The mortgage industry isn't difficult to understand, but like all industries, it has its peculiarities. Everything isn't common sense, and some of it doesn't make any sense, but that is just the way it happens. It is a lot easier than learning English with “there” and “their”, “to” and “too” and “two”, and my favorite: I before E, except after C. And English is not only my native language it's my only language. I digress and need to get back to my point. There are a lot of things people don't know about real estate and financing, therefore the following is to bring some light to the subject.
There was a rule for years that you couldn't refinance after a purchase and get a new value on the property, even if it was higher, for a year. That rule is gone. You can use a new value the next day. (Not every lender will go along with this.)
When two partners decide to go their own ways and one gets the house and the other gets lost (so to speak), be sure if you are the latter, that the surviving owner not only quit claims you off of the title but refinances to get you off the loan. How much fun would it be to not own, but still owe on the house?
When purchasing a house, the value used for loan purposes is the lower of purchase price or appraised value. When someone buys a house that doesn't appraise for the purchase price the loan to value is computed on the appraised value, not the purchase price. An 80% loan with 20% down can easily become a 70% loan with 30% down in such cases.
This one hurts. If you want to pull cash out of your house and have it be tax deductible, you either have to put the money into the house in the way of rehabilitation of the property or expansion. If you use the money for anything else, you are limited to $100,000 for tax deductible purposes over the current loan balance with a maximum cap even if you paid a lot more for the house.
If you are planning to pay down your fixed rate loan with a large amount of money in the next year or so, and are expecting to reduce your monthly payment, it isn't going to happen. Fixed loans are fixed, not recast because of a large payment, and the payment will remain the same. What will change is that the amount going to principal will be much higher and the amount going to interest will go down.
How are you doing to this point? Have you been surprised by any of the rules or are all these familiar to you? I will see what I can do from this point to get you some lesser-known rules to enhance your knowledge.
All loans over 80% loan to value have a surcharge for the risk. They either have a first and a second, a charge built into the rate, or you pay mortgage insurance. Which one of the three isn't tax deductible? The interest paid on the second mortgage, the interest paid on the mortgage with the surcharge built in, or the mortgage insurance premium?
On a stated loan where two people are applying for the mortgage, the lenders always use the lower of the two's credit score. It only stands to reason because neither one is showing any income documentation, so the lender must act defensively. (We actually now have a program known as a rate swap if the one with the better score earns at least 30% of the family income.)
There is never a reason to have a second mortgage and mortgage insurance, yet many people have opted for a second mortgage to get cash out and because they couldn't prove they had 20% equity, the mortgage insurer refused to allow them to cancel the insurance. In every case you should refinance both the first and the second and get rid of the mortgage insurance.
On every mortgage transaction, title insurance is required by the lender, even if you just had a refinance or purchase with the same lender. There are a lot of reasons for this, but the golden rule is the all encompassing one: He with the gold sets the rules.
When you mail your payment to the lender, the postmark is the date that is used to decide whether it is late. This is the rule, but enforcing it may not be that easy, as the lender has the postmarked envelope, not you.
In that same vernacular a 30-day late on your credit report must actually be 30 days late and not just late enough to get a late charge. Many times toward the end of a month I will find a 30-day late on a credit report for the month we are still in. This can be challenged, and you will win if you have a cancelled check, a paid dated receipt or a letter from the lender saying your check was there before the 30 days was up.
These are but a few of many nuances in the industry and from time to time I will write other articles listing another group of these occurrences.
It is important to know as much as you can about this or any industry you will be dealing with to preserve your sanity and your pocket book. Oh, I almost forgot…..The vehicle that is not tax deductible is the mortgage insurance. They are working to change that as I write. Who knows – it could happen.
Roger Schlesinger's Mortgage Minute is heard on hundreds of radio stations and daily on the Hugh Hewitt radio show and Michael Medved shows. Roger interacts with his hosts and explores the complicated financial markets in order to enlighten his listeners and direct them along their own unique road to financial freedom. Roger is the President and founder of Manhattan West Mortgage.