A primary residence is the last mortgage a multi-property owner will default on since s/he has to live somewhere. The primary home mortgage is presumably more affordable once the multi-property homeowner gets rid of other debt. Banks know this and are more stringent in their rental mortgage lending practices. The last thing a bank wants is to repossess a property. Banks are not in the business of buying and selling properties!

THINK LIKE A BANKER WHEN YOU BORROW MONEY Read more…

My last mortgage refinance took 97 days to complete after averaging only 45 days for my previous three refinances between 2005-2010. So what on earth caused mortgage refinance times to skyrocket by 100%?

After writing dozens of posts, reading hundreds of comments, and speaking to multiple loan officers offline and online for the past 18 months, I’ve come with six definitive reasons as to why refinancing a mortgage now is as fast as a stampede of turtles running through peanut butter.

If you plan to go through a mortgage refinance, mentally plan for a three to four month long process. If the refinance gets done sooner, then great. If not, your expectations have already been set.

MAIN REASONS WHY MORTGAGE REFINANCING TAKES SO LONG Read more…

In the Spring of 2012 I almost had a heart attack and then a meltdown when my bank told me on day 80 of my mortgage refinance saga they weren’t going to proceed. Trading information back and forth for 80 days was already painful enough. To get told almost three months into the process that I would not get the 2.625% 5/1 ARM due to a missed $8 electricity bill from two years ago was devastating!

Capillaries in my brain began exploding as I wondered why my tenants didn’t pay their final electricity bill, why the utility company didn’t send me the bill, and how an $8 bill could crush my credit score from 790 to 680. The plan was to refinance my primary home mortgage before quitting my job while I still had a W2 paycheck, otherwise, there would be no way I could pass the gauntlet.

As a result of this discovery, I had to basically threaten to pull almost seven figures of assets from the bank if they dared to stop the refinance process so late in the game. A senior manager got on the phone with me and said not to worry. He had a connection with a manager at the utility company where my $8 late payment was due. They apparently ate lunch together once a week,

Not one to do nothing, I took to social media and contacted Pacific Gas & Electric through Twitter to highlight my grievances. They responded instantaneously to my request thanks to this post and issued a “Clear Credit Letter” to my bank to remove the penalty. After another 10 days of waiting, my bank finally gave me the confirmation they could proceed. Talk about torture!

Refinancing a mortgage with a traditional bank is even tougher than I initially thought. Before you proceed, take a guess at what the average credit score is for rejected mortgage loans. 650? 675? 700? I think you’ll be amazed.

THE AVERAGE FICO CREDIT SCORE FOR DENIED MORTGAGE APPLICANTS Read more…

As I was getting harassed at the car dealership the other day, it dawned on me there are optimal times throughout the month and year to refinance a mortgage due to human nature. Dropping by the car dealership every other week is one of my favorite hobbies because I get to go for test drives, soak up that wonderful new car smell, and curiously practice my negotiation skills all for free! Try it some time.

I’ve refinanced my primary mortgage five times, and have refinanced my other rental properties by a combined 10 times in the past 10 years. With each refinance, I get better at negotiating. I learn where I can press for credits and when I can no longer squeeze blood from stone. One mortgage officer called and yelled at me when I asked for another $250 credit at closing given he promised a no out of pocket refi. I got him to own up to our agreement, but we never did business again.

I’ve gotten to know five mortgage loan officers across various traditional banks such as Citibank, Bank Of America, and Chase. One loan origination officer also works at Quicken Loans, my favorite online mortgage company to check real rates. They’ve all shared with me some of their motivational points, which are all the same. With my experience in refinancing, working in finance, car dealing, and personal relationships with people in the mortgage business, let me share with you some discoveries I’ve found to get the best rates possible.

THE BEST TIME TO REFINANCE A MORTGAGE Read more…

Whoah, that’s crazy! I can hear some of you who don’t live in an expensive part of the world say. Meanwhile, some of you are surely thinking you can’t get anything livable with a $1 million mortgage. The ideal mortgage amount of $1 million is based on the premise that the ideal income for maximum happiness is $200,000 per person.

Back in 2002, a $1 million mortgage cost around $50,000 to $65,000 a year in interest expense given mortgage rates were 5%-6.5% for a 5/1 ARM or a 30-year fixed. Multiply the annual interest expense by three, and you get $150,000-$195,000, the minimum annual income recommended to take out such a loan.

Today, a $1 million mortgage costs around $26,500 to $35,000 a year in interest expense given mortgage rates are now 2.625%-3.5% for a 5/1 ARM or a 30-year fixed. Multiply the annual interest expense by three again and you get $79,500 to $105,000, a far cry from the $150,000-$195,000 you originally needed to make! Note, banks still only lend out 3-4X your income despite a drop in rates.

It is aggressive to think that someone who only makes $79,500 a year in gross salary can afford a $1 million mortgage, but it’s also absurd that one can borrow $1 million dollars nowadays for only 2.625%! I’m not recommending everyone with impecable credit scores, great financial habits, and steady savings rates all get $1 million mortgages. I’m just saying that it’s now possible for someone making $79,500 a year to service $1 million worth of debt at 2.625% if the bank approves.

REASONS WHY THE IDEAL MORTGAGE AMOUNT IS $1 MILLION BUCKS Read more…