The following is a guest post from reader TFB, who blogs anonymously at The Finance Buff where he covers investing, taxes, banking, mortgage, insurance, and other personal finance related topics. You can find more of his posts about mortgage refinances under the “refi” tag.

I refinanced my mortgage recently. The rate on my 15-year loan went down from 4.25% to 3.75%. With a lender credit covering the bulk of my closing cost, I spent about $200 on a refinance that will save me over $1,000 interest every year.

Some people don’t like to refinance their mortgage even when the rate is lower and there’s no fee, because they fear it’s going to reset the clock for the eventual payoff. They reason that when they refinance to a new loan, the payoff date will be extended, and they will end up paying more interest over the life of the loan than they would if they didn’t refinance.

In some cases it’s true. For example, if you are five years into a 30-year mortgage at 5.25% with $200k principal balance remaining, keeping the current loan at 5.25% for another 25 years will cost you additional $159,384 in interest. Refinancing the $200k principal balance into a new 30-year loan at 4.5% will push out the payoff date by five years and cost you $164,813 in interest in 30 years. By refinancing, you end up paying more interest.

It doesn’t have to be that way.

[Read more…]

While doing some more research into a possible refinance or loan modification, I ran across this chart of historical mortgage rates from 1986 from HSH.

Before, I stated a source that said the 30-year fixed-rate mortgage (FRM) averaged 4.56% for the week ending July 22, the lowest since Freddie Mac started tracking the mortgage in 1971. But that was with 0.7 points, while HSH shows 4.97% with only 0.09 points. While we are experiencing some of the lowest rates in a very long time, I also keep reading about how underwriting has made actually getting approved for a loan harder than ever. But according to this article, some “FHA, Fannie Mae and Freddie Mac borrowers who haven’t refinanced their home before may be eligible to refinance without having to get a new appraisal.” Like I say often… it doesn’t hurt to ask!

I’m still excited about my new 4.75% mortgage rate (that I would never have gotten if I didn’t pick up the phone and ask) since I’m looking to stay in my house for a while, but I am also curious as to what will happen to housing prices when rates start to go back up…

Another problem with escrows is by mixing it in with your mortgage payment, it can obscure what you’re paying towards property taxes and homeowner’s insurance premiums. Do you know how much you paid in property taxes this year versus the last? Or how much of each month’s mortgage payment goes towards taxes and insurance? I probably only knew within about $500 the annual total.

Property taxes are usually based on an quick assessment of how much your home is worth. However, local governments rely on these taxes to fund much of their services, so they have an incentive to keep this value as high as possible. With housing prices dropping, the number of property assessment appeals last year doubled in many states.

Should you appeal as well? Here are some quick tips on getting your property tax bill lowered:

• You can find out how often your state does reassessments at this Tax Foundation page. It ranges from annually to 10+ years. For details on how your municipality calculated your assessment, contact your local tax assessor’s office.
• Check your assessment and county records to make sure your land size, house square footage, and other information are accurate. By correcting these measurements, your assessment may automatically be lowered (or raised!) .
• Collect documents that show your home’s value should be lower, such as recent sales of at least three comparable homes nearby. Try using real estate websites such as Zillow or Trulia. You can also see all your neighbors’ property taxes at PropertyShark.com.
• Submit any reports by inspectors or contractors, or at the minimum photos, to prove that your home needs major repairs and is thus worth less. Also document any material changes such as easements, re-zoning, heavy traffic, nearby railroad tracks, or freeways.
• If the amount is significant, you may decide to hire a lawyer or real estate appraiser to help you through the process. Many online sites have popped up that offer to do the legwork for a fixed fee of $100-$300. I have not used any of these sites, and don’t think they are necessary if you are willing to spend a few hours of your own time. If you decide to try one of them, please do your due diligence, and then let me know how it goes! Examples: EasyTaxFix.com, ValueAppeal.com, ReduceHomeTaxes.com.

Have you appealed already? Share your story in the comments below. I hope it’s a success story, but all experiences can be helpful to others.

Sources: AARP, ConsumerAffairs

In response to my earlier post on Should You Manage Your Own Mortgage Escrow?, reader James e-mailed me a trick he found to save some money even if you are required to have an escrow account:

Even if you’ve got an loan that requires an escrow account for the life of the loan, you can still save some money by beating your lender to the punch on payments. Most homeowners insurance companies provide a discount (about $50 in my case) if you pay your homeowners insurance premium yourself on-time or in advance. They get their money sooner that way. Payments made from escrow don’t usually post until 30 to 60 days past the actual due date.

You can make this payment using a credit card, and then provide proof of payment to your lender, who will then reimburse you from escrow instead of paying the insurance company. If you time it right, you can float the payment on a credit card as a regular purchase, and not incur any interest by paying it off as soon as you receive the payment from your escrow account. Presumably, you could do the same with property taxes.

I called my homeowner’s insurance company (State Farm), and they said they don’t offer such a discount. But maybe yours does?

Housing prices. Are they still falling? Stable? Best time to buy ever?

Barry Ritholtz of The Big Picture thinks that housing prices have much further to fall. Here’s part of his analysis:

Today, residential real estate confronts numerous headwinds: Credit, once given to anyone who could fog a mirror, is now tight. Hence, demand is far below what it was during the past decade. Home prices are still unwinding from artificially high levels, and remained over-priced. Inventory is elevated. Unemployment remains high. A huge supply of shadow inventory is out there: Speculators and flippers who overpaid but have held onto their properties await modestly higher prices to sell. Bank owned real estate (REOs) continues to increase. We are barely halfway through a decade long foreclosure surge.

He also shares some historical data from 1977 to 2010 that support his view. The top graph below is home price appreciation divided by rent as measured by CPI. If the ratio is rising, it means that home price appreciation is rising faster than rent. If the ratio is falling, it means that rent is rising faster than home price appreciation. Then there is the price/income ratio, illustrated by the bottom graph below. In both cases, we are currently still above the historical mean.

From 1977 to 2010, the median US home price was 4.1 times median household income. But as the chart below shows, Home prices are still above that mean. Oh, and that mean is artificially elevated due to the 2002-07 boom. Same with home prices relative to rentals, or housing value as percentage of GDP. Further, we should not assume that prices will merely mean revert back to historic levels. In most markets, a near 3 standard deviation price move is resolved not by reverting to the mean, but by by careening far below it.

Data source: Ned Davis Research

I recently got a refund from my mortgage escrow servicer, as my property taxes decreased. This reminded me about how I always used to read that you should manage your own escrow account. I don’t think I have a choice about the matter right now, but I tried to research all the pros and cons below. Did I miss something? Share your own reasons in the comments, and don’t forget to vote in the poll below!

Escrow Definition and Background
When you borrow money to buy a house, the lender holds your house as collateral in case you stop paying them back. However, in certain cases the lender can lose control of their collateral. If nobody pays the city and/or county property taxes, the local government can seize the house and become the first lienholders on the property. Similarly, if the house burns down or becomes flooded without insurance, then they’ll be in trouble too. This is why most lenders require the funds for these types of charges to be automatically collected each month and placed in escrow, until the respective bills are actually due.

Now, most homeowners of course want to pay these things, but as with other big bills, many people may not plan ahead and later find themselves unable to pay. Some lenders may allow you to manage these things for yourself once you reach a certain amount of home equity (loan-to-value ratio) or if you pay them a fee or a higher interest rate.

The Real Estate Settlement Procedures Act (RESPA) provides several requirements regarding escrow. The maximum “cushion” a lender can accrue is for 1/6th of the total amount paid out, or approximately two months of escrow payments. While some states require interest to be paid on escrow account, RESPA does not.

Reasons To Manage Your Own Escrow

• Earn interest. This is the reason I hear most often. You pay out a lot of money ahead of time, when you could be earning interest on those funds instead. Even if you don’t have it as as lump sum, you could tuck away 1/12th of your insurance and tax bills every month on your own.
• Avoid payment errors. Even though the whole point of escrow is to pay your taxes and insurance on time, escrow servicing companies still make mistakes occasionally, resulting in lost payments and big headaches.
• Increase tax deductions. If you think that you will be able to itemize deductions in one year and not the next on your tax return, you may try to “bunch” deductions so that they end up in the preferred year and save you some money. For example, you could pay your 2010 taxes in January 2010, and your 2011 taxes in December 2010, so they both occurred in 2010.

Reason Not To Manage Your Escrow

• You have no choice. Many lenders, like the Federal Housing Administration (FHA), require escrow for the life of the loan. Others, like PenFed only allows you to manage your own escrow once you reach a 75% loan-to-value ratio. If you’re shopping for a new loan, this is a possible negotiable item.
• It costs too much. Some lenders will let you waive escrow, but only for a flat fee (possibly hundreds of dollars) or a quarter to half point (0.25%-0.5% of your loan value). That could be end up being a bad financial trade-off, especially if you don’t keep your mortgage for very long.
• Simplicity and convenience. Hey, it’s one less thing to worry about, and your monthly expenses stay more constant. Technically, if you are short on your escrow, the servicing company will even cover the difference for you and just make it up over the next year. You can view it as a service provided in exchange for any lost interest. If your annual taxes and insurance premiums total $1,500, that is $30 per year at 2% APY, which even assumes that you lose an entire year of interest. Of course, interest rates may rise later.

Poll

Do You Manage Your Own Mortgage Escrow?

• Yes, I do it myself.
• No, but only because of loan requirements.
• No, for other reasons such as convenience and/or simplicity.

View Results

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If you have a mortgage, do you know when it will be paid off? Have you though about paying extra and making that day come earlier? The commonly discussed biweekly accelerated payment plan is the same as making one extra monthly payment each year and knocking off about 5-6 years from a normal 30-year mortgage. For example if your mortgage is $1,200 per month, you would pay an extra $1,200 a year ($100 per month.)

Here’s the effect of one, two, and three extra monthly payments per year on mortgage paydown. The specific numbers are for a $480,000 mortgage at 5% fixed for 30 years, but the general effect for all mortgages is similar.

As you can see, the more you pay down, the smaller the effect because you give yourself less time to compound the interest saved. If you pay down your mortgage principal, you are effectively earning your interest rate. For example, if you have a mortgage at 5% interest with 25 years left and pay an extra $5,000 towards principal, that’s basically the same as having that $5,000 earn 5% for 25 years (taxes tend to wash out if you assume mortgage interest is tax-deductible).

Good Investment?
But is earning 5% a year for 25 years a good deal? First, you must remember that this is virtually a no-risk 5%. A fair comparison would be with bonds backed by the US government. Let’s look at how the current U.S. Treasury bond yield curve.

We see that it’s currently yielding about 4.4% for a 30-year bond and 3.8% at 15 years. Keep in mind that federal bond interest is exempt from state income taxes, which will boost the effective yield for certain residents. For me, it is nearly a wash at the 30-year mark. However, if I pay down my mortgage as fast as I plan to, I’ll only have about 15 years left. Earning 5% for 15 years by paying down my mortgage is better than earning 3.8% in a Treasury bond.

Now, people will say that they can easily earn more than 5% over 30 years. Others go even further and believe that you should never pay off your mortgage. This almost always means taking on more risk, whether in the stock market or wherever. While we should definitely take some risks in our investments overall, 2008 should remind us that taking on extra risk is not something to be taken lightly.

Another thing to consider is that you’ll be losing liquidity on the money being put towards your mortgage, as it can be costly to extract without selling the house. But I lose liquidity on everything I put in a Roth IRA and 401(k) as well. As long as I keep enough liquidity in my emergency fund or elsewhere, I don’t worry about it.

Flexibility
Now, there is a good possibility that at some point I will be able to get greater than 5% in a very low-risk investment, most likely in a time of high inflation. In that case, I’ll simply buy that alternate investment, keep the difference, and stop making extra payments during that time.

I’ll also have flexibility in other areas. If I move early, I’ll be earning 5% for even less than 15-years. If I decide to rent out the house, I can possibly refinance for a lower mortgage payment over a longer period for cashflow reasons.

Execution
Basically, as part of the big picture of your finances, paying extra can make sense. My mortgage is already automatically withdrawn from my checking account each month. So far, I’ve been making my extra payment manually in a lump sum by writing a check. I haven’t made my payment this year, and I am debating whether to switch to a constantly higher monthly payment instead. My bank allows me to make extra payments towards principal each month on an automatic basis for free. One less thing to worry about.