The Interim Mortgage Refinance Scam
February 22, 1999
"I had a $300,000 fixed-rate loan at 8.25% with 28 years to run that I wanted to refinance, but it had a prepayment penalty that amounted to $5,000. So my mortgage broker put me into an interim 30-year loan at 8.5% for $305,000, the extra $5,000 covering the prepayment penalty. It cost me $2600 out of pocket, reducing my gain to $2,400. I expect to refinance again in 3 months at a better rate. My new payment is $2345 compared to $2100 which is what it would have been had I gone directly to a final loan at 7.5% and zero points. So I lose $245 a month for 3 months, which cuts my gain to $1665. Still, I come out ahead. Or am I missing something?"
What you are missing is that you didn't avoid paying the prepayment penalty, so there was no $5,000 benefit from the interim loan. You merely borrowed an amount equal to the penalty. While it did not cost you anything out of pocket, now you must pay it back with interest.
If you had refinanced permanently the first time, it would have cost $5,000 out of pocket for the prepayment penalty, and you would have had a new loan balance equal to the old balance of $300,000. Total cost: $305,000.
With the interim loan, you paid $2600 out of pocket plus $735 in additional monthly payments, and your new loan balance is $305,000. Total cost: $308,335.
In short, the interim loan did not allow you to avoid the prepayment penalty, so all the costs associated with it is money out of your pocket. The interim refinance loan designed to save a prepayment penalty is a scam. Like many scams, it works best with consumers who are fixated on how much cash goes into or out of their pockets today, and what their monthly payments are, while ignoring how much they owe.
"I had a $300,000 fixed-rate loan at 8.25% with 28 years to run that I wanted to refinance, but it had a prepayment penalty that amounted to $5,000. So my mortgage broker put me into an interim 30-year loan at 8.5% for $305,000, the extra $5,000 covering the prepayment penalty. It cost me $2600 out of pocket, reducing my gain to $2,400. I expect to refinance again in 3 months at a better rate. My new payment is $2345 compared to $2100 which is what it would have been had I gone directly to a final loan at 7.5% and zero points. So I lose $245 a month for 3 months, which cuts my gain to $1665. Still, I come out ahead. Or am I missing something?"
What you are missing is that you didn't avoid paying the prepayment penalty, so there was no $5,000 benefit from the interim loan. You merely borrowed an amount equal to the penalty. While it did not cost you anything out of pocket, now you must pay it back with interest.
If you had refinanced permanently the first time, it would have cost $5,000 out of pocket for the prepayment penalty, and you would have had a new loan balance equal to the old balance of $300,000. Total cost: $305,000.
With the interim loan, you paid $2600 out of pocket plus $735 in additional monthly payments, and your new loan balance is $305,000. Total cost: $308,335.
In short, the interim loan did not allow you to avoid the prepayment penalty, so all the costs associated with it is money out of your pocket. The interim refinance loan designed to save a prepayment penalty is a scam. Like many scams, it works best with consumers who are fixated on how much cash goes into or out of their pockets today, and what their monthly payments are, while ignoring how much they owe.