Did you know that....?

Posted: May 05, 2007 7:14 AM

In my fifth or sixth attempt to unleash the unknown about the mortgage industry, attempting to make you a better borrower, I tested my loan officers and found some areas that they didn't have complete knowledge. Therefore I know that you probably don't have sufficient knowledge either. So I begin with some easy situations and will move up from there.

Recasting a loan means changing the payment to reflect the new balance. This only happens in variable loans at the interval that is preset for their change in interest rate and amortization. If your variable changes each year then the new payment will reflect the new interest rate (can be no change) and the new number of months left in the loan before it is paid off (amortization). Fixed rates never recast because the interest rate doesn't change and therefore the payments remain constant during the entire life of the loan.

Interest only loans, even if they are part of a fixed loan, will recast when a principal payment is made during the interest only period. This makes interest only loans desirable for those who buy a house before they sell their current home . Once the current home is sold and the equity is used to pay down the interest only loan , the payment will reduce to reflect interest only on the new balance. When the interest only period is up , the remaining portion of the fixed loan will have a re casted payment based on the time left and the current balance even though the interest rate stays the same.

Seasoning a loan is very important in the mortgage industry. There are several instances where it comes into play: time since purchase, time since the property was listed and time since cash was taken out of the property. In prior years lenders would not allow a refinance using an appraisal that had a higher value than the purchase price during the first year. Most lenders have dropped that requirement but some still use the one year rule.

There are only a handful of lenders who will allow you to refinance a property the day after the property is taken off the market. The number is low if there isn't a prepayment penalty required. More will allow the refinance with a prepayment penalty to be sure you will be in the loan at least a year or more.

The toughest seasoning comes with cash out. Generally if you refinance before a year has past since you took cash out , the loan will be considered a cash out loan and you will have to pay the additional cost. Many people have tried to combine a first mortgage and a Heloc into one loan during the year after the Heloc was acquired. It will be priced as a cash out loan which affects conforming loans above 70% loan to value and generally all jumbo loans. (Conforming loans have a $417,000 limit for single family residences and have gotten their name because they conform to the rules of Fannie Mae and Freddie Mac.) Usually the only exception to the cash out rules comes if the Heloc was used to improve the subject property.

Mortgage Insurance vs. a second mortgage. Lenders want to be protected on loans over 80% of the value of the house as determined by a current appraisal or automated value module (computer value model). Until this year , mortgage insurance known by the initials PMI (private mortgage insurance) wasn't tax deductible so most borrowers took a first mortgage to 80% and then a second mortgage for the portion over 80% up to 100%. The problem with the later approach was it generally called for a refinance once the loans came down to 80% through amortization of the loans or appreciation of the property or both. People didn't have the funds to pay off the higher interest rate second mortgage or Heloc.

If your taxable adjusted gross income (AGI) is under $110,000 then mortgage insurance is partially deductible. If your AGI is $100,000 or less then the mortgage insurance is 100% deductible. This means that you can have only one loan and never have to refinance if it is not needed when you reach the 80% loan to value plateau.

As your knowledge grows about the mortgage business your chances of doing better for yourself and your net worth also increases. I intend to keep writing and I hope you intend to keep reading. We both win!