Weekly Rate & Market Update 12-9-16
Question: How come my lender sent me a notice that my payment is going up, don’t I have a fixed rate mortgage?
Answer: This is a rather lengthy answer today, but very important information to anyone who has purchased a home in the last year, or have someone close to them that has purchased recently, as it involves the payment of taxes and how screwy it can and does get is your taxes are collected and paid by your lender.
Earlier this week I sent out a reminder that for those who own property in California tomorrow is the deadline to pay your property taxes for the 1st half of the tax year without a late fee. Semi-annually when I send out this reminder email I receive inquiries from some property owners who have an impound account for taxes with their lender ensuring their taxes will be paid, or from new homeowners wondering what is going on because of a notice from the lender regarding their taxes.
What is going on? Why might you have received a notice that the lender is raising your monthly payment?
A look at how property taxes and notifications work:
In California your property taxes are based on the purchase price of your home, this sets the base tax rate for the state. On top of this base tax are taxes for the county and city, and sometimes specific location in a city, in which your property is located. For instance in my neighborhood in Long Beach we have the base state tax, base tax for Los Angeles County, then additional taxes that were voted into place for city college district, K-12 school district, LA County parks, emergency services, City of Long Beach special assessments, etc, etc. All the taxes for the various government agencies and propositions passed by voters are put on the tax bill for the fiscal year running from July 1, 2016 to June 30, 2017.
In October the tax bill is mailed with a breakdown of the total amount due and it includes two coupons with half the amount due on each coupon. The first payment needs to be paid by December 10th or there is a late fee. The second payment needs to be paid by April 10th or there is a late fee. If your taxes are not paid by July 1st you are in default.
The amount that is due is based on the assessed value of the home prepared in July by the assessors of the various counties. The tax rolls are finalized in September and the bill is mailed out in October. So what happens when you purchase a home between the time of the value is assessed and the tax bill is mailed out? This is where your high school algebra comes in handy.
The house you are buying for $500,000 and the current owners purchased the home in 2006 and their current tax bill is based on an assessed value of $400,000. Let’s assume the industry standard of 1.25% of assessed value is the tax rate.
The current owner has an annual tax obligation of $5000 per year ($400,000 x 1.25%). Your tax bill will be $6250 per year.
You closed escrow on your home on September 30th 2015 and set up an impound account with the lender to pay your property taxes. The lender collects $520.83 per month for taxes ($6250 per year).
The tax bill is sent, a copy to you and the actual bill to the lender, the amount owed by December 10th is $2500—because the tax bill is showing the assessed value of the prior owner since the County Assessor has not had time to change the assessment and the corresponding tax obligation. Because the tax bill mailed in October covers the entire fiscal year your lender sends another $2500 to the county in April. So the lender has paid the taxes due, $5000, but has collected $6250 from you based on the estimated taxes that would be due based on your purchase price.
Seeing that they have $1250 excess funds in your tax impound account the lender issues you a check for the overage since they are not allowed to retain the excess collected.
Typically at this time the lender will send a notice reducing your monthly payment by $104.17 ($1250 over collected divided by twelve months). Also typically there is poor communication as to a) why you received the check and b) why your payment has been lowered.
In October 2016 the lender gets the tax bill for 2016-2017 for $6250 paid in two installments of $3125 each, one due by December 10th and the other by April 10th. The lender pays the $3125 due and notices that there is a deficit in your impound account. Why? Because the lender refunded you the excess collected for the prior year’s tax bill AND reduced your monthly payment to reflect the taxes due on that prior year’s tax bill.
So the lender sends you a notice that it will be increasing your monthly payment by $208 per month for the next 12 months and then it will reduce by $104 and remain at that payment until/if the tax obligation changes in the future. The reason for the increase is to a) collect for the actual amount that should be collected based on your tax obligation based on your purchase price of $6250 per year and b) to make up the deficit created when the lender lowered your payment earlier in the year since its program thinks your taxes should be $5000 per year based on the prior tax bill. Confused? Exactly.
Compounding the confusion is that you will receive a Supplemental Tax Bill from the County for $1250 for the difference in taxes collected versus taxes due from the purchase date to the end of the tax year. Coincidentally matching the funds sent to you by the lender earlier in the year.
So what can you do?
First, when you receive the refund check from the lender save it as you will need the funds in the future for your supplemental tax bill.
Second, when the lender lowers you payment to reduce the impound account collection for taxes contact them and inquire if they can keep the impound collection the same as when the loan funded, explaining that later in the year the tax bill will be higher and you want to make sure they have the necessary funds to pay the higher amount and not increase your payment in the future.
Third, if they will not keep your payment the same then budget the same amount for your total monthly payment that we estimated at closing and put the additional funds the lender is not collecting into a savings account—and do not touch the funds because….
Fourth, when the lender notifies you that there is a deficit and they are raising your payment to collect the deficit over the next twelve months you can let them know you have the amount of the deficit saved and wish to mail them a check for the deficit and your payment will adjust to the original estimated payment from when we closed and no more.
It can get complicated, confusing and very frustrating when you are getting these notices, changes, money back, money due. If you get any unusual notice, money or request from your lender call me and we can go through your situation and best practice to ensure minimal financial impact in the future. When we provide your payment estimate during the application process and especially with loan docs the payment we provide for your mortgage (principal and interest) your hazard insurance and property taxes is pretty accurate as to what you should be paying. If the lender over-collects (or in some market under-collects but that is another long explanation for when prices are declining) your taxes keep in mind that in the future more taxes will have to be paid. And they will be paid by you.
This type of scenario is why I prefer clients not have tax impounds unless they are required to by the lender due to the type of mortgage product we are using.
If you have not paid your property taxes yet do so today or tomorrow—every county has ability for you to make payment on-line, it is how I make my payments bi-annually and encourage you to do so as well to ensure your taxes are paid on time.
Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.
Slow new week for economic data. Perhaps the most important data was the release of Consumer Sentiment from the University of Michigan. The Sentiment Index climbed from 93.8 from last month to 98.0, one-tenth away from the post-recession high reached one year ago. Cited by those survey is expectations of new economic policies in the coming year with the changeover in Washington that they see as the biggest positive and increase in consumer sentiment. The news is interest rate unfriendly as higher consumer sentiment can/should lead to higher consumer spending, which leads to greater GDP growth and higher inflation.
Rates for Friday December 9, 2016: With not much economic news mortgage rates this week rates continue to move sideways, with no change from Friday to Friday for the second week in a row. Day to day, and interday, Mortgage Backed Securities (MBS) have been very volatile opening significantly higher (lower rates) or lower (higher rates) from the prior day and then through the day reversing direction to finish about where they started. As a result lenders are a bit skittish on their rate sheets and if/when the MBS prices increase in the future (lower rates) we can expect a long lag time between improved pricing and improved rates. I see little decline in rates in the short term and possibility of a bump should more positive economic news present itself.
FIXED RATE MORTGAGES AT COST OF 1.25 POINTS
30 year conforming 4.00% Flat
30 year high-balance conforming 4.125% Flat
30 year FHA 3.25% Flat
30 year FHA high-balance 3.75% Flat
Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down (3.5% for FHA) with 740 FICO score for purchase mortgages.
Leslie and I have seen a lot of movies the past few months (we try to go out every Tuesday night for date night and often include a movie) and have seen some good ones, and one we both did not like (Allied). This past week we saw Arrival. Leslie was surprised when I suggested we see it as she thought she would need to see with girlfriends since I am not a fan of sci-fi genre, but I figure she sat through Magnificent Seven (very good) and I might like the movie.
It was a fantastic movie and as for sci-fi it is not a Star Wars, Star Trek, Independence Day type with fights in space and lots of special effects. Arrival is more along the lines of Close Encounters as it involves initial contact between aliens and humans. Amy Adams is great and the screenplay is one of the best. Whether you like, love, hate or are ambivalent about sci-fi/alien flics I strongly recommend Arrival as an intelligent, thought provoking and engaging movie.
Have a great week,
Dennis
