Which loan rate should I accept?

Question

I am in contract right now to buy a house and my chosen lender is Wells Fargo. I have locked in the rate with them, and they've given me two options, both 30-year fixed:

3.375% (3.42 APR) OR 3.5% (3.5 APR) with 0.5% credit.

The 3.375 is great but the hangup here is that we would like to refinance the house in May, when we will be able to take other income into consideration and hopefully be able to get some money out of the house, as we are currently putting down 40%, the minimum allowed by the bank. We would like to get back about half of that, which we would qualify for with the refinance.

Has anyone refinanced soon after purchasing? Would Wells Fargo be okay with this?

Jeff Trevarthen · Answer

40% down?  With Wells?  Must be an investment property.

Typically there is a 6 month seasoning when you use one lender and then go back to the same lender.  Back in the old days they used to have prepayment penalties.  When prepayment penalties went away and before the crash, some lenders would churn loans...meaning they'd finance a property, and then 3 months later, they'd finance the property again with a refinance.  Essentially, they were earning a fee on the same property every 3 months even there was no real benefit to the borrower.

If you to another lender to get a better deal, then they don't typically care about "seasoning" on the mortgage.  I just completed something similar at the beginning of March.

Chris Mason · Answer

Your "life of the loan" scenario is similar to that of house flippers that once in a while stumble across a property that I can actually lend on as a traditional mortgage lender.

This is a scenario where "purchase" and "permanent" financing are two different things. You want a competitive low rate on permanent financing. On purchase financing that isn't going to be permanent, you actually want to bleed the lender for some money now in exchange for you being willing to accept a higher rate.

Consider, if you will:

Suppose that lender credit for 3.5% is $5,000. Suppose it's going to cost you $100 per month because of the higher rate. That's a 50 month break-even, so taking that lender credit makes sense as long as you are going to be out of that financing in less than 50 months.

I'd say a few months is way less than 50. This actually means you're in the unique position wherein you shouldn't want a lower rate. You should keep jacking that rate up until the lender credit hits the diminishing marginal returns segment.

Whatever money you can squeeze out of Wells, use it towards closing costs and discount points on your permanent financing (which obviously can't be Wells, because you're f--king them on this transaction -- good on ya!).

The above is the rationale flippers usually use. They want to be in and out of that home ASAP, so they don't care about interest rate, they want to know how much of the closing costs I can cover by jacking up and maxing out their rate.

FYI: If you pay off a mortgage in less than six months, my credit repair people say it screws with your credit. The "new account" status sticks for 7-10 years or however long that mortgage appears on your credit report, but you didn't have six on-time payments to make up for the "new account" status. I've seen credit reports where the FICO score only makes sense if this claim by the credit repair pros is true. (FICO treats their exact algorithms as a trade secret).

Edward B. · Answer

Oh, and to answer your other question, the big lenders make most of their money on originating the loan not holding the loan, so they would be more than happy to charge you for a refi if you qualify.

Edward B. · Answer

@Charlie Castor, oh, where to begin? Is this an investment property or your primary? If your primary you may want to consider pulling a HELOC to get access to your equity vice refinancing.

In order to decide whether to take or pay points I divide the cost of the points by the difference in the PI payment. For example: for your .5% credit on a $200k loan you will get $1000. but your payment will be $14 more per month. So as long as you don't hold the loan for more than $1000/$14 = 71.5 months it probably makes sense to take the half point. If you hold it longer than that it is costing you an $14/mo more than if you hadn't.

Usually this conversation goes the other way around where people are deciding whether or not they should buy the point. If you will recapture your money within 24 months I would definitely do it. Anything more than that would be a judgment call.

That is a pretty simplistic explanation assuming I understand your question.