Understanding US Mortgages

[Doubleh]

Hi, I discovered MMM's blog a couple of months ago and have been working my way through, but this is my first post. I'm all the way across the pond in London, where I live (on a boat to keep our costs down while we build our stash) with my wonderful wife who is a native of Seattle.

We still own her old house in Seattle, which has been rented out for the last four years that she has been over in the UK. We want to keep it as part of our asset portfolio, and take advantage of historic low mortgage rates to refinance it to a lower rate and free up some cash-flow so that it is cash generative instead of the very small negative cash-flow we have currently. The plan would be to refi to a lower 30 year fix to lock in current rates, and use the excess cash to overpay the mortgage while we are still accumulating assets over the next few years, leaving us with the option of cutting back to the regular payment when we stop working.

The difficulty we have is that the dynamic in our relationship is that normally I take the lead on finance stuff like this, partly because I enjoy it more than the wife does, and partly because I am qualified as a chartered accountant (equivalent of a CPA) which means I generally have a pretty good understanding of the issues. However I'm discovering that the mortgage market in the USA is a totally different place from the one over here - for example would you believe me if i told you that a 30 year fixed mortgage is absolutely unheard of, and that even a 5 year fix is considered very long? Most people have a 2-3 year fix, or even a mortgage which tracks the bank rate!

So my wife has spoken to a broker, who has quoted us a rate of 4.25 on a loan value of $170k, with 20% down. They have estimated closing costs at $4,136 which seems to be made up mostly of a 1.75% Fannie Investment Fee, plus various items like escrow fee, document fee and title insurance. We have to pay this ourselves, either in cash or by rolling it into the loan. This is all based on my wife's credit which is 798.

In addition there is a Broker's fee of 2% plus a $945 underwriting fee, which will apparently be paid directly by the lender.

I'm in a situation now where my wife is happy to go ahead with the broker, on the grounds that his job is to search the market for the best buy for us. However I have a pathological mistrust of anyone who gives advice based on commission, and would generally much rather shop around myself but don't know the market at all. I have no idea whether all these costs are normal, if this is a good deal, or whether we are being stiffed. I know the rate is higher than the residential rates I've seen advertised, but I'd expect to have a higher rate anyway for an investment property and looking on the web I have struggled to find price comparisons for investment.

So I figured I'd turn to the most money savvy people I know stateside for their thoughts, and here I am. I'd love to hear your thoughts in particular:

 - How does the rate sound for an investment property?
 - Do the fees and broker costs sound reasonable?
 - If not can you recommend good places to check for a direct quote?
 - Any other ideas I don't even know to ask for?


I'd really appreciate anything you great people can contribute

Thanks
Neil

[Another Reader]

Is the property and mortgage in your wife's name?  Assuming it is, what is the property worth and how much equity does your wife have in the property?  If she has at least 20 percent equity and she can qualify for the mortgage, you are being quoted ridiculously high fees and points for that rate, even for an investment property.  The Fannie investment property hit should be in that rate, not in the fees.  You may be being double charged, based on what you are saying. 

I can get a 30 year fixed rate in Arizona on a single investment property in the high 3's with one point and a much lower underwriting fee from a credit union.  The rate is a bit higher from a bank, but the terms are nothing like what you have been quoted.  Do your wife and yourself a favor and shop this loan around.  I don't know lenders and brokers in Seattle, but someone from the area should be able to refer you to several competitive lenders.

[Another Reader]

Be sure to get the good faith estimate (GFE) from any lender you talk to.  It's not all-inclusive, but it's helpful in comparison shopping.

Also, I just re-read the part of your post about the broker's 2 percent and the underwriting fee paid by the lender.  What this really means is the lender is paying the broker over 2.5 percent to induce you into signing up for the 4.25 percent rate.  If you are really paying $2,975 for the Fannie Mae investment property surcharge as part of your closing costs, the loan appears to be a very bad deal.

[salmp01]

What type of loan do you have now (5/1arm, 30 year fixed, etc) and what is your current rate? 
Investment properties will have a higher rate than owner occupant properties so make sure it makes sense to refinance.
Also, you may want to consider paying a slightly higher rate to remove much of the closing costs.  Each time I have refinanced my home I have done a no cost refinance. 

[Doubleh]

Thanks guys for your input, much appreciated. When I posted the wife was all set to sign he papers, after showing her your comments she agreed to hold fire and question the fees with the broker. Since then the 1.75 Fannie Mae fee has mysteriously vanished and the rate reduced to 4.0 - I know the whole market has moved rates slightly lower but from what I can see not this much in a week.  Also the broker tells us the investment fee requirement has bee dropped by Fannie but I can't find any reference to this, has anyone heard of it? I suspect he is absorbing he fee to sweeten the deal and get us to close. I'm much happier now as this seems to be about a 0.5% premium over the equivalent 30 yr fix for a residential property, which is more like the sort of risk premium I would have expected to see based on my experience here in the uk.

Thanks guys, and may each new day find your mustaches a little longer than the day before

[arebelspy]

Based on my personal (anecdotal) experience with investment mortgages, that's a pretty good deal.

[Another Reader]

Did you get a revised GFE?  Does it agree with the broker's verbal revisions?  I would review the revised GFE carefully.  Figure out who is paying what.  Costs get shifted like in a shell game when rates are being negotiated.  I would not trust this broker, based on the history you have described.  When you get the docs to sign, you should carefully review them as well.

Fannie adds a fee/rate hit for investment properties.  Haven't read or heard of anything changing.  The rate hit should be reflected in a higher interest rate, which it is at 4 percent.

[Doubleh]

Thanks again for the tips! Yes we have a revised schedule of total costs, which has indeed gone down by the amount of the fee. I will of course go through the final docs with a fine toothed comb prior to signing.