Refinance misstep forfeits low HELOC rate

Is recourse possible against mortgage broker?

DEAR BENNY: A mortgage broker advised us several years ago to split our mortgage into a $400,000 mortgage and a $100,000 line of credit (we had $300,000 total available on the HELOC). A few months ago, we refinanced our $400,000 mortgage with our current lender. (Our house is assessed at $900,000.) We asked our lender if we could refinance our mortgage up to $500,000, pay down the $100,000 drawn on the HELOC, but still keep the HELOC with the HELOC lender open, and our lender said "yes."

We have now learned from our HELOC lender that our HELOC has been closed. Apparently, our lender was supposed to do paperwork with our HELOC lender to keep the HELOC open, but that was never done. Our former HELOC lender said it can’t reopen the HELOC because the "lien has been released," and that we just have to reapply for a new HELOC.

Our HELOC interest rate was in the 2 percent range, and now the quotes to get another HELOC with the same lender are closer to 4 percent. We were counting on the HELOC for a home improvement project, and now we have to apply for a new one. Our home improvement plans are in jeopardy now because these higher HELOC interest rates are going to make it cost so much more than we had budgeted.

What recourse do we have against our mortgage lender, who gypped us out of our line of credit with the HELOC lender? –Star

DEAR STAR: Are you sure that your old HELOC was a fixed rate? Most home equity lines of credit (HELOCs) carry adjustable rates. Thus, your old one may have gone up over time.

More importantly, interest rates are at an all-time low, so you should shop around for the best rate you can find. It is my understanding the most banks are anxious to make such loans and will not charge for setting it up, or at least the charge will be nominal.

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If you can get a new HELOC similar to the old one, I wouldn’t spend time fighting. However, you can always file a complaint with the Office of the Comptroller if your lender was a national bank.

I strongly urge all homeowners to obtain a HELOC if they have any equity in their home. You don’t pay interest until you borrow on that line, and it’s nice to have a checkbook sitting in your desk drawer for that rainy day.

DEAR BENNY: You say that renting out a basement calling it a "mother-in-law" suite is illegal. Is that true in all states?

I have a finished basement with a separate kitchen, den, bath and bedroom. Other parts of the basement are shared: laundry room, recreation room, exercise area, second bathroom and my office. Please note I also have a laundry area upstairs.

A very good friend of mine lost his house due to reduced income after a local college dismissed 58 faculty/staff members, and he and his teenage son needed a place to live. I have let them stay with me for the last several months rent-free while the friend seeks a full-time teaching position and works at minimum wage.

I have considered putting up a mailbox and allowing them to get their mail there. Will that hurt me? I am sure that once a mailbox goes up, the county will consider it more developed and taxes may go up. Are there any other implications I should be concerned about?

I have seen the movie "Pacific Heights" and often tell people about that movie when discussing horrible renters. I’m not concerned about a roommate going bad. If I don’t charge them rent, can he use the other address without it causing either one of us problems? There will be no rent paid or received — just what he pays towards electricity and gas. –Vernee

DEAR VERNEE: I can’t speak for the laws in your state; they do vary. Typically, in order to be a legal rental, most states require that the homeowner obtain a certificate of occupancy. The local government will inspect the property to make sure that it is habitable and in compliance with all building and housing codes. Some states also require that the landlord obtain a business license. That’s primarily a revenue-raising device.

I think you are fine with your current situation. It’s a temporary situation where you are helping out a friend in need. However, should you decide to formally rent out your basement apartment, I would discuss your situation with an attorney who practices real estate law. You want to know what the applicable landlord-tenant laws are in your state, and you also want to have a good, comprehensive, landlord-friendly lease.

But I do recommend the "Pacific Heights" movie to all landlords and especially potential landlords.

DEAR BENNY: What exactly is PMI? Is it there only to safeguard the lender? Does the borrower who pays the premium get any coverage from PMI?

My daughter bought a condo last year. Since her loan was more than 80 percent of the purchase price, she is required to pay PMI charges along with her mortgage and escrow payments for taxes and home insurance. She also took out a term life insurance policy for the amount of the mortgage. Does she need all three insurances, or is she duplicating coverage? –Nancy

DEAR NANCY: I received two questions on PMI, so see my response below the next question. However, I do want to comment about your term life insurance policy for the amount of the mortgage.

Check the policy. Are you paying the same monthly/yearly premium each and every year? If so, in my opinion, you are being ripped off. Your mortgage balance goes down yearly (albeit slowly). Why should your insurance premium stay the same? Shouldn’t it also go down to match the declining balance of your loan?

I am of the strong opinion that mortgage life insurance is a waste of money. Should you die, your house will either be sold or transferred by your estate to a relative or friend. If you really want life insurance, get a real life insurance policy.

Now see my response below about PMI.

DEAR BENNY: My dad and mom have a house on which they have paid more than their mortgage payment for years. Their balance is now below 78 percent of their purchase price. They have tried to get their PMI removed but the mortgage company says their scheduled time to remove is next year. They live in northeastern Tennessee where home prices have appreciated not depreciated. They have said that if my dad and mom pay $350 for an appraisal they "may" consider dropping the PMI. Is there anything else they can do? –Jamie

DEAR JAMIE: PMI stands for private mortgage insurance. If you do not have at least 20 percent equity in your house (or condo) when you buy or refinance it, your lender will typically require that you buy this insurance.

It is designed to protect the lender if you default on your loan. Lenders also claim this enables borrowers to buy their home without having to put down a large down payment.

But in 1998, Congress passed the Homeowners Protection Act. Based on numerous complaints from homeowners (such as you are raising), the law now allows you to cancel PMI when you pay down your mortgage so that it equals 80 percent of the original purchase price or appraised value of your home at the time the loan was first obtained – whichever is less. You also need a good payment history.

And, your lender must automatically cancel PMI coverage once you have paid down the loan to 78 percent of the value of the loan. Again, you must be current on your payments.

Finally, if you still have PMI and it has not been canceled, the lender must cancel when you have made 50 percent of your payments. In other words, if you have a 30-year (360-month) loan, when you make the 180th payment the loan must be canceled.

If you meet the criteria for termination and your lender is not willing to do so, contact the Federal Trade Commission, the Federal Reserve System and your state attorney general.

Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.

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