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.
Friday, April 24, 2009
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.
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