I am looking for a lender that provides maximum negative points and will allow excess funds from points to be used to reduce principal or fund escrows.
I did a two step refinance about 6 years ago where I first refinanced with Amerisave who provided Negative Points that fully covered closing costs and funded escrows with about 4,000 then I refinance again with my preferred lender.
I am looking to do something similar again and was hoping someone had knowledge on what financial institutions will allow this.
No – negative points are borrowed money, not income. The lender lets you borrow that money in exchange for a higher interest rate (instead of a higher principal balance). They expect to get their money back (and then some) as you repay the loan.
This doesn’t make sense. Borrowing to reduce principal = not borrowing.
Why? What was the point (ha?) of refinancing a second time right away?
I believe the rules are state-specific, not lender-specific. In my limited experience with “limited cash-out refinance” in CA, you can use lender credits to fund prepaid items (like escrow), plus a small amount of cash in your pocket (up to $2K in CA). If you go over $2K in your pocket, it becomes a regular cash-out refinance (not “limited”), which costs more.
This type of mortgage allows you to make a profit if you pay it off in a short time period. The lender is paying you to take a higher rate and expects to earn back what they paid you over the first couple years of the mortgage but if you refi or paydown the loan you lock in a permanent profit.
The other benefit for some people is to use the loan to bridge themselves into a no-cash-out refi.
Example: (totally made up numbers)
Lets say you owe $100,000 and your local CU has a below market rate for no-cash-out refis but you have the equity and want to borrow $200,000. You could do a cash-out refi with Amerisave (or another lender) get 3% negative points ($6,000) on the new loan balance. You pay closing costs of $4,000 and have $2,000 left that goes towards escrow or your pocket. This $2,000 is profit. You now need to Refi fast as your current loan has an above market interest rate that you agreed to in order to receive the $6,000 in negative points.
Some lenders will allow you to take a large amount of negative points but when they close the loan you can only use the to cover closing costs and any excess are lost, they will not let you fund escrows or take the balance that should be due to you.
I am looking to do a regular cash-out refi and want max negative points.
Completed my Refi with Amerisave, they were fast (<3 weeks) and professional. They gave me a Lender Credit of approximately 3% of my Mortgage Borrowing. It cost me 1% to close the mortgage the primary cost was title insurance. I used the 2% excess to fund my escrow accounts. The 2% is profit and will be eaten away over time by excess interest expense.
Things I learned:
Amerisave has additional loan options that are not show on the website - I was able to take an even higher rate loan that had a larger lender credit - The chat person was able to give me those numbers prior to applying
Time your refi so that your required escrows are sufficiently large to absorb the lender credit - This would be before your annual RE taxes are due and Home Owners Policy payment is due.
This is very creative, thanks for documenting the process!
We just completed a refi of an $800k 30 year fixed loan at 3.5% in MA, paying 0.93% of the loan in fees (of which 0.5% was prepaid interest paid as “points”). We got quotes from about six vendors, including various bank relationship rates, and our local mortgage broker matched the best quote.
So, gosh, should we instead have shopped for someone who would loan us $800k at 5.5% and would have paid all closing fees as a lender credit, then additionally put 2% of the loan amount into an escrow account? Raising the escrow amount by shopping for an extra expensive homeowner’s insurance policy? Then refinanced within a month with the same deal, taking a cash refund of the escrow payment?
That seems like it would have been a better deal by about 2% of the loan amount. Not doing that and just doing the straight refi when rates are low seems like making a bet that rates will not go down further, hmmm.
I find it very very hard to believe that we got the rock-bottom refi rate quote, but we did shop throughout the rate lock period until closing, and would have jumped ship for a lower rate, and couldn’t find one; extra 0.125% lower is about 2-3% of the loan total in interest over the life of the loan.
Yeah I think you’re right – the quotes with AimLoan.com (super transparent shopping UI) show about a 0.5% spread between their no-fee, no-points option and their lowest rate (with lots of points). So in our example we probably would have been better off refi’ing to, say, 4% or 4.125% for “free” (with a large funded escrow account), then refi’ing to 3.5% when rates hit another nadir? Super interesting idea.
Right. Or not doing the refi to 3.5% at all, because it’s costing you $4K out of pocket (0.5% of 800K). It probably takes 7-9 years before the $4K “investment” will pay for itself (monthly interest savings minus opportunity cost), which assumes you’re not going to refi again or sell within that timeframe. Paying points is not only a bet that interest rates will not get any lower, but also that you won’t have to sell the house before they pay off.