Real Estate Law Blog : Staten Island Real Estate Lawyer » refinancing

He Saved $300/Month But What His On-Line Mortgage Broker Didn’t Say Cost Him $7,200

Sdecker — Fri, 22 May 2009 19:36:48 +0000

I just talked to a client who had read about wills in our monthly newsletter. He mentioned he recently refinanced with an on-line mortgage lender and reduced his payment by $275 a month. His rate was good and he was happy with the speed and ease of the process and when I asked him about his closing costs he said about $3500 which sounds about right. But when I saw his closing statement the total closing costs were $12,200 which included NYC mortgage tax of $8700, which could have been avoided. His mortgage broker said “it is a tax everyone in New York pays”, but while it is a tax not everyone pays it. I mentioned to my client that he should have read the newsletter article on refinancing which could have saved him $7000 if he would have done a modification to save the mortgage tax.

In New York there is a mortgage tax based on the loan amount. For residential mortgages up to $500,000 the rate is .8% (plus an additional 1% for if you live in New York City – Staten Island, Brooklyn, Bronx, Manhattan or Queens) and the rate increases for higher loan amounts. When refinancing your mortgage you must pay the mortgage tax based on the new loan amount un less you plan wisely. Here my client paid mortgage tax of 1.8% on his new loan amount $485,000 for a tax of $8730. Since he paid off his old loan of $470,000 and his new payment was almost $300 a month less, he calculated he would recoup his closing costs in about 41 months (closing costs 12,200 ÷ monthly savings $300). This refinance made sense but he could have avoided the mortgage tax by doing an assignment and modification and saved about $7200 by getting credit for the amount of mortgage tax paid on the original loan (1.8% of $470, 000) even after calculating the additional modification fees(about $1200).

If you have to pay them to do the refinance they are closing costs. Call your lawyer before refinancing. If I can’t help save you money I will tell you to do it on your own but most times I can save you money. Get a Good Faith Estimate of closing costs and make sure to ask your mortgage broker about doing a modification to save mortgage tax.

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REDUCING MY INTEREST RATE AND PAYING CLOSING COSTS

Sdecker — Wed, 29 Apr 2009 18:56:25 +0000

If extra borrowing is not a priority and the purpose of the refinancing is merely to reduce the interest rate it may still be necessary to increase the principal balance to cover the closing costs of the refinance. In refinancing a borrower will normally incur bank (application, appraisal), title and legal fees which can cost quite a bit. Unless the borrower is prepared to bring a check to the closing these costs are normally rolled into the refinancing leading to a higher principal balance. Since these costs are included in the mortgage they are paid back with interest over the term of the loan and can result in thousands of dollars of added interest costs over the term of the loan. Get a GFE to so you can determine the fees and whether to pay them upfront or incorporate them into the principal balance of the new mortgage.

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HOW TO GET A GOOD FAITH ESTIMATE

Sdecker — Wed, 29 Apr 2009 18:53:18 +0000

When discussing a client’s refinance I usually go over a script on what to say to the mortgage brokers to get a GFE. When you call the right type of lender you should only need to answer a few general questions about your income and credit in order to get a GFE. Because a GFE is not binding until the borrower makes an official application (and the lender is able to verify their creditworthiness), it is not necessary for a borrower to give much information to get a GFE. When shopping for a loan ask for a GFE but make sure the broker does not to run a credit report until you have decides to make an application. You are shopping for a loan so if the broker can’t give you a GFE without running your credit report then you should call another lender. Your lender will ask you about the following 3 items-loan term, loan type and loan amount.

1) LOAN TERM -the number of years that the borrower has to repay the loan is called the term. The term can vary but most common is 30 and 15 year terms (although so lenders will allow you to do 10 or 20 or 40 years). When looking at the term remember that the shorter the term the higher the monthly payments. When looking at the 15 or 30 year mortgages the 30 year mortgage will have lower monthly payments while a 15 year mortgage will have higher payments which will save a substantial amount of interest over the life of the loan. Another issue to look at is flexibility. While a 15 year mortgage will normally have a lower rate (and higher payment) a 30 year mortgage allows the borrower to make lower payments. Once taken a 15 year mortgage requires higher monthly payments which can’t be lowered. A 30 year mortgage can be shortened to 15 years at the borrower’s option by making prepayments. Remember to weigh the interest rate savings of a lower rate on a 15 year mortgage term versus the payment flexibility of the 30 year mortgage term with lower monthly payments and the option to make prepayments.

2) INTEREST RATE TYPE- FIXED or ADJUSTABLE RATE-While most borrowers appreciate the security of a fixed rate loan for some an adjustable rate mortgage can make sense. Whether to consider an adjustable rate will be determined by your estimate of how long you may keep the mortgage. Fixed rate loans offer a principal and interest payment that remains constant. Adjustable Rate Mortgages (ARMs) allow the interest rate to change periodically and are based on an index. The index and change periods can vary greatly and take particular care to understand them before entering into an ARM. Change dates can be as quick as monthly and as long as 7 years. The shorter the change date the lower the initial rate but the risk is that over time the changing rates may be higher than a fixed rate. The index can be a bank prime rate or US Treasury Bill rate or other published rate. Homeowners who do not see themselves keeping their mortgages for a long period of time can save money using an ARM. It is important to remember that an ARM can be tricky as many people who bet that they could refinance their ARMs (or whose plans to sell the home changed) are now stuck as falling property values make refinancing impossible. Before taking an adjustable rate it is quite important to be clear on your goals and discuss with your attorney or accountant before approaching a lender.

3) LOAN AMOUNT – before starting your loan search try to determine if you are seeking to increase the amount you have borrowed. Home Improvement, College Costs and Debt Consolidation are all reasons people seek to refinance and borrow more on their homes. While any borrowing must be looked at from tax and financial perspectives it is often cheaper to borrow mortgage money than other types of loans and given the deductibility of mortgage interest this may be a good option for some homeowners. But remember you have to pay it back.

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SHOPPING FOR A LOAN-GETTING A GOOD FAITH ESTIMATE

Sdecker — Wed, 29 Apr 2009 18:50:02 +0000

I tell all my friends to call your real estate lawyer before you start the process. Even if you are knowledgeable about interest rates it never hurts to make a call to get some advice that could save money. While it serves to reason that a lower rate is better that is not the whole story because if you do not understand the loan program and the closing costs you do not have the whole story. Remember mortgage brokers are selling a product and ordinarily there will be competition for your loan. Competition between lenders is good in that it can help lower your borrowing costs. So what is the best way to determine loan is best for my situation? Comparing estimates from a few different lenders. To adequately investigate a loan I need to review a Good Faith Estimate of Closing Costs (GFE). A GFE is a from prepared by the lender which should show the interest rate and type of program (30 year term, fixed rate) and the closing costs the borrower can expect to pay to close the loan. A GFE is required as part of a lender’s package and a competent broker should be able to get one for the borrower BEFORE the application.

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WHAT IS MY GOAL IN REFINANCING

Sdecker — Wed, 29 Apr 2009 18:37:48 +0000

If you don’t know your goal you will never achieve it, is true of most things including refinancing your home. It is advisable for a borrower to discuss his refinancing plans with his attorney or accountant early on. Before starting the process I ask my clients to get me a copy of your current mortgage statement showing their current loan balance and payments. We discuss their plans on how long they intend to live in the home and if any future investment plans (college or home improvement) need to be dealt with. These factors will help determine the optimal term (years to repay) and the loan amount. A thorough understanding of your goals will allow you shop more efficiently as you can tell your lender what type of product most suits your needs. Once we have a handle on these items we can better determine the goals of the refinance so the borrower is ready to start shopping for a mortgage. Remember a lender is selling a financial product and is looking to make money. Mortgage Lenders do not have a fiduciary responsibility to their borrowers which means they do not any obligation to get the borrower the best loan for the borrower. While it is true lenders are not looking to make bad loans that people can’t pay back, the current mortgage foreclosure crisis is a prime example that lenders were thinking more of their short term profits from making mortgages than the long term effects on borrowers faced with a falling real estate market. By calling your attorney before you make an application he will assist you in clarifying your goals, whether you are seeking a lower rate, to take money out or just to get yourself out of an adjustable mortgage.

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