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Here's an email I got from a friend who's trying to get my relative to refinance:
"It is an option arm and the min payment is fixed @2.75 for 5 years it is on prime – Based on 75% of your current loan balance. In other words, your loan will decrease by 25%. You don’t have to qualify for the loan. Which is the beautiful part. There are a group of investors that are buying ‘paper’ – (they buy in “bulk – so they are making money…somehow) there is an upfront fee for you (and me J) but it should reduce your payments by a substantial amount. I’m look at about 1,000 a month if I pay my full payment and interest, which I can’t tell ya the last time I did that….LOL"
Here's the website:
The Broker is West Coast mortgage and the branch is called JW Financial Solutions.
As soon as you see the words "Option ARM", you should be cautious. Google it or read all the threads about this product before you use it.
Its great when people say fixed for 5 years. Thats a very salesman way of saying its an ARM that adjusts after 5 years, but if I use the word fixed it causes a mental image that I want to create. I have seen people sell 2 year fixed loans as well. Changing the definition or words to suit the needs. Also, if its bsed on 75% of your loan balance... he is saying your loan balance decreases by 25%??? Where does this magical 25% reduction come from? The fairies pay it for you or does the company that is doing it because they are just that rich?
The "minimum payment" means you are deferring interest and your loan amount goes up instead of down. If this broker is LOL about how many times he pays the full payment then he is also heading for a problem when the loan recasts and he has to start making the fully amortizing payment. This can be 2-3x what the min payment is. There is no "no qualifying" or "free" mortgage.
I think its a great product for people that understand it and use it properly.... but that would be about 1-2% of the people that have an Option ARM. Whenever someone is selling it to you this way, its usually because they don't understand it or because they don't think the truth would work for you.
CA and FL where the epicenters of this product because it allowed people to afford $400,000 homes at $1500/month payments. Of course this is the next wave of problems when most reset in 2010-2012 and the payments jump drastically.
Also, 2.75% is NOT your interest rate. This is your minimum payment rate. The truth is hidden there where he says the rate is based on prime, which is 5% right now.
Also, if the loan is based on prime it is an adjustable rate, which means prime (variable part) + a fixed component (called the margin) will be your real rate. In most cases you would be looking at a margin of 1.5-3% (the higher the margin the more profit the broker makes from the lender) so your real interest rate would be 6.5-8%, higher than what you could get on a boring 30 year fixed rates.
Most people didn't even notice they were refinancing into a HIGHER interest rate loan, they were going from 6 to 8% after a refinance. The broker just keeps pointing at that minimum payment based on 2.75% and how much money you will "save". Really all you are doing is deferring the interest. The lender takes the real rate of say 6.75%, - 2.75% interest you are paying and then adds the 4% you did not pay that month to the balance you owe. Your loan amount keeps going up, up, up until you hit a limit, usually after 5 years, when you need to make the full payment.
Option ARMs are one of the most dangerous financial tools if used improperly. They can be great assets for those with variable income or good financial sense, but taking it for the low teaser payment and shifting the pain to 5-6 years from now can blow up in your face.
Also, 2.75% is NOT your interest rate. This is your minimum payment rate. The truth is hidden there where he says the rate is based on prime, which is 5% right now.
Also, if the loan is based on prime it is an adjustable rate, which means prime (variable part) + a fixed component (called the margin) will be your real rate. In most cases you would be looking at a margin of 1.5-3% (the higher the margin the more profit the broker makes from the lender) so your real interest rate would be 6.5-8%, higher than what you could get on a boring 30 year fixed rates.
Most people didn't even notice they were refinancing into a HIGHER interest rate loan, they were going from 6 to 8% after a refinance. The broker just keeps pointing at that minimum payment based on 2.75% and how much money you will "save". Really all you are doing is deferring the interest. The lender takes the real rate of say 6.75%, - 2.75% interest you are paying and then adds the 4% you did not pay that month to the balance you owe. Your loan amount keeps going up, up, up until you hit a limit, usually after 5 years, when you need to make the full payment.
Option ARMs are one of the most dangerous financial tools if used improperly. They can be great assets for those with variable income or good financial sense, but taking it for the low teaser payment and shifting the pain to 5-6 years from now can blow up in your face.
Wow, this helps tremendously! I will definitely share your input, basically it's the same kind of deal that got her in trouble in the first place.
I went to the site and took a "look-see"
What I found interesting was this statement
"Your current loan(s) will be pooled alongside the loans of other JWFS clients, categorized by lender. Once there is enough volume in the specified ‘Pool’ our investors will then negotiate a purchase of the pooled notes and the servicing rights of those notes at the going or discounted rate (according to Merrill Lynch the going rate is 22 cents on the dollar.) "
Make you think hmm "what happens while I am "pooled"" do you continue to make payments ? Make no payments while you wait for your "pool to fill" which will result in late payment charges and negative credit trade lines which could "snowball" into "opps sorry your credit score is too low you won't qualify"
So then as long as I was on the site I took a look at their "Debt Solutions" section Yup just as I though, they are one of those "debt settlement companies" and we all know my opinion on them.
Then I saw
"JW Financial Solutions is a full service consulting and marketing company JW Financial Solutions and its affiliates offer a network of financial advisors, certified debt negotiators, attorneys, and mortgage consultants"
aha yup they are going to "farm you out" to one of their affiliates for what I am sure is a hefty fee
So being bored I gave their 800 number a call
The fee for this referral program is $3500
I also asked and the fee to "settle your debts" is a % based on what they save you
Adding this to the very helpful info rcarrillo posted and I would tell your friend to run very fast away from this "wonderful opportunity"
they can make the min payment but their principle will go up. this is one of the reasons why california and wamu got into trouble...
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