Tag Archive for 'refinancing'

Many a refinancing homeowners is unpleasantly surprised to find that he or she is getting "impounded" by a new mortgage company. What does "impounded" mean? They aren't being towed; they aren't being locked up--just what is being done to these borrowers?

Impound or escrow accounts are not usually required by bad credit or sub-prime mortgage lenders, but most other lenders make you have them if your loan balance exceeds 80% of the value of your home. So even if you put 20% down when you bought your house, if property values have dropped, you may have to get an impound account.

Lenders love impound accounts because they make your loan less risky to them (but more costly to you). When you close on your refinance, you have to prepay property taxes and homeowners' insurance into an impound or escrow account. And every month, you pay a pro-rated portion of taxes and insurance to your lender, which is added to your monthly payment. Your lender then pays the annual, quarterly, or semi-annual installments on your behalf. This makes your loan safer because your lender knows that your taxes will be paid and your insurance kept up.

It's more expensive for you because you have to come up with more money to close your mortgage refinance, and because the lenders like to keep a surplus in your impound account. So hundreds or even thousands of dollars--your dollars--can be tied up and out of your reach.

So, how much of your money can your lender keep on ice in an impound account? Laws vary from state to state, but requiring an excessive escrow balance is not legal. Many states allow a cushion which equals one or two months of escrow payments. In fact, a lender called Fleet Bank got into a lot of trouble a number of years ago for requiring more than 6 months' escrow and had to refund millions of dollars to its customers.

If your escrow account ends up short (perhaps your property taxes increase wildly) and the lender advances funds to pay taxes and/or insurance, then it has the right to ask you to repay those funds. The length of time allowed for you to come up with the cash varies. By law, you should receive an annual statement which analyzes your escrow account to make sure the right amount is being impounded. If you think you're paying too much, check with your state's requirements

In May 2009, a little-known law snuck in like a thief and clobbered a lot of homeowners over their unsuspecting heads. This is referred to as the Home Valuation Code of Conduct or HVCC. It's intent was to make sure that the appraisal you got on your property was accurate--not inflated to help a favorite Realtor or lender close a deal, or to get additional business from anyone who stood to make money on your mortgage or home purchase. But often the road to Hell is paved with good intentions.
The problem is that for an appraisal to take place, someone has to order it and someone has to perform it. Enter the Appraisal Management Company, or AMC. These guys take the order from the lender, Realtor, whoever, and farm the assignment out to an appraiser contracted with them. For an approximately 40% commission. Yep, the cost of appraisals went up and refinancing became a lot more expensive for consumers.

Then there is the quality issue. Just like in all professions, there are good, bad, and ugly appraisers. Sometimes the ones lenders want to use are popular because they are experts and turn in professional work. And provide emergency rush jobs (which helps the borrower) if needed. But with no say in who does the appraisal, the appraisers have less incentive to go the extra mile, and the chance of you getting stuck with an incompetent appraiser goes up. So borrowers have less faith in the system.

Finally, there is the portability issue. In the past, if you started working with a lender and didn't like your rate or service or whatever, you could take the appraisal (which YOU pay for) and go to another lender. Now you'd have to start over and pay twice.

Fortunately, a bill is being kicked around in Congress called HR 3044, which would put an 18 month moratorium on the HVCC. It was just a bad solution and needs to be replaced with something that will actually do what the original bill intended.

What does it mean when a lender claims he or she is "absorbing your mortgage costs"? Or what about an advertisement offering "No Cost" mortgages? Of course, there are costs associated with getting a home loan--a lot of costs. And the lender has to disclose them to you on a form called a Good Faith Estimate (GFE). So, when a lender claims it is absorbing your costs or "giving" you a "no-cost" loan, you will see a bunch of fees on your GFE. Then, the form shows all these fees being reversed or designated "paid by lender."

If you really think the lender is absorbing your fees out of the goodness of its heart (maybe it's run by the Tooth Fairy or something), then I have some really nice abandoned half-built condos in Vegas I'd like to sell you. "Par" is mortgage industry term for the rate you'd pay if everyone involved in the entire transaction worked for free--there would be just the cost of the money, which changes with financial markets just like stock prices do. And you can get that rate if you want--but you are going to have to pay the costs of originating the mortgage--appraisal, title, lender, etc. fees. And you can get a lower rate than "par" if you want--by paying still more--called "discount" fees or points. But if you don't want to come in and pay those fees out of pocket, you have two choices.

You don't have to empty your pockets to pay your costs when you close your loan. You can finance them (roll them into the loan amount), or you can opt for a no-cost loan. A recent survey indicated that 85% of borrowers refinancing chose not to pay their fees put of pocket--they either financed them or went with a no-cost option. So it's a pretty popular choice. You will pay a higher than the average market par rate if you pay no fees. That's just business and is not evil unless you think everyone should work for free.

However, this loan may not be in your best interest. Typically, "no-cost" mortgages, with their higher rates, will cost the borrower more in the long run--not the best deal if you are 30 years old and are imagining grandkids visiting you in this house someday. So if you plan to keep that home and mortgage more than a few years, you might want to pay the fees (and maybe even a discount point or two, or consider a 15 year mortgage) and spend less on interest over the life of the loan. Mortgage calculators abound and are very helpful in putting this concept into actual payments, and amortization schedules show you how your loan will be paid over time.

The easiest way to compare loans is to ask a few lenders for three rate quotes on the same product. Get one quote with all the fees (excluding property taxes and insurance, which you have to pay whether you have a mortgage or not). Then get a second quote on a "no-cost deal." Finally, see what your payment would look like if you roll the costs into the mortgage (you only have this option if you are refinancing and there is enough equity in the property). Run the numbers through a mortgage calculator and see how long it would take for the money you saved upfront to be paid back in higher interest charges. And if you have plans for that money you don't pay upfront (like investing in CD rates paying 3% or whatever) don't forget to include that in your mortgage decision.

Finally, if you aren't sure how long you will be in your home, but the rate on a "no-cost" loan is lower than the rate you're paying now--and you won't be paying any fees--just pretend you're a Nike athlete and "just do it." That decision is a no-brainer.