There’s a thread over at Fatwallet which, though sparsely commented upon, is nonetheless quite interesting as it discusses an obscure, problematic, but nonetheless viable and certainly interesting way to put a few thousand extra dollars in your pocket.
The topic: mortgage churning, the practice of getting a mortgage and then paying it off immediately. Why on earth would anybody want to do this? The answer is simple: negative points. Just as you can buy down your interest rate by paying points, you can do the opposite with negative points–that is, the lender will pay you cash upfront in return for your acceptance of a higher rate.
It is therefore possible to apply for a mortgage where the negative points paid to you by the bank outweigh all the other closing costs. Therefore you could take out a mortgage, pocket the negative points-induced profit, and then pay off the mortgage… and then keep doing it again for as long as banks will lend to you.
Possible problems with this:
- Early payment penalty: some mortgages charge you extra if you pay them off too soon. You would have to make sure there aren’t any restrictions on your paying off the loan early.
- Liquidity: obviously you would need a lot of cash on hand to pay off your high-rate mortgage lest you risk being stuck with a high-rate mortgage.
- Repeatability: if lenders see a whole bunch of recent mortgages in your name on the same property, you’re not likely to get approved.
- Taxability: when you pay points, that payment is tax deductible, but we have no idea how taxes would work if banks are paying points to you.
Then, of course, there’s the fact that applying for a mortgage is kind of a pain in the butt, which would explain why things like this don’t get posted on SlickDeals.
But still, it’s worth thinking about even if you’re not rolling in dough and even if you don’t plan on doing it over and over: a poster in the thread says he was recently quoted a rate of 3.625% with 0 points or 4.75% with 3 points. His current mortgage rate is 5%, so he could actually decrease his rate by a quarter point and get several thousand dollars in cash.
Not bad for filling out an application and sending in some documents, yes?
My brother has been refinancing his mortgage with a program just like this in California. He refinances his mortgage every 6 months or 2 times total per year. Every time he refinances, he pays nothing in costs or fees associated with the mortgage transaction. He does deliberately take a higher interest rate and in exchange, he receives up to 2 points or 2% of his loan amount. He has a $400,000 loan balance so he receives $8,000 in mortgage rebates every 6 months. That is $16,000 every year. He has been doing this program for the past 6 years. He uses the money he gets from this rebate towards his monthly mortgage payments and saves thousands every year. This program is only available in California.
Thanks for the comment, and thanks for reminding me of the existence of this post–I had completely forgotten about it! Good information.
Robert, do you have more info on this ‘program’?