Can I Modify My Existing Mortgage Instead of Refinancing?

Dear Sandy,
I chose an adjustable rate mortgage in 2003, interest only, based on the LIBOR index. The rate has now risen to over 7.5% so I would like to refinance it to get a better interest rate. My neighbor mentioned to me that he just “modified” the loan on his house. Can I do the same on my type of mortgage?
Michael Young
San Diego, California

Dear Michael,
Your neighbor gave you a good tip, which may work out to your advantage. Your existing lender may agree to “modify” your loan, giving you a better interest rate, but leaving all the other terms of the original mortgage in place. The closing costs generally will be lower than in obtaining a new loan. You may avoid having to pay points or origination fees, although you will still have to pay for a new lenders title insurance policy. Generally with a modified loan, a new appraisal is not required. A lender will perform a “book appraisal” usually at no extra cost to you. The lender may offer you several options, such as a fixed rate for 30 years, or a 5/1 or 3/1 ARM (fixed for 3 or 5 years, then reverting to an adjustable rate). Many times a modification may be the best (and easiest) way to go, but I would caution you to shop and compare options from other lenders before making a decision. You may be able to find a more favorable interest rate with better terms from a new lender. Even with the added closing costs, the new refinance loan may work out better than simply modifying the existing mortgage. If you want to take “cash out” (obtain a larger loan than the existing loan), you generally will have to refinance as if you were taking out a new loan.

Dear Sandy,
I am closing soon on a rental property which I am buying. It is a duplex, with two large units and is fully rented. Will I have to sign any unusual documents at closing for this investment property as compared to when I bought the house which I live in? Is there anything special I should look for in the documents?
Michael Zimmerman
Raleigh, N.C.

Dear Michael,
The major difference in the closing documents for your rental property will be certain credits which will appear on your closing statement for your portion of any deposits made by the tenants, which may include a pro-rata share of a deposit for damage, keys, or a non-refundable cleaning fee. You will receive a pro-rata share of any monthly rental income already paid to the seller, depending on the day of the month you close your purchase. You may also be due a credit for the tenants’ last month’s rent, being held by the current owner. These adjustments would show up on your HUD-1 or final closing statement. You may receive a Bill of Sale for such items as appliances or window coverings. Be sure it includes all the items which you agreed would be included in the sale. Prior to closing, be sure you have read thru the leases, because as the new landlord, you will have to honor the provisions in those contracts. You will also want to be certain you have read and approved any inspection reports, since the property will be held for rental income purposes, you would not want to be faced with large repair bills in the near future.

Dear Sandy,
A friend and I are thinking of investing in some investment properties. We’re looking to buy a house or two and use them as rentals. A real estate agent brought up the fact that we may want to think about other ways to hold title besides joint tenancy or tenants in common. What are your thoughts on that and what are some of our other options?
Shane Alexander
Sacramento, CA

Dear Shane,
Many people form a partnership or use a limited liability company for their investments in real estate. Others may choose to set up a corporation or a joint venture. The main reason for choosing one of these forms of joint ownership is to protect the individual owners from personal liability or to allow investors to participate in the property investment. Two or more owners can form a partnership by means of an agreement between the partners to take care of business jointly and share in the profits. You can form a general partnership, in which each partner is liable for the debts of the partnership, or you can form a limited partnership, where each limited partner’s liability is limited to the amount of his or her investment. Holding title in partnership with others allows any number of partners to have an equal or an unequal interest in the property.

Both a corporation and a limited liability company give an owner of the corporation or company protection against third-party lawsuits. A unique feature about a corporation is that it has the legal aspects of a single person. Land owned by a corporation cannot be attached for personal debts or judgments against any of its shareholders. A creditor can attach only the person’s shares in the corporation. To form a corporation you will have to file certain papers with the state in which you incorporate. Each state has its own requirements regarding the proper legal form for the articles of incorporation, bylaws and shareholders’ agreement. These documents are then filed with the secretary of the state where the corporation is to be located. Whichever type of co-ownership you choose with your friend, I would suggest discussing the pros and cons of each type of ownership with your tax advisor or estate planning attorney. Be sure that your friend, or any future partners, understand as completely as possible the intentions and desires of each person involved. It is often hard to predict what will happen when several people become joint owners of land with all the responsibilities that it entails.

Dear Sandy,
My husband and I have found a small commercial building we would like to buy as a way to start planning for the future. We already own our home and we both have jobs. Do you think we will have a problem qualifying for a commercial mortgage? Will the closing costs be much more expensive than on our residence?
Amy and Rick Sands
Redmond, California

Dear Amy and Rick,
Assuming that your credit is good and your employment is stable, you probably won’t have a problem qualifying for a mortgage on the commercial building. However, when buying investment property, the lender will want to make certain that the property itself qualifies according to certain criteria. The lender will ask for a specific type of appraisal, based not only on the property itself, but in view of other comparable commercial rentals in the area. Lenders generally require a survey of the property be included. Commercial appraisals generally cost more than a home appraisal, and may include reports on the condition of the roof, mechanical systems, or parking lot. The bank will want to see copies of any existing lease agreements and a cash flow chart of anticipated income and expenses for the property. The lender may require copies of the existing leases, if the property is currently occupied. As to the loan and closing fees, those will be based on the purchase price and loan amount of the property, as they would have been on your home purchase. You will be required to purchase fire and casualty insurance, with a minimum one year premium paid in full.

Dear Sandy,
I’ve found a perfect little house at a very good price and I am thinking of buying it as an investment. I plan to rent it out for several years. Do you think there will be any problem getting an appraisal since this will be a rental property? The lender said they are going to require some additional documentation which the appraiser must supply.
Jan Salvador
Connecticut

Dear Jan,
Your lender is probably talking about a Form 1007 (Single Family Rent Survey) and Form 216, (Operating Income Statement), which are rental comparison statements. These forms require the appraiser to look at comparable rentals in your area, and compare those rents to the rent you plan on getting for your property. The appraiser may charge an additional fee for each of these forms, typically around $75 each. There is usually no problem in obtaining this information, unless at least 3 similar rental properties cannot be found. In that case, you can ask the lender to make an exception for your loan. You would explain the circumstances that, let’s say, the appraiser can only find one comparable rental home in the area, and generally, if you qualify for the mortgage in all other respects, the lender will comply with your request and waive the requirement.

Dear Sandy,
I am going to refinance my house shortly and I think I’ve found the perfect loan for my situation. I understand that there will be a three-day “cooling off” period between the time I sign my loan documents to the time in which the loan is put in place. What is this and do I really have the choice of canceling the entire deal during those 3 days? What if the lender doesn’t give me the proper disclosure notices?
Jeff
Cincinnati, Ohio

Dear Jeff,
The “cooling off” period which you refer to is called the Right of Rescission and it is a protection guaranteed by the Federal Truth in Lending Act. You really do have the right within the 3 day time limit to cancel the loan, in full, without being obliged to pay any fees or costs associated with the loan. You have to be quite careful that you cancel, or “rescind” the deal within specific time limits. Unless you waive your right to rescission, you will have until midnight of the third business day after the transaction to cancel the contract. Saturday is counted as a business day, but Sundays or legal holidays are not. If, for example, you sign your loan documents on a Friday, you would have until midnight on the following Tuesday to rescind or cancel the deal. If your lender fails to give you the proper disclosures or the notice of rescission, you can cancel at any time during the first three years after you sign the loan contract, or before you sell the property, whichever occurs first. If you have any problems, you can file a complaint with the Federal Trade Commission. You can do this on line at www.ftc.gov, or write to them at Federal Trade Commission, Washington, D.C. 20580.

Dear Sandy,
I’ve been reading about “flipping properties” in this current real estate market, and I was wondering if I am better off selling my option to buy a property, before it ever goes to closing, or am I better off closing the deal and then selling about 4 or 5 months later?
Scott Johnanson
Miami, Florida

Dear Scott,
It’s hard to say which investment strategy would be best for you, as you will have to weigh your profit margin in selling your purchase contract option before closing versus the profit you expect could be made by holding onto the property for several months. You want to consider that when buying any property, you will be obligated to pay closing costs, which can add up to 3-4% of the purchase price. You will be paying title insurance, escrow fees, state and county mandated taxes, hazard insurance, together with mortgage costs (if you will be obtaining financing on the property). If you obtain a mortgage, you would want to carefully read thru the documents to be sure they did not contain a prepayment penalty for paying off the loan early. When you sell the property, you will incur closing costs, such as real estate commission fees, pro-rata property taxes, recording fees, and possible attorney fees. If you anticipate your profit will be greater, after paying closing costs and calculating any capital gains tax you would be liable for, in holding onto the property, you may want to choose that option. If you are in doubt, you may want to sell your purchase contract option before closing and take that profit.

Dear Sandy,
I bought a home recently and found that my neighbor has planted a rose bush on the property line. That was several years ago, and now the bush is hanging way over onto my property. Can I cut the rose bush down? My neighbor said that he was given permission from the previous owner of my house to plant the bush, and that he will not allow me to trim it in any way. What are my options?
Beverly Smith
Woodland Hills, CA

Dear Beverly,
Since the rose bush is on the property line, you own half the bush together with your neighbor. You can’t cut the bush down, but you are allowed to trim it back to the property line. The best option is to come to an agreement with your neighbor, as legal remedies would be costly. Perhaps your neighbor could construct a wire or wooden support which would force the rose bush to grow in the direction away from your property.

Dear Sandy,
I bought a house several years ago in Las Vegas for $155,000.00 which is now worth over $295,000.00. I had to buy PMI insurance at closing because I put less than 20% down on the property and got a mortgage for the balance. Why hasn’t my lender canceled the PMI insurance, since I now have over 20% equity in the house? Do I have to request this myself?
Loren Williams
Las Vegas, NV

Dear Loren,
Provided you signed your mortgage on or after July 29, 1999 and your are not delinquent on your mortgage payments, your lender is required to cancel your PMI insurance automatically once you reach 22% equity in your home based on the original property value, not on its current market value. When making mortgage payments, most of your payment during the first few years goes towards paying finance charges. It sometimes can take up to 10 or 15 years to pay down a loan to reach the 78% loan value required for automatic termination of PMI insurance. Since your home has appreciated in market value faster than paying down the mortgage, you can certainly ask your lender to cancel your PMI policy. Your first step would be to contact the loan servicer where you send in your mortgage payments. This may or may not be the lender who gave you the loan originally. The loan servicer will be able to tell you exactly their cancellation procedure and requirements. You probably will be asked to provide a new appraisal on the property, and also to show that you are a good credit risk and have made your mortgage payments on time. For specific information the Federal Trade Commission publishes free brochures on PMI insurance and your rights under the Homeowners Protection Act of 1998. You can reach the FTC at www.ftc.gov, or call at 1-877-382-4357. Any complaint you have with problems with your lender in canceling your PMI insurance, you would also direct to the FTC.