The Lange Money Hour: Where Smart Money Talks
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Is It Time to Refinance Your Home?
James Lange, CPA/Attorney
Guest: Mike Henry
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- Introduction of Guest – Mike Henry
- Should You Refinance?
- Twelve or Fifteen-Year Loan
- Why Do We Have Title Insurance?
- What is Origination Cost?
- What Are Points?
- Other Costs To Consider
- How Can An Appraisal Affect Your Loan?
- Escrow Accounts and Jumbo Loans
- When To Take On A Reverse Mortgage?
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Welcome to The Lange Money Hour: Where Smart Money Talks with expert advice from Jim Lange, Pittsburgh-based CPA, attorney, and retirement and estate planning expert. Jim is also the author of Retire Secure! Pay Taxes Later. To find out more about his book, his practice, Lange Financial Group, and how to secure Jim as a speaker for your next event, visit his website at paytaxeslater.com. Now get ready to talk smart money.
David: Hello, and welcome to this edition of The Lange Money Hour, Where Smart Money Talks. I’m your host, David Bear, here in the studio with James Lange, CPA/Attorney and author of two best-selling books, “Retire Secure!” and “The Roth Revolution: Pay Taxes Once and Never Again.” Our topic today is mortgage refinancing. With interest rates at historic lows, does it make sense to refinance your home or other significant assets? Joining us in the studio to answer that question is Mike Henry, a sixteen-year Dollar Bank veteran who, as vice president of Residential Lending, oversees the mortgage department’s sales and operation. Based in Pittsburgh since 1855, Dollar Bank has grown into the nation’s largest independent mutual savings bank with $6.3 billion in assets and sixty branches in Pittsburgh and Cleveland. Listeners, since our show is live, Jim and Mike are available to answer your questions. To join the conversation, call the KQV studios at (412) 333-9385. Hello Jim, and welcome Mike!
Jim: Thank you for being on the show, Mike.
Mike: Oh, thank you very much for having me.
Jim: The reason I asked Mike to come down and, specifically, I chose Mike among a number of mortgage experts, is because I noticed in my own practice that more and more people were refinancing, and I actually looked at my own personal finances and decided it was appropriate to refinance, and this is not here as a plug for Dollar Bank, but I did determine that Dollar Bank was the way I was going to go, and that is actually in process, and I like to share things that I think work for me with my listeners. So anyway, it just feels like, you know, back when, 16%, 18% interest, the Jimmy Carter years, and I remember my own dad had a loan at 4.5%, and that just sounded so ridiculous, and the banks were begging for him to pay it off, and he held out until the very last payment, and personally, I have refinanced more than once, and my current loan is at 3.625% and I didn’t think I would ever refinance again, and now, it seems to be favorable. So Mike, a) Does this seem like a good time to refinance, in general?
Mike: Yeah, it’s actually probably the best time to refinance. Rates are, like you said, at historic lows, 3 ½% on a thirty-year fixed, 2 ¾% on a fifteen-year fixed. They’ve been this way for a couple of months, and this is the lowest we’ve seen ever.
Jim: All right. So, 2.75%, and we’ll get into the costs of this soon, but right now, you’re saying basically that somebody qualifying (we’ll talk about that), somebody that qualifies, and they’re willing to pay some costs, or roll those costs into the loan, can now refinance at basically 2.75%?
Mike: Yeah, that’s correct. Yes.
Jim: All right. So, when does it make sense…and now I’m really talking about refinancing now. So, let’s assume somebody has a mortgage, and whether you use $150,000, maybe that’s a nice mid-level amount, somebody has a $150,000 balance on their mortgage, and they’re obviously paying more than 2.75%, and there’s, let’s say, some variation on how long they’re going to stay in the house or how likely they’re going to stay in the house, and there’s, I’m sure, a lot of listeners that have different interest rates. At what point does it really make sense, and I think you have to add something for the aggravation of going through it because it is, frankly, a little bit aggravating.
Mike: Yeah. It can be, yeah. There’s a lot of work involved.
Jim: With all due respect!
Mike: Yeah. No, absolutely, yeah. We understand that. And there’s a lot of, you know, things to verify and cover, and appraisals and credit reports and all that good stuff. But when you’re looking at what rate you’re at, people ask this question all the time, you know. Should I refinance? And it does go to how long you’re going to be in the house, whether you have a thirty-year fix now or whether you have a fifteen-year fix. You may even have an adjustable rate mortgage. So, there could be instances where your rate would go up, but you’re actually fixing it for the long term. But typically, we say if you can lower your rate anywhere from 1% to 2% from where you are now, it’s definitely worth it looking to refinancing as long as you plan on staying in that home for three to five years to recoup those costs. If you’re going to a shorter term, that could even become a little more narrow because it’ll help you pay off your loan faster.
Jim: All right. See, my own general rule of thumb that I always went by, I needed more than 1%. So, right now, I always thought, you know, if myself at 4.625%, I thought well, if it gets down to about maybe 3.5%, then I’ll start looking seriously. But you’re actually saying that if you’re going to be in the house for, let’s say, five years, and let’s say right now, you’re at 3.75%, you’re actually saying that that would still be a good thing for someone to at least consider and maybe even just do?
Mike: It can be. The last factor in that equation is how much you’re borrowing. The bigger the loan amount, the better the impact interest rate has versus the cost.
Jim: All right, and the reason for that is there are certain costs that are a certain amount, regardless of the price, like an appraisal.
Mike: Right, exactly. Appraisal, usually the lender fees…really, the only fee on a refinance, if you were to pay any kind of points, that would change with the loan amount, or the title insurance. That changes based on how much you’re borrowing.
Jim: Yeah, we’ll talk about title insurance. That happens to be one of my pet peeves.
Mike: It actually is one of mine too!
Jim: I hate paying title insurance!
Mike: So it varies. When you get down to…We’ll have a lot of customers that maybe have a $50,000 or $60,000 loan, and it could be at 4% or 5%. We’ll often look at maybe doing some sort of home equity loan where you have maybe only a couple hundred dollars, and that can still save money or pay down their loan faster. We also have people borrowing additional funds to do home improvements, or pay off other debt, or pay off home equity loans, so there’s multiple levels and reasons.
Jim: Of the loans that you actually make, not just the people applying, but the loans that you’re actually making, and I know that you told me before the show that Dollar Bank is very solid, somewhat conservative, that you have a fantastically low default rate compared to other banks, and obviously, you do that because you’re a little bit more careful of who you’re going to lend money to. Do you have a sense of are most people doing this to lower their rate? Are most people doing it to spread their payment over a longer period? Or some people doing it, they’re actually drawing cash out to maybe pay off a home equity loan, maybe pay off credit cards, maybe go have some fun, or maybe, and I don’t want to get in trouble by knocking a relatively popular strategy, taking money out and then putting it in the market, you know, with some kind of arbitrage technique, which scares the bejeevers out of a conservative guy like me!
Mike: And that’s not the one we’re seeing.
Jim: All right. Well, that’s good.
David: What’s your average rate? I mean, what’s your average loan amount?
Mike: About $157,000. That’s our average. The number one reason, or the number one product people are doing is a fifteen-year fixed rate. They’re lowering their rate and they’re lowering their term. I would say the next level is probably…and those are rate in term refinances where they’re just refinancing the balance on their loan.
Jim: And that happens to be my exact situation, and I’m three years into a fifteen-year loan. The only thing I’m considering is whether I should just get another fifteen-year loan, which would even lower the payment even further, or just say well, I’ll just do a twelve-year and get it paid off in twelve years. I would tell my client do the fifteen to keep the payment low and have use of the cash, but for me, psychologically, like most of my clients, I like the idea of having a paid-off house.
Mike: Right, and you can always take the loan for fifteen and then, you know, make additional principle payments every month, or once a year to pay it off in twelve because the interest rate’s the same. So whatever you apply to that loan, it could pay it off in twelve.
David: But is it still true that the interest payments are front-loaded?
Mike: Yes, they are. Yeah, yeah. So, there’s an amortization to it. If you were advertising it for twelve years, you’d be paying a higher payment than fifteen, which is really your additional principle being applied to the loan to pay it off sooner.
Jim: Let’s say that you got the payment amount for a twelve-year loan, and you paid that on a fifteen-year loan. So you’re obviously paying more than the minimum payment. Would that, in effect, be the same as a twelve-year?
Mike: Yes. If you close on a fifteen-year loan and paid it as if it was a twelve-year (and we can show you that, we get examples of that all the time) that it’ll pay a loan off in twelve years, because it’s the rate. And there’s no prepayment penalty for doing that.
Jim: Oh, that’s kind of a cool idea because then, let’s say you’re three years into it and you don’t want to make the higher payment anymore. Then you can just go back to the fifteen-year payment. You’re not in default, and you’ve actually got some credit because you were paying it at a higher rate.
Mike: Right, exactly.
Jim: In fact, by the way, this is the first practical piece of information from me personally.
Jim: So, if I was wavering between the twelve and fifteen-year loan, I would be better off taking the fifteen-year loan, making the twelve-year payment, and I’d build in extra flexibility, and if I really want to pay the thing off in twelve years, just end up making the twelve-year amortization payment on the fifteen-year loan.
Mike: Right, exactly. And if you look at, when you start to get on those shorter terms, the payments get pretty aggressive. So, when you look at a twelve-year versus a fifteen, it starts to increase rapidly, and you don’t want to be stuck not being able to pay that and have to do something then, so you could just fall back to your fifteen-year payment.
David: Well, would it make the same sense to try to get a thirty-year, or just make the term longer and do it that way?
Mike: Yes, yes, but that’s where the rate comes in.
Mike: Because on a fifteen-year, let’s say it 2 ¾%, on a thirty-year, it’s 3 ½%, and then we have something in the middle, a twenty-year rate, so we basically have three different rates. A twenty-year rate’s like an eighth lower than a…so I would look at those increments. If you were trying to pay it off and had a thirty-year that you wanted to pay off in twenty-five year, then take a thirty. If you had a twenty-year and you wanted to pay it off in eighteen years, that kind of thing. Because the lower the rate, the better. That’s still what drives it is the best way to go is the best rate you can afford.
Jim: I always found it curious the banks, at least U.S. banks, I don’t think it’s true of other banks in other countries, are willing to give people loans that exceed their life expectancy. So, I’ve had clients in their seventies and even eighties take out fifteen-year loans because they wanted use of the money, and they wanted to keep their payment down, and I think it’s really interesting that banks are willing to do that.
Mike: Sure. Absolutely. I mean, in reality, the average life of a mortgage is seven to eight years. So, you know, people pay them off, people refinance, sell their houses and move on. I’ve had eighty-five year olds take out thirty-year loans. First of all, we don’t discriminate based on age, but it’s done quite often, actually.
Jim: Well, that probably gets us into the discussion of reverse mortgages, which I’m usually not a big fan of because I’m a cheapskate, and I don’t like paying the bank’s fee, with all due respect, but we’ll get back to that.
Mike: Yeah, we do do reverse mortgages.
Jim: Oh, I know you do! And the concept, by the way, I love. The concept is if somebody has a bunch of equity in their house and they want to spend more during their lifetime, they get more to spend. So the kids end up with less, but they get more. Although, interestingly enough, Jonathan Clements and I actually did an article on that, and we compared that with just taking out a series of home equity line of credits, and in certain situations, you could save a lot of cost with that. But I want to go back to the conventional refinance, and what I have in front of me is the closing cost worksheet for my own loan, and I want to talk about some of the costs because I really don’t like some of them, and why don’t we go to the one that I dislike the most, and I want to ask you about it and ask if there’s anything that can be done about it. You know what’s coming! Everybody knows what’s coming! Title insurance.
Jim: Man, do I hate title insurance because, in my own case, I think I have refinanced twice, and I had to buy title insurance the first time when I got the original mortgage, and then I had to get it again when I refinanced. So that’s like two bites of the apple that the insurance company got for a couple of thousand bucks each, and now, if I refinance again, it’s going to be another couple thousand bucks, and there’s been no transactions on the house other than I’m borrowing against the house. So, why do I have to do that, and isn’t this just something that a law clerk can click a couple of letters on a computer and get an update? And why should I have to pay a couple thousand bucks?
Mike: Yeah, I agree with you because I’m in the same boat. If I refinanced my house, I’d have to pay it too. But where it comes from, and first of all, when you’re looking at the title insurance fees these days, they’re all inclusive. So they don’t break out of title search. There’s not an attorney’s fee than the separate title insurance policy. In Pennsylvania, it’s always been all-inclusive, and that works for us and against us. What that really means is that no matter what title company we go to, it’s going to be the same amount of the same charge for title insurance based on your loan amount or based on your purchase price if you were buying a house. But when you refinance your house, what happens is when you pay off your existing loan, the title insurance policy that was attached to that loan is no longer in effect. It dies, basically. So we have to, in order to make our loans marketable, security into Freddie Mac or into the secondary market, they require that we have title insurance. And that’s, or course, a good tool for the bank, but you’re right. I mean, it’s just really protecting you because you had an original titles policy when you purchased the house. This is overlaying it a little bit.
Jim: Wait, wait, wait, hang on a second. I borrow $200,000 from Dollar Bank on my original loan, all right? And I pay it off, and somebody after the time I pay it off, somebody sues me saying that they, for some reason, they have a claim to the title, or there’s an easement on the property, or what’s more common in my experience is my driveway is three inches into their property and they’re going to make me redo my driveway. Isn’t my title insurance still valid, and isn’t the insurance company going to protect me even though the loan is paid off?
Mike: Yes, it’s the original title insurance policy you bought?
Mike: When we put the new loan on there, when you’re refinancing with a new loan, there’s no lender coverage on that loan.
Jim: Oh, so you’re talking about lender coverage?
Mike: Yes, yes.
Jim: All right.
Mike: So, what you’re purchasing actually when you close your loan, you’ll see ‘lender’s title coverage.’ So, they’re covering you on the title insurance side.
Jim: All right.
Mike: Now, and we have designed some products where we don’t have title insurance, but to get the best available rate on a fixed-rate loan, we have to get the title insurance, and still, when you do the math, it still works out to your advantage in the long term.
Jim: All right. Now, you just said that that includes the attorney fee?
Jim: All right. So, let’s say…a lot of people think that they assume that they have to pay an attorney to either do the original loan or refinance. Is an attorney necessary?
Mike: No. I mean, the title insurance companies will have an attorney on staff, but it’s not really an attorney fee. It’s the services that you’re paying for the title company, who could be an attorney who’s the agent for the title insurer to close the loan. So, they can’t charge you a title insurance policy and a $500 fee to close the loan or an attorney fee, or something else.
Jim: All right. And if some attorney offers to do this without charge, that probably means he has a deal with the title insurance company. Is that likely?
Mike: Well, it goes back to the state. The state regulates that price.
Jim: Okay, all right. But let’s say I’m a real estate attorney and I’m trying to make a couple of bucks just doing closings and refinances, and let’s say somebody comes into my office, and they say, “Well, how much is it for you to do the paperwork on a loan and close the house?” And let’s just say, for discussion’s sake, he charges $135 an hour, and let’s say it’s a three-hour job. Could he not say, “Well, I’d do it for free,” but then, he has a deal with a title insurance company where they give him a percentage?
Mike: Yes, and actually, that is the way it works. When I say ‘all-inclusive,’ that includes their earnings, or their portion of that is part of that.
Jim: All right. So, somebody should not pay an attorney separately to represent them for a standard single house dwelling?
Mike: Right, and I can’t say they should never have legal representations in buying a house…
Jim: Yeah. As an attorney, I hate talking others out of attorney fees, but…
Mike: But that is the design of the title insurance policy that it’s all-inclusive.
David: Now, if somebody already holds their existing mortgage with Dollar Bank, is there any advantage to doing it again with Dollar Bank?
Mike: Well, as far as the cost of title insurance?
David: Well, as part of the overall cost of the loan.
Mike: No, the cost would be the same either way. It’s a little bit of a streamlined process when we have a loan because we have a lot of the data already and we’re able to do some things, yeah.
Jim: All right. Let’s go back to some more costs. So, the title insurance to me is the most offensive and the one that I like the least, and you gave me a good answer but I still don’t like it! Why don’t we talk about the other big ticket items, which are the origination cost and the credit charge, or what is typically called points. Why don’t we talk about the origination cost first?
Mike: Yeah. That’s basically the bank’s fee to do the loan, and we want to get as aggressive as we can on rate and keep our earnings the same, as opposed to raising the rate and lowering that fee. It’s long-term and it’s going to be best for you to pay. But that’s basically the bank’s fee, and at the beginning of 2010, the regulators came out with a new good faith estimate, a new cost structure, and we have to show one charge. So, we bundled that. Years ago, it would’ve been an underwriting fee, a tax service fee, a doc prep fee, and they’re all bundled into one cost.
Jim: All right, and that is not deductible. Is that correct?
Mike: That would be correct, right. There’s no prepaid interest.
Jim: All right. So, the origination cost is not deductible. On the other hand, that would go into the basis of the property.
Jim: All right, and for what I’m talking about, is when you buy a house, so let’s say you buy a house for $200,000, even if you borrowed the money, or borrow a chunk of it, that is part of your basis. The, let’s say, you make other improvements, not repairs, by the way, but improvements, that increases your basis. What you’re saying is the origination cost increases your basis, and that’s a good thing to know because at some point, you might sell it, and even though there are some tax exclusions like the once in a lifetime, $500,000, etc., sometimes people do end up paying taxes, and it’s an important thing to know. And by the way, we actually have a special worksheet on different types of improvements that people have made and probably forgot to increase their basis. All right, so the origination cost…in mine, it looks like it’s about, oh, maybe about ½ of 1% of the loan.
Mike: Yes. It’s actually a ¼%, yeah. .25%. The 743 you’re talking about, or…?
David: No, the 1475.
Mike: Oh, yeah. In your case, yes.
Jim: All right.
Mike: Yeah, and it’s a fixed cost.
Jim: Oh, a special one just for me.
Jim: Wait, is that a fixed cost, or is that going to go up and…we’re talking about the origination cost, now.
Mike: Yeah, that is a fixed cost.
Jim: All right, that’s fixed. So, that’s not going to go up and down with the loan?
Mike: Right, right.
Jim: And that’s why I guess you’re saying that it’s better to refinance a higher amount because that fixed cost is amortized over a longer amount?
Jim: And David is waving his arms, saying, “It’s time for a commercial! It’s time for a commercial!”
David: Well, here, why don’t you read it? Well, it is time for a quick break, and when we return, Jim and Mike will continue the mortgage conversation. Remember, since we’re live, give us a call at (412) 333-9385.
David: Welcome back to The Lange Money Hour. I’m David Bear, here with Jim Lange and Mike Henry from Dollar Bank. If you have a question for either, call (412) 333-9385.
Jim: Okay, Mike. We were talking about the different costs that the bank has, and both you and I hate title insurance, but I guess it is a necessary evil. And then, we talked a little bit about origination cost, and you’re saying the origination cost does not vary with the size of the loan. It’s kind of like a bank fee, if you will.
Mike: Correct, yes.
Jim: All right, and you don’t get to deduct it, but you can include it in your basis.
Jim: All right. And is $1500 a reasonable estimate?
Mike: You know, we do a lot of surveys and compare it to cost of rate, and what we’re offering…we actually offer a discount to that fee if they open a qualified Dollar Bank checking account. We actually discount that fee $500.
Mike: I know that’s a little bit of a promotion, but…
David: Well, that’s worth it!
Jim: Well, how come you didn’t tell me that?
Mike: Well, we’re getting to that. We’re saving it for the show.
Jim: I’m going to open it up, and then I’m going to close it the next day!Mike: Well, we have a contingency to keep it open for three years.
Jim: Alrighty. The next unpleasant piece of information, another one of the bank charges, is points. All right, now, what are points all about?
Mike: Well, points are…first of all, one point is one percent of your loan amount, and it’s used for multiple things. There’s what’s considered today to be risk-based pricing, credit score adjustments, it can be used to buy down the interest rate, for example, you could go to 2 ½ and pay somewhere around one point to lower your interest rate. So, it’s all labeled points, but it’s a completely different structure over the last two or three years. It gets down to your loan value, your credit score, whether it’s a cash-out where you’re taking additional funds out, whether it’s possibly a construction loan. So, there’s all kinds of different pricing factors that go into it, including whether or not you have an escrow account, which is the case in this particular example.
Jim: Ah, another one of my pet peeves!
Jim: But we’ll get to that pet peeve in a minute. I want to make sure that we understand what points are, how they’re calculated and what the tax implications are. So, one point, I assume, would be 1% of the loan.
Jim: And that would be pretty high.
Mike: In this scenario, yes.
Jim: All right. And in my own case, it looks like it’s one-quarter of 1%.
Mike: Right, right.
Jim: Or 25 basis points.
Jim: All right. So, let’s just say, for discussion’s sake, that to make a nice round number, that I pay $500 of points, which wouldn’t be a terrible estimate. Well, I guess it wouldn’t quite be $150,000, but let’s just say $500, and it is a fifteen-year loan. I can’t deduct that whole $500 in year one, can I?
Mike: Right, no. The way it works is, you can amortize that over the life of the loan, so it’s a few dollars a year.
Jim: All right. So, basically, it would be $500 divided by 15.
Mike: Yeah, right.
Jim: Okay. All right.
Mike: If you notice if you’ve ever had a lot of unpaid points, you should on your annual statement, it’ll show the interest paid and it’ll show points. Like, in my case, I think I paid 3/8ths of a point when I bought my house, and I see that few dollars on there.
Jim: I thought you rich bankers just paid cash!
Mike: Far from it!
Jim: Okay! All right, and then, let’s say you do pay it off early, then you get to deduct all of the unpaid points. Is that right?
Mike: I believe so, yeah.
Jim: Okay, all right. So, that’s another thing I don’t like, is points, but at least it’s deductible. All right. Then, the appraisal fee. That also irritates me. I just got a loan in 2009, and they just appraised the house. The house by any stretch of reasonable, without even thinking about it, has to be worth…even if it’s worth 20% less, the loan ratio works, but you guys want to squeeze another $350 out of me.
Mike: Yeah, I mean, we have to get a new appraisal every time we do a loan. In fact, that’s more restricted now on the heels of 2008 and the mortgage crisis. It’s more important now to have appraisal values.
Jim: But mine was after the mortgage crisis and after the big meltdown, and if you look at the property taxes, it’s still…
David: How about the assessed value now of the property in the county?Mike: Yeah, understood. Now, if you look at assessed value, sometimes that’s to your disadvantage, and when we underwrite a loan, we’re underwriting it to Freddie Mac/Fannie Mae standards, and what they’re doing is saying “You have to get an appraisal. We want an appraisal,” in fact, now, we have to export all of the appraisal data directly to them before they’ll let the loan move forward. Now, like I said, we have come up with products, and on the home equity side, we sometimes will do a reduced appraisal, or we’ll look at current values in the last two years, or assess values. So, there are different products, but when you come back to it, and it’s a 3 ½% thirty-year fixed, or a 2 ¾% fifteen-year fixed, you can’t match that with another product and get the interest savings you would over the life of the loan, and the penalty is paying for an appraisal and title insurance and some discount points. When you do the math, it works.
Jim: All right, all right. Now, the other thing is government recording, $120. All right, now, your cost of that is about, that is, how much you actually pay Allegheny recorder of deeds is going to be, like, $30.
Mike: Well, no. Actually, that’s about what it would be…
Jim: Oh, really?
Mike: …to record the mortgage. Yeah, we record that mortgage, it’s actually…sometimes, we’re a little under when we estimate that, and I guess I should explain…
Jim: Oh, oh, I’m thinking of the cost of just doing a new deed, and you’re actually talking about recording the mortgage.
Mike: Yeah, recording the mortgage. There’s a flat fee and there’s a per page charge, and actually, sometimes, we’re a little bit light.
Jim: Oh, I feel so bad that Dollar Bank is a little light on their charge!
Mike: As far as government recording fees, those are passers, and the same with the appraisal. And I should mention that part of the recent…it’s become part of the Dodd Frank Act, is that when lenders give you a good faith estimate, that there are tolerances to that. So, if they say your interest rate is this and your points are this or your origination charge is this, there’s zero percent tolerance. So, when you go to closing, it can’t be more. They can’t turn around and say, “Oh, this happened or that happened. We’re going to charge you more.”
Jim: Oh, good. I’m going to hang onto this for ten years, and back when it’s at 10%, I’m going to come in and say, “I want my 2.75% mortgage!”
Mike: Well, you have to close in sixty days!
David: And you don’t have a choice of appraiser, you know, the bank…
Mike: Right, yeah. And they categorize those. On some of those, where something that’s required but you can’t shop for, there’s like a 10% tolerance. So if we hire an appraiser and within 10%, recording fees are 10% tolerance, so if something changes, if somebody changes their loan amount or changes their term completely and it triggers some fees, then we just redisclose and have to go with that. But it helps a little bit to level the playing field because for years, we would watch other lenders, sometimes brokers, they would quote a certain fee, rate structure, you get to closing, it’s a lot higher, and you get the moving van out front. What are you going to do? And those days are gone, so we like that.
David: Well, apparently, a lot of the loan mortgage problems were because people were getting appraisals that were far too excessive, that were, I guess based on the market assumptions, the sales values of the, not the actually house, not the property itself.
Mike: Yeah, yeah. I mean, when you do a…an appraiser’s supposed to look at comparable values over the last six months of similar homes within a reasonable distance, usually less than two miles from your home, and then we allow them to go out further if that’s, you know, depending on the property. But there was a period of time where appraisals were being inflated to, because they said, the lender said, “And it has to be here for me to make the loan,” and that was probably one of the bigger problems with the mortgage crisis.
Jim: So, it’s usually going to be to a borrower’s advantage to have a high appraisal, particularly if they’re taking out, you know, something like 80% or 70% of the value of the loan. Now, on a refinance, it might not be as much because, presumably, you started with no more than 80% and you’ve paid down some principle. So, let’s say, in my case, at first, I was trying to get as much money as I could, but now, I’m just trying to refinance what I owe. So, if the appraisal comes in lower than I thought, I kind of don’t care, but if it’s the initial loan and I’m trying to get as much money as I can, then I do care. Is that fair?
Mike: Yeah, that’s a fair assumption. Yeah. And, you know, on a refinance, you’ll care a little bit because sometimes, it’s tight. I mean, one of the things we’ve seen, and it’s unfortunate, but we’ve seen some of the valuations that were, when they purchased a home in 2005-2006-2007, and now the refinancing, the values aren’t supported, or they’re not coming in at the same value, and it makes it a little tougher to approve the loan. It could get to 100%.
David: Now, can you take the appraisal that you get and go to the county and say, “Here, this is what I’ve been appraised for, and you recently appraised me for 50% more that this.” I mean, is that going to…
Mike: To challenge your assess value?
Mike: Yeah, you technically could use an appraisal. They’ll look at that.
Jim: And could it go the other way?
Mike: Yes, it could.
Jim: Does the county have access to any of the appraisals?
Mike: No, no. No, the appraisal is done for the purposes of us to determine the collateral.
Jim: All right, and that’s not a matter of public record? And the county isn’t spying on Dollar Bank and using that information to…?
Mike: No, not at all. Because people will ask that question, you know, will they raise my assessment based on this? No, they won’t. It’s a private document between us and you.
David: But if you choose, you could take it to them and use it as a…?
Mike: Yeah, if you wanted to. If that helped you get your assessed value down, sure.
Jim: And, presumably, you were hiring independent appraisers that don’t have any skin in the game, other than their banker buddy might want to hire an appraiser, but hopefully, if they’re a legitimate appraiser, they’re going to come in with the number that they believe is the right number.
Mike: Right, and that’s what we’re concerned with, and we actually, today, we as an appraisal management company, it’s part of the regulatory requirements is we have a distance between us and the appraiser that I can’t call the appraiser and say, “Hey, you need to change this value.”
David: You’re saying that more care goes into that appraisal than went into the county’s reassessment appraisal?
Mike: It’s possible. You know, I don’t know the methodology completely of what the county does.
David: They used Google Earth Satellite Image!
Mike: But, yeah, there’s much more care. It’s a full appraisal with all interior inspections.
Jim: In the financial world, I like to encourage everybody to understand exactly how much all the financial professionals and fees that they are paying. So, for example, when somebody is having money managed and I ask them how much they’re paying, they say, “Oh, I don’t pay anything. The company takes care of that.” Well, that probably means that they were sold an annuity, and the salesperson made 4%, 5%, maybe even 10% or 12%. So, to me, I wish that everybody had to reveal everything about how much money they were being paid. We are, what is known as, fiduciary advisors, meaning that we have the, not only moral, but the legal obligation to do what we think is in the client’s best interest. And I like to tell clients, “Well, this is what we’re going to do for you. This is how much it’s going to cost.” One of the questions that I would have, and then, I tell people, “This is how I make my money. You know, I don’t make a ton of money, let’s say, in asset management, the first year that you come in. In fact, given all the work I have, I’m going to lose money because I want to put a lot more work into it than when justified by my hourly rate, but my goal is to keep you as a happy customer for the next five, ten, fifteen years, and then, over time, I’ll make my money.” And I explain that to people so they understand how I’m making my money, and everything is up and above board. How does Dollar Bank make their money? Do they make the money on the origination fee? Do they squeeze the appraiser and get some profit there? Do they lend out money at 1% on a CD, charge people 2.75%, keep the difference, some combination? Do you have a sense of how Dollar makes their money?
Mike: Yeah, and I can tell you it’s not things like appraisal fees or title insurance.
Jim: I kind of knew that, but people always secretly suspect that.
Mike: Yeah, and if anything, it’s the opposite. Sometimes we take it on the chin, yeah.
Jim: Again, I feel so sorry for Dollar Bank!
Mike: As you should! But obviously, the origination cost is the bank’s fee, and that, of course, is designed to cover the cost of having processors, underwriters, people originating loans, and by the way, our guys on our staff are sales representatives who are paid on a salary, which is unique to our industry.
Jim: I did notice that, by the way. You know, I went shopping and I went to a couple of places, and I talked with you, and you said, “Okay, I’ll give it to my guy,” and I haven’t heard anything yet, and I called a couple other people and they’re like, “E-mail me! Call me!” It’s kind of obvious how they’re getting paid!
Mike: Yeah, right!
Jim: Where your guys are saying, “Well, I’m getting X thousands of dollars anyway!” I mean, I’m sure that I’ll get it.
Mike: Oh yeah, yeah.
Jim: We just talked a few days ago.
Mike: We’re just trying to connect here, yeah.
David: Can’t you sign the deal right now?
Jim: I just happen to have the paperwork right with me, right?
Mike: But, you know, it’s the interest rate on the loan. And when you look at how banks make money, we invest money in mortgages are compared to other investments right now, a very good return.
Jim: All right. So, it’s not really the origination fee, maybe make a couple of dollars there.
David: The cost of doing business, yeah.
Jim: So, you’re saying the real juice for the bank is lending out money at 1% on CDs and collecting 2.75% on the loan, which is why if you think that interest rates can’t go much lower, 2.75% does…of course, I remember thinking that at 4.625%.
Mike: I tell people that all the time that who would’ve thought that it would have been at 3% or 3 ½% that we were going to go deeper, and it’s not to say it can’t. Nobody knows if it will.
Jim: Right, because maybe a year from now, it’s 1.75%.
David: Well, I’m not doing it until you actually pay me!
Jim: Well, by the way, there are some rates that are actually negative. All right.
David: Maybe this is a good time to take another break, one final break. Jim and Mike will continue the conversation when we return. Again, since tonight’s show is live, if you have a question, there’s still time to call us at (412) 333-9385.
David: And welcome back to The Lange Money Hour, with Jim Lange and Dollar Bank vice-president for residential lending, Mike Henry.
Jim: Getting back to refinances and mortgages and loans, another thing that kind of irritates me, and sorry, Mike, I don’t mean to make you the butt of all the irritations that I have…
Mike: That’s okay.
Jim: But the other thing that I don’t like is I like paying my own taxes, and the reason I like paying my own taxes is I can control it, I often, from a tax-planning standpoint, some years I’m doing particularly well, I want to pay them before year’s end. If I’m going to be in a lower tax bracket in the future, I might want to put them off for a while. And the other thing is, with all due respect, I don’t like to give somebody an interest-free loan, and it seems to me if the bank is escrowing my taxes, I’m giving them an interest-free loan. And then, I don’t know what Dollar Bank’s record is. I would imagine, just based on what you’re saying, it’s pretty darn good, but not every bank has a record of paying real estate taxes on time and taking advantage of the discount period. But you’re going to zip me more money if I’m going to have to pay for the right to pay my own taxes, even though, if you looked at my credit score, it’s near flawless and I pay all my bills. What’s up with that??
Mike: That’s a great question. It really goes to the rate or the price of the loan. Mortgages are priced as if there is an escrow account because that creates, technically, a layer of risk, and I understand that when you drill down to the individual, that can be different. But the market looks at is that carries risk, and unfortunately, it does happen where people get behind on their taxes, or don’t pay them, and it gets to the level where we have a mortgage and the taxes don’t get paid, and it pushes all the way to a sheriff’s sale. So, there is an element of risk and this all really stems from the Freddie Macs and the Fanny Maes, they price that loan with usually an eighth higher in rate, or a quarter of a discount point when there’s not an escrow account. So that’s where it comes from.
Jim: All right. So, I’m fighting City Hall. There’s not a darn thing that I can do about it.
Mike: Pretty much. I mean, yeah…
Jim: All right. And again, you probably have a product that doesn’t do that, but it’s not the best for this kind of thing. Okay.
Mike: Yeah, we do. Yeah.
Jim: By the way, every objection, you keep saying, “Well, we have a product like that, but it just doesn’t work very well for you!”
Mike: Right, right. But it could.
Jim: It could?? Uh-oh!
Mike: But your particular example, it wouldn’t make sense.
Mike: And I know it’s kind of a short answer, but we do that analysis, and we have some no-closing cost products, and sometimes they’re in adjustable rate loans. You can do home equity loans for ten years and get a little closer to this rate. You don’t have the cost. But when you do the analysis, nine times out of ten, this is going to be the best option.
David: Do they still have the category that used to be called ‘jumbo loans?’
David: And how does that change the game?
Mike: It’s a loan amount over $417,000. It’s considered a ‘jumbo loan.’
Jim: And we try to avoid those because they’re higher interest rates, right?
Mike: Right, yeah. In this market today, they’re, in some cases, quite a bit higher. A popular product that we have is a five-year adjustable rate loan, and I know sometimes an adjustable rate is, you know, an arm is a four-letter word.
Jim: Yes. As a conservative money manager financial-type, it scares the bejeevers out of me.
Mike: But in the jumbo market, it’s very common because the rates are extremely low, and for our example, we’ll go to loan amounts of $650 at a rate of 2 ½% for fixed for five years. We allow people modifications where they can pay a flat fee and modify that loan for another five-year period. So, if managed correctly…and there are people who say, “Well, I’m not going to be in this house for more than five years.” So why pay a thirty-year rate if you’re going to be there three to four years?
Jim: Okay. I’m about to go off the subject of refinancing, but I do think it’s fair. You’ve done a good job. I will tell the audience that I looked around and I decided to go with Dollar. If somebody is interested in refinancing, and they’re interested in refinancing with Dollar, can you give them a website, a phone number, a contact? What should they do?
Mike: Yeah. Out toll-free number is (800) 344-5626. That’s actually also (800) 344-LOAN, and you can apply online at www.dollarbank.com. You can do a complete mortgage application online and actually get kind of a quick instant approval or we’ll call you. One of the two. But that’s www.dollarbank.com to file mortgages.
Jim: And by way of full disclosure, I get nothing if you do that!
David: We got a great guest for an hour here, so, you know!
Jim: That’s true. I have. I’d like to switch for a minute because I love the concept of a reverse mortgage. Most of my clients, by the way, are not spring chickens. They are at least in their sixties, more often seventies and even older, and a lot of them take great pride in the fact that they don’t have any debt, and that they have paid off everything, and some of them might have a need to spend more money than the safe withdrawal rate might be. So, just take as an example, somebody has $500,000 of investible assets, and without getting into a long safe withdrawal rate discussion, which by the way, we are going to have. I’ve actually had three shows just on the safe withdrawal rate, and we’re going to have another one. But without getting into a long discussion, let’s use the old 4%. So, 4% times the $500,000 is $20,000. Let’s say they’re getting another $20,000 from Social Security and it’s $40,000. And that’s okay, but they’d really rather spend $50,000 or $60,000. And they’re sitting on a house worth, say, $300,000. And by the way, I should mention that I almost always don’t like reverse mortgages because I’m a cheapskate, and I hate paying the fee. Does it make sense to consider a reverse mortgage, and when does it make sense, and at what point does it say hey, you know, you’re going to pay a fee but that’s what you want, so just pay the freight and live the better life? What’s your legitimate take? And by the way, you’ve been very fair and balanced as far as I can tell. What is your legitimate take on reverse mortgages? My instinct is don’t do it until you’re really broke. Although then, you might not be able to get it. What’s your general feel? Now, by the way, I’ll give you a heads-up. What Jonathan Clements and I did is we said get a home equity loan, and then just take the money out as you need it. And that way, you don’t have those big costs.
Mike: Right, right, and they are. Actually, today in the reverse mortgage world, I mean, we could probably spend a whole show on reverse mortgages.
David: Well, we got three minutes.
Mike: We spent a long time, a very, very long time looking at it when we decided to do our own reverse mortgages, and in today’s market, it’s not what it used to be or what the perception of it used to be. It’s now almost the same, as far as mortgage costs, it’s pretty much the same, actually a little bit less today…
Mike: …than the origination charges and the servicing fees. That’s all kind of gone the way, it’s getting more and more like a regular mortgage product as far as your standard FHA loan. It’s just in reverse. And you can take it as a lump sum. You can take it as a line of credit, or you can take a monthly ten-year payment. We have found them to be a great tool to make seniors stay in a home.
Jim: Let’s talk about, and again, why don’t you spend whatever little time there is left talking about taking it as an additional payment to help people stay in their home and maintain a better lifestyle?
Mike: Right, yeah. What you can do is, based on your age, the value of the property, the older you are, the more you can borrow, and it’s a conservative amount. I mean, if you had a $100,000 house, I mean, this is very ballpark, if you’re 75 years old, you’re going to be able to borrow about $60,000 or $65,000, and you can get that paid out in a…I don’t have a calculator here, but we would figure out, okay, you’d get this much a month, and you would get that as long as you lived in the house.
Jim: Or as long as you live.
Mike: Yeah, as long as you live. You have to stay in the house.
Jim: Right, right, you have to stay in the house.
Mike: If you sell the house, it does. If you’re out of the house for twelve months and a day, then the loan becomes due. In the case where somebody might move into a nursing home, so they’d have to sell the property. But it’s been a great vehicle for helping people stay in their homes by providing the additional monthly income, or maybe just simply paying off an existing mortgage that they have, or credit cards. We’ve gone all the way to the level of paying somebody out of bankruptcy or foreclosure with a reverse mortgage to keep them in their home. And you think of the cost of moving out of a home? It’s more expensive than staying in there and paying the cost.
David: And you have the benefit of staying in your home.
Mike: And it’s financed into your loan.
Jim: Well, you’ve peaked my interest because I always assume that there are these fantastic fees involved, but you’re saying not anymore.
David: Well, I think this is a good point to say thanks for listening to this edition of The Lange Money Hour, Where Smart Money Talks. Thanks also to Mike Henry from Dollar Bank for his excellent insights. As always, you can hear an encore broadcast of The Lange Money Hour and today’s show at 9:05 this Sunday morning, here on KQV. You can always access the archive of past shows, including written transcripts, on the Lange Financial Group website, www.retiresecure.com. And please join us for the next new Lange Money Hour next Wednesday, August 29th, at 7:05 pm, right here on KQV. Our guest will be estate planning transition expert Roy Williams, who’ll offer advice on preparing your heirs to be good stewards of the assets they’ll someday receive. I’m David Bear.
James Lange, CPA
Jim is a nationally-recognized tax, retirement and estate planning CPA with a thriving registered investment advisory practice in Pittsburgh, Pennsylvania. He is the President and Founder of The Roth IRA Institute™ and the bestselling author of Retire Secure! Pay Taxes Later (first and second editions) and The Roth Revolution: Pay Taxes Once and Never Again. He offers well-researched, time-tested recommendations focusing on the unique needs of individuals with appreciable assets in their IRAs and 401(k) plans. His plans include tax-savvy advice, and intricate beneficiary designations for IRAs and other retirement plans. Jim's advice and recommendations have received national attention from syndicated columnist Jane Bryant Quinn, his recommendations frequently appear in The Wall Street Journal, and his articles have been published in Financial Planning, Kiplinger's Retirement Reports and The Tax Adviser (AICPA). Both of Jim’s books have been acclaimed by over 60 industry experts including Charles Schwab, Roger Ibbotson, Natalie Choate, Ed Slott, and Bob Keebler.
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