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.
Wednesday, March 25, 2009
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.
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