Fha streamline: escrow cashout or lower monthly?

Question

I am looking into a fee fha streamline options. I currently have 5% interest and pay 1758 per month. I'm working with two lenders, one says he can get me 4.5% and a check for my escrow balance of 4000. The new monthly being 1684. Without the cash out, he says he can get it down to 4%, monthly being 1617 for a monthly decrease of 141. However, he is pushing hard for the payout option. The other lender says the payout option is not as attractive as it looks. I'm more interested in the lower monthly. My question: why is the lender pushing so hard for the cash payout option despite my clear I interest in the lower monthly? And why does the other lender not offer the cash out at all and advises against it?

Zack Karp · Answer

@Jeffrey Valancy that previous answer from @JM Payne is totally false.  The front-end loan officer that you are working with doesn't give a rats behind about whether the future servicer of your loan carries full term and makes all that money on additional interest.

However, that is absolutely a byproduct of you financing a higher interest rate, IF you never sell or refi early.

Instead, the more accurate answer to your question is that the loan officer is actually doing their job and offering you options so that you can make the best educated decision for YOU.  There are reasons to take both options.  Based on your numbers, the break even point is about 5 years ($4000 cash out divided by $67/mo difference in payment).

So, if you are planning on keeping this loan for at least the next 5 years or more, then you are better off taking the lower rate because once you hit 5 years then you are coming out ahead with the lower rate/payment.

But, if you are planning to sell in the next 5 years, or refinance again (perhaps to get out of FHA and into Conventional), then you are better off taking the higher rate and cash out, because you won't have enough time to realize the savings of the lower rate.

Make sense?  Hope that helps and best of luck.

Zack Karp · Answer

@JM Payne sorry you took that defensively, I wasn't looking to argue.  Me and my 21 years of experience of doing the right thing for borrowers by educating them with all of their options will respectfully disagree.  The front end LO doesn't have any skin in the game for the end result of future interest collection.  Period.

@Jeffrey Valancy no one has a crystal ball for future interest rates.  The decision of paying the loan off in less than 5 years is for a planned sale, or if you believe you can get out of FHA (where you are paying PMI) and into a Conventional loan, either to eliminate PMI or to free up your FHA eligibility to buy another property.  It should not be considered as a "what if rates are still low" decision.  That was never suggested.  If you believe that either of those situations apply to you in the next 5 years, then the higher rate option is your answer.  If you are planning to stay in that FHA loan for more than 5 years, then you are better off with the lower rate.

It's just math, and it's that simple.  For the record, 4.0% plus PMI is virtually the same payment as 4.875% with no PMI.  And if you are trying to get out of FHA so you can buy another property with FHA later on, then it doesn't matter if the future rates are higher, even if rates go up to 7%, it's a necessary evil that you will need to refinance.

These are important planning & strategy decisions for real estate investors, and while important, rate is not everything.  Knowledge is power, and understanding your exit strategy and planning ahead is critically important before you take any action.

JM Payne · Answer

No worries, i realize that what i wrote seems like at attack on lenders and im outside of my swim lane. I strayed from the issue at hand, and your math and advice is solid. OP ignore what i wrote plz.

Jeffrey Valancy · Answer

I think this last point about it being unrealistic to expect the rates to remain low is easy to miss. True, even if I were sure I would refi again in a year or two, the rates could surely go up.

JM Payne · Answer

@Zack Karp sells mortgages for a living.  Tell me, which one does better on the secondary market?

What he said about the guy not caring about term is absolutely true because he's going to be paid off long before that happens.  Also true regarding breakeven points, with one caveat; it's easy to say out loud "oh I'll just refinance again in the future and save money," but two points about that;

1) it costs money to refinance

2) is it realistic to expect that rates will be lower than they currently are?

That's not to say that lower rates are the only reason for refinancing...there are plenty of other goals, but to say that everything I said is absolutely false is a bit of a stretch.

- JM

Jeffrey Valancy · Answer

This does make sense. The lender has mentioned refinancing again soon. I will ultimately get out FHA, however, given other factors, I'm not certain how soon that will be. It could be under 5 years, but probably not.

Jeffrey Valancy · Answer

This answer is very helpful. Thank you! I suspected something of the sort, but couldn't be sure. It's interesting that you should use the phrase short game, because when I was discussing the matter with my wife I happened to have said I was playing a long game and preferred the lower monthly over the cash out.

JM Payne · Answer

The lender is pushing for the cash out because they get an extra .5% over the life of your loan.  The payout is the carrot on the stick...you walk with $4k and they walk with monumentally more.  For example, the difference in a $350,000 loan amortized over 30 years between 4 and 4.5% is $37,000 if carried to term!  You're playing the short game because you can go buy a new flat screen, but the lender is laughing all the way to the bank.

As to why the 2nd isn't offering, some banks don't offer cash out refi, or it may just not make financial sense for them at this time.

I hope that helps!

- JM

Fha streamline: escrow cashout or lower monthly?

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