What You Don't Know Can't Hurt You, But It Can Cost You Money

The mortgage industry is not your uncle Charlie’s, nor your fathers, because of the monumental changes that have occurred over the last decade or so.  I will outline some of the big ones that can really create havoc in your life, and hopefully you will cancel those pending plans.

Cash Out

1.  You can pull as much cash out of your house as the lender will allow but anything over $100,000 that doesn't go to improving the house, the interest on the overages is not deductible.

2.  You cannot deduct any interest on amounts of $1,000,000 plus $100,000 or higher regardless of the use.

3.  If you pull cash out of your house to buy Treasury notes, bills or bonds you cannot deduct the interest on that money.

FHA & VA Loans

1.  Both FHA and VA loans are assumable.  As a seller you can pass the loan as it exists, dollar amount and interest rate to a qualified borrower. This goes for fixed or variable loans.

2.  All FHA loans that are originated now have mortgage insurance on any loan that amortizes over 15 years for the life of the loan. The FHA 15 year loan has mortgage insurance for 11 years.

3.  VA loans do not require mortgage insurance but are only available to veterans or active duty military for personal residences, as long as they do not have a current VA loan outstanding for themselves.  They can have other VA loans outstanding that have been assumed.

4.  FHA and VA loans are eligible for streamline refinances as long as they have made their payments on time and have a lower balance than their original loan.

Loan Payments

1.  A 15 year loan pays off twice as fast as a 30 year loan but doesn't cost twice as much.  Not even close.  This should tell you that this is an excellent choice.

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2.  The magic behind a bi-weekly mortgage is not that you pay the mortgage every two weeks but the fact that you are making 13 payments a year (26 half payments).  The extra payment is spread out over the 26 payments and if you just made an additional payment at the beginning of each year it would help you amortize (pay down) the loan quicker and faster.

3.  The 30 year loan takes 10.5 years for the payment to reach 50% principal and 50% interest.  It starts, depending on the interest rate, at approximately 65% interest and 35% principal.  The only other major loan to not have the principal portion of the payment to be larger than the interest from the first payment on is the 20 year fixed.  The principal and interest will be equal, however, in just 4 months.

Common Sense (Hopefully)

1.  If you have a loan that has an interest rate above the current rate by at least 1/2% if you decide to accelerate your payment to set up faster amortization, you must realize that the additional payment will not go to reduce the equity alone, but help pay the above market interest rate.  If you have a choice to refinance factor the above into the equation.

2.  If you have a loan that is over 6 months old and you have mortgage insurance on it you need to check the value of your house monthly to see if you can refinance to get rid of the mortgage insurance.

3.  If your mortgage loan doesn't impound your taxes and insurance (escrows) then you should take a hard look at setting an impound up because it is so much easier to pay monthly than a lump sum for the majority of borrowers.  This also keeps you from being harassed your lender if you skip the payment.

4.  If you plan to remodel or refurbish your house with the main benefit increasing your home's value then you must add square footage to the house if you want the best chance of the house going up in value. 

5.  If you are planning to sell your house call a realtor over to walk the house with you to see what the realtor finds objectionable.  If it makes sense to you to do the fixup then make sure it is done before putting the house on the market.

This article is the first in line of a number of columns I will be writing to note the changes, the dangers and the opportunities currently in the mortgage market. Do not be hesitant to write, call or come up to me to ask any questions about real estate and real estate financing and I will do my best to answer them.