It’s the end of summer and rates are hitting new lows not seen for decades.
When is the last time that you reviewed your current mortgage and its operation?
Do you continue to trust the current mortgage servicing company and their annual statements or do you confirm the numbers for yourself? Have you checked to see if you are paying a competitive rate for the debt you have secured by your property? Is the premium your paying for your hazard or homeowner’s insurance competitive? Do you need additional coverage or does some feature need to be dropped? If you have an umbrella policy can you get away with a lower deductible?
Here are a few priority items to look at. If something is confusing or not clear, contact me.
The first thing to do is to gather some information and documents. A copy of your note is necessary as well as the annual statement of your escrow account should you have one. Your note will tell you what your current rate is. It will also tell you the maturity date and detail any rate changes that you can expect over the life of the loan. If you have a fixed rate loan there will be three dates: the date the note was created, the date the first payment is due and the date the loan matures. The escrow statement will show the deposit that you make each month as part of your “mortgage payment” to cover the real estate taxes and the insurance for the improvements (the dwelling). You should also obtain a copy of your homeowner’s insurance bill and tax bill from your local government. Some of you such as the property owners in an incorporated town like Vienna, Virginia (22180), have two tax bills: one from Fairfax County and another from the Town of Vienna. You’ll need both.
Compare the total amount paid out on the escrow statement for taxes with your tax bills. They should be the same. Do the same for the hazard or homeowner’s insurance premium. All of these disbursed amounts should add up to the billed totals. If not, there needs to be an explanation.
Now, to perhaps the most important part of the mortgage review. Your mortgage balance. We’ll make the assumption that you have a mortgage payment that includes escrows: taxes and insurance. Your payment may also include another insurance premium. That would be mortgage insurance, private or otherwise. What we want to do is subtract the full escrow component from the mortgage payment which is due and you pay each month. We want the principal and interest component – the P and I of the PITI. You may only have ITI, an interest only loan. For the following example we will use a 4.50% interest rate and a loan amount of $417,000, the maximum conventional, conforming loan.
If you have an interest only loan (ITI) calculating the required interest component is as follows:
417,000 x .045 / 12 = $1,563.75 per month until that loan balance changes. If you pay no principal then the required payment will stay the same. But, what happens if you have an “amortizing” loan or make some principal reduction?
Let’s say that you throw in an extra $100 one month so that the new balance is $416,900. Now, the calculation is as follows:
416,900 x .045 /12 = $1,563.38 per month. Just pennies less but, that is your new required payment. Each subsequent reduction in the principal will reduce your required interest payment under most normal note structures. There are exceptions! Check your note to be sure!
Let’s take a fully amortizing loan as an example: the required principal and interest payment on a loan of $417,000 at 4.50% amortized over 30 years is $2,112.28 per month. How does that payment break down into principal and interest? You could consult an amortizing schedule or learn how the calculation is done:
417,000 x .045 /12 = 1,563.75 per month. We calculated this in the above example. To find out what the principal component is you subtract the interest from the required monthly payment:
$2,112.88 – 1,563.75 = $549.13 of principal reduction the first month. Not too shabby. The following month the new payment would be calculated as follows:
417,000 – 549.13 = $416,450.87 which is the new loan balance after the first payment. Take that balance and apply the rate:
416,450.87 x .045 / 12 = $1,561.49 which will be the interest component for the second payment. The principal component is the required monthly payment minus the new interest component: $2,112.88 – 1,561.49 = 551.19 which is slightly larger than the first month’s component (by $2.06) because of the declining balance.
You can do this no matter what your current balance is to check and see whether the right credit is being made to your principal reduction each month. Let’s say that your current balance is $269, 636.69 and you make a payment. The interest would be:
269,636.69 x .045 /12 = $1,011.14 per month. That means the principal component of that payment is 2,112.88 – 1,011.14 = 1,101.74 Congratulations! Your principal component is bigger than your interest cost. Your new balance after this payment is:
269,636.69 – 1,101.74 = $268,534.95 This continues each month until the balance is extinguished.
These are just a few of the items to check while performing your mortgage tune-up and review. If you have a loan where the interest rate can fluctuate monthly the calculation and data points are somewhat more involved. Throw in negative amortization and you might need help. Even if you don’t, if you’re not clear about any issue concerning your property’s debt feel free to call me. I am more than willing to help.
Please let us know by commenting below if this information has been helpful. Thanks.
Photo: Ron Cogswell