Wednesday, September 19, 2007

Actual Conversation with Countrywide Today

background: I'm advising someone on refinancing her mortgage to take some equity out. We have a lock on a 5 year interest only ARM at 5.875%. She's getting close to signing and we just wanted to make sure it's still a good price.

Countrywide: A 30-year fixed would be 6.5%. A 5/1 ARM would be more than that, so I would recommend the 30 year fixed. Her monthly payments would be $300 cheaper than her current mortgage.

me: but the one she's locked at would be something like $300 even cheaper than THAT.

Countrywide: But that mortgage doesn't pay any money toward principal each month.

me: but she saves enough money with the lower interest rate to pay off more than the amount of principal that the 30 year fixed pays.

Countrywide: no you don't get it, this loan is what we call "amortized", which mean the payment stays the same each month but you're paying down principal each month so over time more and more of your money goes to principal. What "interest-only" means is your payment only includes interest.

me: (realizing this guy is just repeating whatever he learned in his training without knowing what he's talking about) I understand. But she saves so much with this lower interest rate that she could pay the amount of principal your loan pays down each month and still have more than $100 left over per month.

Countrywide: (clearly confused) let me get my manager.

The manager did happen to be competent, though she still tried to change the subject and focus on Countrywide's "155 products, so we can structure it however you want" as opposed to admitting that her rates are much worse that this other company. Countrywide apparently isn't just giving away the store anymore...

The only real argument against the other company was just that you have interest rate risk after 5 years with the other company (but even then the other company had a 30-year fixed much cheaper than Countrywide).

For bonus points does anyone know an even better argument Countrywide could have used? Hint: see the Dave Ramsey video I posted.

2 Comments:

Blogger DougieDougieDougie said...

For Bonus Points:
ok. taking a stab at the bonus pts.

Because the girl doesnt understand exactly what she's getting into (interest only loan with "large savings") the likelihood that she will actually use the savings from the ARM to pay towards the principal isn't likely (unless she's still being advised by you.) Her thought process might be, "Sweet, I saving cash on my mortgage, i'm going to go buy new shoes"

The interest you pay is based amount of principal you owe. So the sooner you pay off your principal the sooner you pay off the loan and the less interest you pay in the end.

What I always suggest is to take a fix rate loan (safest) and add extra payments to the principal only each year. This will drastically cut down the life of the loan and save you tons in payments towards interest.

Am i close? or am i just "repeating whatever i learned in training and not knowing what i'm talking about?" haha :)

6:25 PM  
Blogger Ryan said...

Fine answer. Yes that is correct. The problem with saying "well I can just pay off more each month" is that you might not do it! You see all this money in your account and think you're rich and so there's a big self-discipline issue.

Also, I agree, a fixed rate is best for most. Here's where we're at with the person I'm advising, which is unusual - the family has a mortgage on a rental at a 2% higher rate so she's going to do some "mortgage arbitrage" to keep that 2% for herself.

Paying down the mortgage can be great, but only if that's your best opportunity. For instance, you don't want to do that if you haven't fully funded your IRA and 401k yet.

10:55 AM  

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