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Should I Refinance? A Case Study

Thinking about refinancing your mortgage? Unsure how to determine if it is a good idea or not? Three steps can help you decide.

Interest rates remain at historic lows, so for many who haven't refinanced their mortgage recently or have a current mortgage rate above 4.5%, refinancing may be a great financial decision. But how does one determine if now is the right time to refinance?

The first step is to identify your refinancing goals.

  • Do you wish to lower the interest rate on your mortgage or lower your monthly payments?
  • Do you wish to combine a first and second note or a primary mortgage and a home equity loan?
  • Are you interested in paying off your loan more quickly or building equity in your home more quickly?
  • Are you looking to convert some of the equity in your home to cash?

Next is to gather key information about your current mortgage:

  • First payment date
  • Interest rate
  • Beginning loan value
  • Current loan value
  • Current monthly payment
  • Amounts and dates of any additional payments

An important item that may be overlooked in refinancing is that the new loan does come with new closing costs. The closing costs may be paid out of pocket or rolled into the new loan amount. Closing costs for a refinance tend to be higher than for a purchase because you, the borrower, ends up paying for new title insurance. (In many states, it is customary for the seller to pay for title insurance in a purchase transaction.) Some lenders and some title companies will provide a credit or discount to help offset the closing costs.

With your goals identified, your current mortgage information, and a clear expectation on closing costs, you are ready to begin an analysis and make a decision.

You can use online mortgage calculators or amortization tables in a spreadsheet, plus mortgage rates to compare your current loan to a potential refinance. Or, you can talk to me about your goals and receive a customized analysis of your options.

I recently completed a customized refinance analysis for Tom.

Tom's goals are to lower his interest rate and build equity more quickly in his home. He plans to sell his home in 5-10 years and wants to get as much equity as he can on the future sale. Tom had already been paying an extra $100 each month to help with these goals.

I then looked at Tom's credit and current mortgage situation. With excellent credit and current interest rate higher than today's rates, a few scenarios began to emerge for our analysis.

I used a spreadsheet-based amortization table to generate future loan balances, cumulative interest, and pay off dates for three different scenarios: continuation of Tom's current mortgage with the extra payments, a refinance to a 25 Year Fixed Rate mortgage and a refinance to a 20 Year Fixed Rate mortgage.

This analysis indicated that refinancing to a 25 year fixed mortgage may save Tom some interest over the course of the loan, but would not meet his goal of paying off the loan faster. However, refinancing to a 20 year fixed loan would help him pay off the loan nearly 4 years earlier and save $50,000 in interest over the life of the loan. This option clearly met Tom's goals. And if Tom chose to pay extra each month as he had with his current loan, he may save even more in interest, pay off the loan even earlier, and ultimately build more equity more quickly.

Tom found this analysis to be very helpful in making his decision. We discussed all the ins and outs and ultimately he decided that a refinance would help him achieve his objectives.

Refinancing just to capture a lower interest rate doesn’t always make sense. Be sure to understand your goals and analyze your options.

Interested in refinancing? Follow the steps outlined here or contact a mortgage loan officer for a customized mortgage analysis.

Rebecca Thorburn is a mortgage lending expert with PrimeLending, a national mortgage lender, ranked No. 4 nationally for purchase units.Ms. Thorburn uses her mortgage expertise to deliver mortgage solutions to meet individual home ownership goals. She is also a Certified Divorce Lending Professional®, specializing in helping family law attorneys and in helping those in a divorce situation navigate the options and complicated details related to dividing property, managing current mortgages, and preparing for future mortgages. You can contact her on her website.

What the Fed Rate Decision Means for Homeowners & Potential Homebuyers

September 17, 2015 – Los Angeles, CA – Today the Federal Reserve held the federal funds rate at the current rate of near zero, where it has been since 2008.  So what does this mean for those interested in buying or refinancing a home?  In short, if you’ve been thinking of purchasing or refinancing a home, the opportunity to take advantage of low mortgage rates has been unofficially extended.

Though not directly linked, mortgage rates have historically followed the trend of the Fed rate.  When the Fed lowered their key interest rate to near zero in 2008, mortgage rates took a dive and have stayed relatively low ever since, which was good news for those looking for a loan (not such great news for high interest rates on deposits).

Given today’s Fed announcement, mortgage rates are likely to stay low, which means those who are in the market for a home should take advantage of the historically low rates that are still available, but maybe not for long. 13 of 17 Fed policymakers still foresee raising rates at least once in 2015 (Source: Reuters).

“Consumers still have time to take advantage of low rates,” says Ray Montague, Director of Product Research at Informa Research Services.  “It’s a great time for homebuyers to lock in a low rate.”

For those who have already bought a home, refinancing your current mortgage at a lower rate can also help cut the cost of homeownership.  Whether purchasing or refinancing your home, securing a low rate can lower monthly payments significantly, quickly adding up to thousands of dollars of savings over the long term.

If Homeownership is one your goals for this year, financing the purchase with a low interest rate can help you achieve this very exciting milestone.  Hurry! Home prices may be on the rise but there are still plenty of opportunities to find well-priced properties.  This decision opens a window for buyers to finance it with a great mortgage rate to get the most home for their money.

For example, the monthly payment on a $250,000 home purchase would be $1,266 with a 4.50% mortgage rate.  However, the monthly payment drops to $1,157 per month at if you can secure a rate of 3.92%.  The 0.75% difference in interest rates could save you $109 per month, which adds up to over $1,300 annually.  Over the entire term of the loan, this accumulates to nearly $40,000, which could be put to good use for a number of projects such a dream vacation, starting a small business, saving for retirement, or maybe even funding a college education!

According to Informa Research Services’, the current national average rate on a traditional 30 year fixed mortgage is 4.04% (Source: Informa Research Services Interest Rate Review).  Since this is a national average, it means that there may be rates significantly higher and lower than this figure.  Nonetheless, it is a good idea to keep this figure in mind when shopping mortgage rates.

One of the best resources to aid in your search for the best mortgage is everyone’s favorite research tool: the internet. Comparison mortgage rate tables are especially useful in finding the best rates in your region for the loan of your choice.

Find the best mortgage rates here.

To Escrow or Not to Escrow?

Like many seemingly simple questions, the answer to the question "should I use an escrow account for my taxes and insurance or manage it myself" is "it depends".

Like many seemingly simple questions, the answer to the question "should I use an escrow account for my taxes and insurance or manage it myself" is "it depends".

In case you aren't familiar with escrow accounts, let's start by defining it. An escrow account is an account separate from but connected to a mortgage loan account where a deposit of funds occurs for payment of certain conditions that apply to the mortgage, usually property taxes and insurance. Generally, the annual amounts of taxes and insurance are divided by 12; this 1/12th amount is added to your monthly mortgage payment and deposited into the escrow account. Then, on the due dates for your tax or insurance payments, the mortgage loan servicer pays your taxes and insurance from the escrow account. Example: let's say your taxes are $12,000 per year and your insurance is $1200 per year. Divided by 12, your monthly escrow contribution would be $1100.

When you select to have an escrow account, generally this account must be partially funded at the time of your mortgage loan closing - three months is the norm. This means that the cash you must bring to the closing includes your down payment, closing costs, and the escrow funding amount.

Many loan types, such as an FHA loan, require an escrow account, as do most loans when you put down less than 20% of the home sales price. Some lenders offer mortgage loan rate discounts if you agree to an escrow account.

Your personal financial situation and habits play a role in the decision as well: Do you earn the same amount of salary each month or do you have variably monthly income (i.e. commission based)? Are you a good saver? Do you prefer to have ultimate control over every penny and every bill or do you prefer having the loan servicer manage bill payment for you?

For those with variable income, who are good savers, or who like control over every penny and bill, it may make more sense to manage the tax and insurance payments on their own, without an escrow account. For those who prefer to have someone else manage paying the various entities (county, city, school district, insurance company, etc.) or a consistent cash flow, an escrow account may be preferable.

The last consideration is whether or not the money you use to pay annual bills can work for you during the year.

Example: David has purchased a home worth $400K, with a 20% down payment for a loan value of $320K. His insurance and taxes are $11,160 annually. His lender has discounted his mortgage loan interest rate by 0.125% to encourage him to use an escrow account.David assesses his options: 1. he can go with the escrow account, 2. he can put that $11K into a CD at 1.3% and earn $145 over a year, or 3. he can put it into the stock market with a goal of earning 5% or $558 over a year. The CD option is not beneficial to David as he would end up "losing" $255 ($400-$145). The stock option may be beneficial to David however, as he could "earn" $158 ($558-$400). However, the stock option has the risks of the market and potentially trading fees.

Still not sure? Your mortgage lender can help you assess the pros and cons for your specific loan and situation.

Do's & Don'ts for Mortgages During Divorce

Divorce is often emotionally and financially challenging, but following a few key do's and don'ts will minimize the frustration and help both parties weather the process in better financial shape.

Divorce is often emotionally and financially challenging, but following a few key do's and don'ts will minimize the frustration and help each party weather the process in better financial shape.

Do's

1. Engage a mortgage lender into your divorce team very early in the divorce process.

With a mortgage lender on your divorce team, clear choices and implications of each choice are known up front, which can minimize the emotional challenges of divorce and clarify the paths to consider during your settlement negotiations. Ultimately this will smooth the path for a settlement agreement that supports current and future mortgage financing needs.

In addition, a mortgage lender can offer information on the possibility of getting a quitclaim deed on the property. In the case of joint property ownership (and if all the involved parties agree), a quitclaim deed enables the title to be transferred to one of the partners. As a result, the party who gets the deed will be able to sell, mortgage, or simply give the property away without the approval or consent of the other party.

2. Get an appraisal on existing property

The fee for an appraisal performed by a professional appraiser is worth every penny in terms of time and paperwork saved.

3. Regularly check your credit

Everyone is entitled to get one free credit report from each of the three credit reporting agencies each year. I recommend requesting a report from one agency every 3-4 months during your divorce in order to stay on top of your credit history.  Credit reports are available at www.annualcreditreport.com.

4. Keep up with all your bills and financial obligations

If your name is on a bill or obligation - even if you believe your soon-to-be ex is responsible for a bill - make sure it gets paid on time, every time it is due. Late and missed payments can wreak havoc on your credit score, which can create significant challenges for your ability to borrow money long into the future.

5. Close any equity lines of credit on your existing property

If you have a HELOC (home equity line of credit) on your existing property and it is in the names of both spouses, close it! Having a zero balance does not mean that the account has been closed; you must specifically request that the HELOC be closed. Leaving the HELOC open presents an opportunity for one of the spouses to use it, creating a new liability for both spouses.

Don'ts

1. Do not apply for any new mortgages before the divorce is final

You may feel that applying for new mortgages (refinance or new purchase) during the divorce process is helping to speed things along, but you may in fact be committing mortgage fraud without realizing it.

2. Do not agree to any divorce settlement agreement prior to speaking to a mortgage lender

If you plan on refinancing or buying a new home, check with a mortgage lender to make sure the divorce settlement agreement sets you up properly to qualify for a new loan. This is especially important if you require any support payments as qualifying income. The general rule of thumb is that you need at least 6 months history of support payments and at least 36 months of continued payments into the future to consider support as qualifying income for a mortgage, but there are many nuances and rules here that may be missed. Working with a mortgage lender early in the divorce process is best to avoid any issues, but engaging one at any time is better than running into issues after the divorce.

Rebecca Thorburn is a Loan Officer with PrimeLending. She is happy to answer your divorce-related mortgage questions and be a part of your divorce team.

Mortgages for Doctors and Physicians

Residents and existing Doctors can benefit from a mortgage offered by some banks called a Doctor or a Physician Mortgage. The Doctor Mortgage offers special underwriting and rates to residents as well as just starting out doctors who may not have significant salary history yet or a long credit history. This can resolve the problem that many young professionals face of having excellent earning prospects but being unable to quality for a mortgage and buy a home.

In general, a doctor/physician mortgage provides the following benefits: 

  • Is made to a resident or Doctor (7-10 years out of residency), and often dentists, veterinarians, attorneys, and other skilled professionals.
  • Requires little down payment (between 0-5%).
  • Doesn't require the use of Private Mortgage Insurance (PMI).
  • Will accept a job contract as evidence of earnings versus most mortgage programs that require up to two years of pay stubs and tax filings.
  • May allow the purchaser to use gifts as a down payment (many mortgages do not allow gifts to be used for the down payment).
  • Usually do not calculate student loan debt towards the loan/income ratio.
  • Provides the same rate whether the loan is a conforming or jumbo loan.
  • Requires a decent credit score and a loan to payment ratio of between 30-40% depending on the bank.

Below is a comparison of a doctor mortgage versus a conventional mortgage for a 30 year fixed rate loan.

                                         Doctor Loan                 Conventional Loan

Amount:                                $435,000                       $435,000

Down Payment %:                   0%                                 5%

Down payment amt.:              $0                                    $21,750

PMI:                                     $0                                    $213.51

Interest rate:                         4.490%                         4.250%

Monthly Payment:                  $2,201.50                      $2,246.46

* Data supplied by Stephanie Arcelay from SunTrust Mortgage as of May 14, 2014.

As you can see, the rate on doctor mortgages are often are slightly higher than a conventional loan or an FHA loan but the low down payment and fees often offsets the higher rate. And once a doctor has built some earning history and equity, they can refinance to a lower conventional  rate. 

See mortgage rates today.

Government Shutdown's Impact on FHA Loans

The government shutdown will not close the FHA, but it might slow approvals to a trickle.

Recent reports have stated that the government shutdown would virtually shutter the FHA, preventing the agency from approving any additional FHA backed loans. This is significant since 45% of all home purchases last year were made with an FHA backed loan. 

But in what appears to be a change in its position from last week, the U.S. Department of Housing and Urban Development (HUD)’s Office of Single Family Housing said that it would continue to endorse new loans “in order to support the health and stability of the U.S. mortgage market” 

While HUD and the FHA  will remain open, it remains to be seen how many loans will actually be endorsed. It is estimated that only 4% of HUD staff will remain at their jobs as "excepted" employees. With approximately 60,000 loan applications per month, it's hard to see how this skeleton staff will be able to handle new applications. 

If you are planning to get an FHA-backed loan, I'd recommend either hoping for a quick resolution to the funding deadlock, looking for an alternate funding source for your home, or delaying the purchase of a home until the standoff is resolved. 

Mortgage Advice for Lawyers, Doctors, and Young Professionals with High Student Debt

In today's mortgage world, doctors, lawyers, and other professionals can find that getting a mortgage after graduation can be very difficult if they have high student debt and lack significant job history. We ask the experts for some tips on what these graduates can do to improve their chances of being approved for a mortgage.

Many doctors, lawyers, and other graduate degreed professionals finish school in their late twenties to early thirties with a good, steady paycheck and a desire to upgrade their living conditions after many years on a student budget. Part of the plan often includes purchasing a home. Most young professionals assume that with their high salaries and great future job prospects, they should have no trouble receiving a mortgage. In today's mortgage world though, doctors, lawyers, and other professionals can find that buying a home after graduation can be very difficult if they have high student debt and lack significant job history.

While doctors, lawyers, and other professionals often graduate into jobs with high salaries, have great credit histories, and may even have money for a down payment, high student debt is often a huge obstacle to securing a mortgage.  When determining whether to give a loan, a key metric used by lenders is the debt to income ratio, calculating by taking all of a borrowers monthly debt payments (student loan, credit card, auto loan, etc.) and dividing it by their gross income. Thus, a doctor with $3,000 in debt payments and with a gross salary of $10,000 would have a debt to income ratio of 30%. In general, borrowers with ratios over 45% will not quality for a mortgage.  Gloria Shulman, the founder of Centek Capital Group in Beverly Hills stated that "even if deferred, student loan debt is a huge issue for young borrowers... medical or other graduate school debt can be a killer if you don't go into buying property with a debt management plan." Doctors and lawyers because of the number of years of graduate school required, often have the highest amount of debt.

The second reason young doctors and lawyers may find it difficult to get a mortgage is that many mortgage lenders require two years of stable work history before providing a mortgage. A new graduate doesn't have the work history required by many lenders.

But difficult doesn't mean impossible. Here are some tips provided by lending experts from around the country:

Get a Co-Signer

Ms. Shulman recently helped a young neurosurgeon find a loan product after multiple bank denials by working a deal where his parents were co-signers in name only. Having parents server as co-signers places risk on your parents and is often not advised by financial planners, but if you have a great relationship with your parents, and are confident in your future earnings, if might be a sensible step to consider.

Buy a Starter Home

Don't have your sight set on the McMansion down the street, start with more modest aspirations. Look to buy a home with a mortgage of less than $417,000 (a conforming mortgage). Roy Sperr from Equity Source Mortgage in Minneapolis provided the following guideline:

If you have your first pay stub as a new professional employee, are borrowing less than $417K and have a Debt ratio of less than 45% (divide your total monthly base income into your monthly debts to calculate) If you are .45 or less you can most likely buy a home.

If you are buying a home that will result in a Mortgage Loan higher than $417K you are considered a “Jumbo” borrower. This loan is not sold on the secondary market (Fannie and Freddie) and is subject to higher scrutiny.

Look for HUD/FHA Loans

Jason Bonarrigo from Residential Mortgage Services in Braintree, MA says that "with a HUD/FHA loan, "if the lender can document student loans are deferred for more then 12 months, then the person does not have to use the student loan debt in the qualifying ratio's." HUD/FHA loans are popular government sponsored loans that often require lower down payments when purchasing a home. In general, HUD/FHA loans are only for conforming mortgages (less than $417,000) and often have expensive fees, but they are worth investigating.

Consolidate and Pay Down Debt Where Possible

The cleaner you can make your debt situation, the better. Mr. Sperr also offered the following advice:

Before applying make sure you do everything you can as a borrower to understand your student loan debt and its repayment terms. Make sure you know your other outstanding debts.

a.) Consolidate all separate student loans if possible into one payment.

b.) Pay down credit cards, car loans and other smaller debt that can be
controlled to improve ratios.

Malcolm Hollensteiner, Director of Lending Sales and Products at TD Bank advised borrowers to see if a family member can provide a gift and use it to "to eliminate consumer debt, rather than putting family money directly towards a house. In certain cases, eliminating or reducing consumer debt helps to increase buying power more than a higher down payment would."

Buy With a Friend or a Significant Other

Mr. Hollensteiner also advised that pairing up with a friend can increase a buyer's chances of obtaining a mortgage, "assuming both do not have considerable college debt." He advised that individuals considering this route "be cautious and thoroughly think the decision through. Future plans – including marriage and job relocations - could make this kind of partnership inconvenient down the road."

Another option is to purchase a house with a significant other, especially if the relationship is headed towards marriage. Once again, the borrower should carefully weight the pros and cons and think through what happens if the relationship does not work out.

Explore mortgage rates here.