Q&A with Tomaro Financial Group: Strategies for Selecting a Mortgage

WALL TOWNSHIP, NJ—(SBN)—A Monmouth County financial planner says falling mortgage rates are creating an opportunity for homeowners to reduce mortgage payments/rates and for certain borrowers, shorten the life of loans.

“Our current financial environment translates into savings for borrowers,” said Anthony Tomaro, investment advisor with Tomaro Financial Group. “Whether you’re a first-time homebuyer or a refinancing borrower you will likely benefit from today’s attractive rates.”

The benchmark 30-year fixed-rate mortgage fell in September to 3.54 percent from 3.62 percent, according to a survey of large lenders, including the Northpoint Mortgage co. by Bankrate®. That’s barely above the record low of 3.5percent, set in December 2012. According to the Mortgage Bankers Association, statistics also reveal that borrowers are taking advantage of current low rates since mortgage applications are nearly 35percent higher than they were a year ago.

Tomaro answered a few common questions about the state of housing in general, and offers some practical tips regarding mortgages.

Q: What is the current state of the housing industry?

Anthony: The good news is that nationally, the housing market is on the mend. We’re seeing an increase in new home sales and prices have been appreciating compared with one year ago. But for borrowers qualifying for a mortgage, it is a much more difficult process because of new government regulations. We’re dealing with stringent mortgage rules which were created to protect people from overextending and to avoid another financial crisis. If someone hasn’t been through the process in awhile I always explain upfront that the paperwork is burdensome and that it can be frustrating.

I’ve also seen some homeowners who’ve wanted to refinance and couldn’t because they didn’t meet certain qualifications for a lower rate. A common reason is loan-to-value ratio. So if your loan amount is high relative to its value, it may be difficult to take advantage of low rates.

Q: What should a first-time homebuyer expect when they are going through the mortgage process?

Anthony: I feel it’s important for mortgage professionals to educate buyers about all the costs involved, especially if they’ve never been through the process before. I go over their total costs, including down payment, mortgage insurance (if they have a small down payment or none at all), homeowner’s insurance, closing costs, property taxes, costs to establish escrow and monthly payments.  A first time homebuyer should also think about their own situation such as children and their education, how long they plan on staying in that particular home and other factors before making a decision.  In addition, property taxes should be researched by municipality.  Especially in New Jersey, property taxes can vary drastically from one town to the next.

Q: When making comparisons, which is a better option, a fixed-rate or adjustable-rate mortgage (ARM)?

Anthony: Everyone’s scenario is different. In a first meeting with a client, I ask a lot of questions, and take a financial history. Generally, if someone is planning to stay in their home for at least the next 10 years, I advise them to lock in the best fixed rate they can. You might see some short-term savings with a variable rate but with rewards come risks. They should be aware that when the government raises interest rates, mortgage rates will follow.

When selecting a mortgage, there are three things I advise clients to consider. First, what is their time horizon? If they are planning to move out of their home in three to five years, then an ARM could be a good option. Second, they have to consider what is happening with interest rates (because rates are near all-time lows the likely scenario is they will rise in the future). Third, is the individual’s ability to tolerate risk. ARMs come with inherent risk, and I ask clients, “can you afford that risk?” The rationale for inquiring is that if they do not move in three to five years, then the rate will likely rise and will negatively impact their finances because of their long-term unplanned stay in the home.

Q: For a homeowner, what is the advantage of a cash-out refinance?

Anthony: A cash-out refinance allows a homeowner to get a loan to replace their existing mortgage. Their new loan is for more than they owe and the difference can be used for a variety of things like a home improvement project, paying off other higher interest loans or for a child’s college education. The advantage is that you’re getting a low interest rate and it is tax deductible.

In certain instances where a homeowner already has a very low mortgage rate, a cash-out refinance may not make sense. I had a client who possessed a $150,000 mortgage at a 3.5percent interest rate. They needed an additional $30,000. I quoted them a rate of 3.5percent to refinance their mortgage plus closing fees. As it turned out, accessing a home equity line of credit, despite its higher interest rate, was a better alternative since they did have to pay closing fees associated with a refinance.

Q: Can you provide specific examples of how you helped a client get the loan that was right for them?

Anthony: I worked with a couple that was heading into retirement and looking to downsize their home. Simultaneously, their son was looking to purchase his first home, but didn’t have enough funds to put down to get a conventional loan. The parents expressed the desire to help him with the down payment. So they were looking to the sale of their home to provide closing funds on both their new home and to provide a gift to their son for the purchase of his condominium. The mother and father had good pensions and retirement assets, but did not have enough liquid funds for both purchases without the sale of their primary home.

The son put an offer on a residency before my clients were able to sell their home, so his parents were considering pulling money from their retirement funds to help him out. The withdrawal would’ve been taxed heavily. I advised them to borrow the funds from their IRA which gave them a 60-day window to pay back the funds.  This allowed them to provide the gift funds prior to the sale of their home, and once their home sale was finalized they paid back the loan. In the end, the clients achieved everything they wanted while avoiding heavy income taxes.

---