I’ve been following Inman wiki since its launch. So far it seems to be a combination of user-generated great articles, random blog posts, and blatant sales pleas. For example, searching the word “ethics
Rain City Guide
Your Guide to the Seattle Real Estate Market
Rhonda. Very cool. Thank you for the pingback!
Q1: Next Friday, I would love to read rates for zero down loans. I taught a class last night full of consumers and most of them are going for zero down loans. 80% first mortgage with a 20% second mortgage or 100% Loan-to-value “seller paying closing costs” scenario.
Q2: With the new federal and state guidelines that lenders qualify consumers on the adjusted rate (on adjustable loan products) instead of the start rate, are the rates/payment info above, the adjusted rate or the start rate?
It is possible that I’m thinking about a different kind of loan product, so if this is the case, please put me back on track. Thanks!
link opens a pdf:
http://www.dfi.wa.gov/cs/pdf/nontraditional_mortgage_guidance.pdf
Q1: I love taking request…you bet.
Q2: The rates on the ARMs will not adjust for 5-7 years (depending on the ARM). These are NOT Option ARMs (Pick-a-Payment, etc.) with neg. AM.
The 5 year fixed 10 year interest only is my preferred interest only product. If someone were to retain the property beyond the 61st payment, the mortgage would remain interest only for 5 more years.
Other interest only fixed period ARMs would not only have a rate change in 61 months, but would also revert to a fully amortized mortgage. Kind of a doubly whammy. The product I’m quoting is a “kinder” IO product.
In addition, I would probably not recommend any ARM or balloon product for anyone borrower who is intending to stay in their property long term considering today’s interest rates. These determinations must be made after a complete consultation with a borrower.
The 7/1 ARM and the 5/1 ARM with 10 Year Int. Only has caps of 5/2/5. The 5/1 ARM (amortized–not IO) has caps of 2/2/6. Not all ARMs have these CAPs…so it’s important to know what your CAPS are and to understand how they work before proceeding with an ARM. The same is true with understanding a balloon. (I’m working on a future post on balloons and ARMs).
Without knowing what rates will be at the end of the fixed period, it’s not possible to quote exactly what they will be should someone retain the mortgage and not refi or sell.
Worse case, you would add the first cap to the interest rate. Some people, in recent history, have done very well with their ARMs with the lower rates of the past few years and they have not refinanced them. It all depends on what the market is at that time.
PS: I should add that ARMs may adjust up or DOWN. 🙂 The payment quoted was based on the start rate for the fixed period (5 or seven years).
Rhonda,
Fannie Mae released some info not too long ago that said 80% of all mortgages are paid off in 5 years, 90% in 7 years and 99% in 12 years so even if someone thinks they will stay in the home for a long period of time chances are they won’t stay in the loan. This is supported by a Harvard study that said since 1993 the average loan is held 3.3 years.
I know everyone panics about interest rates going up but if you look at historical rates we hit 40 year lows in 2003 but in the 93years before 1963 rates were above those lows only for 2 years. If you look at the time frame that everybody freaks out about it sure looks like an abberation for rates to be higher than 7ish. Combine that with the fact we had the cold war going on most of that time (decreased competition) and the Fed seems to have learned their lessons when it comes to inflation (see the 17 rate hikes 2004 thru 2006) that the chances of us seeing those types of rates again are fairly remote.
Even if we do see rates go back to the late 70’s early 80’s levels if a homeowner is utilizing their mortgage as a principal tool in their overall short and long term financial plan those higher rates will come with compensating factors in other areas of the overall market that if properly structured will more than make up for the increased borrowing costs.
Which makes fixed rate mortgages very expensive for 99% of the population.
Kurt,
It all depends on the borrower’s individual financial goals and plans with how long they plan on retaining the property and the mortgage. There is no cookie-cutter plan for all–we have a 7 year interest only ARM on our property and are very pleased with it. My mortgage may not be suitable for someone else.
Hi Kurt,
Do you have an Internet hyperlink to the Harvard study available?
I’m not quite following how you’re coming to the conclusion that fixed rate mortgages are very expensive for 99% of the population.
I’m no economist, but I believe there are many, many factors that would go into a decision involving a fixed v. variable v. interest only loan product.
Maybe you meant something like, “a fixed rate loan might not be the best choice for some consumers.”
?
Thank you for the clarification.
Rhonda, can you help me out with a list of factors consumers need to consider? Post #5 says
1) their individual financial goals
2) plans for retaining the subject property
3) intended time planned for keeping that particular loan type
I could go on and on but I’d really appreciate your help as I’m working under a deadline for another project.
Thanks!
At what % interest rate drop should someone refinance. Our interest rate 30yr fixed (20% down etc.) was for 6.25% (Sept 06)…now that they are 5.8% is it worth refinancing? I have in the back of my mind that it should be a least a 1% drop.
Certainly, Jillayne.
Example: IF someone only planning on living in their home for a few years 3-5, and IF the 5 year fixed rate is lower than the 30 year fixed rate, THEN the 5 year ARM would be the best option. Assuming the payment difference is $71 per month (based on the rates above and a $300k mortgage), then in 60 months the difference in mortgage payment would be $4274. Currently, there is not a huge spread between ARMs and the 30 year fixed rate. The consumer would need to decide if that savings is worth having the ARM.
With the interest only option, the savings would be more substantial ($368 per month over the 30 year fixed rate). Calculating the savings over 5 years would equal a savings of just over $22,100.
If a consumer were savvy enough to invest the difference ($368) into an interest bearring account each month, and did not pay toward principle with their interest only mortgage, they would actually wind up with more net wealth than having a straight 30 year fixed mortgage.
However, if I had a client who was nearrng retirement age and did not want to refinance down the road, I would probably recommend a 30 year fixed rate product. If they were anticipating their income to decline, I would review an interest only 30 year fixed.
The key is to educate the client, let them know all of their options, provide your suggestions and let THEM make the choice armed with the right information.
Chillyc, you’re probably correct. Unless you have other factors that you’re considering (maybe you have a first and second mortgage to consolidate, etc.); there is not a significant difference between 6.25% and 5.8%. I don’t know your loan balance, but with the cost associated with refinancing, it may take you a very long time to break even on the cost.
Rhonda!! Thank you!! Just in time. Writing two offers, maybe three, before I leave for L.A. on Monday morning.! Friday is RATE DAY!
I don’t have time to work the rationale for the spreads. Don’t need to do that at this point, as I use the 5.875% and 6.125%.
Can you give me a quick update on 20% down investor loan and the amount on a Jumbo. Over $403,000 or so is Jumbo? If the loan is amount $510,000, do I look at two loans for that or one Jumbo rate?
Over $417,000 is a Jumbo rate. If the loan amount is $510,000, the 30 year fixed rate would be 6.125%. If you were to do a piggyback, with $417,000 for the first mortgage, you could do a second mortgage in the amount of $93,000 (many options for the second mortgage too–fixed, 5 year ARM and fixed interest only–not to mention heloc).
20% down NOO (investor loan) based on 1% orig. would be 6.5% for a 30 year fixed. Many investors opt for interest only products if they are interested in more monthly cash flow. And…this is a quick quote, Ardell. I’m running out the door. If I had more time, I would shop the rate out (since I work with many different lenders).
I can do the interest only and amortized payments myself. Thanks!! Very helpful. All I need are the rates and I can back into it with taxes and insurance…condo fees on the investor one. Thanks!
Of course rates can change anyway by the time we get into contract by Monday…so no need to go “the different lendrs” route at this point.
I just like people to know what their payment range will be, before they make an offer. Fine tuning is first five days after “in escrow/signed around”, for me. I can hand calculate for each house in the tour, as long as I have the rates, to show the difference in payment, property to property. No HOA dues, vs yes HOA dues, higher taxes on new construction vs. lower taxes on older constructon. I adjust the payment accordingly.
Even though the payment could change slightly by Monday or Tuesday, the difference between the payments based on dues and taxes, will not. So they can at least see the spread in the payments before making an offer.
There’s another class for agents. Never hire an agent who doesn’t have or know how to use a mortgage calculator 🙂
Jillayne,
I don’t have a hyperlink handy, I do so much research on things when I find them I normally put the source and the info a condensed document to access quickly and easily. If I find it I’ll forward it to you.
As far as the fixed rate mortgage goes and the 99% claim- if 99% of all mortgages are paid off in 12 years then a fixed rate mortgage would be more expensive for 99% of homeowners. Now I realize that this is a pretty general statement, but utilizing a 5, 7 or 10 year ARM would be more beneficial from a financial standpoint if the loan was paid off in 12 years or less.
(Rhonda and Jillayne) People say that they are going to stay in their loan/home for a long time, but the stats don’t show that. Life happens, rates change, kids are born, more kids are born, then they go to college, home values go up, houses sell, improvements are made, jobs change, etc.- there are so many factors that drive our behaviors and a majority of people follow “tradition” when they get their home loans a tradition mind you that is based on 1930’s logic. A logic that is no longer valid.
When we don’t have an inverted yield curve the rate differential on ARMs would provide enough savings to make up the potential risk of rates going up. I don’t mean this to sound absolute, it is just that people just don’t stay in their mortgages that long anymore and getting a fixed rate mortgage for the “safety” can be a very costly premium to pay for that safety.
A quick example: (In a normal rate enviornment)
15 yr fxd 6.00% $250,000 loan P&I $2,109.64
10 Yr ARM (30 yr AM) 5.75% $250,000 loan P&I $1,458.93 which is $650.71 lower per month.
If we make the same $2,109.64 payment on the 10 year ARM the principal balance in 10 years is $102,597 vs. $109,122 on the 15 year loan so the savings are $6,525 or $271.88 per month for 2 years (remember the 12 year 99% figure). The ARM cap on the 10 year ARM is 5% so the worst case scenario is 10.75% and the payment on a $102,597 loan for 60 months at 10.75% is $2,217.94 or $108.30 higher per month. So the 10 Year ARM saved $3,925.92 IF the ARM adjusted the maximum and stayed there until year 12. Does that better explain my assertion?
I would agree that in the current enviornment we do utilize fixed rate mortgages more because the “risk premium” just isn’t enough to justify the shorter term ARM’s for someone who thinks they will keep their home for a long time.
Sorry to jump around, just trying to figure the best way to explain my point.
Hope this helps.
“from any real estate agent.”
but Ardell is NOT a Real Estate Agent. you should be more careful with your terminology. Semantics is VERY important to Ardell.
Hi Mark,
Ardell is a real estate agent.
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Rhonda,
Is there a general rule of thumb for how much higher the rates are for “no-doc” loans (given everything else is the same)?
Thanks.
Clark,
Not really. It can vary quite a bit and is dependent on credit scores and loan to value.
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