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Ask Bankrate is a recurring feature where Bankrate’s experts answer your financial questions. Visit this page for more information on how to submit your question. Click on a question here to jump straight to it.
- Will the new fee on refinancing be permanent?
- Should I roll closing costs into the loan amount?
- Will making an extra mortgage payment shorten the payoff time?
- Do online banks have security issues?
- Should I use cash or tap home equity for remodeling project?
- Can I roll over some of my 401(k) to a Roth IRA?
Q1: Will the new fee on refinancing be permanent?
Do you see the new fee on refinancing mortgages being permanent?
— Francisca J.H.
Answered by Greg McBride, CFA, Bankrate chief financial analyst: “These add-on fees have the precedent of being easy to tack on, but funny enough, they don’t seem to go away so easily. Some loan-level pricing adjustments added during the financial crisis never really went away, they just became a permanent part of the pricing model. So while the 0.5 percent refinancing fee is supposed to be temporary, color me skeptical about whether or not it ultimately will be.”
Q2: Should I roll closing costs into the loan amount?
Is it better to roll closing costs into the loan amount and instead use that money to pay toward the principal/loan amount?
Answered by Greg McBride, CFA, Bankrate chief financial analyst: “There are pros and cons to rolling the closing costs into the loan. Paying the costs out of pocket can be a hefty chunk of change, and the few thousand dollars in costs may not be money that the borrower can readily spare (even if they get some portion of that back after closing with the escrow refund and being able to skip a month’s mortgage payment).
Financing those costs by rolling them into the loan isn’t the end of the world either given how low rates are today. But your ability to roll some or all of your costs into the loan might be limited by the loan-to-value ratio or might bump you into a higher pricing tier with the lender. For example, the lender’s best rate might be if you keep the loan to value under 75 percent, but if rolling your costs in would result in a loan to value ratio of 78 percent and a bump up of one-eighth of a percentage point in the rate, you might think again. For most borrowers, this is more about ability or willingness to part with a few thousand dollars to cover the costs out of pocket versus rolling them into the loan.”
Q3: Will making an extra mortgage payment shorten the payoff time?
Is it true that making an extra payment a year to your mortgage really brings down the years you owe on the mortgage? What about paying down the escrow every year?
Answered by Greg McBride, CFA, Bankrate chief financial analyst: “In short, yes, it can shorten the amount of time it takes to pay off the loan and save a notable amount of interest. I’ll give an example, but promise you’ll read down past the eye-popping savings for a complete perspective before you write that additional check.
Let’s say you take out a $200,000 30-year fixed-rate mortgage at 3 percent. Your monthly principal and interest payment (I’ll get to your question about the escrow in a moment) is $843.21. If you decide to tack on an additional one-twelfth of a payment every month — the equivalent of one extra payment every year — then you would pay $913.48 per month. This would mean paying off the loan about 3 1/2 years early and saving more than $13,000 in interest. Wow! Amazing savings, right?!? But what if you instead took that extra $70.27 per month and put it into your retirement account, earning an average annual return of 6 percent? In 26 1/2 years, you’d still have 3 1/2 years of mortgage payments left but instead of looking at $13,000 in savings you’d be sitting on an extra $54,000 in your retirement account.
So yes, paying extra on the mortgage will shorten the term and save you interest, but the rate of return is equal to that of the mortgage rate. A disciplined saver could do considerably better by devoting their cash to a tax-advantaged retirement account rather than accelerating repayment of a low fixed-rate mortgage.
As to your escrow question, think of your escrow account as a gas tank. You fill it up by putting some in every month and in turn the mortgage servicer will take those funds and make your property tax and property insurance payments when due. There is no advantage to funding it earlier because this is not borrowed money, it is your money being held for later use — with the loan servicer collecting the interest in the meantime instead of you.”
Q4: Do online banks have security issues?
I’m retired and have funds in a brick-and-mortar bank that I’ve used for many years. I’m reluctant to transfer funds by internet to other banks with better savings or CD rates. In your experiences, have you heard or seen security issues in internet banking?
Answered by Stephen Kates, CFP: “If you commonly use your brick-and-mortar bank’s online website, you should feel comfortable using an online bank as well. While they do not have any branches, the online banking industry will use similar and equal safety measures as their physical cousins. Since these banks only exist online, they must maintain robust security, or else customers would choose to bank elsewhere. When choosing the right bank, as you would with any new financial institution, you should do your research and speak with representatives to understand the benefits and drawbacks. This includes their policies on customer security and asset protection.
In regard to specific security vulnerabilities, the greatest risk to any online account is the login credentials you will use. The best way to protect yourself and your money is to stay vigilant to avoid any attempts to steal your login credentials. Maintain a complex password that is not used elsewhere and change it often. Use two-factor authentication and be wary of emails or calls that might be scams.
For more information on protecting yourself online please review this Bankrate article for detailed tips from security professionals.”
Q5: Should I use cash or tap home equity for remodeling project?
Is it better to leverage equity in our home by refinancing for cash out to cover remodeling and use other cash for investing, or maintain the current mortgage and use cash to cover the remodel?
Answered by Greg McBride, CFA, Bankrate chief financial analyst: “If using the cash on hand would deplete your emergency fund or otherwise jeopardize your financial flexibility, then I would advise against doing so. At first blush, doing a cash-out refinance is an attractive way to do it because mortgage rates are at record lows and you might be in the market to refinance your first mortgage anyway. However, in these very unusual times, lenders have tightened credit on cash-out refinancing. Some lenders flat-out won’t offer it. Others will do it but require a large equity cushion to do so, and you’ll often pay a higher rate to take cash out than if you just did a straight rate-and-term refinance.
A home equity line of credit could be an option, but credit has tightened here as well, so shop around. Just as with the cash-out refinance, some lenders have stopped offering home equity lines, while others will only do so to those borrowers that have a healthy enough equity cushion to reduce the risk exposure of the lender.
If you are able to borrow the money at an attractive rate without straining your budget and have the savvy and discipline to invest your excess cash in higher returning investments, this often delivers the optimal financial outcome. But it is not without risk, and not everyone has the stomach for that.”
Q6: Can I roll over some of my 401(k) to a Roth IRA?
Can you roll over part of a 401(k) from your employer to a Roth IRA if they don’t offer a Roth 401(k)?
Answered by Greg McBride, CFA, Bankrate chief financial analyst: “You would not be able to directly roll over pretax 401(k) balances into a Roth IRA. You can still get from here to there, but have to do the financial equivalent of changing planes in Atlanta first. If your employer allows partial rollovers out of the plan for active employees, you would first need to roll over the pretax 401(k) money into a traditional IRA. This keeps that tax-deferred money on a tax-deferred basis. You could then convert your traditional IRA into a Roth IRA. Keep in mind that when doing so, the amount being converted is treated as taxable income, so make sure you have sufficient funds outside of your retirement account to pay the resulting taxes. If you have existing nondeductible traditional IRA balances, then the amount you convert may be taxable on a pro-rata basis. This gets tricky and may or may not pertain to your situation, so consult your tax adviser before proceeding.”