Holy crap! My mortgage is jacked! Advice needed

Step 1 ask you current lender if they have like a no closing costs flout down option for your interest rates (e.g., Wells Fargo has this option). If they don't, forget them and go to Step 2.

Step 2: Refinance, refinance, refinance, REFINANCE. Get at least 3 good faith estimates--preferably from lenders referred to from trusted sources or unbiased (BBS/friends). You should be able to get 5.85 in a 30 year with no points (but some closing costs--detailed in good faith estimates, see below).

WHY?
1) though you didn't say home much you put down, assuming you put some down (5%-10%) with a little appreciation the last 2 years with a good appraisal you may be able to get rid of PMI all together. It may also be possible even if you put less down depending on appreciation in your area.

2) wrap the closing costs and the extra escrow (if legit) into paying off the new loan over 30 years.

Given all the issues you are facing I think this is a slam dunk for lowering you monthly payment substantially and putting you in better financial position the next 30 years.

 

The first thing is to call your current mortgage company and talk to them first. They may have a streamline re-financing plan to fix this situation with minimal paperwork.

 

If you don't have a prepayment penalty, I'd refinance with another company.

 

If you can't afford the new payment it may be.

But if you're just $5K short can you get a line of credit vs your house and pay that off over time.

The interest rate may be slightly higher (6%) but you won't have to pay $2-$3K to refinance.

My solution would be:
1. Borrow the money on a line of credit secured by the house (interest will still be tax deductible)

or if that doesn't work:

2. Refinace

 

I think what happened to you is what people have mentioned already: You were not escrowing enough to cover your taxes for last year because you were still on the unimproved tax value estimates for last year.

This happens at the two year mark for a lot of new homes.

You buy the house. Let's say the lot is appraised at about $30K.
You escrow to pay the taxes on that for the first year...($1,200).
This is actually a tax break for people who buy new homes and live in them for a year at the unimproved rate..

At the beginning of the next year, you get reappraised. Let's say your house is $100,000+land($30K)=$130,000 appraisal value. So taxes would be about $5200 for year 2.

Here is the problem. Your mortgage still bases your escrow on last year's taxes...so for the second year in the house, you are only paying in enough escrow to pay for $1,200 worth of taxes, even though you will end up paying $5,200 for the year. That leaves your escrow account short by $4000.

For examples sake, let's keep out the increase in property value for year 3 and just keep it the same at $130,000.

At the beginning of year 3 (you've lived in the house 2 years), the mortgage company looks at how much taxes you paid the year before...you paid (actually, they paid) $5,200. The mortgage company assumes that year 3 will have about the same amount of taxes as year 2....so they up your monthly escrow to cover the amount you will pay for year 3. They also allow you to pay the $4000 you were short in your escrow over the year....so you are paying $333 more per month to pay the $4000 they paid for you for year 2 + $333 more per month to pay for the $5200 in taxes you will have for year 3....thus, year 3 is a painful year for people who did not tax plan accordingly.

In this example, for year 3, you will pay $666 more per month on your mortgage. It will, however, drop in year 4 because you will have paid the $4000 you owed them from year 2 off, all things else, held the same.

Here is the real reason why this happens (its not a builder trying to dupe you, or the mortgage company, it was poor tax planning).

The real reason this happens is that you've taken a tax break from the first year you lived in the house and projected it forward (only applys to new houses). You only get it for one year.

Also...mortgage companies only look at your appraisal value to determine escrow ONCE...when you buy the house...they never look at it again. They base the escrow off your taxes paid previous year from year 2 on. So if your appraisal goes from $30K to $130K (as in the example) the mortgage company doesn't know and only bases their escrow amounts on the taxes you paid the first year (based on 30K).

Here is what you can do to relieve the high monthly payment pressure:

When you buy the house, guess what it will be appraised at and start saving for that amount for year 2 taxes.

Also, at the end of year 1, when your appraisal comes in, you can have the mortgage company re-estimate your escrow for year 2, and increase the amount per month then, but avoid the HUGE amount in year 2. OR You can just let the escrow be defficient for year 2, and save yourself for the big amount you'll pay at the end of year 2 and just make a lump payment to the mortgage company when they pay your year 2 taxes from the defficient escrow. This would keep you from having to pay the (from the example) $4000 you owe them from not having enough in escrow in year 3, you would only pay the additional escrow that you'll have to pay in taxes for year 3 anyways.

Whew!

OK...another thing...taxes ARE expensive, BUT buying your house has these advantages over renting.

1) You build equity in the house (you own the house)
2) When you don't want to live there any more, you USUALLY can sell your house for a profit, plus, if that was your primary residence for the last 24 months, any capital gains on that house are tax FREE up to $500,000 EVERY 2 years. In theory, you can build a new house every 2 years in a good part of town, and barring a housing collapse, can make tax free profit every 2 years...in theory, if you keep to the same size house or only upgrade a little each time...and put more and more down each time...after 5 houses (10 years) you have a paid for house.
3) When you rent you don't get anything in return, plus, you are paying property tax...its part of your rent, you just don't realize.
4) When you buy, you can deduct your interest payments and property taxes every year...thus a big tax benefit that can almost negate the negatives of having to pay interest and property taxes. (on a side note, you can claim property tax any year you pay it, even if its not that year's property tax...so if its your first year in a house at just the lot value...and you don't make a bunch of interest payments, because you only lived there half a year or whatever, and the itemized deductions don't add up to the standard deduction (if you married a big possibility this year) then don't pay 2003 property tax until Jan 2004 (not due until 31st January)... and pay 2004 property tax in Dec 2004...so you made two property tax payments in 2004...on 2004 deduct BOTH property tax payments.

My longest post ever...I'm done!

 

They didn't "take over", it sounds like your mortgage got sold. A very common practice, but in your case, it sounds like your original company got over on you then bailed.

I'd begin looking into refinancing options ASAP.

 

Oh...by the way...the new amount has nothing to do with principal and interest, only escrow due the the reasons I mentioned above.

I'm not sure refinancing is the best option. If you have the money, I'd pay the lump sum that you owe them for having a defecient escrow...that should drop your payment now, rather than next year (it will naturally drop next year as you pay off the additional escrow amount that you owe them)

 

No problem. It is a hard lesson to learn and I have the advantage of having a CPA for a wife and a builder for a father...so I know a little about this stuff.

I have a word of advice. If you are good with money, don't escrow. Only pay principal and interest to the mortgage company.

I know it is really easy to get into the habit of escrowing...and they pay the bills for you, BUT you have several advantages by paying your insurance and taxes yourself.

1) If you estimate your taxes at the beginning of every year yourself based on your new appraisal, then you can make payments to your own savings account in that amount every month and pay the taxes at the end of the year when you get the bill. This keeps you fom getting low or negative escrow accounts. You will also know exactly how much you will pay every month, every year...so better budgeting can ensue.
2) YOU control the money that you save yourself. You earn interest on it if it is a good savings or money market, not the mortgage company. The mortgage company DOES have an advantage for having you escrow as much as possible. They earn interest on YOUR money. Also, the money is liquid if a medical or tragic emergency comes up and you need it.
3) You can pay your taxes on the data of your choice. This allows you greater control of which year you take your deductions from you taxes.
4) It promotes budgetary knowledge of where you keep your money, you plan your taxes better, you plan your budget better and you don't get caught with surprises.
5) You know EXACTLY how much you are getting appraised for...and can file an objection to the appraisals accordingly if they get too high. (note: if you the country appraisal ever gets = to the actual fair market value of your house, you are appraised too high) On average, a county appraisal is about 70-80% of fair market value. PLUS, (and a surprising number of people don't realize this) your county appraisal has NOTHING to do with market value of your house. My brother and sister in law bought a house where the previous owners had REQUESTED a higher appraisal so they could ask more for the house. This is STUPID....you always want the county appraisal as low as possible. It is actually a selling point to have a low appraisal.

OK...I'm done.

 

I'm quite sure refinancing will lower your monthly mortgage or you payment will be close to the same if you roll your outstanding debt ( this will probably constitute a cash-out equity in which case your interest rate will be higher than if you just refinance the mortgage debt).

However you only want to refi if your are 90% sure you will live in the house at least 5 more years. Otherwise you probably wouldn't get your loan costs back out of your selling price.

Faos, you need to be honest with yourself about whether you might have gotten yourself into a house you can't afford. You might be able to justfy funding a larger house at the expense of your retirement savings in that the larger house appreciating at the same rate as a smaller one will yield more equity when you sell it in the future but that does mean you will have to move at retirement, and it does limit your diversification increasing your risk level.

If you cannot comfortably pay your bills and fund your savings you may need to put the house on the market and downsize. That or deliver pizza at night or gasp! quit paying for golf.

 

Wow, that's a lot of tax you need to pay. This is what happens when you don't have state income tax, they need to collect money for schools/services somehow. The problem with high property tax is that it makes real state less attractive as an investment option. (and you get less growth in property value).

Just as a reference, I pay just over 5k a year in taxes for a house that has appraisal value of 400k+.

There isn't much you can do to lower your tax obligations, only thing you can do is try to get out of escrowing the tax and pay the tax yourself, that way you have some flexibility to arrange the payments.

Refinancing, 6.5% is certainly a little high these days. You should look into refy, try to look for No Points/No Closing options. Remember, anytime you can get a No Points/No Closing loan with lower interest rate, you should do it (even its only 1/4% lower). Because you pay nothing to lower your rate.

However, when the loan has closing cost, you need to think about how much saving you get per month you will get with the lower rate, and in how many month you will break even. If you don't expect you will refy again during that period, then do it.

This really comes down to predicting the interest rate.

On more thing, have you taken a look at ARM rates, they are much lower than 30 fixed. a 5/1 or 7/1 ARM is in the mid 4%. Since your loan value is relative small, any money you saved from the lower interest rate can help you pre-pay a little faster.

 

Here are a couple of thoughts:

1. Has the mortgage company escrowed your hazard insurance since day one? If not, they could have forced place insurance which does not cover you and is really expensive.

2. Call some insurance agents. See if you can get the insurance cheaper than the mortgage company is getting it for. If so, get with the mortgage company about switching to the cheaper (but still the same quality of coverage) policy.

 

The two things aren't necessarily related. There are states with both high property tax rates and state income taxes. There are also plenty of areas where property taxes are lower as a percentage, but the valuations per square foot are far higher.

For example, if you have a $400,000 home in Amarillo, you're living in a place with 6,000 square feet or more. A $400,000 house in Silicon Valley doesn't buy anywhere near as much.

Of course, if not for Prop 13, property tax rates out there would likely be higher than they are already. So, instead of an income tax, we need a tax limiting law like California (which relates to our fear of adding an income tax. Just like the "temporary" raise in the sales tax to 5% in the early 1980s has never gone away and has, in fact, gotten bigger, it's unlikely adding an income tax would lower the property tax rates. We'd simply end up paying more in taxes than we do already).

And to me, Faos taxes seem high. The total property tax rate here in Plano was roughly 2.5% last year, rather than the 4% to 5% people keep talking about in this thread.

 

He lives out in Ft. Bend county, which means there is a pretty good chance he pays MUD taxes, on top of the county and ISD taxes. For some people (including me), MUD easily pushes their total tax rate over or close to 4%.

I cant speak for him, but my MUD taxes are the highest of all the tax rates. In addition, MUD doesnt give breaks on homestead exemptions.

My MUD taxes last month were almost $3,000, which was almost half of my total tax bill.