What Is Mortgage Flipping?
If you have a mortgage you have a debt, but what about the lender? To lenders that very same mortgage note is an asset, a security which can be bought, held or sold.
So — in the most innocent of circumstances — an investor might buy a mortgage note in the morning and selling it in the afternoon, just like stock. In the sense of quickly buying and selling an asset this could be seen as an example of mortgage flipping.
Mortgage Flipping
Unfortunately, there’s another definition of mortgage flipping and this one’s not so innocent.
Imagine a situation where the Smiths finance their home at 6 percent. Mortgage rates drop to 5.88 percent. Their helpful mortgage lender, Jones, goes back to the Smiths and gets them to refinance their loan.
The Smiths now have a lower rate — but their debt has increased. How? The fees charged by Jones were added to the loan balance.
Jones goes back to the Smiths every time rates fall by an 1/8th or 1/4th percent. And each time the Smiths refinance their rates fall and the amount they actually owe goes up.
How often will Jones seek to have the Smiths refinance? As often as possible.
Did Jones do anything illegal under federal rules? Nope. He just sold the financing that the Smiths wanted.
Never refinance unless it’s in your benefit to do so. That means not only a lower rate but also refinancing costs you can justify.
The Math of Mortgage Flipping
A quick way to figure out if refinancing will work for you is to do some math. Let’s say that it will cost $5,000 in lender fees and closing costs to refinance your home. Let’s also say that your monthly mortgage cost will fall by $150. On a cash basis it will take 34 months to re-capture the $5,000 ($5,000 divided by $150 = 33.33 months).
Do you reasonably think you will retain ownership of the property for almost three years? If so, fine. If longer, even better.
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