Hi All,

I have a friend that referred me to a guy that is offering an interesting service that I'm considering.

I have a $303,500 loan on my condo. I am currently on year 3 of a 5 year arm. My interest rate for the 5 years is 4 3/8%. When the 5 year arm ends, the rate will start to climb.

This guy is offering me a service whereby:

1) He'll get me into a 30 year fixed loan, let's say at 7.25 percent.
2) He gets a big kickback from the bank (using his Yield Spread Premium) - http://en.wikipedia.org/wiki/Yield_spread_premium
3) At the beginning of a 4 month period, he gives me a check which is the difference between 7.25 percent and 3.5 percent. Approximately $2840 using my numbers.
4) I pay the 7.25 percent for 4 months, but it's really the equivalent of 3.5 percent since he gave me the subsidy.
5) At the end of 4 months, we do it again with another loan.
6) At the end of the year, I add up all the interest I've paid (at 7.25 or so percent) and write off that interest in full.

So in effect, I'm really paying LESS than 3.5 percent interest.

It sounds too good to be true (yes, I know what they say). Where's the big flaw with this? The cash he gives you is not considered income - it's a YSP payback.

I think the big downside is if the interest rates start to really climb, and then he can no longer get you such a low rate...

Anyone ever hear of anything like this?

- Thanx
- Jon


Edit : Interesting vice Interesing in title
--_l0ser

Ok, 27 reads and no response. I even spoke to my present bank (Wells Fargo) and couldn't get any info about something like this...

I don't think most mortgage guys do stuff like this. They get people into a loan and move on. This guy constantly keeps his customers going with new loans every 4 months...

- Jon

I wonder what this would do to your credit rating?

So you enter and leave a 30 year loan every four months? Aren't their costs associatied with taking out a loan? Those costs are often high enough that they make, for instance, refinancing not worth it; the monthly interest percentage saved doesn't add up to the mortgage application fees, etc.

Yes, and credit rating. I've heard that simply accessing your credit rating (for your own reference, to open a credit card, take out a loan, etc) too often makes the bureaus nervous and they hurt your score.

In short, "dude, don't do it." Crazy schemes aren't worth it. If this really WAS a hole in the system, there'd be basement enterprises of people getting each other into loans and paying themselves YSP or whatever.

Save your $$ and pay hard to get through the first half of the loan where you pay more interest than principle each month (which, oddly, isn't the case for mine.... never did figure that out).

Okay, let's analyze this properly. Assume the standard 30-year loan rate you might get is 6.25%. If you believe the numbers from the Wikipedia page (dubious at best), then your broker's kickback could be as high as 4% of the value of the loan, or $12K. For starters, that's hard to believe, so let's tone it down to 1% of the value of the loan, or $3K. If that's all it is, then he's taking the entire kickback and giving it to you to make up for the difference in loan rates. He's gambling that he gets more on the kickback than he owes you in the deal.

And, oh by the way, there are significant closing costs on a loan. What I've done in the past, when refinancing, is to bid one broker off against another, faxing term sheets back and forth, telling both sides that I'll take whoever gives me the best terms with zero up-front costs. In effect, I forced the brokers to eat into their kickback to cover the closing costs.

Look at this from the bank's perspective. If the banks ever gave kickbacks big enough to finance this sort of shenannigans, then it would suck them dry. As a result, the banks have an incentive to push down the kickback rates.

Now, look at it from the broker's perspective. Assume that one of these four-month periods is up and he's not able to find you a loan that satisfies your terms and where he still makes money. That forces him to either get you into a higher-rate loan, so he gets a bigger kickback, it forces him to loose money on the deal, or it forces him to tell you that you're stuck in your present loan. In essence, if the underlying loan rates are going up, you're still stuck with what amounts to an adjustable rate mortgage.

My advice, for what it's worth: stick with "traditional" mortgage products. When your ARM converts to variable rates, you have three choices. Refinance into a fixed rate loan, refinance into another ARM, or stick with the existing ARM. If you see yourself in the place for the long term, then go for the fixed rate and be done with it. If you see yourself selling in the next five years, see what you can get with another 5/1 ARM (probably higher closing costs unless you go with a higher rate).

I have/had the same concerns as you guys have here. He pays all of your closing costs - it doesn't cost you anything to do this. Regarding your credit report, it will show a look by the bank every 4 months. I am not really worried about that.

I was also worried that something would change and he would no longer be able to do this, but he said that he's been doing this for 15 years and that he is following all of Fannie May rules and such...

The referrals that he gave me, and my friend (he's an American Airlines captain) have told me that they've had no problems, and that they've saved a ton of money.

I'm guessing that he gets you into very high interest rate loans so that the kickback is the highest. In my case (not a jumbo loan) he gives that rebate I talked about. The kickback must be high enough that he can pay your fees, give you the rebate, and make a profit. In the case of a jumbo, like my friend the pilot - he gets them into introductory rate loans that are between 1 and 2 percent and also keeps switching every 4 months as well.

I would be highly dubious about the whole thing if I didn't know my pilot friend so well. He's a pretty smart guy, and he swears by the money he saves doing this...

- Jon

Just to add to this, I asked someone who knows about this sort of stuff to take a look at your post, and here's his reply:

Quote:
Actually, the IRS would consider the payment to him income and taxable. It doesn't matter how you or your partner characterize it. Moreover, there may be closing costs (title insurance, settlement and recording fees and taxes) each time a mortgage is made. If it's an "all-in" mortgage (one where settlement costs are paid by the lender), there's usually some time limit--like one year or more--before the loan can be paid in full. Moreover, this would probably be considered a fraud on the mortgage broker's (that's the recipient of the YSP) part against his loan purchasers. If caught this poster could well be implicated.