Jon Lafferty:
Hey everybody, welcome to Avoiding Real Estate Turbulence Podcast. This is your pilot, Jon Lafferty with Century 21 Town & Country.

Tony Abate:
And copilot, Tony Abate, with Ross Mortgage, and we are your real estate pilots. Our job is to be your real estate advocate, and also make sure you’re educated about the buying and selling process. We’ll keep you informed throughout, until we get you safely closed.

Jon Lafferty:
In a real estate transaction, there are many reasons why you can encounter turbulence. Today, we are going to talk about something that’s pretty prescient in today’s news: refinancing, interest rates. Tony, I have a lot of clients that are starting to ask me whether or not this may be a good time for them to refinance, and what things they should think about, and how do they know if the rate that they’re getting is worth it, and how much should an interest rate be less than what they’re currently financed at to make it worthwhile? All those kinds of questions I get, and I don’t know what to tell them so I always send them your way to talk to you about it. Maybe we can talk a little bit about that today, and maybe shed some light on the whole process.

Tony Abate:
Yeah, well thanks for that, Jon. Yeah, interest rates are really attractive right now. Contrary to what all the pundits were projecting at the end of 2018, interest rates are very, very favorable, and there’s predictions that they’re going to reach all-time lows in the relatively near future.

Jon Lafferty:
What would be an all-time low?

Tony Abate:
Gosh, so 30-year fixed rate loans in the low-3% range. We kind of bottomed out in the three and a half range a couple years back, and we’re close, we’re in the high threes right now. There’s a lot of signals that are suggesting that that’s going to happen. Whenever this happens, the chatter about refinancing certainly picks up, and you certainly see the advertisement, the blanket statement, “Now is the time to refinance.” To your point, I would say, sometimes it is, and maybe for some people it is, but it takes an analysis, just like anything else does. The opportunity is there, interest rates are very favorable right now.

Tony Abate:
The thing that I would advise relative to that is, when interest rates do go down, they can be fleeting. When the experts are projecting that interest rates are going to go down, they never go down in a nice, convenient, linear, straight line. It’s a bumpy ride, and in fact, even though there’s a lot of chatter about low interest rates, over the course of last week they actually increased by about 0.25%.

Jon Lafferty:
How does that happen?

Tony Abate:
In the course of a week’s time, that’s pretty extreme. The predominant trigger most recently had to do with the talk about the tariffs, are they on, are they off, are they good, are they bad?

Jon Lafferty:
Wait, tariffs affect interest rates for people to get a mortgage loan?

Tony Abate:
Yes, they do. I’ll even go one step beyond. The talk of the tariffs affect the interest rates, they don’t even have to be there, it’s just the conversation about they’re coming, or we’re thinking about it, or, “Hey, watch out China,” whatever the case may be. Interest rates are always a function of the strength of the economy, and one of the overriding things that’s thought about right now is that as tariff activity increases, there’s suggestion that that’ll be good in the long run, but in the short run it’s going to pinch the economy. Goods and services get more expensive regardless of who’s responsible for the tariff, at the end of the day, the consumer really foots the bill for that when you think about it. When that kind of thing happens, the economy tends to slow because people can’t just buy as many goods and services, the economy slows.

Jon Lafferty:
Supply inflates, demand goes down, prices drop.

Tony Abate:
Right, yeah. When those things cause the economy to slow, that always tends to bode well for interest rates. That’s kind of where we’re at right now, but then most recently, as there was suggestion from Washington, “Hey, maybe we’ll give China some breathing room, maybe we’ll give them a break,” then the experts on Wall Street decided that things are in good shape, so let’s jump back into the stock market, and interest rates started to climb in response to that. Yeah, I know, it’s an illogical chain of events for sure.

Tony Abate:
It’s a worthwhile pursuit for folks to get a mortgage checkup now, no doubt about it. It’s one of those things where the cost of money is really low right now, so it’s the cost of a phone call to find out if this is something where a homeowner should strike and refinance their home.

Jon Lafferty:
Where does the whole process start then? They give you a phone call and say, “Tony, hey, I bought this house a year ago and my interest rate was here, do you think it’s worth looking into refinancing?” You and I were actually talking about this the other day, and one of the things that I hear people mentioning over and over again are zero out of pocket costs refinancing, or you pay the costs and over a certain number of years, if you’re staying in that home for a certain number of years you’re saving this amount of money over that period of time. Can you go into detail about those, maybe some scenarios about how that works? Is a no-cost refinance mean that you’re just rolling the money into the loan, and that’s why it’s zero out of pocket?

Tony Abate:
That’s a good question, because there are two different things. There’s a genuine no-cost refinance, and in my book, no cost means no cost, and that’s the way it should be presented to a consumer, and then there’s no out of pocket refinances. The difference between the two is, a person can have costs associated with the refinance, and it’s a mortgage so it’s going to have closing costs like any other mortgage would, but if somebody borrows a little more money on that refinanced mortgage to pay for those costs, it’s a no out of pocket refinance. Doesn’t mean it’s a no-cost refinance, just means it’s no out of pocket. A consumer needs to ask those questions.

Tony Abate:
Back to your initial question, of where does a person start, where do you go, and the first place is really, where do you stand presently? Present interest rate, present balance, at least a guesstimate as to where the value of the home is, and what are you looking to do? Are you going to be staying in the home for a duration of time? Or maybe the future for employment says, “Hey, I’m going to be transferred in two years.” Is there opportunity to maybe pay off that loan in the reasonable future? That should be taken into consideration. Step one is analysis of where does that person stand right now.

Jon Lafferty:
Okay.

Tony Abate:
Once we have that, we expand into, what are you trying to do with the refinance here? The knee jerk is, if interest rates are low, I should take my higher interest rate mortgage and go into a lower interest rate mortgage. That’s not untrue, but there’s more to it than that. Folks are generally getting into this for a few different things. Of course, the first one tends to be, I want my rate lowered and I want my payment lowered, and that’s absolutely a fair pursuit and it makes sense to do so. Sometimes folks can do a refinance, and maybe the interest rate doesn’t change a lot but they can remove the PMI, the private mortgage insurance, on the loan. That is money that’s being spent monthly that at the outset, when that person bought the home, that was a legitimate cost and it helped them buy a home, or maybe they couldn’t otherwise buy it.

Tony Abate:
Now that they’re in, it’s really just money that’s being paid monthly that’s not working for that individual. A person might want to shorten the term of the loan. One of the things that we like to do is say, “Well hey, you’re in a 30-year fixed rate loan now, maybe you can get into a 15-year loan.” Not only is the interest rate going to be lower, but of course, the overall interest expense is going to be smaller because of the shorter term. It’s an interesting analysis to say, “Well, you know what? My payment isn’t going up all that much, and I’m cutting that loan in half,” that’s a biggie.

Tony Abate:
Then the last thing is, folks will seek to sometimes do debt consolidations or home improvements by using newfound equity in their home as the market has run up over the last couple of years.

Jon Lafferty:
In order to do the last one there, would you typically just call that a cash out refi?

Tony Abate:
Exactly.

Jon Lafferty:
If somebody wants to do a cash out refi, what’s the minimum amount of equity they need to have in that home in order to justify that? Do they have to have at least 20% in there in order to do cash out refi?

Tony Abate:
Right, that’s exactly the magic number for most loans. To expand on that, that’s really what the equity position cannot exceed after taking that cash out. Round numbers, if somebody owns a home and it’s worth $100,000, and they owe $50,000 on that home, we could do an $80,000 mortgage, which would put $30,000 cash in hand, and then they’ve now financed 80% of the value of that home.

Jon Lafferty:
Does the lender follow the money at all? In other words, take that scenario, there’s a $30,000 cash out, he’s got $30,000 in his pocket and decides to travel around the world for a year.

Tony Abate:
No, to be honest with you. There’s one exception to that though, because we ask, we do ask, and 90% of the answers, we don’t care what the answer is, but there is a category where we do care, and that is if they’re going to use those loan proceeds to purchase another piece of real estate. If that’s the agenda and it’s appropriately disclosed, now we’ve got to factor that in, because now there’s another piece of property that’s going to have expenses that come into play.

Jon Lafferty:
Interesting.

Tony Abate:
The numbers are compelling, can I give you a couple of scenarios?

Jon Lafferty:
Yeah, please, let’s run through a few scenarios.

Tony Abate:
We won’t go too deep into numbers, because it’s tricky over audio where we don’t get to write on a whiteboard or anything. An example, if somebody has a $200,000 mortgage and they’re at 4.75% right now, which really, on the grand scheme of things, is not a terrible rate.

Jon Lafferty:
That’s a house that you bought back in February, March.

Tony Abate:
Well, you’re right, yeah. It’s not that long ago. Over the life of the loan, that individual will pay $175,400 towards interest on the loan. Now we’re kind of being textbook here, because the reality is, most folks don’t see their 30-year loan from beginning to the end, life events happen, but mathematically, this is important. If they refinance from 4.75 to 3.75, then the interest expense over the life of the loan is $133,400, which is a $42,000 difference. It’s pretty substantial, for something that might cost them two or $3,000, but the interesting thing that I think is, when we take that same $200,000 loan, plug it into that 15-year fixed rate loan which is going to come at a lower rate, so let’s say 3.75%, their interest over the life of the loan goes to $52,900. That’s $122,000 less than the same loan over 30 years.

Tony Abate:
It’s big numbers for what folks might say is not a big change in rate. Years ago, somebody had come up with a rule of thumb that said, “Well, you should not refinance unless you’re getting a 2% reduction in the interest rate.” That would probably cause a lot of people to lose opportunity, because I would argue that if somebody is going to be in the home maybe for just a couple more years, a 2% drop in rate is not enough. However, if somebody is going to be in the home for 10, 15, 20 years, the “forever home”, as we sometimes refer to, then 0.5% drop in interest rate is probably justifiable. We’ve really got to look at the individual situation that they have, and the plans going forward to the best extent that we can.

Jon Lafferty:
In a situation like that, a 1% drop in interest rate from 4.75 to 3.75, what would something like that lower their monthly payment, how much would that lower their monthly payment?

Tony Abate:
On a $200,000 loan at the 4.75%, the principle and interest payment is $1,043. By dropping that same loan amount to 3.75%, it goes to $926, so it’s about $120 a month. What would that be? Between 14, $1,500 per year in savings, which leads to the next part of all this analysis, and that is break even. When does this make sense?

Jon Lafferty:
The break even point. Can you explain the break even point?

Tony Abate:
Sure. When somebody is refinancing basically from the same type of mortgage that they’re in presently, so from a 30-year loan to a 30-year loan, it’s relevant to say, “Well okay, my payment’s going down, but if I had to pay a certain amount of money to get there, when does it all start to make sense?” If somebody got a really, really low rate but they had to pay $15,000 to get there, it’s going to take them a really long time to recoup those costs. What we do, I work in a really simple way, my brain is not terribly sophisticated, so we look at what is the cost, what is the savings, and we do a division problem.

Tony Abate:
Very simple, if a refinance maybe costs $2,400, let’s just say, and that’s not too far off, and somebody is saving $100 a month, then in 24 months, they’ll have recouped those costs, two years they’ll recoup the cost. Then that goes back to the other thing we talked about, how long do you think you might be staying there? Because let’s face it, breaking even is no fun. If you’re going to do that, you want to at least realize the genuine saving going forward, but two years on the grand scheme of things, for home ownership, is pretty short.

Jon Lafferty:
It’s a small window.

Tony Abate:
It really is, yeah. Doesn’t really work when you’re going from a 30 to a 15-year or doing a cash out, you’ve got other elements there to have to take into consideration. It’s not quite the clean break even analysis.

Jon Lafferty:
Well, sometimes going from a 30 to a 15-year could work, especially if they have enough equity in the home and they refinance, and they’re refinancing a smaller amount for those 15 years, to pay it off quicker, it would make sense then.

Tony Abate:
It does. In fact, one of the other things that I scratched out this morning, a loan balance doesn’t stay in place, folks pay it down. One scenario that I came up with is that, let’s say somebody did start out with that 4.75% mortgage to $200,000, and then they came to see us five years down the line. Okay, and here we are five years later, rates are about 3.75%. Well, their loan balance now is about $183,000, so they’re at $1,043 per month now, they can go into a 15-year fixed rate loan, they’re payment’s going to be $1,283 based on that new lower balance. They’ve cut the loan term in half, but their payment increased by, what, about $250 a month.

Tony Abate:
That’s a pretty darned good return, so I guess the message is that it’s not automatically a huge increase in payment just because somebody has cut that loan term in half. It doesn’t cost a dime to look, folks really should be checking into this right now.

Jon Lafferty:
What do you say to the person that is out there, and let’s say they’re at the 4.75, they bought their home in February, and so they want to wait though. They think that interest rates, they’re expecting another cut in interest rates in September, and probably expecting another one, maybe one or two more next year, and they’re going to wait. Is there a benefit to waiting to see what happens, or is the smarter play to refinance now if it makes sense, refinance again maybe in another six months if it makes sense, to continue to check and make sure the numbers work? Maybe the numbers don’t work now, but at least have that conversation.

Tony Abate:
Absolutely, absolutely. That circles back to what we brought up a minute ago, Jon, that you said, that we didn’t dive deep into, and that is the genuine no-cost refinance. They’re out there, they’re a legitimate thing, but the reality is, a no-cost refinance comes at a higher interest rate than the standard refinance does. On the surface, that might sound like a bad thing, but not necessarily. Here’s an example. I mentioned a 30-year fixed rate loan, 3.75%, maybe somebody can do a loan at no cost but their interest rate is going to be 4%, so they’re above the market.

Tony Abate:
As we started out the conversation, you’ve got to look at where they’re starting at, where do they stand right now? If they’re at 5.25% and they’re going to 4%, which isn’t as low as they could go, but they could go to four without any cost at all, there’s nothing to lose. There’s nothing to lose, so they have that big spread, they dropped their rate 1.25%, they didn’t spend a dime to do so. Their break even basically happens with their first house payment.

Tony Abate:
Let’s take it one step further and talk about the scenario that you mentioned. What if there was a concern that the rates might go down further? That’s a perfect tool, if that’s what a person is thinking. If they’re already at a rate that they know is higher than the market, they know that there’s some opportunity now, but they think there’s going to be opportunity in the future, a no-cost mortgage kind of straddles that fence, because they could do that second refinance if they’re right and get that lower interest rate.

Tony Abate:
What’s become almost a meme on social media is the folks out there that are saying, “Well, goodness, I’m at a 7% mortgage right now, I could get 3.75% but I’m going to hold out for two.” It’s like my goodness, you’re still spending that interest money all along while you’re waiting for an interest rate that may never happen. I’d love to have 2%, who wouldn’t, but it just may not be realistic. It’s what we tell our kids, it’s like, “Make good choices here.” If you’re going to financially benefit, it’s risky to wait for a future event before you pull the trigger.

Jon Lafferty:
It’s true. A question going through my mind, and I’m sure other people’s minds, how can you do a zero cost to the consumer refinance? Where is the lender making their money? There has to be something hidden in there, some clause that I’m going to have to give you my first child after six months.

Tony Abate:
Yeah, where’s that catch?

Jon Lafferty:
How is the lender making money?

Tony Abate:
Well, and I will tell you that I have no qualms at all about being very transparent with folks on how this works, and hopefully other lenders do the same. It basically has to do with the value of a loan at a given interest rate. Let me back up an example, so if a plain old vanilla, standard 30-year fixed rate loan is at 3.75%, and that’s my strike price, that’s what I need to close a loan at to earn my typical profit, so in doing so, I would have to tell that borrower, “Okay, well this is my par level, if you will, of the interest rate,” but all the costs necessary to obtain that financing you’ve got to pay.

Tony Abate:
You’ve got to pay the appraiser, you’ve got to pay a title company, et cetera. Well, if I offered that individual a loan at 4%, I’ve now got a loan that has more value, it’s a note that’s going to pay off a higher rate of interest to the lender. It’s more valuable to have, and so I’m essentially telling that borrower, “If you agree to take that higher interest rate, I’ll pay those third party costs that we were talking about a minute ago,” because even though I’m paying those costs, the fact that I’m closing a more valuable loan brings me back to sea level.

Tony Abate:
It’s six of one, half a dozen of another to me, as a lender. I think where the consumer has to be careful is, it goes back to that question, how long are you going to be there? Because needless to say, over time, that 4% rate is going to be measurably more expensive than the 3.75% rate where they pay at the cost, in fact probably far more than what those closing costs really were.

Jon Lafferty:
If you have somebody who’s only going to be there for, the plan is within seven years moving up, then that probably makes sense.

Tony Abate:
Yeah, absolutely, and no trickery. We just put them side by side, “Here’s what you can do if we pay the costs, here’s what you can do if you pay the costs.” Neither are necessarily a bad choice, it’s which of these choices fits best for that consumer’s plans going forward.

Jon Lafferty:
That makes sense. Can we explore the scenario of someone we both know currently, who’s thinking about refinancing because their taxes, they got the big tax bill, the big tax hit? This is something that I hope the realtors are having a conversation with their buyers when they’re purchasing a home, especially from a seller that’s been in that home for 10, 15, 20, 30 years, because those taxes are going to go through the roof. If you don’t have that conversation, then they’re going to end up getting a bill that’s crazy. What does the lender do in that instance, especially if they’ve been impounding for taxes and insurance? Can you explain that process and how that works, and the conversation that probably a servicer is dreading to have with the brand new owner of the home?

Tony Abate:
Yeah, that’s a tricky situation, but it goes back to what you were talking about, Jon. It’s informing the consumer appropriately, and I know you do this. Somebody finds that perfect house and it’s hitting all the right buttons, it’s where they want, it’s the room size they want, et cetera, et cetera, and then hey, great news, the taxes are $1,200 a year, bonus. I know the first thing you say is, “Hey, pull the cord on the parachute here, we’ve got to talk about this a little bit, because those taxes are artificially suppressed.” It’s just that quasi-broken part of how the Michigan tax laws work, that is intended to keep a homeowner from having sticker shock, but then the sticker shock is really just transferred to the new owner in the second year of them owning the home.

Tony Abate:
What happens is that a lender is compelled to set up an escrow based on the taxes that they know to be. In many cases, that is a much lower figure than what they’re going to be next year, but we can’t just arbitrarily over-escrow. There’s accounting provisions that prevent that, but we can have, like you said, that conversation with the consumer that says, “Look, taxes aren’t static, they’re going to change on you going forward.” Let’s assume that conversation doesn’t happen and the scenario that you decked up happens, and that is, taxes are $1,200 this year and they’re $2,000 next year, what happens with their current mortgage?

Tony Abate:
Well, two things have happened, maybe more than two. The lender is going to keep paying those taxes if that consumer has an escrow account on the mortgage, even if they’re higher than what the projected taxes were. Then what happens is that that servicing lender reaches out to that poor surprised homeowner and says, “Hey, your escrow is short because we just paid a bigger bill than what was expected.” Not only do we have to make up the short edge, but the cat’s out of the bag about next year, so we’ve got to get you prepped for next time as well.

Tony Abate:
On the surface it looks like a double hit, and it kind of is, but they’re making up for a shortage in the past, and they’re prepping for a higher number in the future. It can be really painful if that consumer is not informed. Boy, if that’s not real estate turbulence, I don’t know what is.

Jon Lafferty:
It really is complete turbulence in that regard. In this particular instance, he was prepared but that didn’t lessen the blow. It actually happened and I got that call from the servicer saying, “Hey, you need to cut us a check for this, and by the way, your payment is going to go up this much per month unless you’re willing to escrow this much.” In a case like this, he’s a classic example of somebody that really should be looking at refinancing, and maybe it doesn’t work right now, the numbers don’t make sense, but maybe in two months, maybe in five months, maybe next year, maybe it make sense at that time.

Tony Abate:
Yeah, and you know what Jon? This is a good dialog, because on the surface, the legitimate question will be, “Hey, we’re talking about the real estate taxes, they are what they are, how would a refinance help that?” Well, what happens in most cases on a refinance is that a homeowner does fold in costs, and escrow if they have an escrow, into that new loan.

Jon Lafferty:
I like that, they fold in costs.

Tony Abate:
Yeah, they fold it in.

Jon Lafferty:
It’s like folding in the cream when you’re trying to make whipping.

Tony Abate:
It really is. Again, full transparency with it, it’s like, “Hey, you owe $120,000, your costs are $2,000, you don’t want to pay anything out of pocket? Great, we’re going to lend you $122,000.” The same idea can happen with an escrow balance as well, so we’re not causing a deficiency to go away when we refinance somebody whose intent is to not only lower a rate and a payment, but also to recast or rebalance an escrow account. All we’re doing is taking a deficiency that they would otherwise have to write a check for, and including it in the amount that they borrow.

Tony Abate:
Arguably, would you want to pay interest on that? Not necessarily, but if you don’t have the liquidity to write that check, it’s really your next-best option. We can resize that escrow so it’s set up properly. A homeowner is always going to skip a payment in a month before they start making those house payments, it’s not a freebie, it’s just the way the mechanics work, but that allows them to get their bank balances prepped for what their payment might be and those new taxes. You can’t escape that tax guy, they’re just going to be there.

Jon Lafferty:
Can we stay on this for a second?

Tony Abate:
Mm-hmm (affirmative).

Jon Lafferty:
One of the questions that always come up at closings are, “So we’re going to pay off your loan for your lender, Mr. Seller, and by the way, you should be getting you check from your lender for your escrow accounts. If you don’t in this amount of time, I would give them a call.” That’s a conversation that when I’m sitting on the other side, I don’t always hear take place, if perhaps the other agent hasn’t mentioned it. Sometimes I wonder if you’ve ever had to chase down, or if the servicers that you know of have ever had to chase down sellers, trying to find them to mail them a check.

Tony Abate:
Not that I’ve heard of, but it wouldn’t surprise me if it happens. I think the important thing that a consumer has to recognize if they do have a mortgage that has an escrow, and they’re paying it off either through refinance or sale of the property like you’re talking about, is that’s their money. That’s their money that’s sitting in that escrow account, the consumer’s money, and the lender acknowledges that. It does happen after the fact, some people say, “Well gee, if I owe them $100,000 and my escrow balance is $200,000, why can’t I just pay them $98,000 and just call it a day?” Some lenders will permit that, that is the minority.

Tony Abate:
The reason is, is that by holding onto that escrow, that lender has one last ditch effort if there were some kind of accounting issue that might’ve taken place, they’ve got that money that they can use to adjust if the need arises. Sometimes it’s timing, a tax bill comes out before a payoff hits, or something like that, but to your point, Jon, there’s a payoff of a mortgage takes place at closing, and then some weeks down the line, that check comes from the servicer, “Hey, here’s your escrow balance.”

Jon Lafferty:
Do lenders make interest on that money?

Tony Abate:
No. In theory, no. It’s a true escrow account, it’s an interest-bearing account, but it’s also, by having that money sitting there, other funds that the lender has can be put to use, and they can earn interest on that. No, it truly is a bucket of money, it doesn’t cost any interest, doesn’t earn any interest, and that’s both for the lender and for the consumer.

Jon Lafferty:
Can we talk a minute about neighborhood enterprise zones? Obviously, this is specifically in Detroit, and so you have a lot of neighborhoods that are in these zones, and it gives them a break on taxes. From a lender’s perspective, how hard is that to get adjusted? For instance, a perfect example is, I have these buyers that I’m working with, and we’re looking specifically in these areas where these enterprise zones exist, and there’s quite a few homes that don’t actually have them currently, they haven’t applied for them. What would happen is, they would purchase that home and then apply, get approved. How do they square that with the lender if they’ve set up escrow accounts beforehand, obviously before closing, and obviously they can’t do anything until after closing, how does that get squared away and readjusted, and how does all that work?

Tony Abate:
Well, the first tool in the toolbox for that is educating that consumer, and I know you and I both advocate that strongly. If I’m understanding correctly, because this is more on your end of the transaction, so you have a property, it has taxes at a certain level, somebody purchased it, they apply to be part of their enterprise zone, and because of that, if it’s approved their taxes go down, is that what happened?

Jon Lafferty:
Considerably, yeah.

Tony Abate:
All right. You have a situation where an escrow is then going to be overfunded because of that decrease in taxes. Ultimately, that number will catch up to the lender and it would be adjusted, but I would tell consumers, you can force that. If you have bonafide third party notification that says, “Hey, your taxes are going from A to B, they’re being reduced,” you can provide that to the servicer and they’re compelled to make that adjustment. There are accounting regulations tied to escrows that are very specific, that say a lender cannot over fund or over hold money when they know that a bill is going to be less than what they thought it was.

Tony Abate:
We see it when a home goes from non-homestead to homestead too, that tax goes down. You can wait for it to flesh out and for the lender to do their escrow analysis on schedule. You’re kind of making artificially high payments while you’re waiting for that, so as soon as you get notice from the assessor’s office, says your taxes are being reduced, get that to the servicing lender and say, “Hey, I want this calculated into a new escrow analysis.”

Jon Lafferty:
From a lender’s perspective, when do you tell a buyer that, “You know what? We’re going to give you our best interest rate, and you don’t have to impound your taxes and insurance with us,” is that 20% or more that’s not a requirement to get the best interest rate?

Tony Abate:
That’s correct. With us at Ross Mortgage, and with most lenders, the interest rate is not going to change whether somebody does or does not have an escrow. The point of entry, to your question, is when somebody has 20% equity, that’s a requirement on the Fannie Mae, Freddy Mac side that says when there’s less equity than that 20% mark, you’ve got to escrow those taxes and insurance. When somebody has 20% or more equity, they can choose to pay those taxes and insurance on their own.

Jon Lafferty:
That’s the mark of a good lender, is a lender who makes that clear to people upfront. I will tell you that I’ve been at transactions at closing tables where I’ve represented the seller, and I had one buyer walk away because they weren’t told ahead of time that they had to escrow taxes and insurance-

Tony Abate:
Oh my gosh.

Jon Lafferty:
Accused the lender of lying, refused to sign, and on the spot, signed their deposit over to the seller-

Tony Abate:
Wow.

Jon Lafferty:
Because they weren’t going to buy that house because the lender didn’t tell them that. Then I had somebody else refuse to close with a lender because that wasn’t disclosed upfront. It really goes to the lender, disclosing and being upfront with that buyer throughout the whole process, and sometimes you just don’t see that happen, and when it comes out is at the closing table.

Tony Abate:
You know what, Jon? That is so unfortunate too, because at the end of the day, why would I not include that in the conversation? They’re not my costs, that’s the tax man and the insurance guy assessing their legitimate costs. That absolutely should be baked into the conversation, but unfortunately, and sometimes with the less experienced lenders, when the question is posed, “What are your closing costs?” then the answer is just what the closing costs are. As you and I know, there’s more transactional costs to that, and they can be substantial.

Tony Abate:
There’s no shame in saying, “Hey, you know what? You’ve got to pay the tax guy, and here’s the way it works if you have an escrow.” Crazy that that kind of thing goes all the way to the closing table, but I’m not surprised to hear you say that, unfortunately.

Jon Lafferty:
You and I have been to enough closings to know that there’s actually, there’s a lot of stuff that happens at the closing table that people aren’t prepared for. We talked about this in a previous podcast, but I think it’s worth mentioning again, that when it comes to a buyer asking for closing costs when they’re purchasing a home, and sometimes asking for way more than they need and it can’t be used, and so having a lender that actually knows what the hell they’re doing, to have that conversation ahead of time to say, “Here’s the property taxes on this property, what am I looking at for closing costs?” That is important stuff, because no buyer wants to get to the table and find out that, “Well, I asked for 3% closing costs, and I had six grand to use, and my lender could only use $4,200 of it, I’m losing $1,700, that’s going back to the seller.”

Tony Abate:
It does happen, and Jon, you hit the nail on the head, it’s good education on our side and on the realtor’s side too, to say, “Let’s be very methodical about exactly what’s happening. Are there repercussions, are there unintended consequences? Let’s walk it through from start to finish.” It’s not rocket science really, when I’m walking folks through those numbers, but yeah, it does lead to some unhappy clients at the closing when it’s not discussed properly.

Jon Lafferty:
For somebody who hasn’t done a refinance before, can you talk a little bit about what standard costs they can expect when they refinance? If they’re going to pay out of pocket and they don’t want to roll it in, or they don’t want to pay a higher interest rate, they want the best interest rate to refinance, what are their typical costs?

Tony Abate:
Great question, that kind of leads into four tips that I wanted to pass along. As I mentioned-

Jon Lafferty:
I noticed you had four tips there.

Tony Abate:
That’s okay.

Jon Lafferty:
I like it.

Tony Abate:
They’re hiding at the bottom, yeah.

Jon Lafferty:
Hey, all right.

Tony Abate:
A refinance is a mortgage, right? We have to do the same things that we would have to do on a purchase mortgage, it’s just that there’s that conversation about the seller’s side that doesn’t come in. We still have to appraise the property, we still have to-

Jon Lafferty:
Wait, hold on.

Tony Abate:
I know where you’re going, but go ahead.

Jon Lafferty:
You know where I’m going with this?

Tony Abate:
I think. Go ahead.

Jon Lafferty:
A refinance appraisal, same as a purchase appraisal?

Tony Abate:
Yes, same report.

Jon Lafferty:
This is interesting. I have had people who are selling their home, they refinance, and six months later find out that they’re getting relocated and say, “Well, we’ve got to sell.” I’ll just sit down with them, “Here’s where value is,” “Oh no, no no no, we just had an appraisal done on a refi, and it said that our property’s worth this much,” and it’s 10 grand over where the value is. I’m looking at the comparables, so I say, “What the hell happened here, how can this be? All these facts are right in front of us.” No difference, huh?

Tony Abate:
No, it is literally the same report, it’s the same format, the same rules of engagement that the appraiser has to happen. Here’s my comment on that though, because that’s a worthwhile question and I don’t think it’s all that unusual, but you and I know that if there’s a particular property and we put a bunch of appraiser names in a hat, we pull out five, we send them out there, there’s going to be a spread between what those appraisers say. It’s an imperfect science, and it’s got subjectivity as well as objectivity, so hard to know without knowing the particulars, but it could’ve just been just because of a more aggressive or more conservative appraisal being done at the time. It could’ve been a different data, if there were-

Jon Lafferty:
Seller flirting with the appraiser.

Tony Abate:
Seller flirting with the appraiser, you never know, you never know.

Jon Lafferty:
I know this just doesn’t happen to me, this has happened to Steve, who we both know. This has happened to other realtors, where I’m holding this appraisal from a year ago when I refinanced, it’s saying my house is worth 390. You know better, that’s not where it’s going to sell, you list it at that price and it sits, and it sits, and it sits, and it sits. Then eventually it sells for 25 or 30 grand less because that’s where the market was, so it’s just odd to me that … I don’t know, it just seems like on a refi appraisal, the pressure is off to be more conservative. I don’t know, that’s probably not true, but it just sometimes feels like that because the always want to wave that refi appraisal at you when you come out to list their home.

Tony Abate:
I would tell you emphatically that the rules of engagement for an appraiser are the same, the data moves though.

Jon Lafferty:
Of course.

Tony Abate:
You have the comps that existed at the time of the refinance, and then you have the market sentiment that exists when you’re trying to sell that home, and have comps closed in the meantime that point the needle a little bit lower? Who knows, but I think it’s a reasonable starting point. If the value is not supported at the time you do the listing agreement, the data is going to show. It’s unfortunate when it goes that way, but I would argue that the reverse conversation probably doesn’t happen. If you were to say, “Hey, I can sell your home for $280,000,” a seller is probably not going to say, “Oh no, I appraised last year and the appraisal only said $230,000.”

Jon Lafferty:
Of course not, of course not.

Tony Abate:
The reality is, we are in a business where the data is dynamic, it just changes, ebbs and flows. I will tell you this, when an appraiser goes out to an appraisal on the refinance, they don’t know how much that consumer is borrowing.

Jon Lafferty:
That’s not disclosed, then that’s interesting.

Tony Abate:
They do not. Yeah, I would almost argue that a refinance appraisal has a different level of purity into it, and this is why. What do we give the appraisal on the purchase transaction?

Jon Lafferty:
Yeah, we get the purchase agreements.

Tony Abate:
We give them the stinking purchase agreement, don’t we, because we have to?

Jon Lafferty:
More often that not, it comes in at purchase price, wow.

Tony Abate:
Right at the button, yeah.

Jon Lafferty:
Hey, right on the button.

Tony Abate:
Miracle of miracles, exactly, but that’s a fair conversation. I guess I would just sum that part of it by saying, it is an imperfect science, it just is. It’s a look in the rear view mirror, and it’s someone’s conclusion of value based on data as they see it. Yeah, so and half the time it’s a logical conversation and half the time it’s not, depending on which way the market’s going. I wanted to pass along some things for folks real quick, real quick.

Jon Lafferty:
Yeah, please.

Tony Abate:
That’s good conversation, I’m glad you brought that up. The first thing to know, when I have conversations, consumer about maybe why they’re hesitant or why they don’t, you probably won’t have any out of pocket expenses except the appraisal on a refinance. It’s pretty financially friendly to go through that.

Jon Lafferty:
No title search required?

Tony Abate:
Not upfront, we’re talking out of pocket at the start.

Jon Lafferty:
Right, just like a purchase.

Tony Abate:
Right, but you know what? To get back to your question, because we started talking appraisals, the costs are really similar, refinance versus a purchase on mortgage. The closing fees from the title company are a little bit less because they don’t have quite as much work to do, but by and large, you’re running $2,500 to $3,000 for a typical mortgage, whether it’s a purchase or a refinance at this point in time, somewhat lower on lower loan amounts, somewhat higher on higher loan amounts. However, because you do have the ability to incorporate that into the loan, you’re probably not going to have any out of pocket expenses except the cost of the appraisal. An appraisal might not be needed, that’s probably another show, but you may not have to have that.

Jon Lafferty:
Yeah, we’ll have to dig into that sometime.

Tony Abate:
Yeah. You certainly have to look beyond just the difference in the rate and the payment. Like we talked earlier, you’ve got to layer in there, “Well, how long am I going to be in that home? What are my other financial needs?” If somebody sees the efficiency of a 15-year loan and that’s their choice, but at the same time they’ve got high interest rate consumer debt that they’re struggling to do only the minimum payments, a 15-year loan is probably not that consumer’s best choice. We’ve got to look beyond the difference in rate and payment.

Tony Abate:
We talked about break even, that was one of the things that we should always ask your lender about that kind of thing, if you’re going from, again, 30 to a 30-year loan or a 15 to a 15-year loan. Then the last thing, that the no-cost options are usually available, but are not always the best option. We talked about when it can and cannot be.

Tony Abate:
The other thing that I would say relative to that, especially when rates have been favorable, is folks making the decision to lock in their interest rate or float their interest rate when they’re doing a refinance loan. I will tell you that when people are refinancing because there’s not a deadline when you close like there is on a purchase, they get a little more commando about whether they should or should not lock in their interest right. I get a little bit nervous when they choose to float their interest rate on the hope that they’re going to go lower prior to the closing.

Jon Lafferty:
Hold on, hold on. You’re telling me somebody can call you up today and say, “Hey Tony, I want to refinance, get everything in place,” and they can put you off for a month, two months to see if rates are going to go down maybe the next time the Fed meets, and just stretch it out?

Tony Abate:
They can, yeah. Now ultimately, stuff is going to start to expire, so that’s part of it too.

Jon Lafferty:
You need more documentation, then you need to resubmit things.

Tony Abate:
[crosstalk 00:44:37] You can have an appraisal expire-

Jon Lafferty:
You have people that have done-

Tony Abate:
No, because you know what? I try to keep a more simplistic view on the refinance, and that is, “Here’s what I can do for you right now. Are we hitting your goals?” If we’re hitting our goals, then let’s pull the trigger and do that, instead of speculate as to what the future might hold. If somebody says, “Well, I’m not hitting my goal right now, but I want to get it going,” on the hope and prayer that rates are going to go lower, that’s a risky thing. That’s a trip to Las Vegas without the free drinks, that’s the wrong kind of a gamble.

Tony Abate:
When you get really simplistic on locking or floating interest rates, there’s three scenarios: rates could go lower, rates could go higher, or rates could stay the same. In two of those three scenarios, it is not a worthwhile risk to float your interest rate. It’s not worthwhile to take the risk and then have rates go up. If you end up floating your interest rate and the rate stays the same, you took the risk for nothing, so the only time it really makes sense is if you’re lucky enough in that one out of three scenario where interest rates float down.

Tony Abate:
Again, this goes back to, “Hey, make good choices, kids, don’t gamble with the wrong things.” You know what? An interesting analogy, it’s not a whole lot different than buying a stock. If it makes sense to buy a stock, and you buy a stock at a given price, you can’t really lament if a week later the price is lower and you’re kicking yourself, it still met your goal at the time. My advice to folks, if you’re meeting your goals and you’re hitting the nut as far as what you want to accomplish financially, you make that loan application, you lock your rate and just don’t look back, you’ve accomplished your goals.

Jon Lafferty:
Question for you regarding the old liens once they refinance: who’s responsible for removing that lien?

Tony Abate:
Luckily, not us, the lender.

Jon Lafferty:
Man, I’ve got to tell you, and I know you come across this, but it’s usually a handful of deals a year where we’ve got to track down this … GMAC is a perfect example, they would slap Heloc liens against a house, and so when you go to sell the house 20 years later, you never use the Heloc, but because they sent you something in the mail it’s attached to the house as a lien, but yet they refinanced in that time, but it’s still a requirement from title that it has to be removed. It’s just something that just befuddles the mind, that this is happening in this day and age, that they would allow that lien to stay in place and just record around it.

Tony Abate:
Well, I would argue that it’s probably a lien that was missed when the refinance took place prior. Title searches are what they are, and it’d be nice if a title search 100% of the time was accurate with the liens.

Jon Lafferty:
They’ve got to stop using Louie’s Title Company to do these title searches.

Tony Abate:
Yeah. I’m going to tell you a funny title story after we get off the air here. Yeah, you’re exactly right, it’s got to be somebody reputable because this is what happens. You close or refinance, you think all your liens are discharged because it’s done, and now you go to sell your home and there’s a scramble to discharge a lien that is old and dusty, you thought it was long gone. Heaven forbid it’s a lender that’s gone out of business, which certainly happened as we cycled through the recession the last decade. That’s really tough to do.

Tony Abate:
I will say, part of the onus is on the consumer as well. If you have a lien on your property and you’ve taken some action to pay off and have that lien discharged, you don’t turn your back at that point. You continue to be on the lookout and you insist, “I want to see that discharge document.” If that person goes to sell, and the title company says, “You got this GMAC lien back before your kids went into school,” you can say, “Here you go, title company, here’s the discharge that I got.” That’s a perfect scenario. I get it, but consumers need to keep their eye on the ball as well.

Jon Lafferty:
They need to stay vigilant on that part. Yeah, for sure, because stuff like this happens, and every time the economy takes a downturn, we lose some mortgage companies-

Tony Abate:
Yeah, for sure.

Jon Lafferty:
And some smaller banks, and who the hell knows where those loans and liens and records end up at that point? GMAC is spread out all over the place, good luck wading into that nightmare.

Tony Abate:
You look at their situation, they stopped doing their lines of credit on properties, and so if the division is closed, how do you chase them down to get that discharge? It’s a tricky thing to do.

Jon Lafferty:
GMAC, Countrywide, Indie Mac, all these. Is that all four?

Tony Abate:
That’s all four, yes, I’m done with my four.

Jon Lafferty:
We’ve exhausted your list?

Tony Abate:
Yeah. I could go on and on, but no, those are the things that I wanted to bring to the surface, because I think some people avoid doing a refinance because of what they feel are going to be high obstacles. My advice, pick up the phone and let’s have the conversation, it’s a worthwhile dialog. If the timing’s not write, I’ll tell that consumer, “No, you’re sitting good, you’re in good shape.”

Jon Lafferty:
What do you charge for that conversation?

Tony Abate:
Zero dollars and zero cents.

Jon Lafferty:
What do you charge to explore those numbers, to make sure that it’s going to work or not work?

Tony Abate:
Yeah, that one is zero dollars and zero cents, Jon.

Jon Lafferty:
Really?

Tony Abate:
Yeah, it’s the cost of a phone call. I will tell you, and again, I’m advocating for the smaller lender, that is a tricky conversation to have when you’re calling a call center to explore refinance options. I would argue that they’re probably not going to go deep into, “How long do you think you’re going to own that home, what are you really trying to accomplish, Mr. Homeowner? Here’s our rate, here’s our costs, we’re the best lender since sliced bread, give me your credit card number.”

Jon Lafferty:
You’re obviously not talking about Spaceship Mortgage.

Tony Abate:
Chicken bones? Right, yeah, we’re not going to disparage any company, but it happens, unfortunately. You get people that have limited training and take the order, is basically what happens, and there’s a lot of money on the table. It warrants thorough conversation and thorough analysis.

Jon Lafferty:
The thing I like about your company and you is that people have a personal phone call with you, they can meet with you in person, it’s you handling it throughout. The only time another person gets involved is the processor, when they may need additional information, but for the most part, you’re involved throughout. It’s one of the things that’s changed in this industry with a lot of bigger lenders, if you’re dealing with some of the larger ones, you sit down with a person at a branch and have a conversation with them, they get the paperwork started, then you’re getting phone calls from India from that point forward telling you what they need, or from some cave in San Bernardino, California, about what else they need, and you’ve got to fax it, and then you’ve got to re-fax it.

Jon Lafferty:
This kind of stuff, this is where customer service and being able to meet with somebody face-to-face becomes very important, because sometimes you want to know who the hell you’re dealing with on the other end of a phone, and whether or not they’re being truthful.

Tony Abate:
Thank you for that, Jon. I know we share a lot of the same philosophies when it comes to customer service, but even here in 2019, it’s a transaction that warrants and requires hand holding. Yeah, I tell folks when they apply, “You’re stuck with me until the end.” It’s not a comfortable thing to get into a situation, “Press two for processing, press three for closing, press three for this,” but you want to go too. You want to go too, and that’s one of the things we pride ourselves on at Ross Mortgage.

Jon Lafferty:
That’s one of the things I like.

Tony Abate:
Thank you, thank you.

Jon Lafferty:
All right, well-

Tony Abate:
We beat that subject to death, do you think?

Jon Lafferty:
With a wet mop.

Tony Abate:
For sure, for sure. Yeah, good questions though and good dialog. Folks need to look into it, they really do.

Jon Lafferty:
Yeah, and I think that this topic is really current, because I’ve talked to enough past clients who are thinking about it and I’ve talked to family who are thinking about it, and wondering when it’s the right time to pull the trigger.

Tony Abate:
Well, I’m glad we talked about this, we probably couldn’t have timed it much better in light of the-

Jon Lafferty:
I’m glad you came prepared.

Tony Abate:
Thank you, yeah. Every now and then, right? All right, well hey, thanks for listening to Avoiding Real Estate Turbulence. If you’d be so kind to subscribe, review and rate, we would appreciate it. Please share with your friends, family and coworkers that they too can find us on Apple Podcast, Google Podcast and Spotify.