For those of you who have high Loan to Value ratios the main option for you had been Fannie Mae’s Refi Plus program. In order to qualify for the program your loan would need to be owned by Fannie Mae – if it was owned by Freddie Mac then you would have to approach your current lender directly.
However, there is now an alternative. Freddie Mac’s Open Access program allows us as a broker to refinance your mortgage with up to 100 – 105% Loan to Value (depending on the lender).
If your loan is a Freddie Mac loan, contact us and we can confirm your eligibility and help you refinance while this special program is still available!
Tuesday, December 1, 2009
Thursday, August 20, 2009
Return to ARMs (Adjustable Rate Mortgages)
ARMs or adjustable rate mortgages is making some what of a comeback. While ARMs took a beating the past few years for getting borrowers into loans with low initial teaser rates that promoted unsustainable low monthly payments. Eventually this caused borrowers financial problems who were unprepared when the adjustment period kicked in and increased the monthly payments caused defaults on loan. The key word was for unprepared borrowers, but if you know how to use an ARM it does have its advantages for certain borrowers.
Rates for 5/1 ARM are very attractive right now, as low as 4% with no points and can be even lower with some points for loans up to $729,750.
To know if should you take an adjustable rate mortgage you need to understand what exactly is an ARM. An adjustable rate mortgage have several components; some generic to the industry some specific to the loan. The generic components are:
Starting rate, this is the rate your initial monthly payments are based on. It can be as low as 1% in the past, most of those loans is no longer around.
Adjustment period, this is when the monthly payment will change based on market rate changes, for example if it is a 5/1 ARM with a starting rate of 4%, it means you will have your first payment change after 5 years.
An index, a published rate based on some industry recognized source. The most common indexes are United States treasuries and LIBOR, which stand for London interbank offering rate. Many home equity loans are based on WSJ (Wall Street Journal) prime.
A margin is what each lender adds on to the index to calculate your new monthly payment. Most margins are between 2.25% to 2.75%, each loan will have its own stated margin and the margin will be constant and never change. Today most margin are 2.25%, so in five years after the initial period has expired, your new payment will be based on whatever the index is at the time plus the margin. Many of the ARMs are using the LIBOR index. Today the 1 years LIBOR index is 1.32% assuming five tears from now the index rises to 3.32% which means rates increased by 2%, your new payment will be calculated base on 3.32% plus 2.25% for a new rate of 5.57%, not a prediction just an example. And the loan will have that rate for 1 year, the following year the same calculation is done again.
For protecting against unexpected large rate increases, ARMs have built-in rate caps. Today the most common rate caps are 5/2/5. This mean for the first adjustment period the rate can increase by no more that 5% higher than you initial rate; each year after it can increase no more than 2% higher than the previous year and for the lifetime of the loan no more than 5% of the initial rate. To be clear, if your first adjustment is 5% higher then you have capped out and it can never increase. Any future adjustments can only be lower than the 5% cap.
Shopping for ARMs is much less confusing today. The margin and index are fairly standard and the days of the past when loans with artificial low teaser rates and complicated payment options allowing borrowers to pay less than what the actual payments should be are gone. While conservative borrowers may still fear the ARMs, if your individual situation fits the parameter of an ARM, you should consider it.
The clearest example of a candidate for ARMs is someone who intends to move on to a new home after 3 or 5 or 7 years. In this case the ARM certainly offers a lower rate than the traditional fixed rate mortgages. All the variety of ARMs offered in the past probably had some feature that can benefit some borrowers, but many of the borrowers who took out the fancy ARMs did not fully understand the loans to truly benefit from them.
I am a conservative borrower and stayed away from the ARMs, but as it turned out because the rates have been so low for so long, one of my mortgages based on LIBOR have been the best loan I have had for the past 5 years.
Rates for 5/1 ARM are very attractive right now, as low as 4% with no points and can be even lower with some points for loans up to $729,750.
To know if should you take an adjustable rate mortgage you need to understand what exactly is an ARM. An adjustable rate mortgage have several components; some generic to the industry some specific to the loan. The generic components are:
Starting rate, this is the rate your initial monthly payments are based on. It can be as low as 1% in the past, most of those loans is no longer around.
Adjustment period, this is when the monthly payment will change based on market rate changes, for example if it is a 5/1 ARM with a starting rate of 4%, it means you will have your first payment change after 5 years.
An index, a published rate based on some industry recognized source. The most common indexes are United States treasuries and LIBOR, which stand for London interbank offering rate. Many home equity loans are based on WSJ (Wall Street Journal) prime.
A margin is what each lender adds on to the index to calculate your new monthly payment. Most margins are between 2.25% to 2.75%, each loan will have its own stated margin and the margin will be constant and never change. Today most margin are 2.25%, so in five years after the initial period has expired, your new payment will be based on whatever the index is at the time plus the margin. Many of the ARMs are using the LIBOR index. Today the 1 years LIBOR index is 1.32% assuming five tears from now the index rises to 3.32% which means rates increased by 2%, your new payment will be calculated base on 3.32% plus 2.25% for a new rate of 5.57%, not a prediction just an example. And the loan will have that rate for 1 year, the following year the same calculation is done again.
For protecting against unexpected large rate increases, ARMs have built-in rate caps. Today the most common rate caps are 5/2/5. This mean for the first adjustment period the rate can increase by no more that 5% higher than you initial rate; each year after it can increase no more than 2% higher than the previous year and for the lifetime of the loan no more than 5% of the initial rate. To be clear, if your first adjustment is 5% higher then you have capped out and it can never increase. Any future adjustments can only be lower than the 5% cap.
Shopping for ARMs is much less confusing today. The margin and index are fairly standard and the days of the past when loans with artificial low teaser rates and complicated payment options allowing borrowers to pay less than what the actual payments should be are gone. While conservative borrowers may still fear the ARMs, if your individual situation fits the parameter of an ARM, you should consider it.
The clearest example of a candidate for ARMs is someone who intends to move on to a new home after 3 or 5 or 7 years. In this case the ARM certainly offers a lower rate than the traditional fixed rate mortgages. All the variety of ARMs offered in the past probably had some feature that can benefit some borrowers, but many of the borrowers who took out the fancy ARMs did not fully understand the loans to truly benefit from them.
I am a conservative borrower and stayed away from the ARMs, but as it turned out because the rates have been so low for so long, one of my mortgages based on LIBOR have been the best loan I have had for the past 5 years.
Thursday, August 13, 2009
Subordination: What is it & why should I care?
Guest-blogging today is Alex Nunemaker, a Loan Consultant with Borrow123.com. He can be reached at alex@borrow123.com with any specific questions or comments.
You have a mortgage that you’d like to refinance – but you also have a home equity line or other 2nd trust on the property. While this situation is fairly common, the market has made getting these 2nd trusts “subordinated” more difficult.
To begin with resubordination (or just subordination) is required when you have more than one lien on the property. More than likely, your smaller 2nd trust (such as the case if you have an old 80-10-10 loan) or a Home Equity line is in the second lien position. Anytime you refinance your primary or first mortgage you have to get a Subordination Agreement from you 2nd trust holder. This agreement will state that your 2nd trust holder has reviewed the new terms and conditions and they agree to stay in the 2nd lien position. Otherwise the new mortgage you are refinancing into would go into the 2nd position, and your Home Equity Line would bump into the first lien position (which almost all lenders will not agree to).
While it’s not important that you as a borrower now everything that goes on this process, there are a few reasons why you as a borrower may be effected, and they all stem from two facts: 1) home values are dropping and 2) interest rates are low and 2nd trust lender have received a lot of requests for subordinations. As a result lenders are taking longer to subordinate loans and are rejecting more subordination requests.
Let’s look at an example:
You have a first mortgage of $250,000; a HELOC with no balance but a total line up to $100,000. Your current market value is $350,000, but when you received the HELOC it was $450,000. When you send in a subordination request they will calculate your CLTV based upon your first mortgage + the total line (not just your balance – since you can draw upon the entire line). This would make your CLTV 100% since your value is $350,000. Most lenders will not approve this – traditionally what we see is lenders approving loans between 85-90% CLTV as a maximum. To proceed with the loan you would likely need to reduce your total HELOC amount or reduce your 1st mortgage loan amount.
Before even locking in a rate, it is also imperative to contact your 2nd trust lender to see how long their turn-times are for subordinations. While in the past in only took a couple of days, we now routinely see them take 2-8 weeks which will effect your lock-in period.
Many times, it makes more sense (especially if you have a HELOC with no balance) to close the loan and reopen another HELOC after refinancing. Just make sure you won’t have any unexpected early closure penalties. With any loan these days it’s important to contact your 2nd trust lender to see how long they would take, and if they have any special guidelines to make your refinance as smooth as possible.
You have a mortgage that you’d like to refinance – but you also have a home equity line or other 2nd trust on the property. While this situation is fairly common, the market has made getting these 2nd trusts “subordinated” more difficult.
To begin with resubordination (or just subordination) is required when you have more than one lien on the property. More than likely, your smaller 2nd trust (such as the case if you have an old 80-10-10 loan) or a Home Equity line is in the second lien position. Anytime you refinance your primary or first mortgage you have to get a Subordination Agreement from you 2nd trust holder. This agreement will state that your 2nd trust holder has reviewed the new terms and conditions and they agree to stay in the 2nd lien position. Otherwise the new mortgage you are refinancing into would go into the 2nd position, and your Home Equity Line would bump into the first lien position (which almost all lenders will not agree to).
While it’s not important that you as a borrower now everything that goes on this process, there are a few reasons why you as a borrower may be effected, and they all stem from two facts: 1) home values are dropping and 2) interest rates are low and 2nd trust lender have received a lot of requests for subordinations. As a result lenders are taking longer to subordinate loans and are rejecting more subordination requests.
Let’s look at an example:
You have a first mortgage of $250,000; a HELOC with no balance but a total line up to $100,000. Your current market value is $350,000, but when you received the HELOC it was $450,000. When you send in a subordination request they will calculate your CLTV based upon your first mortgage + the total line (not just your balance – since you can draw upon the entire line). This would make your CLTV 100% since your value is $350,000. Most lenders will not approve this – traditionally what we see is lenders approving loans between 85-90% CLTV as a maximum. To proceed with the loan you would likely need to reduce your total HELOC amount or reduce your 1st mortgage loan amount.
Before even locking in a rate, it is also imperative to contact your 2nd trust lender to see how long their turn-times are for subordinations. While in the past in only took a couple of days, we now routinely see them take 2-8 weeks which will effect your lock-in period.
Many times, it makes more sense (especially if you have a HELOC with no balance) to close the loan and reopen another HELOC after refinancing. Just make sure you won’t have any unexpected early closure penalties. With any loan these days it’s important to contact your 2nd trust lender to see how long they would take, and if they have any special guidelines to make your refinance as smooth as possible.
Wednesday, July 29, 2009
The "No Cost" Refinance
Guest-blogging today is Alex Nunemaker, a Loan Consultant with Borrow123.com. He can be reached at alex@borrow123.com with any specific questions or comments.
As a loan consultant I hear a lot about no-cost mortgages being done. The name seems to imply that the loan will be done for free – making it pretty hard to beat! However, there is almost never a time when a loan will truly be done at no cost. If you are ever marketed a "no cost" loan, it is imperative that you know exactly how the loan is being structured.
This type of loan really should be called the “no out-of-pocket cost” loan, because it means at closing you would not have to bring funds to cover closing costs. Traditionally, there are two ways to make this happen. The first way is to get rebate points from the lender by accepting a slightly higher rate. However, lenders have dramatically reduced the amount of rebate points they offer for accepting a higher rate so it is becoming more unlikely to find a rate that will give you enough rebate points to cover closing costs and still have a rate that makes refinancing worthwhile.
What is much more frequent with a no-cost mortgage today is to roll closing costs into the principal of the loan. So in reality there is no immediate cost – but you will pay that cost over the amortization of the loan.
For example, let’s say you are looking to take out a loan for $250,000. Offer A is for $250,000 at 5% with $5,000 in closing costs. Offer B is a no-cost loan also at 5%. More than likely, that $5,000 in closing costs is included in the principal so really you are borrowing $255,000 at 5%. Offer A has the advantage of borrowing less initially by paying today and Offer B allows you to keep money in your pocket today, but you owe more over the life of the loan.
This is not to say that wrapping closing costs is a bad idea – in some ways it can really work for you. For instance, Offer A will give you a Principal & Interest payment of $1342.05. Offer B will give you a payment of $1368.90 – a difference of about $27/month. If that $27 does not make a big difference in your monthly budget it may be worthwhile to keep that $5000 in your pocket right now and roll it into the loan.
Another advantage of wrapping in closing costs is that you can wrap in some additional points into the loan to buy down the interest rate. While you may have to borrow a little more, you can lock in a lower interest rate than you otherwise normally could. This could keep your monthly payment at roughly the same amount (possibly lower) and allow you to pay down the principal faster.
Let’s go back to our example. Offer A stays that same at 5% with $5000 in closing costs. However, Offer B could allow you to buy down the rate to 4.375% at a cost of an additional 1.25 points, or $3225 (bringing total closing costs to $8,187 and rounding the loan amount to about $258,200).
Offer A:
Loan Amount $250,000
Interest Rate: 5%
Monthly Payment: $1342.05
Closing Costs: $5000
Principal Amount after 10 years: $202,860.42
Total Payments after 10 years: $161,046
Offer B:
Loan Amount: $258,200
Interest Rate: 4.375%
Closing Costs: $0
Monthly Payment: $1289.15
Principal Amount after 10 years: $205,422.67
Total Payments after 10 years: $154,698.00
The important thing to take away from this is that Offer A will have a slightly lower balance after 10 years (about $2500). However, Offer B got to where it’s at with $6348 less in total payments ($52.90/month) and without paying $5000 at its inception.
In conclusion, it’s important to realize that there is never really a "no-cost" loan. However you can minimize out of pocket expenses. It is also important to keep in mind your overall goals when making any decision in relation to your mortgage – in order to see the benefits of these rate reductions you need to hold on to the asset (your house) for long enough to see the benefit.
As a loan consultant I hear a lot about no-cost mortgages being done. The name seems to imply that the loan will be done for free – making it pretty hard to beat! However, there is almost never a time when a loan will truly be done at no cost. If you are ever marketed a "no cost" loan, it is imperative that you know exactly how the loan is being structured.
This type of loan really should be called the “no out-of-pocket cost” loan, because it means at closing you would not have to bring funds to cover closing costs. Traditionally, there are two ways to make this happen. The first way is to get rebate points from the lender by accepting a slightly higher rate. However, lenders have dramatically reduced the amount of rebate points they offer for accepting a higher rate so it is becoming more unlikely to find a rate that will give you enough rebate points to cover closing costs and still have a rate that makes refinancing worthwhile.
What is much more frequent with a no-cost mortgage today is to roll closing costs into the principal of the loan. So in reality there is no immediate cost – but you will pay that cost over the amortization of the loan.
For example, let’s say you are looking to take out a loan for $250,000. Offer A is for $250,000 at 5% with $5,000 in closing costs. Offer B is a no-cost loan also at 5%. More than likely, that $5,000 in closing costs is included in the principal so really you are borrowing $255,000 at 5%. Offer A has the advantage of borrowing less initially by paying today and Offer B allows you to keep money in your pocket today, but you owe more over the life of the loan.
This is not to say that wrapping closing costs is a bad idea – in some ways it can really work for you. For instance, Offer A will give you a Principal & Interest payment of $1342.05. Offer B will give you a payment of $1368.90 – a difference of about $27/month. If that $27 does not make a big difference in your monthly budget it may be worthwhile to keep that $5000 in your pocket right now and roll it into the loan.
Another advantage of wrapping in closing costs is that you can wrap in some additional points into the loan to buy down the interest rate. While you may have to borrow a little more, you can lock in a lower interest rate than you otherwise normally could. This could keep your monthly payment at roughly the same amount (possibly lower) and allow you to pay down the principal faster.
Let’s go back to our example. Offer A stays that same at 5% with $5000 in closing costs. However, Offer B could allow you to buy down the rate to 4.375% at a cost of an additional 1.25 points, or $3225 (bringing total closing costs to $8,187 and rounding the loan amount to about $258,200).
Offer A:
Loan Amount $250,000
Interest Rate: 5%
Monthly Payment: $1342.05
Closing Costs: $5000
Principal Amount after 10 years: $202,860.42
Total Payments after 10 years: $161,046
Offer B:
Loan Amount: $258,200
Interest Rate: 4.375%
Closing Costs: $0
Monthly Payment: $1289.15
Principal Amount after 10 years: $205,422.67
Total Payments after 10 years: $154,698.00
The important thing to take away from this is that Offer A will have a slightly lower balance after 10 years (about $2500). However, Offer B got to where it’s at with $6348 less in total payments ($52.90/month) and without paying $5000 at its inception.
In conclusion, it’s important to realize that there is never really a "no-cost" loan. However you can minimize out of pocket expenses. It is also important to keep in mind your overall goals when making any decision in relation to your mortgage – in order to see the benefits of these rate reductions you need to hold on to the asset (your house) for long enough to see the benefit.
Tuesday, July 28, 2009
Borrow123.com is now on Twitter!
You can now follow Borrow123.com on Twitter at http://twitter.com/Borrow123
This is just one more tool for you to stay up to date on the latest rates, updates, market conditions and happenings here at Borrow123.com
This is just one more tool for you to stay up to date on the latest rates, updates, market conditions and happenings here at Borrow123.com
Friday, May 29, 2009
HR 1728
HR 1728 is a mortgage reform bill passed by congress earlier this month.
"The act is to,
To amend the Truth in Lending Act to reform consumer mortgage practices and provide accountability for such practices, to provide certain minimum standards for consumer mortgage loans, and for other purposes."
The bill is to be presented to the senate sometime in the future, and when and if it does pass and become law this could change the way mortgages are originated in the future.
The bill is comprehensive, covering from the mortgage origination to mortgage standards to appraisal, high cost mortgages counseling and fraud prevention and a host of other related activities.
I am impressed by the breath of the act, and an extensive portion of the act is to protect the consumer from unscrupulous practices of the lenders and brokers.
Many of the current lending practices may have to change and brokers in particular may be most affected. The bill is to reform and regulate many areas of the mortgage industry, and heated discussions by interested parties have argued for the pro and cons of the bill.
It is too early to tell how all this will turn out, but one example of what is proposed is the elimination of the broker compensation from the lenders in the form of rebate points.
As most borrow123.com customers know, we offer rebate points corresponding to certain interest rates, you then can have a choice of lower rates or higher rate with rebate points to offset closing cost. This practice may be eliminated, along this proposal is brokers may not be compensated by lenders so we may have to charge borrower for origination fee, making the zero point loan extinct.
So this is not an attempt from me to rush you to refinance but rather a heads up on current mortgage reform and maybe trigger readers who are interested to look further into the possible impact of the bill.
On a personal note, for long time borrow123.com customer, I like to report two of my former employees, processor Olivia and Loan consultant Qi, pronounced as Chee, during the slow down of the market both have graduated from law school and Olivia has past the Bar exam and is practicing in a DC law firm, while Qi is scheduled to take the Bar soon.
Congrats to them and this is also an indication of great people I have had working for Borrow123.com.
"The act is to,
To amend the Truth in Lending Act to reform consumer mortgage practices and provide accountability for such practices, to provide certain minimum standards for consumer mortgage loans, and for other purposes."
The bill is to be presented to the senate sometime in the future, and when and if it does pass and become law this could change the way mortgages are originated in the future.
The bill is comprehensive, covering from the mortgage origination to mortgage standards to appraisal, high cost mortgages counseling and fraud prevention and a host of other related activities.
I am impressed by the breath of the act, and an extensive portion of the act is to protect the consumer from unscrupulous practices of the lenders and brokers.
Many of the current lending practices may have to change and brokers in particular may be most affected. The bill is to reform and regulate many areas of the mortgage industry, and heated discussions by interested parties have argued for the pro and cons of the bill.
It is too early to tell how all this will turn out, but one example of what is proposed is the elimination of the broker compensation from the lenders in the form of rebate points.
As most borrow123.com customers know, we offer rebate points corresponding to certain interest rates, you then can have a choice of lower rates or higher rate with rebate points to offset closing cost. This practice may be eliminated, along this proposal is brokers may not be compensated by lenders so we may have to charge borrower for origination fee, making the zero point loan extinct.
So this is not an attempt from me to rush you to refinance but rather a heads up on current mortgage reform and maybe trigger readers who are interested to look further into the possible impact of the bill.
On a personal note, for long time borrow123.com customer, I like to report two of my former employees, processor Olivia and Loan consultant Qi, pronounced as Chee, during the slow down of the market both have graduated from law school and Olivia has past the Bar exam and is practicing in a DC law firm, while Qi is scheduled to take the Bar soon.
Congrats to them and this is also an indication of great people I have had working for Borrow123.com.
Wednesday, May 6, 2009
Market Update
We are now seeing long term bond yields climb to 3.188% (as of May 6th). Yet mortgage rates for 30 years fixed remains at below 5%. This is definitely a sign of the spread narrowing between treasuries and mortgage backed securities. How long can the rates stay at the present levels is anybodies guess.
While I pretend playing amateur economist, I will attempt to guess and give some reasons as to why I think the direction of the rates will go.
Given federal policy has dominated the mortgage rates and strong and forceful controls are in place to ensure rates stay as low and as long as the economy need it, we will continue to see rates between the range of 4.75% to 5.25% for the 30 years fixed mortgages. This will be the range where the agency loans rates will be until Federal policy changes. Obviously, when there are signs of economic recovery, Federal policies will no longer focus solely on keeping rates low. Monetary policies may change to other areas of the economy, and any sign of inflation will cause the rates to go up.
In the news, Mr. Bernanke (Chairman of the Federal Reserve), has commented that he sees no sign of inflation as of now. He also stated that he thinks the economy may see improvements in late 2009. Based on these statements we might see rates remain low for the remainder of the year. In the meantime, it appears that the economy has made some sort of recovery, housing sales are stronger, stock market has rebounded, and unemployment is slowing down. If unemployment is a lagging economic indicator, then we may have seen the worst of the economy.
There are also signs of revival of the mortgage market other than agency loans. I am seeing some very attractive super jumbo rates, albeit the really good rates are the Adjustable mortgages. As of today (May 6th), we have 5/1 ARMs for 3.75% with no points. For those that don’t plan on staying in the house for more than 5 years, these 5/1 ARMS maybe a consideration.
While I pretend playing amateur economist, I will attempt to guess and give some reasons as to why I think the direction of the rates will go.
Given federal policy has dominated the mortgage rates and strong and forceful controls are in place to ensure rates stay as low and as long as the economy need it, we will continue to see rates between the range of 4.75% to 5.25% for the 30 years fixed mortgages. This will be the range where the agency loans rates will be until Federal policy changes. Obviously, when there are signs of economic recovery, Federal policies will no longer focus solely on keeping rates low. Monetary policies may change to other areas of the economy, and any sign of inflation will cause the rates to go up.
In the news, Mr. Bernanke (Chairman of the Federal Reserve), has commented that he sees no sign of inflation as of now. He also stated that he thinks the economy may see improvements in late 2009. Based on these statements we might see rates remain low for the remainder of the year. In the meantime, it appears that the economy has made some sort of recovery, housing sales are stronger, stock market has rebounded, and unemployment is slowing down. If unemployment is a lagging economic indicator, then we may have seen the worst of the economy.
There are also signs of revival of the mortgage market other than agency loans. I am seeing some very attractive super jumbo rates, albeit the really good rates are the Adjustable mortgages. As of today (May 6th), we have 5/1 ARMs for 3.75% with no points. For those that don’t plan on staying in the house for more than 5 years, these 5/1 ARMS maybe a consideration.
Friday, April 24, 2009
The Math of Refinancing
One of my friends, who is very smart and financially savvy, asked about refinancing. It is a very interesting question that borrowers have rarely asked.
He had bought and financed his home a couple of years ago and has an interest rate of over 6%. He realizes that in the current environment he can lower his rate by refinancing. So his questions are what happened to the payments he made in the past two years? And is he really saving any money by starting over for another 30 years?
The primary motivation for most borrowers to refinance is to reduce their monthly payments, very few homeowners ever intent to stay in that same home for 30 years. It is assumed when refinancing, based on the lower rate, you will gain net savings in addition to the payment reduction. But let’s look at someone who does not need to lower the payment and see if it makes sense to refinance.
I can do this a couple of ways. The simplest way is to compare the total monthly payments. For example, a $400,000 30 years fixed mortgage taken 2 years ago at 6%, and now refinanced to a 30 years fixed mortgage at 5%.
The 6% loan will carry a principal and interest payment of $2398.20/month and the current balance of $389,873.
The new loan will be for $393,000, rolling in some closing cost, at 5% and have a monthly payment of 2109.70/month.
Now, we multiply the remaining payments of both loans, one over 336 months (since he has made 24 payments) and the new loan over 360 month, since he is starting over.
When the mortgage is fully paid, the original loan will have pay out $805,795 compared to the new loan of $759,492. In this case the math is clear; the lower rate gives you both lower monthly payments and long term savings of more than $40k.
Of course different scenarios will have different results. From my experience, if you have made less than 3 years of payments and can reduce your interest rate by 3/4%; you can achieve both payment reduction and net savings. And if payment reduction is not your primary concern, then you should consider refinancing to a 20 or 15 years mortgage to maximize your total savings.
Send me an Email if you want to know your own particular circumstances.
He had bought and financed his home a couple of years ago and has an interest rate of over 6%. He realizes that in the current environment he can lower his rate by refinancing. So his questions are what happened to the payments he made in the past two years? And is he really saving any money by starting over for another 30 years?
The primary motivation for most borrowers to refinance is to reduce their monthly payments, very few homeowners ever intent to stay in that same home for 30 years. It is assumed when refinancing, based on the lower rate, you will gain net savings in addition to the payment reduction. But let’s look at someone who does not need to lower the payment and see if it makes sense to refinance.
I can do this a couple of ways. The simplest way is to compare the total monthly payments. For example, a $400,000 30 years fixed mortgage taken 2 years ago at 6%, and now refinanced to a 30 years fixed mortgage at 5%.
The 6% loan will carry a principal and interest payment of $2398.20/month and the current balance of $389,873.
The new loan will be for $393,000, rolling in some closing cost, at 5% and have a monthly payment of 2109.70/month.
Now, we multiply the remaining payments of both loans, one over 336 months (since he has made 24 payments) and the new loan over 360 month, since he is starting over.
When the mortgage is fully paid, the original loan will have pay out $805,795 compared to the new loan of $759,492. In this case the math is clear; the lower rate gives you both lower monthly payments and long term savings of more than $40k.
Of course different scenarios will have different results. From my experience, if you have made less than 3 years of payments and can reduce your interest rate by 3/4%; you can achieve both payment reduction and net savings. And if payment reduction is not your primary concern, then you should consider refinancing to a 20 or 15 years mortgage to maximize your total savings.
Send me an Email if you want to know your own particular circumstances.
Monday, April 20, 2009
Market update April 20, 2009.
There have been more announcements in the news about the Federal loan modification plan, not to be confused with for profit or not for profit firms who works with borrowers to modify their mortgages in distress. As some of you know the government also has announced their intent to prosecute some companies who are charging a fee to homeowners in distress to help them get loan modifications because some of these firms have been deemed as fraudulent operations.
The Federal loan modification plan identified six major banks who agreed to participate, and by participating will receive some federal subsidies over time. The stated goal of the plan is to prevent foreclosures, and loan modification is a better alternative than foreclosure for all parties involved.
I will share with you some of the feedback from my customers about their attempts for loan modification. The most common comment is you have to wait a long time for someone to respond to your loan modification request, if ever. And if you are making payments on time you should not expect anything you couldn’t get by refinancing. For the distressed homeowners, by that I mean borrowers who has missed a few payments, loan modification has a wide range of possibilities. I have heard rates as low as 2% and in some instances of reduction in principal. I will have to admit that I have not seen any of the paperwork, only second hand anecdotes.
I did see one loan modification agreement issued by a major bank. It did reduce the monthly payment substantially for a borrower who has missed several payments. The payment was reduced by a half, but the terms were very vague on how long this reduction would be (on paper it was for only two months). What was very clear was that an accounting of all the missed payments, penalties, and legal costs is totaled up. The borrower accepting the payment reduction will have to acknowledge the liability for those penalties, missed payments, and accept that any payments made going forward will be paying off the delinquent accounts first. There was no specific language on the new interest rate; in fact it appears that the document served more of as a restatement of charges in arrears and promises to repay them.
It is hard to turn down a payment reduction of 50% when you are having financial trouble. The borrower is grateful for the reduction but it is hard to see on paper the real savings of the loan modification or it is just a mechanism to defer the payments of the loan. Whether this borrower chooses to accept these terms or continues to negotiate is not known to me. But I do think if you are current on your mortgage, your best chance to reduce your payment is by refinancing.
The Federal loan modification plan identified six major banks who agreed to participate, and by participating will receive some federal subsidies over time. The stated goal of the plan is to prevent foreclosures, and loan modification is a better alternative than foreclosure for all parties involved.
I will share with you some of the feedback from my customers about their attempts for loan modification. The most common comment is you have to wait a long time for someone to respond to your loan modification request, if ever. And if you are making payments on time you should not expect anything you couldn’t get by refinancing. For the distressed homeowners, by that I mean borrowers who has missed a few payments, loan modification has a wide range of possibilities. I have heard rates as low as 2% and in some instances of reduction in principal. I will have to admit that I have not seen any of the paperwork, only second hand anecdotes.
I did see one loan modification agreement issued by a major bank. It did reduce the monthly payment substantially for a borrower who has missed several payments. The payment was reduced by a half, but the terms were very vague on how long this reduction would be (on paper it was for only two months). What was very clear was that an accounting of all the missed payments, penalties, and legal costs is totaled up. The borrower accepting the payment reduction will have to acknowledge the liability for those penalties, missed payments, and accept that any payments made going forward will be paying off the delinquent accounts first. There was no specific language on the new interest rate; in fact it appears that the document served more of as a restatement of charges in arrears and promises to repay them.
It is hard to turn down a payment reduction of 50% when you are having financial trouble. The borrower is grateful for the reduction but it is hard to see on paper the real savings of the loan modification or it is just a mechanism to defer the payments of the loan. Whether this borrower chooses to accept these terms or continues to negotiate is not known to me. But I do think if you are current on your mortgage, your best chance to reduce your payment is by refinancing.
Tuesday, April 14, 2009
A Few Comments About Recent Underwriting Trends
Since the collapse of the financial market, and since most people attribute this to the loose underwriting standard of mortgages prevalent in the past few years, the obvious response is to tighten underwriting standards. From our front row seats as brokers we see lenders across the board tightening loan approvals.
The range of actions start with requiring more equity in the property to higher credit scores. But more importantly is the changes in philosophy: every loan goes under the magnifying glass regardless of how well qualified the borrowers are.
Examples of what I mean are all borrowers are now required to sign forms authorizing the lenders to pull transcript of their tax returns and most lenders are pulling and re-verifying the information. Most lenders are also performing verbal verification of employment on the day of settlement to make sure job status have not changed.
It is understood by most people mortgages are getting harder to qualify, besides the required down payment and the thorough review of past credit history mostly defined by your credit score and the careful review of your ability to make payments. New hurdles include extra layer of underwriting by mortgage insurers if you need mortgage insurance; this means even some of the most qualified borrowers cannot get mortgage insurance in certain instances. Appraisers frequently receive challenges on the value of the property, requiring more supporting documents. Lenders can ask for a myriad of minor details which can be inconvenient or downright raise havoc.
For example the borrower who’s HR person responsible for verification of employment is on vacation on the day of the settlement and lenders cannot close the loan because of it.
I think most of us understand this is a normal course of business when responding to a catastrophic event, as evidenced by recent airline security changes.
Almost all of our loans are conventional loans with FannieMae and FreddieMac guidelines, and we have been relying on their AUS (automated underwriting system) for instant loan approvals, now the most obvious change is underwriters not relying strictly on the Automated Underwriting System (AUS) decisions and imposing additional review or documentation requirement, making the approval process longer and more complicated, bringing back memories of old days of loan underwriting.
Well folks, be patient, for you the well qualified borrowers, just like the airline security lines, the loan approval process will eventually cycle back from one extreme to another.
The range of actions start with requiring more equity in the property to higher credit scores. But more importantly is the changes in philosophy: every loan goes under the magnifying glass regardless of how well qualified the borrowers are.
Examples of what I mean are all borrowers are now required to sign forms authorizing the lenders to pull transcript of their tax returns and most lenders are pulling and re-verifying the information. Most lenders are also performing verbal verification of employment on the day of settlement to make sure job status have not changed.
It is understood by most people mortgages are getting harder to qualify, besides the required down payment and the thorough review of past credit history mostly defined by your credit score and the careful review of your ability to make payments. New hurdles include extra layer of underwriting by mortgage insurers if you need mortgage insurance; this means even some of the most qualified borrowers cannot get mortgage insurance in certain instances. Appraisers frequently receive challenges on the value of the property, requiring more supporting documents. Lenders can ask for a myriad of minor details which can be inconvenient or downright raise havoc.
For example the borrower who’s HR person responsible for verification of employment is on vacation on the day of the settlement and lenders cannot close the loan because of it.
I think most of us understand this is a normal course of business when responding to a catastrophic event, as evidenced by recent airline security changes.
Almost all of our loans are conventional loans with FannieMae and FreddieMac guidelines, and we have been relying on their AUS (automated underwriting system) for instant loan approvals, now the most obvious change is underwriters not relying strictly on the Automated Underwriting System (AUS) decisions and imposing additional review or documentation requirement, making the approval process longer and more complicated, bringing back memories of old days of loan underwriting.
Well folks, be patient, for you the well qualified borrowers, just like the airline security lines, the loan approval process will eventually cycle back from one extreme to another.
Monday, April 6, 2009
Latest announcements
Conforming Limits
We just got word conforming jumbo loan limit has been raised to $729,950 in 250 counties.
Locally, in Maryland the following counties will allow up to $729,950,
Charles, Frederick, Calvert, Montgomery and Prince Georges.
In Virginia, Alexandria city, Arlington county, Clarke county, Fairfax county and city, falls Church city, Fredericksburg City, Fauquier, Loudon, Prince Williams, Spotsylvania, Stafford, Warren counties, Manassas City and Manassas Park City.
Other local counties also have their loan limits raised. Call me if you want to know the new limit.
May 1st is the day these loans limits will take effect, you should apply now to get ready for loan approval in May.
Refi Plus Program
Starting on April 6th (today) we will be able to offer up to 105% financing on existing Fannie Mae loans, this will allow borrowers underwater to take advantage of the current lower rates. Contact me to find out if your loan is an existing Fannie Mae loan if you are interested in applying.
Eligibility
As of right now, to be eligible for this program your loan must currently be Fannie Mae loan. You can look up whether you have a Fannie Mae loan with Fannie Mae in a matter of 5 seconds by going to: http://loanlookup.fanniemae.com/loanlookup/ . Enter your address and it will tell you if Fannie Mae owns your loan.
This program is aimed at people who are current on their mortgage payments (no 60 day lates in the last 12 months), but cannot take advantage of the low rates because their current Loan to Value is too high to refinance, or based upon the new LTV the hit on Mortgage Insurance makes it unsensible to refinance.
Your loan amount must also must meet conforming limits (each county has a conforming limit assigned by Fannie Mae).
Valuation
The main advantage of this program is that you can finance up to 105% of your current market value at near market rates (we'll have to wait and see how closely to the market lenders can offer for this program). From all preliminary accounts, your value will be determined by census track data. Obviously, there are no cash-out transactions allowed on any refinancing.
Mortgage Insurance (Starting May 4th)
If you did not pay MI on your current transaction, or you had it waived after reaching below 80% LTV and you use this program you will NOT need to pay MI, even if your new LTV is above 80%.
However, if you currently are paying MI you will still need to pay MI. Many MI companies (if not all) are offering modification programs, so more than likely your rate and coverage will remain the same, but is based on the new loan amount.
2nd trusts & HELOC's
Under the new guidelines, you cannot set up 2 trusts at the time of closing. This means, you cannot set up an "80-10-10" in order to avoid paying mortgage insurance (this really shouldn't be an issue since there are very few lenders who even offer this anymore). If you currently have a 2nd trust or HELOC, you must subordinate them.
We just got word conforming jumbo loan limit has been raised to $729,950 in 250 counties.
Locally, in Maryland the following counties will allow up to $729,950,
Charles, Frederick, Calvert, Montgomery and Prince Georges.
In Virginia, Alexandria city, Arlington county, Clarke county, Fairfax county and city, falls Church city, Fredericksburg City, Fauquier, Loudon, Prince Williams, Spotsylvania, Stafford, Warren counties, Manassas City and Manassas Park City.
Other local counties also have their loan limits raised. Call me if you want to know the new limit.
May 1st is the day these loans limits will take effect, you should apply now to get ready for loan approval in May.
Refi Plus Program
Starting on April 6th (today) we will be able to offer up to 105% financing on existing Fannie Mae loans, this will allow borrowers underwater to take advantage of the current lower rates. Contact me to find out if your loan is an existing Fannie Mae loan if you are interested in applying.
Eligibility
As of right now, to be eligible for this program your loan must currently be Fannie Mae loan. You can look up whether you have a Fannie Mae loan with Fannie Mae in a matter of 5 seconds by going to: http://loanlookup.fanniemae.com/loanlookup/ . Enter your address and it will tell you if Fannie Mae owns your loan.
This program is aimed at people who are current on their mortgage payments (no 60 day lates in the last 12 months), but cannot take advantage of the low rates because their current Loan to Value is too high to refinance, or based upon the new LTV the hit on Mortgage Insurance makes it unsensible to refinance.
Your loan amount must also must meet conforming limits (each county has a conforming limit assigned by Fannie Mae).
Valuation
The main advantage of this program is that you can finance up to 105% of your current market value at near market rates (we'll have to wait and see how closely to the market lenders can offer for this program). From all preliminary accounts, your value will be determined by census track data. Obviously, there are no cash-out transactions allowed on any refinancing.
Mortgage Insurance (Starting May 4th)
If you did not pay MI on your current transaction, or you had it waived after reaching below 80% LTV and you use this program you will NOT need to pay MI, even if your new LTV is above 80%.
However, if you currently are paying MI you will still need to pay MI. Many MI companies (if not all) are offering modification programs, so more than likely your rate and coverage will remain the same, but is based on the new loan amount.
2nd trusts & HELOC's
Under the new guidelines, you cannot set up 2 trusts at the time of closing. This means, you cannot set up an "80-10-10" in order to avoid paying mortgage insurance (this really shouldn't be an issue since there are very few lenders who even offer this anymore). If you currently have a 2nd trust or HELOC, you must subordinate them.
Wednesday, March 25, 2009
APR, interest rates & points
APR, the acronym for annual percentage rate, has been a confusing number for most borrowers. Many borrowers are advised to shop for the best deal based on APR, whether or not the lowest APR is the best deal for you is debatable.
The combination of interest rates, points you are paying, plus portions of your closing cost form the components of the APR calculation. In general, any items of the closing cost you are paying related to getting the mortgage is part of the APR. Examples are: any lenders charges, mortgage insurance and points are part of the APR while surveys, attorney’s fees and termite inspections are not. The actual calculation involves adding those closing cost related to the loan as part of your finance charges and spread it over the term of the loan. Therefore, the APR will always be higher than your actual rate, the rate your monthly payments are based on.
The fallacy of shopping for the lowest APR is mostly because the calculation of the APR is based on the term of the loan. The APR disclosed on the TIL, truth-in-lending disclosure, required by law is assuming you will pay the loan off for the entire term of the loan; for example paying off a 30 year mortgage in 30 years. If your loan is paid off early or refinanced the APR is different than the original APR since the cost is spread over fewer years. For the same loan you can usually get a lower APR by paying some points, but if you pay off the loan in the first few years, you would not reap the benefit of buying down the lower rate.
Another fallacy is APR calculation for adjustable rate mortgages (ARMs), since assumptions have to be made for future rate adjustments, APR calculation for ARMs are basically meaningless. Other reason APR can be misleading is there are some leeway for the calculation to meet the federal laws. By comparing two loans with APR within 0.25% of each other may or may not tell you the better loan just by the fact there are different ways of calculating APR to meet the federal requirements.
To me the best way of calculating the APR is to start with a zero point loan with no origination or discount points, this will give you a way to shop for the base loan. Then decide on how long you intend to keep the loan, the longer you intend to keep the loan the more beneficial it is to pay some point to buy the rate down. Most lender fees are within a few hundred of one another, unless there are some exorbitant fees, they won’t impact the APR much.
You will probably find comparing the monthly payment amount for different rate more helpful in deciding the best option/APR for you.
The combination of interest rates, points you are paying, plus portions of your closing cost form the components of the APR calculation. In general, any items of the closing cost you are paying related to getting the mortgage is part of the APR. Examples are: any lenders charges, mortgage insurance and points are part of the APR while surveys, attorney’s fees and termite inspections are not. The actual calculation involves adding those closing cost related to the loan as part of your finance charges and spread it over the term of the loan. Therefore, the APR will always be higher than your actual rate, the rate your monthly payments are based on.
The fallacy of shopping for the lowest APR is mostly because the calculation of the APR is based on the term of the loan. The APR disclosed on the TIL, truth-in-lending disclosure, required by law is assuming you will pay the loan off for the entire term of the loan; for example paying off a 30 year mortgage in 30 years. If your loan is paid off early or refinanced the APR is different than the original APR since the cost is spread over fewer years. For the same loan you can usually get a lower APR by paying some points, but if you pay off the loan in the first few years, you would not reap the benefit of buying down the lower rate.
Another fallacy is APR calculation for adjustable rate mortgages (ARMs), since assumptions have to be made for future rate adjustments, APR calculation for ARMs are basically meaningless. Other reason APR can be misleading is there are some leeway for the calculation to meet the federal laws. By comparing two loans with APR within 0.25% of each other may or may not tell you the better loan just by the fact there are different ways of calculating APR to meet the federal requirements.
To me the best way of calculating the APR is to start with a zero point loan with no origination or discount points, this will give you a way to shop for the base loan. Then decide on how long you intend to keep the loan, the longer you intend to keep the loan the more beneficial it is to pay some point to buy the rate down. Most lender fees are within a few hundred of one another, unless there are some exorbitant fees, they won’t impact the APR much.
You will probably find comparing the monthly payment amount for different rate more helpful in deciding the best option/APR for you.
Tuesday, March 17, 2009
Market Update
I am not sure how best to describe how most of us feel about this economy and our place in it; especially for me as a small business owner. It makes you wonder who you can place your faith with; however it is also during these times that our instincts are sharpened which hopefully translates into the resurgence of strong stable business structures.
As a general rule, I find that when people are giving you advice there exists a direct correlation between the octane level of their spill to the lack of credibility. By that I mean, in general, the louder someone pitches their views the less likely I am convinced of their credibility. But I am even more skeptical of anyone who whispers their “can’t miss, once in a lifetime opportunity” in my ear.
Commentaries aside, interest rates have remained about the same for the past couple of weeks. Ten year bond yield is hovering just under 3%, as compared to December 2008 when the same bond yield was just over 2%, but the mortgage rates did not go up by the same spread. This is an indication of the MBS (mortgage backed securities) trading closer to treasuries; something I thought was a likely scenario. For all the borrowers who are still waiting for lower rates, you will have to pay close attention to the bond yields. The movement of the bond yield will be an accurate indicator of the direction of the mortgage rates. Any sharp movements of the bond yields will definitely cause the same movement on mortgage rates.
Something to keep in mind, more and more lenders are kicking in extra benefits for all the borrowers who have maintained a superior credit history and have plenty of equity in their homes. It could be a reduction of rate or partial point reductions. There are still benefits to maintaining financial responsibility and good credit ratings.
As a general rule, I find that when people are giving you advice there exists a direct correlation between the octane level of their spill to the lack of credibility. By that I mean, in general, the louder someone pitches their views the less likely I am convinced of their credibility. But I am even more skeptical of anyone who whispers their “can’t miss, once in a lifetime opportunity” in my ear.
Commentaries aside, interest rates have remained about the same for the past couple of weeks. Ten year bond yield is hovering just under 3%, as compared to December 2008 when the same bond yield was just over 2%, but the mortgage rates did not go up by the same spread. This is an indication of the MBS (mortgage backed securities) trading closer to treasuries; something I thought was a likely scenario. For all the borrowers who are still waiting for lower rates, you will have to pay close attention to the bond yields. The movement of the bond yield will be an accurate indicator of the direction of the mortgage rates. Any sharp movements of the bond yields will definitely cause the same movement on mortgage rates.
Something to keep in mind, more and more lenders are kicking in extra benefits for all the borrowers who have maintained a superior credit history and have plenty of equity in their homes. It could be a reduction of rate or partial point reductions. There are still benefits to maintaining financial responsibility and good credit ratings.
Thursday, March 12, 2009
More on the Homeowner Affordability and Stability Act.
It has been almost a month since the White House announcement of the government assistance to help stimulate the housing market. The Act has been signed into law but most borrowers are still not sure how this helps them directly.
Let me tell you what I know. But before we get started let’s explain some of the terminologies.
Lenders are the entities who actually own the mortgage, also called investors.
Servicers are the entity you send payments to who may or may not own the mortgage.
GSE or government sponsored enterprises refers to Fannie Mae and Freddie Mac, also know as agency loans.
FHA mortgage is loans insured by Federal Housing Administration.
The intent of the Act is to help prevent foreclosures and to help stabilize the housing market by allocating federal money to the distressed homeowners. To date $75 billion has been appropriated to prevent foreclosures.
The Act provides loan modifications ranging from lowering interest rate to reductions of principle to get to a lower payment that will allow you to stay in your home. Incentives are given to the lenders from the government as long as the new payment is expected to be affordable and stable for the borrower. Payments are based on a percentage of your income not to exceed 31% of your gross monthly income. This is a voluntary decision for the lenders and I expect it to be limited to homeowners in distress only. If you are in foreclosure or envision economic hardship leading to foreclosure, you should contact your loan servicer.
The Act also deals with borrowers who are unable to refinance to the current lower rate because the value of their home has dropped. The Act will allow these borrowers to refinance their home up to 105% of the current property value. Guaranties are provided by the government to the lender so borrowers can take advantage of the lower market rates therefore lowering payments.
I was aware by early April that we will be given the entire qualification criteria. Now I understand this is limited to agency loans. The process will be the same like any refinance transaction, same process and qualifying guidelines and market rates. This does open the doors for many who are unable to refinance today due to lower home value. You should not expect modifications to rates lower than market rate or reduction in principle. One of the keys is to make sure your loan is an agency loan and that you are current on your payments.
Starting in April application for loan modification that has no mortgage insurance will be accepted and starting in May loans with mortgage insurance will begin. I expect there are many borrowers who fall under this category and we will see high volume of applications. You should plan ahead with your application.
I will keep updating the ramifications of the Act in future posts.
Let me tell you what I know. But before we get started let’s explain some of the terminologies.
Lenders are the entities who actually own the mortgage, also called investors.
Servicers are the entity you send payments to who may or may not own the mortgage.
GSE or government sponsored enterprises refers to Fannie Mae and Freddie Mac, also know as agency loans.
FHA mortgage is loans insured by Federal Housing Administration.
The intent of the Act is to help prevent foreclosures and to help stabilize the housing market by allocating federal money to the distressed homeowners. To date $75 billion has been appropriated to prevent foreclosures.
The Act provides loan modifications ranging from lowering interest rate to reductions of principle to get to a lower payment that will allow you to stay in your home. Incentives are given to the lenders from the government as long as the new payment is expected to be affordable and stable for the borrower. Payments are based on a percentage of your income not to exceed 31% of your gross monthly income. This is a voluntary decision for the lenders and I expect it to be limited to homeowners in distress only. If you are in foreclosure or envision economic hardship leading to foreclosure, you should contact your loan servicer.
The Act also deals with borrowers who are unable to refinance to the current lower rate because the value of their home has dropped. The Act will allow these borrowers to refinance their home up to 105% of the current property value. Guaranties are provided by the government to the lender so borrowers can take advantage of the lower market rates therefore lowering payments.
I was aware by early April that we will be given the entire qualification criteria. Now I understand this is limited to agency loans. The process will be the same like any refinance transaction, same process and qualifying guidelines and market rates. This does open the doors for many who are unable to refinance today due to lower home value. You should not expect modifications to rates lower than market rate or reduction in principle. One of the keys is to make sure your loan is an agency loan and that you are current on your payments.
Starting in April application for loan modification that has no mortgage insurance will be accepted and starting in May loans with mortgage insurance will begin. I expect there are many borrowers who fall under this category and we will see high volume of applications. You should plan ahead with your application.
I will keep updating the ramifications of the Act in future posts.
Friday, March 6, 2009
More on buying down points
Earlier we went through some examples comparing monthly payments using zero point rates and paying some point for a lower rate. To further illustrate the different scenarios of how to get a lower payment, let look at one more example of someone refinancing a mortgage.
Let assume you have an existing mortgage that initially was $417,000.00 at 6.125% fixed for 30 years. Now 1 year later you can refinance this loan with a lower rate and your choices are 0 point at 5%; 4.875% with ½ point; or 4.75% with one point. Your current principal and interest payment should be $2533.73 and your remaining balance should be just under $412,000.00.
With the cost of points rolled into the loan and putting aside all other related cost (closing cost, prepaid items and escrow balances), your monthly payments for the three different rates will be as follows:
$412,000.00 @5% for 30 years = $2211.70
$414,060.00 @4.875% for 30years = $2191.23 (cost of ½ point = $2060)
$416,120.00 @4.75% for 30 years = $2170.67 (cost of 1 point = $4120)
As you can see the payments are lower using the lower rate. The same calculation can be done with the closing cost rolled into the loan also. One consideration of this example is the increase of the loan balance. So is it real saving or is it just deferring the payment to the future?
Using the above example, if you keep the loan for 10 years, the balance of your loan will be correspondingly equal to $279,681, $279,388, and $279,067. The balance is pretty much the same with the lowest balance being the one with the lowest rate.
So if you are planning on staying the house for extended period, 10 years or more, the lower rate will give you the lower payment and amortize the loan faster.
Let assume you have an existing mortgage that initially was $417,000.00 at 6.125% fixed for 30 years. Now 1 year later you can refinance this loan with a lower rate and your choices are 0 point at 5%; 4.875% with ½ point; or 4.75% with one point. Your current principal and interest payment should be $2533.73 and your remaining balance should be just under $412,000.00.
With the cost of points rolled into the loan and putting aside all other related cost (closing cost, prepaid items and escrow balances), your monthly payments for the three different rates will be as follows:
$412,000.00 @5% for 30 years = $2211.70
$414,060.00 @4.875% for 30years = $2191.23 (cost of ½ point = $2060)
$416,120.00 @4.75% for 30 years = $2170.67 (cost of 1 point = $4120)
As you can see the payments are lower using the lower rate. The same calculation can be done with the closing cost rolled into the loan also. One consideration of this example is the increase of the loan balance. So is it real saving or is it just deferring the payment to the future?
Using the above example, if you keep the loan for 10 years, the balance of your loan will be correspondingly equal to $279,681, $279,388, and $279,067. The balance is pretty much the same with the lowest balance being the one with the lowest rate.
So if you are planning on staying the house for extended period, 10 years or more, the lower rate will give you the lower payment and amortize the loan faster.
Tuesday, March 3, 2009
A small discussion & history on subprime lending
Recently there has been a lot of discussion about how loose qualifying guidelines of mortgages has led to the financial meltdown. Even Warren Buffet has spoke about how mortgage lenders has to qualify a borrower based on income and how income documentation has to be carefully reviewed in order to ensure the soundness of the loan.
Very few will argue against owning your own home and many feels homeownership is the foundation of ones financial security. Yet many are also blaming the current financial crisis on the mortgage industry. First, by the subprime category of mortgages and now spreading to all classes of mortgages causing an overall lack of confidence in mortgage backed securities across the board and weakening the financial institutions who owns these type of assets (i.e. Fannie Mae, Freddie Mac, BankAmerica, Citibank, to name a few.) In turn these events have greatly impacted everyone, from daily spending to erosion of their hard earned retirement accounts.
I found a comprehensive article on Wikipedia titled Subprime mortgage crisis (http://en.wikipedia.org/wiki/Subprime_mortgage_crisis) that does a pretty good job of describing historical data, origin, participants, current and ongoing impact of the crisis. This article is not short but I found it to be accurate and objective in nature of the crisis. A very good article for those interested.
In the article, just about everyone involved in the mortgage industry is revealed andit analyzes their actions and impact in great detail. What is not discussed is the circumstances and motivation of the individual borrowers who took out these mortgages other than irresponsible speculation fueled by greed.
It has been almost twenty years that I have been a mortgage broker. As brokers we play no role in the creation of the loan products nor do we play any role in approving a loan other than making sure our borrowers fit the required guidelines as presented by the lending institutions. We get paid a fee for the origination process and have no inherent risk over the performance of the loan; meaning we are not impacted when a borrower does not make their payments. Very few of my borrowers belonged in the subprime category. When assisting and fighting for an approval on borderline loans, any argument would have been augmented by the fact the borrowers can well afford the monthly payments. Sometimes the issue would just be a documentation issue required by the low documentation loan products.
In hindsight, almost everyone was caught up by the spiraling price appreciation of the housing market, whether it is your first home, upgrading to a bigger home or buying an investment property. Many thought if you waited any longer it would be too late – the market would pass you by.
So I don’t think we have changed from the way we help our borrowers. It is just that at the present time, people are more cautious and conservative in their borrowing versus the past few years when borrowers allowed themselves a more aggressive attitude because they were more optimistic about their finances. Let’s see if we can light a fire for the industry to recognize there still are many qualified borrowers deserving of the best the market can offer.
Very few will argue against owning your own home and many feels homeownership is the foundation of ones financial security. Yet many are also blaming the current financial crisis on the mortgage industry. First, by the subprime category of mortgages and now spreading to all classes of mortgages causing an overall lack of confidence in mortgage backed securities across the board and weakening the financial institutions who owns these type of assets (i.e. Fannie Mae, Freddie Mac, BankAmerica, Citibank, to name a few.) In turn these events have greatly impacted everyone, from daily spending to erosion of their hard earned retirement accounts.
I found a comprehensive article on Wikipedia titled Subprime mortgage crisis (http://en.wikipedia.org/wiki/Subprime_mortgage_crisis) that does a pretty good job of describing historical data, origin, participants, current and ongoing impact of the crisis. This article is not short but I found it to be accurate and objective in nature of the crisis. A very good article for those interested.
In the article, just about everyone involved in the mortgage industry is revealed andit analyzes their actions and impact in great detail. What is not discussed is the circumstances and motivation of the individual borrowers who took out these mortgages other than irresponsible speculation fueled by greed.
It has been almost twenty years that I have been a mortgage broker. As brokers we play no role in the creation of the loan products nor do we play any role in approving a loan other than making sure our borrowers fit the required guidelines as presented by the lending institutions. We get paid a fee for the origination process and have no inherent risk over the performance of the loan; meaning we are not impacted when a borrower does not make their payments. Very few of my borrowers belonged in the subprime category. When assisting and fighting for an approval on borderline loans, any argument would have been augmented by the fact the borrowers can well afford the monthly payments. Sometimes the issue would just be a documentation issue required by the low documentation loan products.
In hindsight, almost everyone was caught up by the spiraling price appreciation of the housing market, whether it is your first home, upgrading to a bigger home or buying an investment property. Many thought if you waited any longer it would be too late – the market would pass you by.
So I don’t think we have changed from the way we help our borrowers. It is just that at the present time, people are more cautious and conservative in their borrowing versus the past few years when borrowers allowed themselves a more aggressive attitude because they were more optimistic about their finances. Let’s see if we can light a fire for the industry to recognize there still are many qualified borrowers deserving of the best the market can offer.
Friday, February 20, 2009
Homeowner affordability and stability plan
The government has just released its plan to prevent foreclosures. The plan is called Homeowner affordability and stability plan. It contains three parts; part one and part two deals with specific groups of borrowers, and part three deals with mortgage market in general by increasing FannieMae and FreddieMac lending capacity. (The link to the full press release is http://www.treasury.gov/news/index2.html) My summary is as follows.
Part one of the plan deals with borrowers who are unable to refinance today because their property value have dropped. The plan allows these groups of borrowers to refinance up to 105% of the current home value. The way I read it is basically an opportunity for borrowers who cannot refinance because the value of their property has dropped. So the plan set clear guidelines allowing the borrower to refinance up to 105% of the current property value at current interest rates within some income limitations. Financial incentives are created for both the borrower and lenders to keep mortgage payments current and in the future. It does not specifically address how Private Mortgage Insurances affects the loan, or the interest rate, or the specific income calculations to qualify and you don’t have to be delinquent to qualify. The intent of the plan appears to be to solidify the loan for both the borrower and lender, echoing some of my previous blog comments.
Part two deals with loan modification for distressed borrowers. The plan contains various proposals ranging from payment reductions, principle reductions, financial incentives, to allowing the lenders to modify a mortgage to the point where it becomes affordable for the borrower so foreclosure can be avoided. Similar to Part one, it is in keeping with the philosophy that it is better for everyone to prevent an actual foreclosure, that it benefits the borrower, the lender and the community and the overall housing market. This part specifically excludes investors, classifying them in the category including speculators, flippers and irresponsible borrowers. I would argue investors who bought properties with 20% or more in down payment are certainly not irresponsible. There are also provisions in the plan to help people who are displaced by foreclosure by creating support agencies and housing subsidies.
Part three is fairly simple. FannieMae and FreddieMac will get $100 billion injection each from the government. Further implicit and explicit support will be extended to both of these agencies to promote a vibrant and healthy environment of secondary market so rates are kept low and housing activities are not stymied. The involvement of the federal government will be extensive from direct participation of buying and selling of the MBS (mortgage backed security) to allowing bigger lending capacities to create liquidity in the market.
I feel that most of my borrowers will benefit from the third part of the plan. The details of the plan are to be announced by March 4th and we will keep you updated of its implications.
Part one of the plan deals with borrowers who are unable to refinance today because their property value have dropped. The plan allows these groups of borrowers to refinance up to 105% of the current home value. The way I read it is basically an opportunity for borrowers who cannot refinance because the value of their property has dropped. So the plan set clear guidelines allowing the borrower to refinance up to 105% of the current property value at current interest rates within some income limitations. Financial incentives are created for both the borrower and lenders to keep mortgage payments current and in the future. It does not specifically address how Private Mortgage Insurances affects the loan, or the interest rate, or the specific income calculations to qualify and you don’t have to be delinquent to qualify. The intent of the plan appears to be to solidify the loan for both the borrower and lender, echoing some of my previous blog comments.
Part two deals with loan modification for distressed borrowers. The plan contains various proposals ranging from payment reductions, principle reductions, financial incentives, to allowing the lenders to modify a mortgage to the point where it becomes affordable for the borrower so foreclosure can be avoided. Similar to Part one, it is in keeping with the philosophy that it is better for everyone to prevent an actual foreclosure, that it benefits the borrower, the lender and the community and the overall housing market. This part specifically excludes investors, classifying them in the category including speculators, flippers and irresponsible borrowers. I would argue investors who bought properties with 20% or more in down payment are certainly not irresponsible. There are also provisions in the plan to help people who are displaced by foreclosure by creating support agencies and housing subsidies.
Part three is fairly simple. FannieMae and FreddieMac will get $100 billion injection each from the government. Further implicit and explicit support will be extended to both of these agencies to promote a vibrant and healthy environment of secondary market so rates are kept low and housing activities are not stymied. The involvement of the federal government will be extensive from direct participation of buying and selling of the MBS (mortgage backed security) to allowing bigger lending capacities to create liquidity in the market.
I feel that most of my borrowers will benefit from the third part of the plan. The details of the plan are to be announced by March 4th and we will keep you updated of its implications.
Tuesday, February 17, 2009
Does it make sense to pay points for a lower rate?
As most Borrow123.com customers know, we offer a spread of rates based on paying some points to rebate points. For example, for one loan scenario for 30 years fixed rate mortgage your options could be 4.75 % with 0.75 points or 5 % with 0 points. On a $400k loan the cost of the point is $3000 up front, the monthly payment difference is $60.69/month. So it takes about 50 months to make up for the cost of the 0.75 point. This is a simple calculation, not factoring the future value of the $60.69 /month stream of payments for the next 50 month or the future value of the up front $3000.
So, the decision to pay the points will be based on how long you intend to stay in the house. The trick is to find some instances where the cost of buying down the rate cost less than normal ranges. By this, I mean sometimes it cost less than my example to buy the rates down. Depending on the market, sometime it cost more than 1/2 point to buy the rate down by 1/8%. Sometimes it cost as little as ¼ points to buy down the rate by 1/8%. If the cost of buying down the rate on the above example was 0.375 point, it would only take 24 month to recoup the up front cost. Of course with purchase transactions, take whatever points the sellers are willing to put into the deal, using the same calculations in your negotiations to see if it works out better for you to take price concession or point contribution from the sellers.
I also get questions about the tax write off on the points that you pay. On a refinance transaction, you have to amortize the points over the life of the loan and on the purchase transaction you get to deduct the whole amount in the year of your purchase. This is my current understanding, however I would check with your accountant before making any decisions.
One important consideration when deciding whether to pay points is what are the chances of refinancing again within a few years? If that was an option, then paying points is less attractive. If you are refinancing to a 15 or 10 year loan it probably make more sense to pay the points for a lower rate since is likely you will make the payments for the life of the loan.
So, the decision to pay the points will be based on how long you intend to stay in the house. The trick is to find some instances where the cost of buying down the rate cost less than normal ranges. By this, I mean sometimes it cost less than my example to buy the rates down. Depending on the market, sometime it cost more than 1/2 point to buy the rate down by 1/8%. Sometimes it cost as little as ¼ points to buy down the rate by 1/8%. If the cost of buying down the rate on the above example was 0.375 point, it would only take 24 month to recoup the up front cost. Of course with purchase transactions, take whatever points the sellers are willing to put into the deal, using the same calculations in your negotiations to see if it works out better for you to take price concession or point contribution from the sellers.
I also get questions about the tax write off on the points that you pay. On a refinance transaction, you have to amortize the points over the life of the loan and on the purchase transaction you get to deduct the whole amount in the year of your purchase. This is my current understanding, however I would check with your accountant before making any decisions.
One important consideration when deciding whether to pay points is what are the chances of refinancing again within a few years? If that was an option, then paying points is less attractive. If you are refinancing to a 15 or 10 year loan it probably make more sense to pay the points for a lower rate since is likely you will make the payments for the life of the loan.
Thursday, February 12, 2009
Market Outlook
In the last couple of weeks the mortgage market has been very quiet. Rates trickle up and down a little and applications have slowed down substantially. From what my customers tell me, there are a lot of people still waiting anxiously for the rates to drop so they can follow through on their refinance. In the meantime with all the news of federal stimulus plans and related speculations of how it will affect the market (specifically how it will affect the mortgage rates) have put many borrowers in the hold mode.
A constant theme being reported in the news is that mortgages rates will dip to 4.5%. The different reports have indicated either this is a stated goal or a mandate of some sort by the government. Personally I don’t read it the same way. I see reviving the housing market is a big part of the government’s economic recovery plan. The entire fiscal stimulus plan have far reaching goals and impact affecting employment, capital market, credit market both consumer and business, infrastructure, advancement in education and technology and many other components of the economy driven by government spending.
How much direct impact to mortgage rates remains to be seen. Long term mortgage rates is still a market function today, until the government dictates the actual mortgage rate, the capital market determines the mortgage rates. An active investment community with many sellers and buyers tend to drive long terms rates down.
Using treasuries as the underlining guide, mortgages backed securities will trade within some range of the treasury index. Unfortunately today we have fewer participants in the mortgage backed security (MBS) arena, and can’t quite get the participants back in the game yet. The government has indicated that they will continue to use a variety of methods to revive the market by actively buying and offering guaranties on these securities, but I can’t see them solving the problem by themselves. This is evidenced by the fact that loans over the conforming limit still have no market. I believe in the short term, meaning less than three years, we will have sporadic opportunities for the rates to dip to as low as 4.5% on 30 year loans. Some lucky borrowers will get that rate, most of you will lock in to something between that and 5%.
But when the rates drop the next time, don’t wait. I also believe, eventually, long term mortgages rates, while they maybe low, and will come with many conditions. Conditions being higher loan to value requirements, tighter credit score requirements and maybe prepayment clauses, among others.
Reviving the housing market is definitely a key to reviving the economy. Lower interest rates are definitely a big part of that equation. Since it looks like all the burden is put on the new administration and everyone is waiting anxiously, let’s hope all the planning and implementation will lead us to lower mortgage rates.
A constant theme being reported in the news is that mortgages rates will dip to 4.5%. The different reports have indicated either this is a stated goal or a mandate of some sort by the government. Personally I don’t read it the same way. I see reviving the housing market is a big part of the government’s economic recovery plan. The entire fiscal stimulus plan have far reaching goals and impact affecting employment, capital market, credit market both consumer and business, infrastructure, advancement in education and technology and many other components of the economy driven by government spending.
How much direct impact to mortgage rates remains to be seen. Long term mortgage rates is still a market function today, until the government dictates the actual mortgage rate, the capital market determines the mortgage rates. An active investment community with many sellers and buyers tend to drive long terms rates down.
Using treasuries as the underlining guide, mortgages backed securities will trade within some range of the treasury index. Unfortunately today we have fewer participants in the mortgage backed security (MBS) arena, and can’t quite get the participants back in the game yet. The government has indicated that they will continue to use a variety of methods to revive the market by actively buying and offering guaranties on these securities, but I can’t see them solving the problem by themselves. This is evidenced by the fact that loans over the conforming limit still have no market. I believe in the short term, meaning less than three years, we will have sporadic opportunities for the rates to dip to as low as 4.5% on 30 year loans. Some lucky borrowers will get that rate, most of you will lock in to something between that and 5%.
But when the rates drop the next time, don’t wait. I also believe, eventually, long term mortgages rates, while they maybe low, and will come with many conditions. Conditions being higher loan to value requirements, tighter credit score requirements and maybe prepayment clauses, among others.
Reviving the housing market is definitely a key to reviving the economy. Lower interest rates are definitely a big part of that equation. Since it looks like all the burden is put on the new administration and everyone is waiting anxiously, let’s hope all the planning and implementation will lead us to lower mortgage rates.
Tuesday, February 3, 2009
Rising Rates
In the last two weeks we have seen the rates take a dramatic jump. From the lowest point which was around 4.75% to more than 5.5 % for the 30 years fixed rate. What happened and where is this going? Are we seeing the end of the refinance?
I hope not. Beyond my selfish reason for the refinance to continue, I also think the low rates helps with the economic recovery for the simple reason that any monthly savings one gets from refinancing it may trickle back into the economy as discretionary spending.
The federal government in 2008 used tax rebates of up to $600 per tax payer, up to a certain income, to stimulate the economy. The net effect of homeowners refinancing on the average put more than $200 a month back into the hands of the consumers, substantially higher than $600 a year, this must create some stimulus to the economic month after month!
Another less obvious effect of refinancing is a smooth and orderly way of loan modification. Most distressed mortgages are having a difficult time having the loan modified by the lender, even though most of the time it is to the lenders’ advantage to have a loan modified rather than have it go to foreclosure. The actual loan modification process is mostly a lose/lose proposition for the lenders and borrowers. By refinancing the loan, favorable terms are available to the borrowers, even though these borrowers are not in distress and all have great credit history and are well qualified. With this shaky economy any borrower who can solidify their financial well being by reducing some debt obligation in turn will also solidify the lenders themselves who holds the notes.
Well, it just occurred to me may be the lenders can engage mortgage brokers like us to help then do loan modifications.
So why are the rates are going up? The most direct answer is the long term bonds yield has jumped. Correspondingly, the mortgage rates have also increased by more than 75 basis points. The next question is why did the long term bond yield jump? The most direct answer to this is that there are more sellers of long bonds than buyers.
Now we get to the question of what happens next. I am skipping a whole series of questions related to the who and why of more sellers than buyers since I don’t know the answer, so my prediction of the rates is it will continue to fluctuate because the bond market have always moved up and down. Even in a clear up or down trend there are still fluctuations. Keep watching the rates closely and for those who missed their target rate don’t hesitate too long when the next valley comes around.
I hope not. Beyond my selfish reason for the refinance to continue, I also think the low rates helps with the economic recovery for the simple reason that any monthly savings one gets from refinancing it may trickle back into the economy as discretionary spending.
The federal government in 2008 used tax rebates of up to $600 per tax payer, up to a certain income, to stimulate the economy. The net effect of homeowners refinancing on the average put more than $200 a month back into the hands of the consumers, substantially higher than $600 a year, this must create some stimulus to the economic month after month!
Another less obvious effect of refinancing is a smooth and orderly way of loan modification. Most distressed mortgages are having a difficult time having the loan modified by the lender, even though most of the time it is to the lenders’ advantage to have a loan modified rather than have it go to foreclosure. The actual loan modification process is mostly a lose/lose proposition for the lenders and borrowers. By refinancing the loan, favorable terms are available to the borrowers, even though these borrowers are not in distress and all have great credit history and are well qualified. With this shaky economy any borrower who can solidify their financial well being by reducing some debt obligation in turn will also solidify the lenders themselves who holds the notes.
Well, it just occurred to me may be the lenders can engage mortgage brokers like us to help then do loan modifications.
So why are the rates are going up? The most direct answer is the long term bonds yield has jumped. Correspondingly, the mortgage rates have also increased by more than 75 basis points. The next question is why did the long term bond yield jump? The most direct answer to this is that there are more sellers of long bonds than buyers.
Now we get to the question of what happens next. I am skipping a whole series of questions related to the who and why of more sellers than buyers since I don’t know the answer, so my prediction of the rates is it will continue to fluctuate because the bond market have always moved up and down. Even in a clear up or down trend there are still fluctuations. Keep watching the rates closely and for those who missed their target rate don’t hesitate too long when the next valley comes around.
Friday, January 23, 2009
Examples of documents needed for a loan approval
Sometimes we are asked why so many documents are required from our borrowers before we can approve a mortgage. Beside all the credit documents (income and asset documentation, credit report, appraisal ) there are other documents that may be required that may seem like they do not have any bearing on a loan approval.
Examples of this may include insurance information on the property, title history or home owner association information.. If there are gift funds for part of the down payment lenders will ask for donor’s statements, funds transfer and a gift letter. It all seems so redundant and creates all kinds of unnecessary activities at a time when there are already enough stress. There are reasons for all the documentation although the reasons may not be so apparent to the borrower.
Take the example of home owner association (HOA) information. Any property that belongs to a HOA or if it is a Condominium may have to provide a set of documents to reveal the articles and bylaws of the association, insurance information of the association, budget and reserves of the association and sometimes even more; down to the occupancy status of the residents and other aspects of the association. To get this information usually takes time and some money, as much a couple of weeks of time and over $100 for a set of the documents.
I have had a borrower ask me, “I have great credit, I am putting down over 20%, I am making more than enough money to qualify, why are you making me jump through hoops to get this package of documents?”
I could be funny and say “I feel you” but the reason is the lenders have an interest in the collateral which is a property in a HOA or Condominium. The information in the HOA documents is part of the make up of the value of the property. Think of it this way: If a HOA budget or reserves for the maintenance of the common areas of the community is below what the requirements and the collection of the HOA fees are not sufficient to make up for it, what will happen to that particular property value?
It is a hassle sometimes to comply with all the documentation of the lenders but the beneficial part is they looking at your interest as well. If you were paying cash for the property, you may not think of all the things you need before you pay for it, but when you are financing it, the bank will.
I know from personal experience of instances where the buyer of a property incurred significant damages when he bought a property with cash. Had they financed it, it never have happened due to the checks and verifications a lender would have put in place.
So when we ask you for documents please keep this in mind. We don’t like asking customers to jump through hoops, however they are a necessary evil that just may protect your investment.
Examples of this may include insurance information on the property, title history or home owner association information.. If there are gift funds for part of the down payment lenders will ask for donor’s statements, funds transfer and a gift letter. It all seems so redundant and creates all kinds of unnecessary activities at a time when there are already enough stress. There are reasons for all the documentation although the reasons may not be so apparent to the borrower.
Take the example of home owner association (HOA) information. Any property that belongs to a HOA or if it is a Condominium may have to provide a set of documents to reveal the articles and bylaws of the association, insurance information of the association, budget and reserves of the association and sometimes even more; down to the occupancy status of the residents and other aspects of the association. To get this information usually takes time and some money, as much a couple of weeks of time and over $100 for a set of the documents.
I have had a borrower ask me, “I have great credit, I am putting down over 20%, I am making more than enough money to qualify, why are you making me jump through hoops to get this package of documents?”
I could be funny and say “I feel you” but the reason is the lenders have an interest in the collateral which is a property in a HOA or Condominium. The information in the HOA documents is part of the make up of the value of the property. Think of it this way: If a HOA budget or reserves for the maintenance of the common areas of the community is below what the requirements and the collection of the HOA fees are not sufficient to make up for it, what will happen to that particular property value?
It is a hassle sometimes to comply with all the documentation of the lenders but the beneficial part is they looking at your interest as well. If you were paying cash for the property, you may not think of all the things you need before you pay for it, but when you are financing it, the bank will.
I know from personal experience of instances where the buyer of a property incurred significant damages when he bought a property with cash. Had they financed it, it never have happened due to the checks and verifications a lender would have put in place.
So when we ask you for documents please keep this in mind. We don’t like asking customers to jump through hoops, however they are a necessary evil that just may protect your investment.
Wednesday, January 21, 2009
When to lock in
In the last post I promised to provide some ideas on how to decide when to lock in your rate when applying to refinance an existing mortgage. Keep in mind that it is to everyone’s interest to maximize their saving by lowering their monthly payments, and to get the lowest rate possible. Also recognize that you cannot see the bottom of the market until the rates have gone back up. So in the typical catch 22 scenario, my approach is to do a risk/reward analysis.
First of all, every situation is unique to a certain point. Not everyone’s motivation is the same, and the scale of the risk versus reward is also different for different people.
So let’s use an example of someone looking to refinance an existing mortgage with a $500,000.00 balance and an interest rate of 6.25% on a 30 years fixed rate to another 30 years fixed rate. Current rates are fluctuating between 4.875% to 5.25% and the old loan has a payment of $3127 (principle and interest only) a month based on original loan amount of $508,000.00. The new loan will be $505,000.00 including closing cost for a new monthly payment of $2710 a month at 5.0% interest rate. Your monthly payment reduction will be $417, good enough for a new car payment.
Now, the question is, is it worthwhile to wait for the rates to drop to 4.875% or even 4.75%? If the rates hits 4.75% your new payment would be $2634, an additional saving of $75 a month, that would be your reward for waiting. What is the risk? For this example, I will assign the risk this way, at 5% you will save $417/month. If you missed waiting for 4.75% and the rate went up to 5.25% you can still save $338. So you are basically risking $75 to save $75. If you think the chances are equal of hitting 5.25% and 4.75% then it is a wash by waiting. Extrapolating this further, if there are very little chance of the rates going to 4.75% then it wouldn’t be worth it. But like a stop loss stock order, you must be prepared to pull the trigger sometime when the market is moving away from us, because locking in at 5.25% still give you over $300/month of savings.
You must keep mind that if the rates goes any higher you could lose the entire monthly savings. You don’t normally think of the reduction as money out of your pocket since you are already paying it. Most of you will look at it as some sort of lost opportunity. The reality is in this economy these savings are magnified and by locking in a rate you would have sure money in your pockets. At some point in time you will be risking $300 to save $75.
Assigning your own value of risk/reward scenario by calculating what your monthly savings are and calculating the likelihood of further rate reductions will help you make better decisions, if you are not sure how, send me an e-mail.
First of all, every situation is unique to a certain point. Not everyone’s motivation is the same, and the scale of the risk versus reward is also different for different people.
So let’s use an example of someone looking to refinance an existing mortgage with a $500,000.00 balance and an interest rate of 6.25% on a 30 years fixed rate to another 30 years fixed rate. Current rates are fluctuating between 4.875% to 5.25% and the old loan has a payment of $3127 (principle and interest only) a month based on original loan amount of $508,000.00. The new loan will be $505,000.00 including closing cost for a new monthly payment of $2710 a month at 5.0% interest rate. Your monthly payment reduction will be $417, good enough for a new car payment.
Now, the question is, is it worthwhile to wait for the rates to drop to 4.875% or even 4.75%? If the rates hits 4.75% your new payment would be $2634, an additional saving of $75 a month, that would be your reward for waiting. What is the risk? For this example, I will assign the risk this way, at 5% you will save $417/month. If you missed waiting for 4.75% and the rate went up to 5.25% you can still save $338. So you are basically risking $75 to save $75. If you think the chances are equal of hitting 5.25% and 4.75% then it is a wash by waiting. Extrapolating this further, if there are very little chance of the rates going to 4.75% then it wouldn’t be worth it. But like a stop loss stock order, you must be prepared to pull the trigger sometime when the market is moving away from us, because locking in at 5.25% still give you over $300/month of savings.
You must keep mind that if the rates goes any higher you could lose the entire monthly savings. You don’t normally think of the reduction as money out of your pocket since you are already paying it. Most of you will look at it as some sort of lost opportunity. The reality is in this economy these savings are magnified and by locking in a rate you would have sure money in your pockets. At some point in time you will be risking $300 to save $75.
Assigning your own value of risk/reward scenario by calculating what your monthly savings are and calculating the likelihood of further rate reductions will help you make better decisions, if you are not sure how, send me an e-mail.
Friday, January 16, 2009
Rates Ticking Up
In the last couple of days we saw rates creep up a little. As of today (16 Jan 09), 30 years fixed rates for conforming loans are over 5%. Still low but last month we saw instances where it was as low as 4.75%. What does this mean and what is ahead of us?
I get asked all the time about what I think will happen to the rates. I also understand most people are expecting an opinion from me and not necessarily a reliable prediction. There is a wealth of information and opinions on TV and on the internet on the future movement of the interest rates - almost as much as the stock market. People invest in bonds and bonds trade like stocks. The value of the bonds is influenced by interest rates. So anticipating rates movements is a big part of the investment community.
The methods of analysis range from analyzing fundamentals like inflation, unemployment, commodity prices, government policy, stock market and a host of other underlying factors, to quantitative analysis based on recent and historical movements of the rates and pinpointing peaks and valley and ranges of the movement to looking into crystal balls and reading tea leafs.
I follow the news and try to make sense of all that information just like everyone else. So I cannot say my opinion is any more accurate than anyone else. But I can clear up some misconceptions I have heard from others in the past. The most common misconception is tying mortgage rates with short term rate announcements from the Federal Reserve. Announcements of Federal Reserve lowering Fed Funds rates and Overnight rates has some impact for the general trend of interest rates, but long term rates like mortgages sometime moves opposite of the short term rates.
Mortgages rates track longer term bonds rates much more closely. Fixed rates used to track the longer maturity treasuries and adjustable rates tracked shorter term maturities like one year or three year treasuries. So don’t get too excited with those short term rate announcements.
Another misconception is that government policy has a direct impact on mortgages rates. Short of doing what they are doing now ( buying mortgage backed securities or MBS directly) the market has a will of its own on the movement of the rates. So right now the government is directly influencing the rates by actively participating in the market. Other times policies are just another factor in the equation. You should also understand FannieMae and FreddieMac have no control over the rates, nor do any of lenders. These entities have some control over the margins they need over the underlying rate, but they have almost no control over the rates themselves.
Anyway, my take of the rates are, at this point in time the 30 years fixed rates will fluctuate between 4.75% and 5.25%. The other loan programs will fluctuate relatively the same. Unless we see the economy shifting significantly, we are probably within 0.5% of that range. If there is anything unique going on now, I have to speculate because the lenders are so busy, they may be holding a higher margin than normal market conditions.
I have notice in the past that rates are usually at the lowest point when people think it is going lower. You can only recognize the bottom after it has passed. This won’t help you if you are trying to pin down the best rate to the 1/8 of a point, but on the next post I will try to come up with some help on how to decide when to lock in.
Tuesday, January 13, 2009
Credit Scores
Your credit score is an integral part of loan application. It not only determines whether or not you can be approved, it also can make a difference on the interest rate of your loan.
For mortgage application purposes, we require a “tri-merge” credit report. It means we are receiving information from all three major credit repositories: Equifax, Trans Union, and Experian.
Your trigger score is the middle score of the three. For conventional loans like the ones we offer, the minimum score required is 740, any score lower than 740 may negatively impact your interest rate. The amount of the adjustment depends on other factors. The most important of which is the loan amount and property value ratio.
An example is if you are refinancing between 75% and 80% of your property value and your middle score is between 700 and 739, you may be subject to additional charge of 0.75% of your loan amount as an adjustment. Lower credit scores and different loan to value ratios trigger different adjustments. The guidelines are clear, one point short of stated criteria will cause the adjustment, and it is not negotiable.
So one of the things you can do is to review the credit reports for any mistakes or discrepancies. We can help you to correct mistakes and update outstanding balances to bring your score up. You will want to do this if it will help get a better rate. It takes some time and does cost up to $90 per trade-line to correct all three repositories.
I have seen dramatic increases in credit score when an account with late payment history is corrected with clear and indisputable documentation. Sometimes you can also bring your score up by reducing the balance of your credit card accounts. The process takes anywhere from a few days to a few months depending on the complexity of the disputed account.
There is vast information about credit reports and credit scores. A Google search will probably more than satisfy your curiosity. Otherwise, making your payments on time is probably the best way to protect or improve your credit score.
Monday, January 12, 2009
A far fetched prediction
On Thursday’s Washington Post there was an article about Henry Paulson’s final speech as Treasury Secretary. As reported by the Post, the speech involved proposals to replace FannieMae and FreddieMac with highly regulated “utilities” that would play a limited role in making money available for home loans.
The article went on to say that Paulson is leaving the position and changes to the future roles of Fannie and Freddie will fall on the shoulders of the new administration.
Quoting parts of the article, in the “short term” government must bring down mortgage rates, using Fannie and Freddie. In the long term, private investors operating as “housing utilities” will replace the functions of Fannie/Freddie. The idea is to 1) clearly define the role of government backing of these companies, 2) high regulatory supervision, and 3) limiting profits while keeping the entities in the hands of public investors to encourage “private market stimulus to innovation”. The old “implicit backing of the
Mr. Paulson is saying the new entities should either be a government entity or a private enterprise, not a hybrid of some kind.
I also found a few interesting tidbit from the article, 1) the Washington Post made a trillion dollar error when they stated Fannie/Freddie own or stand behind $5.4 billion in mortgages, when later in the article it was stated they owned about $1.5 trillion in mortgages. 2) Mr. Paulson could almost personally save the financial crisis with his pre-Treasury Secretary investment portfolio (He left Goldman Sachs to become Treasury Secretary with about $500 million to his name).
It is clear overhaul of the financial entities dealing with the mortgages are in the works. How and when it will impact us is unknown, but it definitely will come to fruition. How much longer are we going to have these low rates or loan products are all questions with no answers.
Anyway, my far fetched prediction is this: As the wheels turn, we will see rates for the best qualified borrowers go lower and lower. The trend is already apparent; most mortgages are layering additional costs for borrowers with lower down payments, credit scores; limited documentations; and subordinate financing scenarios.
The gap between the best qualified borrower and lesser qualified will be higher and higher, and I don’t mean sub-prime borrowers. So maybe when the proposed mechanisms are functional, we will see some mortgage rates track treasury rates so closely that the spread is less than 100 basis points (1%). Based on today’s bond yields, you would have a 30 years fixed rates for some people in the 3.5% range. I am not saying to hold your breath for it. I am definitely not telling you to wait for that rate to refinance. Just making a far fetched prediction for the unforeseeable future.
Wednesday, January 7, 2009
Buying Bank Owned Properties: Part 1 (of many)
A lot of recent purchase transaction we have processed for our borrowers have been properties owned by the bank. In another words they are foreclosed properties.
You can write a book on the ins and outs of buying foreclosed properties, and people have. I not going to write about the pro and cons or how to find a great deal, nor I am going to write about the different ways of buying foreclosed properties (short sales, auctions, etc). What is important for me is to prepare you for some of the intricacies that seemed to occur specific to bank owned sales during the loan approval process.
The first thing that sticks out is the seller you are dealing with is not an individual. Bank owned property buyers are usually dealing with are intermediaries; either an agent or employee of the bank. Any negotiation between sellers and buyers takes a much more circuitous route.
Sometimes even the most minor issues becomes a project. An example could be a minor repair that needs to be fixed prior to closing will take days or longer to solve. Anything not specifically spelled out on the sales contract will have to go through the corporate chains of command to approve which takes much longer than dealing with an individual seller.
Most bank owned sales are sold as is, but this does not mean you are obligated to buy it as is. Most contracts allow you to inspect the property and back out if the condition is not acceptable to you. The tricky part is getting the inspection done. Many of these properties have been vacant for sometime, making the inspection more difficult. Sometimes just to get the utilities turned on for the inspection can take days to coordinate.
Back to minor repairs, if the inspection discovers some defects, the buyer no longer can easily approach the seller to negotiate a resolution. Sometimes lenders will not close on a mortgage if the inspection has identified defects. This is especially frustrating when the defect can be easily cured or the cost to cure it is minimal.
Another common occurrence is the title issue. Many approved loans have had their settlement delayed because the bank may not have clear title to the property yet.
A lot of these bank owned properties are great deals, but there are also many additional considerations. In future postings I will try to give more specific examples on the challenges of buying bank owned properties.
Tuesday, January 6, 2009
30 years VS 15 years
I have been asked many times whether a 15 years fully amortized mortgage is a better deal than a 30 years fully amortized mortgage. By amortized I mean a mortgage which is paid off completely after the term of the loan.
It is an interesting question, and I myself have had both types and both fixed rates and adjustable rates mortgages. Let’s compare the benefits and draw backs.
For 15 years mortgages, you can usually get a little better rate, combined with a quicker amortization schedule, your total payment to get the mortgage paid off is much lower than the 30 years mortgage. For example, a $300,000.00 mortgage @ 5% over 30 years is $1,610.46 of principal and interest payment per month. Multiply that by 360 month the total payments to pay off the loan is $579,767.35. The same loan amount for a 15 years loan @ 4.875% is $2,352.89 per month. Multiply that by 180 month the total payment is $423,520.61.
Over the term of the loan you will pay more than $150,000 less for the 15 year mortgage.
Looks like a simple decision. In reality most people still chooses the 30 years mortgage.
I think the higher payment is not the only consideration. Looking at my own experience for my first home, I took a 15 years mortgage with the higher payment. Years later I felt I would have done much better if I had bought a bigger home and took a 30 years mortgage with the same payment. Using the above example, a monthly payment of $2,352.89 would have allowed me to finance $438,300.00 mortgage. I could have bought a home worth $150,000.00 more.
At the time, it would meant buying a bigger home in a better neighborhood and have a much better appreciation value Beyond the monthly payment consideration another reason I felt 30 years mortgage’s lower monthly payment would be a huge benefit if I was to keep the property as an investment - giving me better cash flow as a rental.
Whether or not you can do better investing the difference in monthly payment is another consideration. You can build a model to pinpoint the minimal return needed to be worthwhile. Intuitively, if you can gain more than the interest you are paying, you should come out ahead. In today’s environment, that may or may not be realistic.
For me, I looked at it another way, I wondered how realistic the savings of $150,000 is.
To achieve that saving, you have to complete the loan cycle over 30 years, most mortgages are paid off much earlier. I remember some statistics that, 90% of mortgages are paid off in less than 7 years.
So, let do some math. Using the above example, the 15 years mortgage, assuming you stay with the mortgage for 5 years you would have paid $2,352.89 times 60 for a total of $141,173, and you would have a balance of $223,116 on your loan. Your interest expense amounted to $64,289. The same loan amount with the 30 years mortgage you would have paid $1,610.46 times 60 for a total of $96,627 and you would have a balance of $275,486. Your total interest expense is $72,113. The real difference in interest paid over 5 years is $7,824. Is this a worthwhile trade off for the higher monthly payment? (Keep in mind you get to write off the interest expense.) Probably not, maybe that is why most borrowers choose the 30 year mortgage.
If you have already paid a few years and do not wish to extend the payment terms, I can see how a 15 years mortgage would make sense. Again, there are no simple answers. My best advice is if you are pretty sure you intend to keep that mortgage for the entire 15 years, you will see the benefits. However, if you are not keeping it for more than 10 years, it probably will not give you much savings with the higher payment.
It is an interesting question, and I myself have had both types and both fixed rates and adjustable rates mortgages. Let’s compare the benefits and draw backs.
For 15 years mortgages, you can usually get a little better rate, combined with a quicker amortization schedule, your total payment to get the mortgage paid off is much lower than the 30 years mortgage. For example, a $300,000.00 mortgage @ 5% over 30 years is $1,610.46 of principal and interest payment per month. Multiply that by 360 month the total payments to pay off the loan is $579,767.35. The same loan amount for a 15 years loan @ 4.875% is $2,352.89 per month. Multiply that by 180 month the total payment is $423,520.61.
Over the term of the loan you will pay more than $150,000 less for the 15 year mortgage.
Looks like a simple decision. In reality most people still chooses the 30 years mortgage.
I think the higher payment is not the only consideration. Looking at my own experience for my first home, I took a 15 years mortgage with the higher payment. Years later I felt I would have done much better if I had bought a bigger home and took a 30 years mortgage with the same payment. Using the above example, a monthly payment of $2,352.89 would have allowed me to finance $438,300.00 mortgage. I could have bought a home worth $150,000.00 more.
At the time, it would meant buying a bigger home in a better neighborhood and have a much better appreciation value Beyond the monthly payment consideration another reason I felt 30 years mortgage’s lower monthly payment would be a huge benefit if I was to keep the property as an investment - giving me better cash flow as a rental.
Whether or not you can do better investing the difference in monthly payment is another consideration. You can build a model to pinpoint the minimal return needed to be worthwhile. Intuitively, if you can gain more than the interest you are paying, you should come out ahead. In today’s environment, that may or may not be realistic.
For me, I looked at it another way, I wondered how realistic the savings of $150,000 is.
To achieve that saving, you have to complete the loan cycle over 30 years, most mortgages are paid off much earlier. I remember some statistics that, 90% of mortgages are paid off in less than 7 years.
So, let do some math. Using the above example, the 15 years mortgage, assuming you stay with the mortgage for 5 years you would have paid $2,352.89 times 60 for a total of $141,173, and you would have a balance of $223,116 on your loan. Your interest expense amounted to $64,289. The same loan amount with the 30 years mortgage you would have paid $1,610.46 times 60 for a total of $96,627 and you would have a balance of $275,486. Your total interest expense is $72,113. The real difference in interest paid over 5 years is $7,824. Is this a worthwhile trade off for the higher monthly payment? (Keep in mind you get to write off the interest expense.) Probably not, maybe that is why most borrowers choose the 30 year mortgage.
If you have already paid a few years and do not wish to extend the payment terms, I can see how a 15 years mortgage would make sense. Again, there are no simple answers. My best advice is if you are pretty sure you intend to keep that mortgage for the entire 15 years, you will see the benefits. However, if you are not keeping it for more than 10 years, it probably will not give you much savings with the higher payment.
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