Help from the refi masters please

[cardude]

I am thinking about doing a refi on my current mortgage (480K) to lock in a 30 year rate, but I’m a refi neophyte and need some advice from the refi masters.

My current rate is 5.065, but it is only locked for 7 years. I was thinking I would just pay if off in 7 years, or possibly just sell and move when the kids graduate from high school and head off to college, but I’m a little worried that if the recession stretches out longer than I had anticipated I may not want to burn up all that liquidity, or may not be able to sell.

My current bank does not do 30 year mortgages, and the only reason I used them last time is because I have a friend at the bank and it was easy—she knew my situation and was not worried. My situation is I’m recently retired, and have interest and rental income coming in to the tune of about 60K net. My wife works, and makes about 41K gross as a librarian at a public school. We both have good credit (780 and 730 at the time of last loan) and no other debt.

What should my closing costs be? What kind of a rate should I expect? Where should I go to refi? Do I say I'm retired or self employed with rental income? I don't really want to have to give tax returns for last two years because they have my old business on them and they are very confusing (and no longer accurate).

I’ve piddled around on various websites, but when it comes time for them to pull my credit I always stop because I don’t want a bunch of enquires on my bureau. Plus, the fees seem a little high—Penfed for instance estimated a $5800 total in closing costs including a 1% origination fee I think. Is there any way to get around some of those fees, especially that 1%?

I don't mind putting some more into the home to get the loan down to the 417K connforming level to get a better rate and to not have to escrow taxes and insurance (don't do that now).

Has anyone ever used a loan broker? How do they get paid?

 

[LOL!]

A loan broker gets paid the same way a car finance guy gets paid: They borrow money at 3% and sell it at 5%.

 

[cardude]

I thought a mortgage broker just put together the loan and placed it with lenders or something. Are we talking about the same thing?

Running the numbers on the cool Mortgage Professor site I just found, it really is a wash financially if I refi or not since the rates are not that much lower than my 5%, and since I don't plan on being in the house that long. However, the wild card is the liquidity issue. I'm a little uncomfortable with the possibility of having to pay off the house in 7 years (or try to refi at a much higher rate possibly) if the recession drags out forever, or if something else happens I'm not forecasting (illness, huge portfolio hit, or some other reason I may need cash).

Maybe since it does not cost me anything over 7 years I should consider doing it............

 

[W2R]

I thought a mortgage broker just put together the loan and placed it with lenders or something. Are we talking about the same thing?

As I understand it, I think a mortgage broker packages mortgages, gets a break on the interest rate, and shares that break with you. At any rate, my mortgage broker got me a 1/8% better rate on my mortgage with Chase than what Chase's mortgage rate (posted daily on the internet) was at that time. Also my mortgage broker provided me with excellent services and contact with a real human being with a phone number, who did a lot of the work for me and answered my questions (important for me). This was not for a re-fi but for an original mortgage.

If your mortgage broker wants to charge you the same rate that you could get on your own, tell him that. If he doesn't then get you a better rate, drop him and get a reputable mortgage broker. When I told mine the rates that I was seeing online that day, and what I would accept, she immediately came down a percent or so. This is a negotiating process and if you aren't good at negotiating, you might as well not use a mortgage broker at all.

 

[Westernskies]

I am already re-fing a loan that I just closed in June... that loan was sold three times before we made our first payment. It was a 40%LTV loan- apparently the banks were using it as a sweetener on mortgage loan packages- didn't they learn something from this the last time around?)
The mortgage broker that I used the first time (It was a quick turn around on a bank owned investment property- we needed to close very quickly and they were the only ones who could get it done- ended up with 5.75% fixed for 30 years) called me a couple of weeks ago.
Rates had just taken a tumble, and she was able to offer us 4-7/8% , no points, using the same appraisal, and only a few hundred $ to re-issue the title insurance, her brokers fee was $500. Payback on the refi costs is only 5 months. We close next week; the 4-7/8% rate is locked in.

 

[Nords]

I am thinking about doing a refi on my current mortgage (480K) to lock in a 30 year rate, but I’m a refi neophyte and need some advice from the refi masters.
My current rate is 5.065, but it is only locked for 7 years. I was thinking I would just pay if off in 7 years, or possibly just sell and move when the kids graduate from high school and head off to college, but I’m a little worried that if the recession stretches out longer than I had anticipated I may not want to burn up all that liquidity, or may not be able to sell.

When you divide your refinance's monthly savings into the total refinancing cost, the payback may well be approaching seven years. If you're already paying 5% then it's going to be tough to push a jumbo loan lower without paying 2.5-3.5 points.

If you're even considering selling at the seven-year point (or before) then it may not be worth refinancing.

My current bank does not do 30 year mortgages, and the only reason I used them last time is because I have a friend at the bank and it was easy—she knew my situation and was not worried.

Would your friend be able to get an exception to the 30-year rule, or refer you to another bank? We've usually refi'd through credit unions, but our last two refis have been through a local bank that's tapping into the national banks or making their own loans. There may be a bank in your area that's not popping up on BankRate.com.

My situation is I’m recently retired, and have interest and rental income coming in to the tune of about 60K net. My wife works, and makes about 41K gross as a librarian at a public school. We both have good credit (780 and 730 at the time of last loan) and no other debt.

Remember the old lending rules of keeping mortgage payments (and taxes and insurance) less than 28% of income, with total debt payments less than 36% of income? Most of the lenders still refer to those rules. If your net income can support the payments then you're fine. In addition to W-2, interest, and rental income you may also want to provide whatever dividend income you're receiving.

A 5% 30-year mortgage on $480K is about $2576/month, or $30,900/year. So you're pushing the 28% limit at that rate. A 4.5% mortgage would be $2432/month or $29,200/year, a little more breathing room. Navy Federal: Mortgage Loan Calculator

If you're close to the underwriter's limits then they may want to do an analysis of your rental. This is usually an appraisal of the rental property and harsh assumptions like 10% vacancy rates. But if you have no other debt then you may be fine without the extra analysis.

It's hypothetically possible that your credit ratings may qualify you for a discount on the loan's origination points. But we were told that most of the discounts & freebies don't kick in until 800. Depends on the bank's underwriting policies and eagerness to lend.

What should my closing costs be?

All over the map. For example, around here it would be about $2000-$2500 plus points & origination fees. You could ask for the title policy to be reissued (instead of getting a new one) which might knock its cost down to $1200-$1500. Processing fees may be $300-$500 depending on discounts & specials. The appraisal may be anywhere between $350-$500, a bit more if it's expedited. Recording fees can easily exceed $100. Other banks will pile on junk courier/fax fees in increments between $25-$50.

Then there's the points & origination fees. If you pay 2.5 points to get that 4.5% interest rate then you're looking at another $12,000. If you spend $14,500 to lower your payments by $150/month then your payback is just over eight years. Would you stay put that long?

Part of the process is a form HUD-1 "good faith estimate" of closing costs. You could start the negotiations from there.

What kind of a rate should I expect?

This week, below 4.5% the points get pretty high. Brewer nailed a PenFed adjustable-rate mortgage at 4%, which probably puts him among the top three winners in a national competition. And your jumbo mortgage may not be able to get below 5%.

Where should I go to refi?

You could start with Navy Federal Credit Union (if you can qualify for membership), PenFed, BankRate.com, and a couple of your local banks. (Ours actually popped up on BankRate.) The problem with the Internet banks is that many of their rates are teasers. If that doesn't work then you could hire a mortgage broker, but they're paid by the lenders who may pass their costs right along to you.

Do I say I'm retired or self employed with rental income?

Doesn't matter. They want to see W-2s or tax returns... your choice.

I don't really want to have to give tax returns for last two years because they have my old business on them and they are very confusing (and no longer accurate).

Hopefully your processor has some experience (or at least some gray hairs) and will understand your explanation. They'll disregard the things you say are no longer relevant, like your old business income. They're using the tax returns to verify the interest, dividend, and rental income that you're declaring on your application. They'll use your spouse's W-2, checking-account statements, and perhaps brokerage statements as well. The logic is that you may lie to them on your application but you're unlikely to commit the federal offense of lying on your tax returns.

Is there any way to get around some of those fees, especially that 1%?

Some of it is knowing the secret vocabulary, like "re-issuing" your title insurance instead of going through the due diligence/research of underwriting a new policy. Some of it is personal relationships or having a large account with the institution. Some of it is negotiation or whatever they're willing to discount for sales or special offers. Some of it is pointing out that you're an easy/quick refi and won't take much of their time/effort.

I haven't tried bribery, seduction, or blackmail. Yet. Let me know if I'm missing out.

I don't mind putting some more into the home to get the loan down to the 417K connforming level to get a better rate and to not have to escrow taxes and insurance (don't do that now).

That may be a very good (but somewhat painful) idea. A 4.5% mortgage on $417K would drop your monthly payments to $2113 or $25,350/year-- well within the debt guidelines. Your points would drop, too, so you might only pay a grand total of $13K on the refi but your payments would drop by over $450/month. Now your payback is only 2.5 years. Of course you had to pay in an extra $63K of equity to get these favorable numbers.

Many lenders will no longer waive escrow/impound accounts for taxes/insurance. We were told it takes an 800+ credit score and a stubborn insistence. Impound accounts are a profit center for the banks, as well as perhaps a bit more assurance to whoever buys the loan, so if a bank wants to meet FHA guidelines for packaging & selling your loan then they won't budge on the impound account.

Has anyone ever used a loan broker? How do they get paid?

We used one over 20 years ago when we had very little more than a 5% down payment and steady Navy paychecks. Brokers get paid by the lenders, although of course those costs may be passed straight back to you...

 

[Animorph]

Wow, I can't top Nords great post, but I'll second the idea of checking that your income matches the ratio limits and getting to a non-jumbo size. My lender didn't pay any attention to my assets, just income. A broker would help with the ratios. Online lenders were kind of a shot in the dark in regards to suitability. Also, the 780 score is probably fine, but the 730 may be a little low for the lowest rates. Hopefully the combination will work for you. I thought they were looking for something close to 760 for the top rates.

Compare rates on bankrate.com or Yahoo.com. Then you know what to shoot for with a broker or if you do it yourself. I went through aimloan.com and got the rate advertised on their website, though closing was slow during the spring/summer rush.

 

[jazz4cash]

One thing I noticed about PenFed and Navy Federal's closing cost estimators is that they estimate "tax stamps" on a refi even though they are only required on change of ownership. A refi only requires recordation fee in my state. Another area to explore is discounted owner's policy title insurance if you can get it re-issued by whoever has your current policy...same goes for survey. When I attempted to get responses from Navy Fed to verify the estimates were excessive, it was tough to get a live body on the phone.

 

[Nords]

My lender didn't pay any attention to my assets, just income.

We get that too. Nobody cares about assets, just income. I guess they feel the assets might not last 30 years, no matter what FIRECalc says.

When I attempted to get responses from Navy Fed to verify the estimates were excessive, it was tough to get a live body on the phone.

They've become impossible to talk to, and I don't even try to phone those guys anymore. I get a fairly prompt response to website e-mails (two days) but otherwise I just let the title company wrestle with NFCU. The title company gets the super-secret high-priority NFCU phone numbers.

 

[cardude]

Wow, as usual great info from everyone-- especially Nords, the original Refi Master! Thanks!

My thought for using a broker was it might be easier to explain my "lots of assets but not much income" problem to a live body, but it looks like the banks mostly look at income so that might not matter.

After running some numbers it looks like it's probably not worth it to pay a bunch of closing costs if we are really only going to be in the house another 7 years or so, as Nords pointed out.