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Why Refinancing for a Lower Mortgage Rate Won’t Necessarily Save You Money

Mortgage rates have dropped significantly over recent years, so many homeowners have refinanced to reduce mortgage payments, save on interest costs, and pay off their homes faster. Though refinancing is generally a good move, there are some situations where a lower mortgage rate won’t necessarily equal savings over the long run. A home loan is much more than just an interest rate, so it’s important to look at the entire picture, not just the interest rate, when evaluating the merits of a refinance. Continue reading

Posted in Mortgage & Homeownership, Mortgage Lending | Tagged

Is a Mortgage Origination Fee Deductible on My Taxes?

You probably already knew that mortgage interest could be deducted on your income tax returns, right? But did you also know that some of the closing costs you paid for your mortgage may be deductible as well? Depending on what you’re using the mortgage for, you may be able to deduct all or a portion of the origination fee you paid to get the mortgage.

The following is just a basic rundown of the rules for when an origination fee is deductible. A lot of other rules and nuances can apply, so I highly recommend working with a qualified tax professional to determine when and how you may be able to deduct origination fees on your taxes.

What Is An Origination Fee?

Origination fees are charged by the lender to cover services such as underwriting, loan processing, document preparation, loan funding, etc. Essentially, origination fees help cover lender overhead and pad the bottom line.

Origination fees may also include points, which are charges for the interest rate on the loan. The IRS views points as mortgage interest, which means that the portion of the origination fee that goes to points may be deductible on your taxes.

For more information about points and how they impact the rate on a loan, be sure to check out Should I Pay Points On My Next Mortgage? and Fannie Mae LLPA: How Loan-Level Pricing Adjustments Impact the Cost of a Mortgage.

When Points Are Fully Deductible

Points paid for a mortgage used to purchase or improve a primary residence are entirely deductible in the same tax year you paid them. If you refinanced and used mortgage proceeds to improve the home, you can deduct the part of the points related to the home improvements in the year you paid them. The rest of the points have to be deducted over the life of the loan, as described in the next section.

When Points Are Deductible Over the Life of the Loan

Points paid for a refinance (assuming the loan isn’t used for home improvements) on a primary home, second home, investment property, or for the purchase of a second home or investment property, are deducted over the life of the loan.

To calculate the deduction, you divide the total dollar amount of points paid by the number of payments in the loan (360 for a 30-year loan, 180 for a 51-year loan, etc.), then multiply by the number of months you had the loan during the tax year in question. For example, if you paid $4,000 in points for a 20-year loan and had the loan for 8 months during the first tax year (meaning the loan funded in May of that year), you can deduct $133 (($4,000/240) * 8) for that year. The following year you can deduct $200 because you’ll have the loan for the full 12 months of the year (($4,000/240) * 12).

If you pay off the loan early, you can take whatever you have left to deduct in the tax year the mortgage is paid off. From the IRS website:

If you spread your deduction for points over the life of the mortgage, you can deduct any remaining balance in the year the mortgage ends. However, if you refinance the mortgage with the same lender, you cannot deduct any remaining balance of spread points. Instead, deduct the remaining balance over the term of the new loan. A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event.

Prepayment penalties are often considered mortgage interest as well. If you end up paying one, be sure to check with your accountant about deducting it on your taxes.

Check With an Accountant

Again, this only covers the basics. Plenty of other rules can apply, so be sure to check with a qualified tax expert to determine when and how you can deduct points on your taxes.

For more details on this topic, check out the IRS website.

Posted in Mortgage & Homeownership, Taxes | Tagged

How Grossing Up Social Security Income Can Get Your Loan Approved

Grossing up Social Security income (SSI) is a great little trick that can make the difference between getting your mortgage application turned down or approved.

Because all or a portion of your SSI is not federally taxable, lenders can often gross it up for qualifying purposes, meaning you can qualify with more income than you actually receive. If you have a tight debt-to-income ratio, grossing up your SSI can often make the difference needed to get the loan approved. 

How Grossing Up Social Security Income Works

If you receive Social Security income, it’s a good bet at least part of it isn’t subject to federal income taxes. The part that you don’t pay taxes on can be “grossed up” by 125% for mortgage qualifying purposes. This means that you can qualify with more income than would otherwise be possible under “normal” lending guidelines.

Check out the examples below to see how grossing up Social Security income works.

Example #1: All of Social Security is Non-Taxable

Let’s assume you have a total annual income from Social Security of $12,000 ($1000/month) and all of it is non-taxable. Because none of the income is subject to income taxes, all of it can be grossed up by 125% for qualifying purposes.

Example #1: Total Social Security Income Gross Up
Annual IncomeMonthly IncomeQualifying Income
$12,000/yr (non taxed)$1,000/mo$1,250/mo *
TOTAL:$1,250/mo
* Because it is not taxable, all of the income was grossed up by 125%.

Instead of qualifying with just $1,000/month, you instead can qualify with $1,250/month, or 125% of the actual monthly income. This may not sound like much of a difference, but if your debt-to-income ratio is tight, grossing up can make the difference needed for loan approval.

Example #2: Just Part of Social Security is Non-Taxable

Now let’s assume you have a total annual income from Social Security of $16,800 and $4,800 of it was taxable last year. This means difference, $12,000, is non-taxable and can be grossed up for mortgage qualifying purposes. Check out the table below for how the lender would calculate the qualifying income.

Example #2: Partial Social Security Income Gross Up
Annual IncomeMonthly IncomeQualifying Income
$12,000/yr (non taxed)$1,000/mo$1,250/mo *
$4,800/yr (taxed)$400/mo$400/mo
TOTAL:$1,650/mo
* The non-taxable portion of the income was grossed up by 125%.

Because you only paid taxes on part of the Social Security income, the lender can only gross up the part that wasn’t taxed, which is $12,000.

So, instead of  qualifying with $1,400/month in income, you would be able to qualify with $1,650/month. The non-taxed portion ($1,000/month) is grossed up by 125% to $1,250/month and the taxed portion remained at $400/month, totaling $1,650/month for mortgage qualifying purposes.

Other Types of Income Can Be Grossed Up Too

If you receive other types of income that aren’t subject to federal income taxes, you may be able to gross it up for qualifying purposes as well.  This can be extremely useful if you derive portions of your income from sources that are tough to document, such as intermittent income, self-employment income, farm income, notes, dividends, stock sales, etc. A good loan officer can help you avoid some paperwork headaches by grossing up more easily documented income so that income more difficult to prove can be disregarded altogether.

For example, farm income can be tough to document for loan approval purposes. If you receive other income that is more easily documented and can be grossed up to enable you to qualify, you may be able to disregard the farm income altogether for qualifying purposes. This can significantly reduce the amount of paperwork you’ll need to provide to get your loan approved.

Posted in Mortgage Lending | Tagged

Another 30 Insider Mortgage Tips and Tricks to Get a Lower Rate, Reduce Closing Costs, and Eliminate Qualifying Hassles

I’ve been in the mortgage banking business for over seven years now and have seen hundreds of loan files cross my desk.  Here’s another 30 insider mortgage tips and tricks I’ve gleaned from my seven years of mortgage banking experience to get a lower rate, reduce closing costs, and eliminate qualifying hassles. Not all of these tips will apply to every loan scenario, but I’m sure most people will find at least a few useful things here.

This is the second post with 30 tips and tricks; if you didn’t catch the previous one, you can read it here.

30 Insider Mortgage Tips and Tricks to Get a Better Deal

1) Use the same company for your owners and lenders title insurance policies when buying a home. You may be able to get a nice discount if the same title insurer issues both policies versus buying them from separate companies.

2) Don’t shop based on APR alone. Contrary to what you may have heard, APR is not always the best way to determine which loan is the best deal. For one thing, the laws that govern it are unclear, so lenders often calculate it differently.

The biggest problem, however, is that it assumes you’ll be keeping the loan for the entire term of the mortgage – and very few people ever do that! Most people tend to keep their mortgages for 5 to 7 years then either refinance or sell the home. In such cases APR doesn’t truly measure the cost of the mortgage – not even close! Let me show you why.

The reason APR is flawed is that it amortizes your closing costs out over the total life of the loan. In other words, if you pay $5,000 in closing costs to get a 30-year mortgage, the APR calculation assumes an annual cost of $166.67 for closing costs ($5,000 divided by 30 years) plus the accrued interest on your loan balance.

But what if you don’t keep the loan 30 years? Herein lies the problem!

If you keep the loan only five years instead of 30, your annual cost now becomes $1,000 for closing costs ($5,000 in closing costs divided by 5 years) plus the accrued interest on the outstanding balance. Remember, closing costs are front-loaded – meaning they’re paid at loan closing. You paid interest and $5,000 in closing costs to borrow the money for just five years, which means your effective financing costs are much higher for each year than if you’d kept the loan for the full 30-year term.

If you shop just based on APR, you could end up paying a lot more for the loan than you need to. The best strategy is to shop based on rate and fees. If you’re considering keeping the loan long term, it may make sense to spend a little more on closing costs to get a lower rate. If you’re not planning to keep the loan more than 5 to 7 years, it usually makes more sense to take a slightly higher interest and let the lender cover the majority or all of your closing costs.

3) If you’re buying a home, use a real estate agent. They’re paid by the seller, so they’re free to you. Good real estate agents can help you through the process and serve as a great resource for finding a great home.

4) Make sure your listing agent takes great photos. I find it extremely annoying that some real estate agents are too lazy to take really great photos when listing their client’s property. Sellers pay listing agents 4% to 6% of the sales price to sell the home, so the least they can do is take great photos (or have them taken by a professional).

Most home shoppers start their home searches online, so you want to make sure your home looks as great as it can on the MLS. Personally, I think bad photos are enough of an infraction to fire the agent and find another one.

5) Don’t shop just for rate. You can get the lowest rate available, but it’s probably going to cost you the most in fees as well. The tradeoff in mortgage financing is always rate and fees; in other words, lower rates come with higher costs, higher rates come with lower costs. The trick is to shop for both rate and fees and strike the appropriate balance based on how long you plan to keep the loan. If you only plan to keep it a few years, a lower cost/higher rate option usually is better. If you plan to keep the loan long term, it can make sense to pay more in costs to get the lower rate, but be sure to do a good analysis to make sure it truly makes sense.

6) Don’t necessarily shop for “no cost” either. Again, it’s important to shop for both rate and fees and balance them appropriately based on the time frame you’re likely to keep the loan. If you’re going to keep the loan long term, it might make sense to spend a little more in costs to get a lower rate that can pay off huge in the long term.

A good loan officer should be able to structure a few different options with various rates and fees and figure out which one makes the most sense for how long you plan to keep the loan.

7) Don’t be the type that demands a rate quote without giving out any information. Yes, it can be a hassle to shop for a mortgage because the loan officer will likely barrage you with a variety of questions. Folks, it’s just the reality of the mortgage business. There are a lot of factors that influence the rate and fees for a mortgage or whether you even qualify at all. If you want a solid quote that the lender can deliver on, then you need to give them the information they need. Be forthcoming with the information requested.

8) Don’t be rude and demanding. If you’re serious about getting a loan done, it doesn’t pay for you to be difficult to deal with. If you have a good relationship with your loan officer and you recognize that getting the loan done is a mutually beneficial team effort, the loan officer is far more likely to work his tail off to keep you happy—which means you’re much more likely to get your loan done in a timely manner.

If a borrower gives me a hard time on the first phone call when I simply ask for his name and property address, I can only imagine what it’s going to be like dealing with him if speed bumps pop up in the process later. It’s just not worth the hassle and headache to deal with people like that.

9) Putting down 20% on a condo? I recommend scraping up another 5% if you can to get much better pricing. The 75% loan-to-value mark is a key pricing cutoff for condos and townhomes. In other words, a 25% down payment is going to get a much better deal than a 20% down payment when you’re buying a condo.

10) Putting down 20% on an investment property? Same deal as above; you’ll likely get a much better deal if you put down another 5%. If you’ve got the cash, it’s well worth it to come in with the bigger down payment.

11) Have high credit card balances that are hurting your credit scores? Consider asking your credit card issuers to raise your credit limit. If you can get your balances below 50% of the credit limit (30% is better), it could make a big difference in your credit scores. Big disclaimer here: only do this if you truly manage credit well. If this is going to just lead to more spending, don’t do it.

12) Ask your lender if they can do a rapid rescore. If some surprise credit issues come up during the application process, see if the lender can do a rapid rescore. Instead of waiting for 3 to 4 months for the credit bureaus to update their files so you can have a new credit report run, lenders can often rescore a credit report within days if you can provide the appropriate documentation that proves a particular credit issue has been resolved.

13) Putting down 3% on a conventional purchase loan? Try to scrape up another 2%. The mortgage insurance is much cheaper if you put down 5%.

14) Mortgage rates tend to move with the 10-year Treasury bond. Mortgage rates tend to move when the 10-year does as well, so if the 10-year yield is down hard, that might be a good day to request a rate lock. Having said this, I don’t recommend trying to pick bottoms in interest rates—the market can move against you just as easily as it can move in your favor. However, if you’re already working with a lender but haven’t locked your rate yet, the best days to lock are usually the ones where the 10-year yield has moved lower.

15) Owe a lot on your HELOC? If so, make sure it’s not reporting as a revolving account on your credit. If it is, and the amount you owe is more than 50% of the total credit limit, your credit scores could suffer. Make sure the lender holding your HELOC reports it as a mortgage, not a revolving account like credit cards.

16) If you have a collection account hurting your credit, you may be able to negotiate a payoff. Collection agencies buy old debts for pennies on the dollar, so you may be able to negotiate a payoff for far less than the amount actually owed. Just make sure you get an agreement in writing before you send a check.

17) If rates are on a continuous downtrend, it could be a good time to finance an investment property. When rates are on a steady downtrend, the margins in the rate sheet tend to widen, which makes it easier for lenders to absorb the pricing hits that can make closing costs really expensive for investment property deals. In one downtrending market I was able to refinance a $300,000 investment duplex with a conforming Fannie Mae loan for just a few thousand in closing costs. That’s a phenomenal deal for a 2-unit investment property.

18) Don’t believe everything you read about a lender on the internet. I once heard it said that you’re not popular if you don’t have at least something negative posted about you somewhere. Mortgages don’t always work out and angry consumers often take to the internet to vent their frustrations – sometimes with justification, sometimes not. If you’re researching a lender online, don’t be alarmed if there’s a few negative comments hear and there. If they’ve been in business for a long time, there’s bound to be complaints at some point. The lenders you should avoid are those that have a long history of complaints with a similar theme. If you see that, it might be better to shop with a different lender.

19) The crazy rate deals lenders advertise are usually not realistic for most people. The insanely low rates with no closing costs you see or hear advertised are thrown out there for one reason: to get you to pick up the phone and call. However, buried in the fine print you’ll discover that these deals are only applicable to borrowers with something like 60% loan-to-value, $417,000 loan amount, impounds, stellar credit scores, and are financing a single-family home they live in. If you fit within this narrow box, good for you! If you don’t, you’re probably not going to get a deal quite that good.

For more about the marketing gimmicks lenders use to get you to call, check out my post on it here.

20) Buying fixer properties to rent out? Consider financing your purchase and rehab with hard or private money instead of buying with cash. If the property is free and clear when you refinance into a permanent, long term bank loan from a traditional bank, it will be considered cash out and subject to much more restrictive rules and less favorable pricing. If you already have a loan on the property, then it can be considered a rate and term refinance and you’ll likely get a better deal.

21) Avoid balance transfers if you’re planning to apply for a mortgage. When you do a credit card balance transfer, the credit limit on the new account usually is set to the amount you transferred. This means the new card is “maxed out”, which can damage your credit scores.

22) Pull your own credit before you starting shopping. There have been more than a few times where I’ve pulled credit for a client and a surprise popped up that preventing them from getting a good deal. Pull your own credit ahead of time so you have a chance to correct any problems. You can do so for free once per year at AnnualCreditReport.com

23) Buying a condo with a FHA financing? Be sure the condo complex is FHA approved before you start paying for appraisals and inspections.

24) Make sure all rate quotes from different lenders assume the same rate lock period. Rate lock has a big impact on the pricing of a rate quote, so if one lender is using an unusually short rate lock in their numbers, their quote might look much better than it really is.

25) Lock for at least 45 days. Lending is tougher and more complicated today, so don’t go with a short rate lock to get the better pricing – unless you like risking rate lock extension fees. The only exception I would make is if you are a super clean, well qualified borrower and you already have an appraisal that is less than a month old. In that case, you might be able to get away with a 30-day rate lock, but check with your loan officer to be sure.

26) Gather up all your qualifying paperwork before you start shopping. This will enable you to move forward much faster once you’ve found a good deal. Delays in getting paperwork to your lender can be costly if your rate lock expires and you have to pay rate lock extension fees. For a good list of what the lender might ask for, check out my article here.

27) Prepare cash-to-close (for down payments or refinance balance pay downs) at least 90 days in advance.  Lenders will always want to “source” and “season” the funds, which means they want to see the last 90 days worth of bank statements for the account you wish to use for your cash-to-close. Keep this money for at least 90 days in a quiet account that gets very little deposit activity to avoid the paperwork headache of documenting unidentified deposits.

28) Do your rate shopping within a span of a few days. Rates change every day, sometimes even a few times a day. You want to make sure all the rate quotes you receive are from the same time in the market.

29) Allow lenders to run your credit. Credit score makes a big difference to a rate quote, so you want to make sure lenders have the most accurate picture of your credit profile. The credit bureaus will treat the inquiries as one for scoring purposes as long as you do your shopping within a few weeks time.

30) Get a little extra cash from your refinance. Lenders often allow up to 2% of the loan amount or $2,000 at closing without the loan being considered cash out. Between this, the fact that you skip a payment when you refinance, and an escrow account refunds, you could get some significant extra cash out of your refinance without falling into the “cash out” category (and being subject to more stringent guidelines and less favorable pricing).  Keep in mind that getting a little extra cash at closing from the loan could be subject to various limitations.

Check Back For More Tips

Be sure to check back again for more insider mortgage tips and information to get a better mortgage deal and minimize qualifying hassles. I’m always posting new information on this site to benefit you, so thank you for reading!

Posted in Mortgage & Homeownership, Mortgage Lending | Tagged

Three Phenomenal Features One Mortgage Product Has That All Others Do Not

What if I was to tell you that you could get a line of credit that you would never need to make a payment on, wouldn’t need to pay back in this lifetime, and the credit limit would automatically increase every year? Would you think I was crazy? I wouldn’t blame you if you did! Folks, this kind of loan exists, and as long as you’re 62 years of age or older, you could be eligible for it.

The HECM reverse mortgage is a phenomenal loan product that enables seniors 62 years of age or older to tap into their homes and convert a portion of their equity into cash they can use for any purpose. You can eliminate mortgage payments, pay off other bills, supplement retirement income, do home improvements – whatever you wish.

No Payment For Life

One of the most notable features of the HECM reverse mortgage is that no payment is ever required. You can make a payment if you wish (and some of my clients do), but you don’t have to for as long as you’re living in the home. This gives you the financial flexibility to make a payment if you’d like or instead spend the money on things you enjoy.

No Repayment in This Lifetime

Even more amazing is that the loan doesn’t have to be paid back until all individuals on the loan are no longer permanently living in the home, whether they’ve moved or passed on. If heirs wish to keep the home, they’re free to do that, they just have to pay off or refinance the home. They don’t wish to keep the home, the bank just sells the property, pays back the loan balance, and the remaining equity goes to the heirs.

The most that will ever have to be paid back is the value of the home, regardless of how much that is, or how much is owed.

The Line of Credit Grows

If anything these days, banks are reducing how much they’ll lend you, not increasing it. I remember banks slashing the borrowing limits of many HELOCs after the 2008 financial crisis. In light of that, it’s hard to believe that any bank would give you access to more money over time on a credit line, but that’s what the reverse mortgage does.

The HECM credit line grows over time based on a growth rate that can change with interest rates.

The HECM credit line grows over time based on a growth rate that can change with interest rates.

One of the options to receive benefits from a reverse mortgage is a credit line where your money is stored in your equity until you need it. If you don’t need the money, it’s not borrowed, and it doesn’t accrue any interest.

The best part is that whatever you don’t borrow grows over time, allowing you to access more money without ever having to make a payment or pay the money back in this lifetime. What other mortgage product does that?

Check out the chart, which shows how a $150,000 HECM credit line would grow over time with a growth rate of 4%. This growth rate is based on current interest rates, but if rates go up, the growth rate will increase as well.

As you can see, the credit line grows to a very substantial amount over time. Again, this is money that can be accessed at any time, for any purpose, without a monthly payment, and without having to be repaid in this lifetime.

No Other Mortgage Product Does This

It’s unfortunate that the reverse mortgages still gets a bit of a bad rap because of lingering misinformation and past unscrupulous practices by some lenders. It really is a phenomenal loan product for the right borrower. No other mortgage product can do what a HECM reverse mortgage can do: get tens or hundreds of thousands of dollars, never make a payment, and never repay the loan in this lifetime. And no other credit line will grow larger over time, giving you access to more money in the future.

Posted in Mortgage & Homeownership, Mortgage Lending | Tagged

How to Turn a Portion of Your Home Equity Into a Liquid Asset That Grows Over Time

What if there was a way you could turn a portion of your home equity into a liquid asset that grows over time and can be used to supplement your retirement income? If you’re 62 years of age or older, this is entirely possible!

In fact, I would urge any senior with a free and clear home to take advantage of this phenomenal strategy to supplement your existing financial plan. Continue reading

Posted in Mortgage & Homeownership, Mortgage Lending | Tagged

15 Insider Tips and Tricks for Reducing Mortgage Closing Costs

It’s no secret that mortgage closing costs can be expensive. To get your loan done, your lender will have to hire out third party services like title insurance, escrow, appraisals, credit reports, government recording, notaries, etc. Additionally, you could end up paying for lender overhead in the form of points and origination fees. A lot of people are involved in making a mortgage loan happen, so paying for all of their services can get expensive.

The following is a list of great insider tips for reducing mortgage closing costs gleaned from my years of experience in the mortgage industry. Not all of these tips will apply to every loan scenario, but there’s probably something here for just about every mortgage shopper. Continue reading

Posted in Mortgage & Homeownership, Mortgage Lending | Tagged

Everything You Need to Know About How an Adjustable Rate Mortgage (ARM) Works

Adjustable-rate mortgages, or ARMs, have interest rates that fluctuate based on conditions in the financial markets. Most adjustable-rate mortgages have a 30-year term and are either adjustable from day one or have an initial fixed rate period of three to ten years. The longer the initial fixed rate period, the higher the initial rate will be because the bank is protecting you from rate changes for a longer period of time.

ARMs, unfortunately, have received a bit of a bad rap over recent years because they were abused during the mortgage and real estate boom of the last decade. However, used correctly, ARMs can be a great option because the initial rates are often far lower than what you would get on a comparable 30-year fixed loan. Continue reading

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How to Buy a House Part 4 – How to Save Up a Down Payment

This post is part 4 in a series of posts entitled “How to Buy a House” that outlines the basics of how to become a homeowner, including preparing your financial profile and credit to qualify, the process of applying for a mortgage, working with realtors to find a home, closing the deal, and any other great advice I can think of.

You can find all the other posts in this series by clicking here.

Once all your debt is paid off, the next thing is to start saving up for a down payment. How much you’ll need depends on the type of financing you select, but most people will need at least a minimum down payment of 3% to 5%. If you’re military active duty, a veteran, or in the reserves, you may not need a down payment at all. Continue reading

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How to Buy a House Using Gift Funds for the Down Payment

If coming up with a down payment on your own is a bit of a stretch, you may be able to buy a home using gift funds for the down payment.

This is perfectly acceptable under the lending guidelines for most types of mortgage financing available today, but it’s super important that it be documented properly or your loan could get turned down. Continue reading

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