"Alternative" mortgages.

[CCdaCE]

Anyone read about a different type of mortgage where all of your paycheck is put toward a home loan, as soon as you get paid? Then you write checks against your mortgage when you need money throughout the month.

http://www.cmgmortgageservices.com/

Anyone have any experience with this type of a loan? I'm thinking "what's the catch". Some monsterous closing cost? It's a company from Cali., so already I don't trust 'em. HA!

Obviously you have to assume a few things, and the assumptions have to be true (are they called assumptions any more?).

1. You have a "great" credit score. I think the above link requires a 680 or better.
2. You have the discipline to not abuse your line of credit and write more checks than your paycheck covers.
3. LIBOR indexed loan isn't going to go thru the roof on the interest rate.
4. The spread between your present interest rate and this type of loan makes it "worth it".
5. The website of this particular company wants a loan to value of 80%.
6. You have a lot of cash flow, but don't necessarily spend it all as soon as you get paid.

... the list goes on. Read the website.

Personally, I've been in this house 3 years, I figure I would've got a different job and sold by now. (I was *this close* to switchin' jobs.) So you could accuse me of gettin' beat up by the ARM. There's less than $111k left on the loan. The tax assessor thinks the house is worth $140k+. My loan started at 4%, now it's 5%, I suppose it'll go to 6%. A big $93 more a month from interest, whoop-tee-do. The big increases went to escrow as a result of double digit yearly prop. tax increases, insurance increases, etc. Including everything my payment has gone from $915 to $1050 in 3 years, and it'll go to about $1150 after the next ARM jump. So, the interest isn't killing me, but everything else PLUS the interest is. I'm also sick of paying PMI, flood insurance, and all the other bullsh!t.

So, theres several issues here, and I thought I'd run this past you smart cookies and see if anyone has experience or heard any horror stories about this "new" type of loan. I read about this loan type two years ago, but blew it off as BS. "If it sounds too good to be true, it probably is."

http://www.cmgfs.com/home_loans/cmghome/index.htm

-CC

Edit: added last URL which is a simulator.

 

[califdreamer]

Thanks for info CC.  I heard an ad on the radio sometime back about this idea.  I think they said this type of loan has been used in Australia for some time... don't know if that is accurate.  It piqued my interest but I never followed up on it.  I put a call in to the toll free number on the website you posted.  They are supposed to get back to me tomorrow.  If I learn anything interesting I'll post it.  Thanks again for the information.

 

[MasterBlaster]

My take is that it is just one more way for the average Joe to get into debt trouble.

This loan product induces people to never pay off their mortgage.

 

[honobob]

I have a 15 year 5.5% that I thought I wanted to pay early and usually have a 5-10K checking balance so I called several months ago. As I remember it was like a rolling HELOC that your balance would act as prepaid principal. The kicker was that it was an adjustable with a cap about 17% and you would always be able to "withdraw" what ever you prepaid so I can see some people would be tempted to pay forever.

 

[free4now]

The idea of monthly sweeping extra money from a checking account away into another account seems like an interesting idea.

I haven't read the details but I'm assuming this loan allows a lot of flexibility to avoid principal payments or maybe even avoid interest payments through reverse amortization. Those kind of features always come at some cost: higher interest rates, more likelihood of abuse, etc.

 

[califdreamer]

I agree the two big concerns with this type of loan would be higher fees/rates and the potential to mismanage. As I mentioned, they're supposed to call me back tomorrow. I am curious to see if the benefits of paying down more principle by applying the paycheck immediately outweighs the higher costs, and I am assuming higher costs, of the loan.

 

[Nords]

Those kind of features always come at some cost: higher interest rates, more likelihood of abuse, etc. 

"Here, hold my money for me, willya?" has hever been free...

 

[MasterBlaster]

This loan is just a gimmick.

Your numbers (and milage) may vary but just for grins lets look at some numbers. Lets say you clear a few (three) grand every month from your job over and above the mortgage payment that is deposited into your loan. If the average balance throughout the month is half that amount, then on avreage you'll earn interest on $1500 each year. Guessing that the interest rate they charge is 6.5 percent then you'll get (before income taxes) a benefit of around $97. After taxes maybe you'll clear $60-70.

Sure that's some fun money but is it worth paying an (estimated) extra half percent interest (or the equivalent extra fees and charges) or so on your (estimated) $200k loan.  That extra half percent on that $200k balance will cost you around $1000 a year. After your tax break maybe you'll only pay $600-700. Guess who loses here.

Run it with your numbers to find out the actual cost/benefit.

Some people game their credit cards to gain a few dollars in interest. Some people send out checks that they hope to cover before they clear.

This is the latest scam for people who can't do some arithmetic.

And by the way, if you want to pay off your mortgage faster just pay some extra principal each month on a traditional loan. Most mortgages don't charge any pre-payment penalties. Why do you need this bizarre loan product to pay off a mortgage faster ?

 

[CCdaCE]

Yeah, when I did the math, it didn't look too stunning either. But, if I had a huge interest rate now, a bigger loan, and more cash flow, it might start to make sense.

Perhaps, tomorrow, I'll fire up a spreadsheet.

Plus, I'm sure you'd have to drop another $2k+ or whatever for closing costs again.

Thanks for the replies so far.

-CC

 

[califdreamer]

Excellent points, blaster.  I did do use the "powerful interactive simulator" on the website and the results were quite unimpressive.  My initial reaction was, hmm, I must not be doing this correctly.  In any event, I'll have fun with the mortgage rep tomorrow.

Yeah, when I did the math, it didn't look too stunning either. But, if I had a huge interest rate now, a bigger loan, and more cash flow, it might start to make sense.

Perhaps, tomorrow, I'll fire up a spreadsheet.

Plus, I'm sure you'd have to drop another $2k+ or whatever for closing costs again.

Thanks for the replies so far.

-CC

The low rate on my current loan will make this look even less attractive, as CC points out.  Plus upfront costs and it really weakens their case.