Nick Pakulla - Mortgage Lender Loan Officer in MD, DC, VA

Should I refinance to a 15 year mortgage? A number of borrowers who have the equity and cashflow are making the switch and refinancing to 15 year mortgages.  15 year mortgages are amortized over 15 years instead of 30 years, so the payment is slightly higher but the loan is paid off much sooner.  Also 15 year mortgage rates are much better than their 30 year counterparts.

The benefits to refinancing to a 15 year mortgage: If you are buying your "final" home in your mid 30's would it be great to know you'd be done with your mortgage payment when you turn 50!? Rates are about 0.5% to 0.75% better.  Ie: if 30 year rates are around 4.25-4.5% you can expect 15 year to be between 3.5-4% On a $300,000 30 years mortgage at 4.5% you will end up paying $247,000 in mortgage interest.  On a 15 year at 3.75% you would pay only $93,000 in mortgage interest.  That is a difference of $154,000!

There are a few caveats to the numbers above that are worth consideration:

1. On the $300,000 mortgage your monthly principal and interest payment on 15 years would be $2182 as compared to $1520 on a 30 year. 
   
   
2. If you made the equivalent $2182 payment per month on the 30 year mortgage at 4.5% your mortgage would be paid off in 16 years and 2 months, but with a total interest cost of $123,000.  In this scenario the actual savings of the 15 year is $123,000 - $93,000 = $30,000!
   
   
3. Financial advisors would argue that you can earn a rate of return higher than 4.5% and putting more money into your home vs. investing it may not ultimately be the wisest choice.  (Realizing those gains requires a disciplined investment strategy)

Bottom line, there is something great to knowing that your mortgage payment will be done in 15 years, plus you pay down principal much faster.  If you are disciplined and think that investing your money would yield greater returns a 30 year may be your best choice.  Happy refinancing!  Please feel free to call me or drop me an email if you have any questions, 301.585.7283.  I can also connect you with a qualified financial advisor to help guide you with your specific situation.

With new construction picking up in Potomac, MD. Should builders be allowed to give incentives for using their recommended or affiliated lender?  

Often when purchasing a newly built home builders offer discounts, rebates, closing costs, or upgrades, only if the purchaser agrees to use the builder’s mortgage lender. 

While it is understandable that a builder would want to refer customers to reputable lender(s) they know and trust, enticing customers with large incentives to use a certain lender may be considered a borderline violation of RESPA.  It becomes even more controversial when the recommended lender charges higher than market rates and or fees for their services.  After all, are Potomac real estate agents or sellers allowed to give incentives for using their recommended lender?

Image: Bill Longshaw / FreeDigitalPhotos.net

While I have been noticing a lot of new construction in Potomac, MD, a majority of the new construction is done with construction loans instead of the builder constructing the property with their own money and then selling the property with conventional financing.  This post is addressing the scenario where a builder constructs with their own funds and then they sell the properties with conventional financing (construction loans usually do come with higher fees as they are more at risk and require much more coordination between the bank, appraiser, builder, and loan officer.)

RESPA’s required use definition is “a situation in which a person must use a particular provider of a settlement service in order to have access to some distinct service or property, and the person will pay for the settlement service of the particular provider or will pay a charge attributable, in whole or in part, to the settlement service.  However, the offering of a package (or combination of settlement services) or the offering of discounts or rebates to consumers for the purchase of multiple settlement services does not constitute a required use.  Any package or discount must be optional to the purchaser. The discount must be a true discount below the prices that are otherwise generally available, and must not be made up by higher costs elsewhere in the settlement process.”

On the surface the builder incentives do not appear to be a RESPA violation, however, the last sentence states that “the discount must be a true discount below the prices that are otherwise generally available.”  So if the recommended lender is charging higher than market rates and fees, or if the builders are marking up their homes more to offer the incentives it could be considered a violation.  If the lender is offering extra services and flexibility required for new construction, are the higher fees justified?

In the builder’s scenario, it is difficult to prove whether items are being provided at a higher than market cost, and whether builders actually gain anything financially from the use of the preferred or affiliated lender. Clearly new construction has slightly different lending rules, and potentially different timelines than normal sales, so it is understandable why the Potomac Maryland builder may want to heavily incentivize use of a lender who is able to accommodate to the unique circumstances that come with new construction to ensure that transaction will go smoothly.

RESPA rules aside do you think it is ok for builders to do this?  Should RESPA enforce practices such as this or are they overstepping their bounds?