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Originally Posted by BlaqK20
Ok, so I think I get this. It's pretty much a credit card, but instead the amount you take out just adds on top of your home value/equity?
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I think you have it, but I think the terms are a bit off. It's pretty much a credit card, but it utilizes equity in your home as collateral. The amount you take out actually reduces the amount of equity you have in your home, as you have more borrowed against it. Does that make sense?
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Originally Posted by BlaqK20
I do have another question.
In this case I have a client who is doing a refi with another company, which we will call company A. He did the docs, got approved and all that and the title company recorded the refi. Now what if he changes his mind? Say, he decides its just not what he wants and he wants to pull out? I know that there is a 3-day grace period where you can retract, but I also hear that as long as you did not receive the money in your account (he also took cash out) you can still fax in a cancellation letter.
Now say, it has funded, and everything went through. Is there still a way to undue the loan? What consequences would there be, or what would be the simpplest, fastest way to undue the process?
Reason I'm asking is because one of my clients is in this situation and company A provided him with a good faith estimate for a 30 year fixed rate, but at the end they were only able to give him a 2-year arm. At that moment they convinced him that it was the only option he had so he signed. But now that company B is able to provide him with the plan he originally wanted, a 30-year fixed, what can he do to switch? Since company A already funded and it has been more than 3 days?
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Federal Law mandates that (with few exceptions) refinances are required to have a three day grace period called a recision period. In essence, the borrower has up until midnight on the third business day after the loan closes to cancel the loan. If it isn't cancelled by that point, the loan goes through. Unfortunately, since the three days have passed without the borrower recinding, he's out of luck, whether or not the money is in his account.
Fortunately, you can still refinance, although the broker who just did the loan isn't going to be happy. Due to RESPA regulations, the broker should have had to redisclose the change in the terms of the loan, as well as had a new application signed. So either the borrower didn't really pay attention to what he was signing or the broker is out of compliance.
One thing you would want to make sure with the customer is that it is beneficial for him to refinance so quickly. Two year arms are usually used in B/C Lending (at least in Wisconsin) so it may be beneficial for him to improve his credit before refinancing, and hopfully get into a conforming loan program. If that isn't the case or there was some other reason for him to go on the ARM, find out what the borrowers intentions are. If he is only planning on living in the home for a couple more years, it may not be in his best interest to go on a 30 year fixed. If he isn't sure what is going to happen, it may be better for him to have the security of a long term fixed loan.
One advantage you have over the other lender, though, is the fact that you are going to be dealing with a rate/term refinance rather than a cash out loan. The programs are usually a bit better and he'll likely qualify for a better rate as a rate term, not to mention paying less in fees.
I'd suggest working out a cost/benefit analysis for the borrower, and show them exactly what it is going to cost them to refinance, how much they'll save over the long run, and approximate the time frame for them to break even with the closing costs. (For example, say he is going to end up paying $2000.00 in closing costs, and is saving approximately $80.00 a month on average over the life of the loan. If he sells the property before 25 months are up, it would have been better for him to keep his current mortgage. If he stays there longer, it will be beneficial for him to pay the costs now and refinance, the longer he stays there, the more he will have saved.
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Although I am no expert, if he isn't B/C, you may want to wait a few weeks before you lock the rate. It looks like there is a small squeeze on the 2-10 year bonds, which should cause rates to dip temporarily. I would imagine we might see that dip in late August or Early September.
Good luck, if you have any more questions, let me know!