Dec
3
Rates are really low again
Filed Under mortgage, rates | Leave a Comment
I’ve had severa mortgagel inquiries lately so it probably had something to do with this
National mortgage rates fell sharply last week, with rates on 30-year mortgages dropping to the lowest level in more than two years.
As of today 30 year rates are pretty low:
- One point will get you 5.5%
- Want no points, you’ll get 5.75%
- Want zero points, you’ll get 6.5%
Of course to qualify for these mortgage rates you’ll need superb credit, decent income, an 80% loan balance to property value ratio, and decent assets.
Sep
26
A letter from a reader
Filed Under mortgage | Leave a Comment
I get a lot of email. Some are linking requests. Some are spam that somehow get through GMAIL’s spam filter. Some are mortgage requests. Some are mortgage questions. Some are mortgage vendors trying to sell me something.
On Sunday, I received a well written argument from a reader who asked me to post his response to the Denver Post article NO MONEY DOWN: A HIGH RISK GAMBLE.
Phil,
I enjoy frequenting your blog, and wanted to be sure to share this with you. I am an independent Mortgage Broker with my own company Source Financial LLC, and I wrote an extended response to The Sunday Denver Post’s lead article from September 17, 2006 entitled “No Money Down: A High-Risk Gamble” [www.denverpost.com/ci_4347686].
I found the Denver Post article to be riddled with misrepresentations, one-sided accountings, and dangerous misinformation, all supporting a traditionalist approach to mortgages that has put two-thirds of all families into home ownership, but yet has led to a situation where the average fifty year-old American is worth negative $7000, only 5% of Americans retire at age 65 in financial dignity, and 9 out of 10 Americans die in debt.
In reference to my 2000 word response, Denver Post Business Editor Stephen Keating indicated that “I will take the time to read it and digest your observations, and discuss it with the rest of the reporting/editing team here.” Article author and Denver Post Business Writer Greg Grifffin wrote “This is a well-reasoned and well-supported argument. I don’t agree with everything you’ve said, but you’ve managed to get me thinking.” Unfortunately, checking today’s (September 24) Sunday Denver Post and www.denverpost.com, my response remained unpublished…
A Response to “No Money Down: A High-Risk Gamble” – The Sunday Denver Post, September 17, 2006 lead article [www.denverpost.com/ci_4347686]
As an independent Mortgage Broker that owns my own company, Source Financial LLC, in addition to being affiliated with a larger mortgage company that handles the processing and servicing of my loans, Lion Financial Corporation, I read the lead article “No Money Down: A High-Risk Gamble” with great interest. Knowing that a lot of folks along the Front Range turn to the Denver Post as an objective source for information, I was shocked and dismayed by much of the information and conclusions that were put forth on a topic that already invokes a fight or flight response among many home owners.
100% financing loans have been an amazing tool that has greatly contributed to the 5% increase over the last twenty years in percentage of homes occupied by the owner. But it is not the lack of equity that is putting these borrowers into jeopardy, it is a lack of a flexible asset base to deal with changes that has been increasing the risk of these folks defaulting. In general, people that utilize 100% financing for home purchases usually are lacking the liquid assets, emergency funds, and overall wiggle room to deal with financial hardship.
Of course lenders usually have guidelines concerning liquid asset reserves that must be held by the borrower in order to qualify for a loan, but often they only require enough to cover two to four months of mortgage payments. When people do face catastrophic events rightfully referenced by the Denver Post, “job loss, medical problems and divorce,” those reserves can often quickly disappear.
But having equity in one’s home when faced with these situations does not “give homeowners options when they face financial problems,” because it is precisely when folks are facing such dilemmas that they are quite often unable to qualify for refinancing, as at that point in time they are too high risk of a borrower for lenders to work with. As a Mortgage Broker I am deeply disturbed by this fact, but unfortunately it is a reality that we all must face when dealing with banks and lenders.
And probably the most misunderstood aspect of homeownership is the fact that equity is a ZERO PERCENT RETURN INVESTMENT. Yet two-thirds of Americans hold the majority of their wealth in home equity, which is a non-liquid asset that gives them absolutely zero return. Many people confuse appreciation, which is the increase in home value due to market trends, with getting some kind of return on their equity, but that is a common misconception. That is why it is so important for homeowners to separate their equity from their home via refinancing, and put those “cashed out” funds into investment vehicles that offer an actual rate of return. In doing so, homeowners increase their overall liquidity, improve their capacity to face emergencies, reduce their financial risk, increase their rate of return, improve their tax deductions, and diversify their investment portfolio.
Instead of spending their liquid asset base (savings) to finish their basement and send money to their parents, such as in the case of Jose Garcia and Maria Vanderhorst, borrowers with 100% financing have to exercise greater financial discipline. And putting money down and getting into a 30-year fixed would not have improved their situation, as then their down payment would be tied up as equity, which is a non-liquid asset, money that can only be accessed through refinancing or by selling their home.
100% finanacing loans are not dangerous, what is dangerous is borrowers not having a liquid asset base to deal with life’s contingencies. Unfortunately, these are the type of borrowers that tend towards 100% financing, as it really is their only option for home ownership. And tying up their wealth in the straightjacket known as equity is not part of the solution, it is part of the problem. An incredible means to access equity for the purpose of greater fiscal flexbility and all the other goods mentioned above, or “cashing out equity as one goes,” is the Option-ARM loan, which received quite a misguided slamming in the Denver Post article.
The Payment Option Loan gives the borrower four different payment options each and every month: they can make an Interest Only, 30-Year amortized, or 15-Year amortized payment based upon the fully indexed interest rate, or they can make the minimum payment that is based upon a very low “start rate” (usually between 1% and 4%), which involves deferring interest (a.k.a. negative amortization), or adding the difference between the Interest Only payment and the minimum payment onto the principal of the loan. Now while most lenders offer the Payment Option Loan with an adjustable fully indexed rate, one that starts adjusting as early as the first month, some lenders offer the Payment Option Loan with a fixed interest rate for the first five years.
The Payment Option Loan has proven to be a favorite of Real Estate Investors and Real Estate Agents, as it frees up extra cash flow on a monthly basis for much greater investment opportunities. Knowing that equity is a zero percent return investment is some powerful information to have.
The annecdote concerning Louis and India Harts conflated the fixed “start rate” with the adjustable “fully indexed rate”, such that readers were left with the impression that the Harts’ interest rate went from 2.6% to 8.1%. The start rate, which determines how much the minimum payment will be, is not a “teaser rate” that “quickly shoots up”. Some lenders do gradually increase the minimum payment itself (not its determining start rate) on an annual basis, usually somwhere in the range of 7.5% per year, to keep the borrower from deferring too much interest. But the start rates is always otherwise a fixed rate. It is the fully indexed rate, upon which the Interest Only, 30-Year amortized, or 15-Year amortized payments are based, that is adjustable is this case. And this fact is consistent with the numbers quoted in the article: the minimum payment of $919 the Harts are making would be the combination of $721 (2.6% start rate on a $180,000 loan) and $198 of escrowed Property Taxes and Hazard Insurance, which is approximately what they would be for such a home.
In the Harts’ particular case, they are going to have plenty of time to refinance before their loan starts to recast when the principal hits 115% (which would be $207,000 in their situation), as they will be well below that total when their three year prepayment penalty period is up. So the answer to Louis’ “I don’t know how we’re going to do it,” is that when those three years are up, they’ll refinance and get themselves into a loan that they feel more comfortable with and educated about. Though given their situation, if properly understood the Payment Option Loan really is their best option.
My question is how can mortgage products themselves be blamed for foreclosures? At best the article points towards a correlation, but demonstrating causation surely requires more than offhanded references to what some unnamed experts stated the next wave of defaults “may” come from. Beyond unpredictable catastrophic occurences like job loss and overwhelming medical bills, foreclosures occur because borrowers are getting into loans that they do not understand, and often they do not know that they do not understand the mortgage product. It is the responsibility of the Mortgage Broker to completely explain all the details of any mortgage product to the borrower. But it is also the responsibility of the borrower to be certain that they understand the terms of loan before signing off on it at closing. Vehicles and guns both kill in the range of 35,000 Americans each year, but it is the human misuse due to lack of education, ignorance or simple negligance that creates this reality, much like in the mortgage scenario.
Every different mortgage product serves its purpose, and what works for one borrower will not work for another given the specifics of their situation. To label certain categories of loans as “high-risk gambles” or as leaving “no room for slips” ignores the millions of families that are in these loans and find that they very much work for them. It is also a disservice to consumers to mislead them with such one-sided representations.
The true irony of the lead piece in September 17th Sunday Denver Post is that the conclusion that “Option-ARMs… could fuel a surge in foreclosures in the next few years” is the opposite of what we find is actually going on in the mortgage industry, as Payment Option Loans have proven to have the lowest foreclosure rate of any mortgage product currently on the market. World Savings is a bank that specializes in this product, which they refer to as the Pick-A-Pay Loan, as more than 90% of the loans they outfit borrowers with are of the Option-ARM variety. As a lender they have less than a 1% percent foreclosure rate! But World Savings, along with the independent Mortage Brokers like myself that they work with, take on the responsibility of educating the borrowers as to how to properly and smartly manage this incredibly powerful mortgage product.
A lot of mortgage brokers I know will not touch Payment Option loans, but I believe that is primarily because they are not all that interested in educating the consumer. Why not just throw them into a 30-year fixed APR mortgage? Everyone pretty much knows how that works. But that is also how banks make of the most money off of borrowers! The “list of higher-risk, alternative mortgages” the article refers to are not only not necessarily higher risk (Payment Option loan has the lowest risk, as discussed above), but they also provide the borrower the opportunity to increase their monthly cash flow by lowering their monthly mortgage payments by as much as 40%. In this way consumers are empowered to “become the bank” and grow their own investment portfolio, rather than falling into the trap of handing over their hard earned capital to the banks in the form of a large down payment or paying down principal so that they can have more of a zero percent return investment, equity.
Affiliates of Lion Financial Corporation, like myself through my company Source Financial LLC, do not shy away from the privilege or responsibility of educating our clients how to properly utilize alternative mortgage packages. And why is this? Because when families are taught smart mortgage product and equity management, they learn to utilize their mortgage as a financial tool for building wealth, which easily makes a $500,000 to $1,000,000 difference for the borrower over the next fifteen to twenty years. The affluent have always understood how to leverage their mortgage, pay as little down as possible, and keep very low monthly payments in order to increase cash flow for investment purposes. The American middle class is being transformed by engaging in these very same concepts and increasing their fiscal discipline, and I absolutely would not have it any other way.
Brent Ritzel
President/CEO, Source Financial LLC
Denver, Colorado, USA
An affiliate of Lion Financial Corporation
303-590-8999
Brent.Ritzel@lionfinance.com
Jan
1
Seller paid closing costs
Filed Under mortgage | Leave a Comment
One of the most popular ways to buy a home today is to have the home seller pay your loan closing costs. There are restrictions based on the type of home loan you qualify for but its becoming one of the most common ways to bring no money down.
Home buyers who are short on cash should negotiate to have the home seller pay for all or part of the closing cost. The advantage is that the buyer can purchase the house with less money. Take for example, a house selling for $300,000. A buyer offers $290,000 and the offer is accepted. The homebuyer gets a mortgage of 80% loan-to-value, with a 20% down payment, or $58,000. Assuming the closing costs is 5% of the loan amount, or $11,600. The buyer would need $69,600 ($58,000 + $11,600) in order to purchase the property. Instead of offering $290,000, suppose the buyer purchases the house for $300,000 and asks that the seller pays $10,000 towards settlement costs. The buyer then takes out a mortgage of 80% of the purchase price. With a 20% down payment ($60,000), 5% closing costs ($12,000), and the seller contributes $10,000 towards closing costs, the buyer needs only $62,000 to purchase the same house. In effect, the home buyer is able to get a bigger loan, without having to go over the maximum 80% loan-to-value set by most banks.
Talk to your real estate agent about seller’s concessions when discussing financing of closing costs on any new purchase.
Many loan programs allow for seller paid closing cost to pay for all the fees associated with the loan. This allows buyers taking advantage of 100% financing to literally walk to the closing table with no money at all and at times even getting a refund of earnest money.
Different loan programs will dictate how much you can receive from the buyer. This can be a percentage or it can be a fixed amount and is usually between 2% to 6%. The most common amount used is 3% on a average priced house. This is fully negotiable with the seller and some sellers may not be willing to give. The more motivated they are the better chance you might have. I would always start out with asking for seller contribution…it’s usually free money for you.
Did you know that sellers are allowed to pay for your closing costs and prepaids? Sellers are allowed to pay up to 3% (6% on some programs) of the sales price toward closing costs, prepaids and points. This helps you with cash needed at closing. It is important to remember that if you want a seller to pay closing costs, you must detail this in your offer to purchase the property.
Seller paid closing costs are a great loan feature, especially for the borrower who may not have all of their closing costs available to them. I frequently will pre qualify a borrower who does not realize that they are expected to bring their closing costs to the table. However, after I have had a chance to explain that seller paid closing costs are essentially financing your closing costs in with the loan have a very positive response.
Seller paid closing costs are the best way to bring zero money to the closing table. Your mortgage broker and real estate agent can help you structure your loan this way.
Why would a Seller want to pay the buyers closings costs? In a buyers market Sellers wanting to sell their home quickly often use this as an incentive for buyers to purchase their home. A benefit to the Seller is that this also increases the number of buyers that are able to purchase their home. Many buyers today lack the resources or savings to pay the sometimes hefty upfront closing costs of buying a home. Today, more Sellers are figuring in buyers closing costs when setting the price of their home, knowing upfront that to sell their home quickly they need to increase the number of potential buyers.
Seller concessions, which allow the closing costs to be paid, are subtracted from the appraisal price. The appraisal price must be large enough, to include the purchase price and the concessions.
Jan
1
No Points No Fees Loan
Filed Under mortgage | Leave a Comment
These loans are possible. The lender will give the broker a commission if you take a loan with a higher rate then what you qualify for at even (par) pricing. So if you qualify for a 7% and take a 7.5% instead then the lender will compensate the broker. The broker then uses this compensation to cover all of your fees for the loan plus pays himself. In the end you can get a loan for no points and no fees and the broker still gets paid for the work.
Another way to have fewer out of pocket costs associated with acquiring a loan and still get a decent rate is to work with the seller of the property and ask for 3% seller contribution. You can use this to pay for closing costs and/or down payment. This is becoming more and more common these days and most state promulgated contracts provide a place for this amount. In hot markets it may not be as easy to get this accomplished.
If you have a home that you believe you will live in for the rest of your life (or at least a long time) then it will be in your best interest to take the lower interest rate and pay the closing costs. The closing costs can most often be made back within the first 3-5 years of your loan; whereas in taking the no closing cost loan with a higher interest rate, you are stuck with that higher rate and payment for the life of the loan.
Have your mortgage broker calculate the exact length of time you should be in your home in order to have a no cost loan, and paying higher interest, make sense. Basically you take the costs you saved and divide by the increased monthly mortgage payment. This will tell you how many months you can have this mortgage before it starts costing you to have chosen the “no cost” mortgage.
No Points No Fees or Zero Closing Cost loans are usually not available on smaller loan amounts.
Often its best to pay the points. Have your broker figure out which way you come out ahead.
There are Mortgage Brokers and Agents who have special pricing available with the banks they work with, and who have worked out special pricing with their title and escrow companies. Some of these Brokers can offer borrowers a Cost Free Refinance, at truly competitive interest rates. Make sure to always compare the Good Faith Estimates(GFE) between the brokers/banks you are considering doing business with. The GFE’s will show your total costs as well as the interest rate and APR.
If you are planning to stay in your home for 1-2 years you should consider a zero cost loan.
Such a program may end up costing you significantly more in the long-run depending on the loan type.
Be careful of those that tout “no fee loan,” when in reality they only intend on not charging origination points or processing fees. In this particular case the lender still will be charging all other fees associated with the loan. A Good Faith Estimate should dispel what is really being paid for or assumed in the financing.
The no points or no fee loans are best for short term loans. If it is a property that you plan on living in for a short time than the thousands that you save in fees will be greater than the savings for the first few years allowing you to close your mortgage with less money out of your pocket or a lesser loan amount.
Not all No Fees Loans are created equal. Some No Fees loans require the home buyer to pay for home inspection and appraisal report. Others only mean no lender fees. Applicants are still required to pay for third party fee such as recording fee, taxes, insurance, etc. When shopping for No Fee loans, it is important to compare the Good Faith Estimates and find out what exactly are being paid by the lenders.
Become an educated consumer and directly ask the lender what is included in the “no fees” loan and if it covers third party fees. Then ask how it will effect your interest rate.
The key thing for the borrower to realize is that in a No Points No Fee Loan is does not mean that the points and fees are simply being given away. They are just being paid for in a different way. What way is right for you will depend on your individual situation. Unfortunately, much of the advertising for a No Point No Fee Loan implies the opposite, that the lender is giving away these costs. Smart consumers need to understand that they are being way to naive if they believe that to be true.
As an example, consider a no-down-payment auto lease, where the dealer still expects you to pay taxes, tag, fees and freight. The down-payment in this example would equate to the lender fees, but your local city and/or county government still expects (requires) you to pay the county tax, and you must pay to record the deeds, etc. A complete, detailed good faith estimate, or GFE, will highlight line by line what fees you are being asked to pay.
Jul
28
Paying for Points Part II
Filed Under mortgage | Leave a Comment
Points come in two varieties, origination and discount points. Generally a “point” is a fee that the lender charges to buy down the interest rate and is equal to one percent of the loan amount. “Discount points” vary inversely with the rate quoted-that is, the lower the rate quoted, the higher the amount of points charged. Discount points are used to adjust the yield on the loan to the institution providing the money. Origination points, such as is common for FHA and VA loans, are generally charged by the lender to offset the lender costs of administering the transaction.
Does it make sense to pay the points? The answer is…it depends. There are many factors to consider. One of the primary items to review is the overall long term cost of a zero-point loan versus a loan with points. One easy way to determine the value of paying points is to determine how many months (payments) it will take to recoup the original expense. The math is easy. Simply, divide the cost of the points by the monthly savings to arrive at the number of months it will take for yourinvestment in points to pay for itself. Here is an easy example:
| 2 Points | 1 Points | 0 Points | |
| Loan Amount | $250,000 | $250,000 | $250,000 |
| Cost of Points | $5,000 | $2,500 | $0 |
| Interest Rate | 5.00 % | 5.50 % | 6.00 % |
| Monthly Principal and Interest | $1342.05 | $1419.47 | $1498.87 |
| Monthly Savings | $156.82 | $79.40 | $0 |
| Months to Recoup | 32 | 32 | $0 |
| Total savings over 360 payments | $56,455.20 | $28,584.00 | $0 |
The example is a simple approach to compare the difference between a zero-point loan and a loan with points. However, there can be other factors to consider. Some consumers may try to calculate tax implications of the different amount of points and interest paid and the subsequent tax deductions. Other borrowers may consider the present ‘value’ of the dollars spent on points today, versus the future ‘value’ of the dollars if they were invested instead of being paid to the lender. A great majority of consumers will be able to determine the advantages or disadvantages of a zero-point loan by using the above scenario.
NO COST LOANS There is no free lunch, even in mortgage lending. Every real estate financing transaction has costs for processing the application, appraising the subject property, administering the transaction escrow, securing title insurance, etc. In a typical “no-cost loan” the lender agrees to pay all of the costs of the transaction for the borrower in exchange for the borrowerpaying a higher price for the loan. Depending on the individual borrower’s circumstance, this may or may not be a “good deal.”
You will make the right financial decisions today if you have a plan for your future. In other words, your mortgage professional can plan your mortgage around your goals and aspirations. If you plan to move or refinance your mortgage loan within the next five years you most likely should not pay points. If, however, you know you are going to be in this home for a long period of time, you can definitely save money by paying the points. Take a few minutes and think about where you are going to be in the next 3-5 years. The answers you come up with will help you make the right decision about paying points.