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Finance
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Hello Smart People! I’m back with more mortgage related questions (tagging @scripta and @sullim4 since you guys were so helpful last time).

Good news: we just had an offer on a house accepted. Based on @sullim4’s recommendation from last time, we looked around various lenders, but ultimately found a local lender generate a pre-approval letter and I’m most likely going to go with them. I compared with BoxHomeLoan and terms were fairly comparable.

Anyway, we have a couple of options and I’m hoping you guys can help me better understand the differences.

Purchase: $1,765,000 (offer: $765,000 down, $1MM loan).

Product 1:
3.25% – par ($0) – $4352.06/mo
3.125% – 0.498%pt ($4980) – $4283.75/mo
3.0% – 0.998% ($9980) – $4216.04/mo

Product2:
3.125% – par ($0) – $4283.75/mo
3.0% – 0.306% ($3060) – $4216.04/mo

However, Product2 has two restrictions. First, because of minimum credit-line requirements the loan would be under my name only and will not include my wife. Second, it includes an impound account.

From my research, the single-spouse mortgage doesn’t seem to be that big of an issue here in CA since it’s a Community Property state. As I understand it, it just means my wife won’t build credit off this load. If we can’t pay off the mortgage, it’ll hurt my credit but not hers.

I’m less certain about the Impound Account requirement. As I understand it, we’re basically pre-paying property tax / insurance on a monthly basis (instead of twice-a-year) for the remainder of the loan. Not sure if it’s worth it.

Any thoughts/advice/additional info would be appreciated. Thanks!!

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I’m in CA and my spouse is not on any of our mortgages, but is on all the titles. It’s called a “titled non-borrowing spouse”. I’ve only found one lender that does not allow this (Provident). All others have no problem with this. I tried to explain to Provident that we’re in a community property state and it shouldn’t make any difference legally. They wanted a quit claim deed from the non-borrowing spouse. They presented me with an actual written policy that contained their rules for all the states. Interestingly enough if you go through a broker that resells to Provident they don’t care about this, they only care if you apply through them directly. In terms of legal differences, the only thing I found is that if the borrower passes away and the spouse misses a payment, the lender may recall the loan (ask to be paid in full or refinanced). They should not be able to recall if payments continue on time. Other legal protections (like titling into a family trust) don’t care about the loan, only about the title.

The impound account (aka escrow account or escrows) is not a big deal. Personally I prefer to avoid it, because taxes and insurance are the homeowners responsibility (and there are a few rare horror stories online of lenders missing those payments), and because I’d rather use a rewards credit card (or Visa/MC gift cards that work as debit and have lower fees than credit cards) to make those payments myself last minute. It is still possible to pay those expenses yourself in advance, then request a refund from the escrow account. I’ve done it both ways, but IMO having to ask for escrow reimbursement 2-4 times a year is time-consuming. The loans with escrows are usually cheaper than those without escrows. I’ve seen one lender whose difference was only $150, but almost all others charge a quarter point to remove escrows (that’s $2500 in your case). You can ask Product2 what the cost difference would be to remove escrows and decide for yourself if it’s worth it. Personally I would avoid escrows if it only costs maybe $300, but if having escrows saves me more than $300, I’d be fine with it.

It’s also possible to ask the lender to remove escrows later on. They might have some requirements, such as low LTV (which you might have already) and a year of timely payments. But they could also charge a fee for doing this – a few lenders I’ve looked at charge that same 0.25% of the remaining principal balance. Another way to get out of this is to refinance, but you may have to wait 6-12 months from the initial purchase due to “seasoning” requirements (I believe most lenders seasoning requierement is 12-mo after initial purchase and 6-mo after last refi).

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266

Thank you again; this helps. “Titled non-borrowing spouse” didn’t bother me much but it’s good to get confirmation that it really isn’t that big of a deal. What bothered me about the impound/escrow account is the idea of prepaying property tax. At ~$1700/mo in property tax, it seems like a lot of money sitting in escrow not doing anything for me.

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Actually you’re in luck, as escrow accounts for CA earn 2% fixed APY. More than you can currently get from any bank without jumping through hoops.

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268

Oh really? That’s really helpful to know. That certainly changes my thinking a bit. THANKS!!

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Haha… If your escrows are $1700/mo and the property tax payments are semi-annual, then your average annual balance, including the escrow cushion, will be ~$5800, yielding ~$116 in annual interest income. I suppose it’s better than nothing, but in the grand scheme of things and in the shadow of a 1.765MM purchase – a pittance :smile:. I’d be more worried about the 765K equity.

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270

LOL fair enough. It’s more out of principle I didn’t like the idea of it doing nothing.

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271

I agree with Scripta’s take. I personally don’t care for the escrow account - I like to pay the bills myself because I don’t trust the servicer to do it correctly… though in CA, you actually get interest. Here in WA, you get diddly squat.

That upcharge, however, is not worth foregoing the escrow account. You should stick with it (and maybe refi at some later point to get out of the jumbo and into a conventional loan with interest rates in the 2’s).

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272

Thanks again. I went ahead and locked it in with impound/escrow. I almost locked in yesterday but didn’t because I wanted to get thoughts on that. Luck me, between yesterday and this morning, the cost of the 3.0% dropped by $1500, so I went ahead with that. :moneybag:

P.S. I did inquire how much it would cost to remove impound requirement and it was something like $2200.

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273

Do we need to file income taxes for Kids. My kid got $200 as a referee to soccer game. Wondering if we need to report it to IRS. Thinking of opening a Roth IRA for him and put this money in this account. Trying to understand the process.

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I’m assuming this was your child’s only income, that no taxes were withheld, that it would be considered self-employment income, and that the income didn’t come from a church-controlled organization. In that case, you don’t need to file. Once they earn $400 in a year, though, they’d have to file and pay FICA taxes. You can see IRS Publication 929 for all the details.

Roth IRA is a good idea. They don’t need to file a return in order to contribute, but keep the checkstub or other proof of income in the extremely unlikely event the IRS questions the income.

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Hi Doveroftke,
Thanks for the information. He is working as Soccer referee for non profit organization in a city. I should be able to open Roth IRA with me as guardian. He can manage it right? I also need to study about FICA. Is SCHWAB good place to open account?

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I’m buying a house in California and I’m married with children. They are asking how to hold the title. What is fragiledeal’s recommendation on that?

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Yes, I’m a fan of Schwab. There’s a sign up bonus if you get a referral from a friend and deposit at least $1000 (if your son is planning to earn more or if you were considering opening other accounts).

FICA includes Medicare and Medicaid contributions, which employers would normally withhold for you. If he earns over $400, report that as self-employment income on his tax return and use Schedule SE to figure the applicable self-employment tax. I don’t think it’s very complicated, but I’ll admit it’s been several years since I’ve had to worry about it.

278

Don’t know about everyone else’s, but my research (in CA) landed me on HUSBAND AND WIFE AS COMMUNITY PROPERTY WITH RIGHT OF SURVIVORSHIP. This assumes that you and your wife completely trust each other and want the other to get the house if one passes. And if you want to put it in a trust, then holding title this way makes it easier, because some other ways of holding title may require you to change it before you can transfer.

Do not add your children to the title – multiple negatives and no positives. Ideally you’d transfer the title to a trust and have the children be listed as secondary beneficiaries of the trust (you and wife being primary).

IANAL, I only play one on the internet sometimes.

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279

Great thanks scripta. My research also concluded the same thing.

280

No prob. Do consider getting a trust lawyer to set up a trust if you don’t have one already (costs $1600-$4500, depending on where you are and how hard you search, or free if you have a group legal plan through employer). If you and wife upload (to the cloud :slight_smile:) without a trust and the property market value (not your equity) is > $150K, then the property will go through probate, which is costly and time-consuming. A will is not enough to avoid this.

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Wow OK, thanks good to know. Another thing on the list for a new house ugh.

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Hi Doveroftke,
We opened custodian Roth IRA with Schwab. He is planning to move $480 of his savings to this account (using my account as intermediary). Can i also match another $480 into his custodian Roth IRA account. He is going to make another $100 to $150 in next 3 weeks. We are planning to move this amount also into his Roth IRA account and add our match. This should be fine right?

Thanks

283

Strictly speaking, no. The maximum he’s allowed to contribute is the amount of money he earned this calendar year and there are no provisions for matching contributions. That being said, here are two potential courses of action you might consider:

  1. Gift him some money. He’ll still only be able to contribute the amount he’s earned, but he won’t be deprived of actually having that money to spend or keep in a regular savings account. For example, he earns $350, contributes $350 to his IRA, and gets $350 (or whatever amount you decide) in his savings account. There are no tax implications if your gift is under $15,000.

  2. Hire him to complete chores around the house. The money he earns counts as income he can contribute to the IRA and isn’t even subject to FICA taxes. Here’s the low-down on how you make that work: Fund Your Child’s Roth with Chore Income – Marotta On Money

Don’t forget, once he has $400 in earned income he’ll need to file a tax return even if no taxes are due. It would be a red flag to the IRS if Schwab sends a form 5498 for over $400 of contributions and he hasn’t filed a return to declare that income.

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