Should I refi my 15 year fixed mortgage if my rate is 3.250%?

I’m reviewing a scenario for one of my returning clients who currently have a 15 year fixed mortgage at 3.250% from when they purchased their Seattle home 1.5 years ago.  The current balance is around $387,600 with a principal and interest payment of $2930.13. They do not have taxes and insurance included in their mortgage payments. My clients are considering another 15 year fixed mortgage or possibly a 10 year fixed mortgage.

Quotes below are with impounds waived (lenders typically charge 0.25% in fee when taxes and insurance are paid by the borrower instead of included in the monthly mortgage payment). Rates are based on mid-credit scores of 740 or higher and a loan to value of 80% or lower.  Mortgage rates are as of January 8, 2013 and may (and will) change at any time. 

2.875% for a 15 year fixed (apr 2.979)  has a rebate credit which brings the estimated net closing cost down to $1229 based on a loan amount of $389,000. The principal and interest payment is $2663.04 reducing their monthly mortgage payment by $267.09.  

2.750% for a 15 year fixed (apr 2.886) has closing cost estimated at $4195. The principal and interest payment is $2660.20 with a loan amount of $392,000. This scenario reduces their payment only slightly more to $269.93. If it were my choice, I’d opt for the slightly higher rate with lower closing cost.

Currently, the 10 year fixed rate for this scenario is actually priced slightly higher than the 15 year fixed.

2.875% for the 10 year fixed (apr 3.020) with $1700 in net closing cost after rebate credit. The principal and interest payment would be $3,733.81 based on a loan amount of $389,000.

Again, I would opt for the 15 year at 2.875% as the pricing is slightly better and I could always make the additional principal payment of $1070.77 (3733.81 less 2663.04) in order to pay down my mortgage in 10 years vs 15.  

If you are interested in refinancing or buying a home located anywhere in Washington state, please contact me.

A compromise for waiving your escrow reserve account

An escrow reserve account is used to collect and “reserve” the real estate taxes and home owners insurance portion of your monthly mortgage payment for when your taxes and insurance bills are due. In Washington state, property taxes are paid twice a year and home owners insurance is paid annually.

If you have enough equity (80% loan to value or lower), a lender may permit a home owner to pay taxes and insurance are their own and not have them included in their monthly mortgage payment. Lenders typically charge 0.25% in fee if a home owner elects to do this. On a $400,000 loan amount, this is a cost of $1000. This fee is often priced into the cost of the rate. It’s not unusual for a home owner to be unaware they paid this fee since it is most often already factored into the cost of the interest rate.

However there is a compromise of sorts. Did you know that many lenders will permit a home owner to pay their home owners insurance and not charge a 0.25% escrow waiver fee? This is possible when property taxes are still included in the monthly mortgage payment and the property has an 80% loan to value or lower.

If you are considering buying or refinancing your home located anywhere in Washington, I’m happy to help you.

An Awkward Time of Year for Closing Refinances: 1st Half Taxes Due

On April 30th, first half of real estate taxes are due for properties located in Washington State.   For those homeowners who are refinancing with a closing in April to mid-May, this can cause an inconvenience.   Lenders, the title insurance company and the escrow company need evidence from the County that the taxes for the first half of the year have indeed been paid. 

Unless your reserve account is waived, taxes are collected on a monthly basis in your mortgage payment and then paid when they are due: first half is due by April 30th and the second half is due by October 31st.  

The County typically has a lag time before the processed payments appear once they receive the payment from the mortgage servicer.  King County’s website states:

“It may take up to two weeks for your property tax payment to be reflected in our records after receiving your payment”.

For refinances closing before it is reflected in County records that taxes have been paid; they have a few options:

  • Pay six months of taxes at closing towards your payoff.  The mortgage servicer will refund the balance (overage) a few weeks after closing with their existing reserve account balance.
  • Pay six months taxes at closing; the escrow company might hold funds for the 6 months taxes as an escrow hold-back and refund them to you once County records show the taxes are paid.
  • Delay the closing until the taxes show as being paid per County records (this could cause an extension fee).

Folks closing their refi’s in October to mid-November will be in the same boat with their property taxes. 

How Much Reserves are Required When Refinancing?

I had a great question yesterday from a potential client who asked how come my Good Faith Estimate was showing more reserves being required than the other lenders he was comparing me to. 

Reserves are what the lender collects upfront to make sure they have enough funds to pay taxes and home owners insurance.  On the Good Faith Estimate, this also includes prepaid interest.

The other lender was showing 6 months of property taxes and 3 months of home owners insurance.  My estimate had 7 months of property taxes and 10 months of home owners insurance.  My Good Faith Estimate reflected higher reserves than the other lender.  My estimate is more accurate…but doesn’t look as attractive as my competitor.  My bottom line appears a couple hundred dollars higher.

The other lender can easily shrug off the difference (and they do) when the consumer is at closing and learns the amount due at closing is different than originally anticipated.   They’ll say that a good faith estimate is just an estimate and that reserves are prorated based on the date of closing…and they’re pretty much correct.

The amount of property tax reserves required is based on when the first mortgage payment is due.   I would say it’s an accepted standard for Loan Originators to use 6 months for property tax reserves…especially when it’s an estimate for a purchase and the closing date is unknown.  With a refinance, I know I’m probably closing in the next 30-45 days (or 60 days if we’re subordinating a second mortgage) and I’ll adjust my estimate accordingly.  I don’t want clients to be surprised at closing or after they’ve made a decision to work with me.  

Unless a loan originator knows when the borrower’s home owners insurance is up for renewal, they ought to use a higher amount (like 8-10 months)–we’re all ready guessing (in most cases) how much the home owners insurance is.

With a refinance, unless I’m certain that we’re closing at month end, I use 15 days of prorated interest.  Again, not a pretty figure–15 days of interest is almost half of your mortgage payment.   The prorated interest will be adjusted based on the actual day the mortgage is closed.  Closing towards month end reduces the prepaid interest.  Closing in the middle of month will create about 15 days of prepaid interest.

I would question working with any loan originator who does not provide an accurate good faith estimate when selecting your next mortgage professional.  Good faith estimates (and APR) are easy for LO’s to manipulate which is why you should not solely rely on them when making your choice.

EDITORS NOTE: This post was written prior to HUD’s 2010 GFE which is less easy to manipulate…however, I still see some pretty interesting stunts despite the regulations with the new Good Faith.

Funds for closing when you’re buying a home

Mpj030576000001Whenever you are buying a home utilizing a mortgage, your lender is going to need to know where your funds that will be used for the down payment and closing costs are coming from.   And in most cases, they will want the funds to be “seasoned” (statements showing the funds have been in  your account for a two month minimum).

A lender wants assurance that the borrower has enough funds for closing and ideally, enough savings when all is said and done after closing, to have a cushion (2-6 months of your proposed mortgage payment aka “reserves”).  Typically a lender is looking for 2 months of asset account statements.   If large deposits are shown on the statements, the lender (or underwriter) may will require to have the large deposits explained and possibly documented.    Many people have their paychecks go into their bank account and, like the tide, out goes the money.  What ever is shown as ending balance is what the lender will use for your loan application and approval purposes.

Depending on the mortgage program you’re utilizing for your financing, different types of funds for closing may or may not be acceptable.   Here is an example of some traditional funds allowable for closing:

  • Checking and savings accounts
  • 401(k)s and other retirement accounts
  • Stocks, Bonds, Mutual Funds, etc.
  • Income Tax Refund
  • Seller closing cost credit (varies depending on program and loan to value)
  • Gifts from family (depending on loan program)
  • Proceeds from the sale of property (real estate or other)
  • Inheritance
  • Sale of personal property

Cash on hand (also referred to as “mattress money”) is a no-no.   If you’re planning on buying a home in the next 3-6 months, you’ll want to get your dough into a bank account where a “paper trail” can be established of your funds.

With today’s automated underwriting and all of the available mortgage programs, more or less documentation may be required from the lender.   The above list is only a sample.  The requirements for your personal financing may be different.    It’s important that regardless of what funds you’re planning on using for your down payment and closing costs, that you discuss it with your Mortgage Professional.

If you are considering buying a home located anywhere in the State of Washington, I’m happy to help you with your mortgage needs, including reviewing your down payment options.

Related Post:  Qualifying for a mortgage: Funds for Closing

EDITORS NOTE:  This post was last updated on April 11, 2011.  

Why Is My Payoff Higher Than The Principal Balance?

Mpj040096800001I am often asked this question during a refinance from homeowners.   Your mortgage payment is paid in arrears.   For example, your February payment is paying January’s interest.   Remember when you bought or refinanced your home and the loan originator stated “you’re going to skip one month’s payment” or “you won’t have another payment due until the following month after closing”?  Well this is where that payment essentially catches up with you.  (Technically, it’s not “that” payment, you’re just always paying the previous month’s interest).

The escrow company will order the payoff from your mortgage company.   The interest is prorated to the day of funding/closing.   There may be additional fees included in your payoff that the lender will charge, such as:

  • pay off transmission fees
  • unpaid late fees
  • prepayment penalties (you may want to consider delaying a refinance if possible until the prepay period is over if you have a prepayment penalty)

Often times, the escrow company will request the payoff with a few additional days factored in to act as a cushion.  The escrow company may (should) order an updated payoff closer to the signing date in order to provide the most accurate figures possible.  The lender being refinanced will refund any difference in your favor.   In addition, if you have an escrow reserve account for taxes and insurance, you will receive a refund from the lender in approximately 6-8 weeks after closing.    

At your signing appointment, ask to receive a copy of your payoff statement.  Check to see how recently it was requested.  If it was ordered at the beginning of the transaction and you have since made a mortgage payment, you can ask the closer to order an updated statement prior to closing (with a refinance, their is a three day right of rescission that takes place, so there should be enough time for this to take place with most lenders).   

Can I Pay My Own Taxes & Insurance?

Mpj034188500001Unless you have 20% or more of equity in your home, chances are you have an escrow account (also referred to impounds or reserves) for your home owners insurance and property taxes.   Lenders want to make sure that they reduce risk by requiring taxes and insurance to be included in your monthly mortgage payment.  Property taxes are one of the few items that can take precedence over lien position in the event they were to not be paid.   Your first mortgage wants to stay just that, a first mortgage (in the event of a worse case scenario, foreclosure).

A few years ago, there were a few lenders (subprime) who were providing 80/20 mortgages (100% financing) and not requiring that taxes and insurance be included in the payments.   This was a disaster.    A majority of these borrowers did not plan for the huge tax bills (on a $350,000 valued home, taxes would be roughly $4,375 annually) even though they had the best intentions of doing so.

Having your taxes and insurance included in your mortgage payment is actually very convenient.  Instead of having to pay an annual insurance premium and half of your annual taxes on April 30th and the second half on October 31st, the lender establishes an automatic savings plan for you.

In addition, most lenders charge a fee when you pay your own taxes and insurance (or waive your reserve account).   Typically, the fee is 0.25% of the loan amount.  For example, on a $250,000 loan amount, the fee is $625.00 of additional cost. This can either be charged upfront as an escrow waiver fee or may be priced into the interest rate depending on pricing when the loan is locked.   The most it should impact the rate would be by approx. 0.125%, which is about $20.00 more per month on a $250,000 loan.    So you may be getting better pricing having your taxes and insurance included in the mortgage payment.

The amount of reserves the lender requires varies depending on the closing date of the new mortgage.  Property tax reserves are based on what month your first payment is due and interest on the new mortgage is prorated to the day of closing. If you’re buying, 14 months of home owners insurance is collected.  If  you have a condo, the lender does not collect home owners insurance (but you should check into insurance for your belongings).

In my opinion, the only time it makes sense for home owners to not have their taxes and insurance included in their mortgage payment is when they are savvy investors who are going to earn enough interest in a short period of time (remember, taxes are paid twice a year) and still come out ahead of the costs (possibly 0.25% of the loan amount).  Even if you have 20% or more equity in your home, I don’t recommend waiving your reserve account.

PS: There is a compromise to waiving your reserve account when you have at least 20% down payment, you may be able to waive your home owners insurance and just have property taxes included in your payment.

NOTE:  This information is intended for properties in Washington State.  Check with your Mortgage Professional to see how impounds are treated in your specific state.

If you would like a rate quote for your home located in Washington, with or without reserves, click here.