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

moneyclockmortgageporterAn 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.

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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).

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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).

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