If you just want the tips, skip to the end.
Some people notice that on my resume, I have a 2004 listing as a Real Estate assistant. I worked with my friend, Margot, and had a great time. She is a Real Estate Agent and only works with reputable people. In fact, she can be a little anal, but all in a good way, because there is no way something shady is going to go down while she is in charge. What you don’t see in my resume is a 2002/3 listing of loan ‘consultant’ which is what we called ourselves. I’d like to forget about the time I spent doing it. But maybe the lessons I learned have some value and I’ll try and share what I know here.
At the end of 2002 I was newly back to San Diego and looking for work and I needed it fast. I found a job with a company that did home loan refis. Our target market were the sub-prime people – those people with kinda bad to really terrible credit but still able to qualify for a refinance loan because they had equity in their home or their bankruptcy was over 3 years old.
I remember my first day on the job. I was sitting near the center of a very long desk, maybe 8 or 9 of us all together, each with a phone, a pad of paper and pen, and a computer printout of leads. These were supposedly ‘warm’ leads, meaning people that had qualified by merely existing, owning a home and hadn’t refinanced in the past 2 years which meant they most likely had some equity. It was a given that they had bad credit. My job was to call each of the people on the list, ask if they had received the letter we had sent them X number of weeks ago and ask if they could use a little extra money. I seriously tried. I made the first two calls, got hung up on, made another call, found someone that was vaguely interested but said to call back when her husband was home and then started listening to the people around me. Holy crap, they were full of it. They were saying all kinds of things that I knew weren’t true. But the fact that they got around 1% per done deal was the motivating factor for them to say just about anything they thought would help get the paperwork started.
I asked to see the owner of the company, who I knew was upstairs. I had done ‘training’ the week before for an entire afternoon, like 4 whole hours (sarcasm intended), and I’d seen his office. The floor manager didn’t want to let me up to see him, but finally did let me, calling ahead and saying in a sarcastic tone that I was someone new with ‘some qualms’ to talk over. Then he chuckled and sent me up.
The owner was a smallish Hawaiian man. His office was covered with photos of his extended family at beaches across the islands. He had a lava lamp. He seemed like a very nice man. He asked me to sit. Our conversation went something like this:
Him -I hear you have some concerns.
Me – I do. During our training we were told that there are some thing you can’t say or promise the potential customer. I had to sign paperwork saying I wouldn’t say or promise those things but downstairs, on the floor, I’m hearing almost everyone say and promise those very things.*
Him (chuckling) – Well, Leah, I can see why you would feel uncomfortable. You seem to be a very honest person, and let me say how much I appreciate that. (Suddenly looking intently at me) Let me tell you that I take integrity very seriously here. If you don’t feel good about it, don’t do it. With the exception of 2 people down there, everyone else is just like you – they are in training – so they can make a few mistakes. After they get their license, well then, they can’t say those things anymore or it might come back to haunt them.
Me – So, you’re fine if they say and promise those things right now because they are new? And it’s on you?
Him – Let me ask you this – are we helping those people we reach on the phone? Are they desperately trying to make ends meet? Could they use the extra money to help a kid go to college? Are we doing what they ask us to do?
Me – I guess so.
Him – Well, if you ever think the answer to that is no, then stop. But until then, keep going and helping everyone you can.
I was a little confused. He was very charming. I left and went back downstairs thinking that he seemed like a pretty ok guy and that he seemed to genuinely want to help people. In fact, you can read in this entry where I call him one of the most honest people in sales. I was SO snowed.
So I sat back down and started calling. I didn’t say anything that I didn’t feel good about and I didn’t make any sales.
I continued to not make any sales for a few weeks. During this time I read up on the loan products we were selling and what the actual terms were. I had a bit of customer interest here and there but I had the nasty habit of talking the people out of the loans because in all actuality, the type of loan products we were selling were really for only a particular type of person and I hadn’t found any of them yet.
Our main product, a variable rate Neg-Am was, I think, created basically as a tax loophole for really rich people who were buying homes or rental properties to re-sell them in 3 years or less. The initial rate on the loan would be something insane like 2 or 3%, making the monthly payment less than half of a normal monthly payment, and sometimes deferring the interest every month. Another option, an interest only loan, where you would pay just the interest and never touch the principle, was also one we sold. Why would someone want one? Well, if you are going to gamble on the market, buying a house low, make as small as payments as possible, using the loan as a roll-over to avoid paying some taxes, and then selling for a profit when the market went higher, it was great. But, let me remind you that our target group was people that had BAD credit. Which was not ever going to include an uber-rich property tycoon. I was supposed to sell this loan to people who couldn’t afford their original, normal monthly home loan payment. So, someone that has a loan of $300K outstanding on her home, the home comes in as worth $400K by the new market standard during the appraisal, can refi the home, getting about $100K out in cash, minus the fees, and get a lower monthly payment in the process. The loan amount went up, but the monthly payment went down. What’s not to love, right? Well, everything.
These people, who couldn’t make their money stretch looked at it as a lifesaver. They WANTED the loan. My co-workers were selling them left and right and making a 1% commission on each one. It was the beginning of selling Neg-Ams to poor credit customers. Up until that time, it was very hard for someone with bad credit to get a home loan or refinance an existing loan unless the LTV (existing loan to value of the home) was very low. My problem was that I understood too much and couldn’t let these people chop their own heads off. I knew that in 2 to 3 years, when their initial variable rate went out the window and the increase came into town, it was going to kill them. Yes, maybe they thought they would refinance before that happened, but with the way the homes were increasing in value so fast, with how much money they were borrowing against the value of their house, there was no way that in three years they were going to have any equity since most likely, the market was going to pop. Everyone in the business thought so. The rates would go up to 12, 14+%, sometimes tripling or quadrupling their payments and if they couldn’t afford their payment before, there was no way they could afford it later. It felt so wrong to help them into losing their house. I wouldn’t do it. I sometimes passed irate people who wouldn’t listen to me on to my co-workers who gladly took the client and the commission. But there was no way to talk these people and get them to take a solid, fixed 8-10% interest rate with a normal monthly payment amount. They wouldn’t hear of it.
I spoke on the phone to people who had done a Neg-Am a few years ago and were now going into foreclosure. One older woman particularly stands out as she sobbed on the phone and there was nothing I could do to help her. She had no equity in her home and the foreclosure was days away. I talked to her son on a few occasions over a week, trying to help them figure something out but there was nothing I could do in the end. She lost her home. She sent me a Christmas card. I cried when I got it.
Near the end of December, I found a businessman that wanted to purchase some property. He had great credit, he knew all about the Neg-AM and wanted it for all the right reasons. I finally had found the right customer. I submitted three loans for him and looked forward, finally, to a big $7-9K check at the end of January.
I got called into the office around January 15th. Mr. Charming boss was sick of me. I wasn’t calling everyone on my list. I wasn’t hard-selling the loans to everyone. I was not doing what he hired me to do. He liked me, he said, and appreciated how honest and full of integrity I was and would love to keep me in the company because hey, we were going to start profit sharing, right? And I liked that, right? And what’s wrong with helping the people get what they ask for, right? And I had some big commissions coming, right? So, play the way I tell you to, or else. So I quit. And I never saw any of that money. I walked away and it was really hard.
I had met someone a few weeks earlier, a broker that worked in a different office, and I had liked her. She had a reputation of being honest and not being a cutthroat. I called her and begged her for a job and she gave me one. And for a few weeks it was great. You can actually see my ad in a magazine in this photo, left bottom side. I was very optimistic about it working out. She was really honest. She did play by the book but I was still unhappy. I couldn’t talk people into getting the loan products that were truly best for them. And in the end I realized it was a problem with me. In sales, you are always going to have to try and sell people things they might not need. And I just couldn’t do it anymore. I was so happy to get out of the business. I was never a big money-maker anyway and I slept better at night.
I look around right now, as Joe and I are walking through homes in Moorpark, and I’m so happy we didn’t buy two years ago and we aren’t trying to buy now. Our credit is marginally good but not great and we wouldn’t qualify for a great loan product. We’d end up being hard-sold some variable, probably a Neg-Am, from some loan agent that is watching their sales decrease monthly and near panicking. The market is hard right now, my husband and I are hearing “friend of a friend” stories that are scary. Foreclosures are happening to people after missing 2 or 3 payments. Moorpark is a great town, but is there any justification for the doubling and tripling of home prices in the past three years? The home prices increased with an artificial market and now people are scrambling to make payments, which jumped two or three times the amount they could barely pay before. And they are angry. They didn’t understand what they were doing, the loan agents were more than happy to help them do it anyway and they are losing their homes. But this hasn’t been going on long enough to have an effect on home prices. Someone coming in to buy will probably pay too much and someone trying to refinance will probably not have enough equity left to make it happen.
Some are trying to refinance, if they are lucky enough to have equity or good credit, and it’s costing them $30K to do it. Because, this time around, they are desperate and willing to pay out the nose. And I don’t mean to say that no one should be buying right now. If you live in an area where the home prices went up a typical amount over the past few years, more like $5K to $75K instead of $400k, and you have pretty good credit and can qualify for a fixed interest rate of 10% or under, then by all means, do it. Buying a home is still a good investment if it’s the right home and you’re in the right situation. But renting in a down-plunging inflated market is always going to be the better choice if all you can qualify for is a variable interest rate or a balloon loan, unless you are buying the home as an investment or flip property and can absorb a bad hit if your gamble doesn’t pay off.
1. Research the normal loan rates and home prices. Research. Research. Research.
2. If you are buying, make sure you really trust your Real Estate agent. If you don’t, find someone new.
3. Ask them about which loan agents they use. Ask pointed questions about their honesty and reliability. Listen to your gut. If they squirm but they are promising you the moon, walk away anyway.
4. If you are buying, PAY POINTS AND FEES UP FRONT. I know this goes against the grain. I know that the ads everywhere boast ‘No Fees! No Points!” But honestly, it is the dumbest move you can make. Agree on the lowest amount of points you can talk your Real Estate agent into but understand that they have to make money. 2 or 3% is very fair for the average home and should be a little bit negotiable depending on how much work the agent has to do for you and what the price of the home is. For example, even 1/2 a point on a million dollar loan is a large sum and they might be willing to only charge 1 point.
5. If you are refinancing, PAY POINTS AND FEES UP FRONT. I guarantee you that anyone not charging you points or fees is raking in the dough on the backside and the banks have incentives built right into the loan product for the loan agent that doesn’t charge them up front. You will pay at least double in fees by refusing to pay up front and your interest rate and overall loan repayment amount will be higher.
6. How can you be sure you are not being charged money ‘in the back?’ Check the APR against the interest rate. These two numbers should be the exact same number if you are truly being charged no fees, as some companies proclaim to be doing. If the APR is slightly higher, by say, max a quarter to a half a point, then you know you have a loan that is fair to the average consumer. The brokering house is getting some amount back from the bank, which usually pays some of the broker fees, and you are paying a fair amount for your loan. No one is getting jacked. If you refuse to pay fees and points up front, expect these two numbers to be quite a bit different, maybe up to two points, which could represent quite a few thousand dollars going straight into the broker and loan agent’s pocket. You have much more leverage if you pay your fees up front to get the interest rate that you want. They aren’t doing their work for nothing and they will find a way to get paid. Ask them what their lowest fees are and agree to pay it if the APR and the interest rate are within striking distance of each other. You’ll save a lot of money that way.
7. Accept that a normal interest rate is probably higher than you want. Why? Because you look at all the advertising that saturates the media and somewhere in your brain, 5 or 6% sounds right. It’s not. Unless you have a credit score of over 800 (FICO score) and can buy 3 or more points down on your loan, which could equal about $300K, it’s not right. Then, you might get a 4 or 5% interest rate. Normally, people with pretty good to great credit (650 – 750) will qualify for a pretty great interest rate around 8 or 9%. That is a good number. 7% would be a great number. Buying down to 6% would make sense if you can afford it.
8. If you plan on living in your home (not using it to invest and flip) and you have to get a variable loan, make sure it’s fixed for the first 5-7 years. The market usually ebbs and flows in 5-7 year increments and it’s a pretty safe bet that after the first 3 years, and sometime during the last few years, you’ll be watching for the interest rates to go down and you can refinance, hopefully with the same company you used when you bought it. They’ll appreciate the repeat business and might be more helpful than others. And if the market doesn’t go down, chances are they’ll help you get the same rate you had before. Just realize you’ll be paying those fees again for the service. Weigh the options, crunch the numbers and make sure it makes sense for you and your family, whatever you decide. It’s still a gamble, but safer than 2 or 3 year variables. Also –
9. Make sure your variable loan product has a reasonable cap on the amount the rate can jump after the fixed year portion is over. Yes, if you decide on the 5-7 year plan, you plan to refinance, you think it won’t matter, but YOU NEVER KNOW, so be smart, and make sure it’s not a huge 20 point spread. 5% jumping to 15% sounds ridiculous but could happen. 5% jumping max to 10% would hurt a lot, but might not make you lose your home.
10. Read all the fine print. If you don’t understand it, ask them to explain it. If they quick-speak or don’t make sense, ask them again. If you find that they are using buzzwords and marketing talk over and over and not really making sense, then they probably don’t know what they are talking about. Ask to talk to a manager or the broker. If they seem put out or start rushing you or make you feel dumb, WALK AWAY. One of the worst things that happens is that people feel like they have invested so much time and energy into the process, that they can’t bear to walk away and start over, so they just sign. But 9 times out of 10, if it doesn’t feel right, it’s not and you would be serving your interests much better to start fresh with someone new, even though you are losing all the work you put in the past 6 weeks. That is so much better than paying for it for the next X number of years.
11. If you can’t afford to buy a home, don’t do it. If you can almost afford it but aren’t stable with your work and/or income, wait. If you have someone on the phone trying to talk you into buying a home or refinancing when your credit is bad, THEY DO NOT HAVE YOUR BEST INTEREST IN MIND. There are, of course, exceptions to this. If you are about to lose your home and are forced to refinance with a crappy short term variable rate with high fees, I suppose the lesser of two evils is to keep your home and pay out the nose. But, PLEASE work with a finance specialist to improve your credit immediately after and refinance again, realizing you must pay the fees, and get out of it before the fixed portion ends.
12. If you decide to rent and ask someone in Real Estate to help you find a rental, realize that they will ALWAYS first try to sell you a house instead of find a rental. That is where they make their money. You might have to say, quite a few times, ‘No, really, we just want a rental.” Then smile, and keep looking. Or ask them to tell you straight out if they can help you find a rental because you don’t want to waste your or their time.
None of what I’ve written thus far has been about lines of credit awarded to people who have a home loan. When done directly with the bank that owns your original 1st loan, there may be no fees attached to setting it up. I wouldn’t recommend it to anyone with a variable rate on their 1st mortgage.
Generally speaking, home equity loans are low interest and you owe nothing if they aren’t used. When added to what you owe on your home already, they should not exceed a debt total of more than around 70% of your home value. Because you don’t actually get a large lump sum of cash deposited into your checking account, you should think of an equity line of credit more like a credit card. It’s a cushion if you need one but best if left for an emergency. If used responsibly, it can help a kid through college or help with a medical emergency or send you on a vacation for your 30th wedding anniversary. You should plan on paying what you borrow within 30 days to 3 months, just like a credit card. And unless it’s an emergency and it will take you longer than three installments to pay back, save up instead. Most times you are allowed to deduct the interest because it’s attached to your home. But if you know that historically you have not been good with a $500 limited credit card, I wouldn’t suggest a $15K new equity credit line against your home or you might find that you have 3 new flat screen TVs, a new car, an equity credit line of zero and in danger of losing your home if you have a 1st that is adjustable. Home equity lines of credit are viewed as a 2nd mortgage on your credit report.
IN MY OPINION (I am not Suze Orman)…
Reasons that are not good enough to refinance:
a) you want to go on vacation
b) you have too much credit card debt
c) you want a pool
d) or a Harley
e) or anything else that is not a long term investment
Reasons why it might make sense:
a) you need to build an addition to the home that has long-term resale value
b) you need to make other improvements on the home that have long-term resale value
c) you bought your home well before prices ballooned OR was given it as a gift OR it is paid off AND the amount you want to borrow does not exceed 50% of what your home is worth.
d) you are about to lose your home and the only way to keep it is to refinance.
e) you are so rich you don’t care about silly things like home value.
*Things no one should promise you over the phone:
a) I can guarantee you a rate of X
b) When the rates go up on your variable, they won’t go higher than X
c) We won’t charge you a dime
What they should say:
a) The rate today is currently X
b) The normal rate spread for X company/bank is X-X but we can’t promise it will be that for your loan unless the paperwork is completed by X. (It is normal for the rates to change daily. It is possible to pay a fee to the bank and ‘freeze’ a certain rate so if the rate is super low and believed to go up in a few days, it might be worth it)
c) We charge a fee of X for our loans and will show you an itemized list of where all the other fees will go. If you prefer to not pay any fees up front, we can arrange that for you but please be advised that if you can afford it, paying the fees up front will lower your over all repayment amount and give you a lower interest rate.
How do you know what a typical monthly payment should be? Here is a guide. For a $100K on a 30 year loan at 8%, a fully amortized payment would be approximately $735.00. Increase the payment times how many $100K the actual loan would be. Quickly, you can see that paying $500 a month on a half million dollar home is severely under the threshold of your best interest.
This calculator, (on a page trying to sell you poor loan products, so please ignore them) will let you input amounts and rates. Click on the button [Show Amortization Table] to see how the payment is divvied up to interest and principle. If you got a 30 year loan in March 2007, it would take until August 2028 for you to finally start paying equal and then more principle than interest on your loan.
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