Possible Mortgage Fraud or Sweet Mortgage Deal?

[solwoldjr]

What is the name of your state (only U.S. law)? Wisconsin

I was approached by some friends of mine that own a mortgage company. They have a new program in which I receive a buydown from them for refinancing. The plan is to refinance twice per year, each time with a buydown. I am somewhat concerned that this may be illegal. It appears that buydowns are legal from the research that I have done. It seems like a great opportunity as my effective interest rate will be several points lower than I currently have, however I don't want to be involved in anything illegal.

Anyone have any thoughts on this?

[FlyingRon]

Doesn't sound illegal.

It does sound like it won't work.

The last thing you want to do with a mortgage you are not intending to stay with very long is buydown. Just how is this supposed to save you anything?

[dmiller12]

What are your costs to refinance? Can you recoup these costs in 6 months? What happens if rates go up and 6 months from now you're scheduled to buydown again but the rates have increased. It is possible for the future buy down rate to exceed the current rate.

Sounds like a scam to me to get people to refinance in a non-refinance market but I'd need more details.

A buydown is simply paying in cash today the difference between the par or market rate vs the bought down rate - in some cases less a small discount.

I want to see the details of this program... Option ARMs sounded good on paper too. What the people selling them weren't hiighlighting is that property values can go down and they have and the margins on these loans were so high that when the rate did adjust, it was going to go up...WAY up. The high margins meant BIG commissions.

Before you sign anything, check it out thoroughyl and have someone else like a financial planner check it out too.

[amadeus49]

Originally Posted by solwoldjr

It seems like a great opportunity as my effective interest rate will be several points lower than I currently have, however I don't want to be involved in anything illegal.

When you refer to your "effective interest rate" , I assume you're referring to the rate you would pay on your bought down mortgage. IMO your "effective" interest rate is the APR, which in your scenario would be extremely high, and is what you should be concerned with. The APR takes into account your closing costs over the life of their benefit to you.

IOW what is it costing you to do these buydowns versus what you save with a lower interest rate ? Assuming your house value appreciation flatlines or goes down, how would you come up with the buydown money and closing costs for successive buydowns ?

Sounds like the real estate equivalent of stock churning to me.