Overnight letter -mrtg refi -need advice

[ILoveMyDVC]

I'm reaching out to those in the know to please give me some advice.
I received a call from my mortgage company today and an overnight letter saying we might be eligible to refinance with WCS Lending

We are not delinquent on anything and are not 'upside down' on our loan.

We have two mortgages 5 years old(both used to purchase the house only (no cash was taken out!)- fixed rate of 6.35 and 8.99). The lender holding the larger of the two (and the smaller interest rate) has offered to refinance both loans for a fixed 5% and no closing costs.

HOWEVER, they said we *might* get a 1099 for 10-15k for loan forgiveness - we're not getting any 'loan forgiveness' as we will still owe exactly what we owe today.
They claim it's for the closing costs; to set-up the new escrow; and for the money my current mortgage company is losing to them....

Any advice? Warnings? Future tax or credit ramifications?

Thank you!!!!

 

[xmlguy]

You need to provide the principal size of the 1st, 2nd, and new refi, and it would help to know the remaining terms on the 1st, 2nd, and the term of the new refi. That's the only way to determine whether it's worth doing the refi. Also, are you planning to be in the house for more than 5 years. Did they give a full disclosure of all the loan+closing costs? There are ALWAYS loan and closing costs. The only difference is how they are paid - upfront, added to the principal of the loan, or added to the interest rate. The information above will help determine where they're hiding the costs.

 

[ILoveMyDVC]

Sent PM

Yes, we're planning on staying for 5 years.

Current loan 1 is 6.35% 5 years out of 30 paid - 4x the size of loan 2

Current loan 2 is 8.99% 5 years out of 20 paid.

New loan would be 5% @ 30 years- cost of outstanding loans combined - not a penny more.

 

[minnie1928]

They claim it's for the closing costs; to set-up the new escrow; and for the money my current mortgage company is losing to them....

This sounds very weird to me...why would you possibly incur 1099 reportable income on costs related to settlement that have nothing to do with your principle? And, if your current mortgage company is losing money on this deal then why are they offering it? If they do plan on losing money on the deal, that's their loss and I don't see how that would translate into reportable income for you...

I'm a 20+ year banker, and while I didn't work in the mortgage division (i worked in the Finance/Acctng area), I've never heard/seen an offer worded like this.

 

[Cheshire Figment]

I would say go for it. I would, however, ask them to specify what the closing costs will be in advance; if they roll them into the mortgage that will not hurt. If they pay them on your behalf it may be taxable.

However, I would also suggest looking at what your payments currently are and pay the difference between the old payments and the new payments every month as a reduction of principal. This will end up cutting several years off the mortgage and saving a lot on interest.

 

[xmlguy]

I would say go for it. I would, however, ask them to specify what the closing costs will be in advance; if they roll them into the mortgage that will not hurt. If they pay them on your behalf it may be taxable.

However, I would also suggest looking at what your payments currently are and pay the difference between the old payments and the new payments every month as a reduction of principal. This will end up cutting several years off the mortgage and saving a lot on interest.

Actually, it hurts a lot more to pay the closing costs over 30 years than to pay the tax. Let's say the closing costs are $5,000. Rolled into the loan the final cost will be $9,662 at 5%, nearly doubling the cost.

The idea of continuing to make the same payment as previously paying is a great idea, however it will do a lot more than just cut several years off the mortgage. It will cut the term by 40% to 18 years instead of 30 years, and cut the total interest paid in half.

For the OP, the refi will save you about $95,000 if you pay the new payment to the full 30 year term. The refi will save you about $210,000 if you pay the old payment on the new refi (assuming about a $470/mos difference between payment of the new loan to the old loans). So it should be obvious that any tax hit on the closing costs, so long as the closing costs are reasonable and not jacked up, will be very minor compared to the overall cost savings.

The really important question you should ask is: How much interest am I paying over the life of the loan vs. the principal of the loan? If you pay an extra $470/mos on your new refi, then the answer is 50%. If you pay to full term it is about 93%, which means you will buy your house nearly twice, once in principal and once in interest. If you keep your existing loans and pay them to full term, the answer is about 129%, meaning that you'll be buying your house twice, plus another 30% of it.

If anyone gets a 30 year loan at 5%, you are not only buying a house, you're buying the bank 93% of a house too. At 6% it's 116%, at 7% it's 140%, at 8% it's 164%, at 9% it's 190%, and that's not including PMI premiums. So at 9%, people basically have the good fortune (for the bank) of buying their house 3 times, but only getting one, and one that's 30 years old that probably needs renovations.

 

[PinkRhombus]

Are you sure this is from your mortgage company? They did this out of the blue without you initiating it? Just sent you an overnight letter?


On our 15-yr refinance, if we rolled the closing costs into the loan, it would have been $10,000 more that paying the $1400 up front. That's four Disney trips.

 

[CyndiLooWho]

Well, I wouldn't do it, even if it were with your mortgage lender, not under those terms.

As I read it, they are going to turn in the closing costs, refi costs, etc to the govt and YOU will have to pay taxes on the "write-off" AND it will hit your credit report as a write-off. To me, that's bad news. Anytime they are going to give you 1099 income on "loan forgiveness", they are talking about a write-off and it will go against your credit report.

Instead, ask if you can do the same deal, paying the fees yourself, IF it makes sense per the pp's formula. (and you'd have to see how accurate their $10-15K estimates are - they sound a bit high to me, but real estate never ballooned where we live).

 

[Chicago526]

The whole thing sounds fishy to me. Overnighting a letter to a customer that didn't initiate contact?

If you're really interested in a refi, I'd shop around and see if you could get a better deal elewhere.

 

[PinkRhombus]

Well, I wouldn't do it, even if it were with your mortgage lender, not under those terms.

As I read it, they are going to turn in the closing costs, refi costs, etc to the govt and YOU will have to pay taxes on the "write-off" AND it will hit your credit report as a write-off. To me, that's bad news. Anytime they are going to give you 1099 income on "loan forgiveness", they are talking about a write-off and it will go against your credit report.

Instead, ask if you can do the same deal, paying the fees yourself, IF it makes sense per the pp's formula. (and you'd have to see how accurate their $10-15K estimates are - they sound a bit high to me, but real estate never ballooned where we live).

I was talking how much financing the closing costs in over the life of the
loan.

 

[Bren's Mom]

Op, before you'd accept this offer from your current company I'd contact a reputable broker and get some quotes from them. Many will not require an application fee and it's likely you can get a better deal.

 

[CyndiLooWho]

I was talking how much financing the closing costs in over the life of the loan.

Yes, that's what I mean, is the $10-15K accurate and does it actually make the loan cheaper when amortized over the life of the new loan. The last time we refi'd, it seems like we only paid about $5k, but that was in the time of easy financing and the value of the house had shot up $15k over the previous 12 mos).

 

[ILoveMyDVC]

Are you sure this is from your mortgage company? They did this out of the blue without you initiating it? Just sent you an overnight letter?


On our 15-yr refinance, if we rolled the closing costs into the loan, it would have been $10,000 more that paying the $1400 up front. That's four Disney trips.

I was shocked when I got the call in the a.m. first from my mortgage company, then the letter, and then the call from the broker. We've never missed a payment on anything.

Yes, I verified -called my mortgage company using the number on my regular statement. They checked my acct. # and said it was a company they were working with and had given the info to.

Naturally, I'd love to roll both mortgages into one and drop the interest payment. It's the 1099 and 'loan forgiveness' that has me freaked out.

 

[squirrlygirl]

Have you seen a disclosure statement? It almost sounds like they plan to forgive 10-15,000 of the original loan, and then tack on 10-15,000 in closing costs onto the new loan to bring it up to the old outstanding amount. Plus, that sounds like too much for closing costs.