I received a phone call from one of the agents I work with who is representing a seller requesting my opinion on another lender’s closing costs. The seller had agreed [photopress:MPj04331500000_1_.jpg,thumb,alignright] to “pay up to $10,000 towards buyers closing costs.
I was at my massage therapist yesterday (I was in an auto accident last July) and she was “talking mortgage” with me because she thought I find the conversation relaxing. 🙂 She recently was in the process of going through a refinance (with someone else, aahhhh…even more soothing) and discovered she has a prepayment penalty of $7,000 on her current mortgage. She called off the refinance even though it could save her a couple hundred dollars a month (she may not keep her current residence for long, so this may not be a good move for her…I do not have all of her financial details, so I cannot provide a professional opinion).
Apparently her original lender never disclosed her prepayment penalty; at least she does not recall such a discussion. She was very surprised with how little she knows about her largest debt. She’s not alone.
I’m challenging RCG readers to make sure you understand your current mortgage. I double dog dare you to dig up your Note (this should be with the inch thick stack of papers you received at your signing appointment) and confirm:
Is your mortgage an Adjustable Rate Mortgage? I have some additional questions…just for you:
In light of all the press mortgages are getting these days, this is a good excuse to brush up on yours. Just like my Massage Therapist, your Loan Originator may not have fully explained the details, or maybe you were so caught up in purchasing or financing your home, all those numbers slipped by. It happens.
It’s up to you to make sure you are massaging your financial future to work in your best interest. You can always contact your previous Loan Originator and have them explain your mortgage in fine detail or find another Mortgage Professional to help you.
[photopress:693_kick_tire.jpg,thumb,alignright]What? I’m writing about something I don’t agree with in principle? True. I think that many people are spinning their perfectly good wheels in order to try to find a rate they cannot have unless they’re prepared to lock at the precise moment they are shopping. But, the practice of rate shopping and kicking the tires of Loan Originators appears to be a necessary evil in the mortgage process.
Here’s my advice, if you feel you must shop rates.
Step 1: Contact at least three different people you trust financially and ask for referrals. I suggest family members, friends, co-workers, your real estate agent, CPA, Financial Planner, etc. Ask your sources what they liked and did not like about their Loan Originator. Gather their contact information and visit their web sites and blogs, if they have one.
Step 2: Prepare your personal financial story. You’ll need to retell the exact scenario to each Loan Originator so they can each provide you a rate based on the same information. If you just want to see how skinny someone will quote a rate to you, you can make up a vanilla story of “I’m putting 20% down on a $500,000 house. My mid credit score is 700 and I would like a 30 year fixed rate with no origination or discount points, please. I would like the loan priced with a 30 day lock
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A few weeks ago, one of the Realtors I work with, Suzy Seller, contacted me to see if I could help her client with an out-of-state mortgage. Ima Rusty (names are changed to protect the innocent), was moving to Arizona to retire and perhaps see the sun. Ima had gone to her “local bank mortgage company
Owning a home is not right for everyone. There are certain benefits to not owning the home you live in. If something goes wrong with the property, you simply ring up the landlord and they get to fix it. You pretty much know what your cost are going to be month to month (unless your landlord decides to sell the property, increase rent, convert the condo, etc.). On comments from last Friday’s post on interest rates, there is a discussion debating if one could consider having a mortgage as a forced savings plan. I know I’m going to seem biased since I am a Mortgage Planner…and I fully expect all of the number-crunching-junkies out there to have a heyday with what I’m about to post…but here goes!
[photopress:northgaterental.jpg,thumb,right]I found two similar homes, both in the north Seattle area. The rental property is available for $1850 per month. The home for sale, with close square footage, rooms, area, etc., is available (actually, an offer is pending) for $499,995.
With the comparison, I’m going to assume someone has 20% down to either invest in the stock market or to buy a home. The current rate for a 30 year fixed is 5.75% (APR 5.904%). Principle Principal and interest is $2,334 plus taxes and insurance equals a total payment of $2623. First year monthly tax benefits are $606 (mortgage interest benefit will decrease, property tax benefit will most likely increase).
The prospects are in the 28% tax bracket; they have a gross income of roughly $8000 per month and can have $700 in monthly debts with credit scores at 680 or better. The investor will receive 11% from the stock market and the homeowner will benefit from an appreciation of 7% on their real estate.
| Rent | at 5 years | Homeownership | at 5 years | |
| Total Payment | $117,863 | Total PITI | $157,396 | |
| Principal Paid | 0 | Principal Paid | $28,951 | |
| Tax Benefit | 0 | Tax Benefit | $35,293 | |
| Net Cost | $117,863 | Net Cost | $93,152 | |
| Real Estate Value | 0 | Real Estate Value | $701,269 | |
| Loan Balance | 0 | Loan Balance | $371,045 | |
| Total Home Equity | 0 | Total Home Equity | $330,224 | |
| Rent | at 10 years | Homeownership | at 10 years | |
| Total Payment | $254,498 | Total PITI | $314,792 | |
| Principal Paid | 0 | Principal Paid | $67,519 | |
| Tax Benefit | 0 | Tax Benefit | $67,893 | |
| Net Cost: | $254,498 | Net Cost: | $179,381 | |
| Real Estate Value | 0 | Real Estate Value | $938,566 | |
| Loan Balance | 0 | Loan Balance | $332,477 | |
| Total Home Equity | 0 | Total Home Equity | $651,089 | |
| Investment | Investment | |||
| Opening Balance | $109,000 | Opening Balance | 0 | |
| 5 Yr Return @ 11% | $188,452 | 5 Yr Return @11% | 0 | |
| 10 Yr Return @11% | $325,817 | 10 Yr Return@11% | 0 | |
| 5 Year Net Worth | $188,452 | 5 Year Net Worth | $330,224 | |
| 10 Year Net Worth | $325,817 | 10 Year Net Worth | $651,089 | |
The first five years with the mortgage provide an average monthly principle reduction of $482.47 per month. Taking out any appreciation factors, the principle principal paid each month is a forced savings plan. With that said, home equity does not earn interest. And I would probably encourage most clients to consider not using the entire 20% for the down payment to stay more liquid (depending on their entire financial picture).
For many Americans who do not have a savings plan (and the statistics show that many do not save), owning a home is as good as it gets for building savings…and it ain’t so bad.
Let the games begin!
When Ardell suggested that I post rates on Friday, I was a bit reluctant to do so. Why? Because it promotes rate shopping and I don’t believe that is the best way for consumers to select the professional who will be advising them on one of the largest financial transactions they will make in their lifetime. But I must admit, the posts have created a lot of very interesting comments and kudos to Ardell for putting me on the spot to post rates.
Recently, one of RCG’s frequent readers added a comment on Mortgage Rates for Friday Morning that brings home why you should not shop mortgage professionals by rates and that you should select your mortgage professional by referrals instead:
I got a GFE from a broker recommended to me by my boss. She was smart and knowledgeable, but not particularly personable.
I also got one from a guy who worked with my Realtor who called himself a Home Mortgage Consultant (with BIG BANK Mortgage). Personable, but not that sharp.
I also called a few other brokers off the net and paper – straight APR shopping.
The first broker, the one recommended, had the best rate. Because I liked my Realtor, I gave the (Bank) guy a shot to match her rate, which he did.
He made numerous mistakes, and I was forced to go over my docs repeatedly with a fine tooth comb to make sure they were correct.
In retrospect I should have gone with the recommended broker, though perhaps not, given that she was angry with me and showed it.
In the end, however, I am going to go with the reputable person who gives me the lowest rate in an apples-to-apples comparison. A quarter point could mean 10s of thousands of dollars over the life of a loan. That’s going to trump loyalty every time, and you are fooling yourself if you think otherwise.
There are many issues with shopping lenders by rate:
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Brian Brady recently suggested that I explain how mortgage interest rates can be priced with or without a discount point since I’m now posting mortgage interest rates on Fridays here at RCG.
One point is one percent of the loan amount. Typically, but not always, one point equals 0.25% in interest rate. You may hear lenders refer to discount points or origination fees…for me, they’re one in the same. I’m paid eitiher way. If you’re a buyer shopping rates, look on the Good Faith Estimate for the origination fee and discount points and add them together. That’s how many points you’re paying to buy that interest rate for a certain period of time.
For example, if a 30 year fixed rate has a rate of 5.75% with paying 1 point, zero points would probably be 6.00%. Whether or not someone pays for a point should be decided by how soon they will break even on the point as it is a significant cost. A simple formula to determine when you break even is to divide the difference in payment between the 1 point and the 0 point scenario into the cost of the point paid. The scenario below is based on a loan amount of $400,000.
Rate: 5.75% based on 1 point = $4,000
Principle and interest payment: $2,334.29
Monthly savings over the 6% payment at zero points = $63.91
How long to break even on the $4000 = 63 months
Rate: 6.000% based on 0 points = $0
Principle and interest payment: $2,398.20
If a borrower is planning on living in their home more than 5 years and not refinance during that time, then paying the point may be the right choice.
A borrower can also have their loan priced to pay their closing costs.
Rate: 6.125% = 0 points and approx. $2000 in rebate to cover closing costs (a.k.a. the “no cost mortgage
Update 11/11/2008: This is post is more of a reflection of the times. Zero down loans are not available with convetional financing at this time. Private or hard money may have zero down loans available. FHA with a loan from family members is the closest to 100% financing that I’m aware of. As with any posts about mortgage guidelines, be mindful of when they were written as guidelines have (and will continue to) change.
I’ve been working on a zero down rate quote for Jillayne, since she requested that two weeks ago when I did my posted my first Friday rate’s on RCG. She was curious how 100% loan to value mortgages compare based on different credit scores. At the company I work for, we have around 80 (woops…make that 78 now) lenders we work with. A majority of our business is handled in our credit line (Mortgage Master is a Correspondent Lender) and some business is “brokered”. Typically this is subprime or unique loans with added risk. As a Loan Originator, you wind up selecting 3-5 of your favorite “a money” sources, a few “alt a” lenders and of course, and I like to have around 3-5 sub-prime lenders. These are the lenders and representatives you rely on, get to know their products and trust their underwriting.
Back to Jillayne’s request, last night I called my three preferred subprime resources for my rate quotes…what’s the lowest credit score they will lend to at 100% ltv and is the rate and program? Thanks to RCG’s Tim, I’ve just learned that one of those resources I’ve relied on, New Century…and the only one that I work with who did quote yesterday an 80/20 with a 600 mid-score is facing troubling times to say the least.
“New Century Financial Corp. said it’s the subject of a criminal probe and Fremont General Corp. agreed to a cease-and-desist order with bank regulators in the biggest regulatory actions to emerge from the subprime mortgage meltdown.” To read the entire article on Bloomberg, click here.
Every day I’m receiving memos from various subprime lenders with details of (much needed) tightening guidelines. If you currently have clients shopping for a new home and they are using subprime financing (you might know this if they’ve told you their credit is not great, if the mortgage is a 80/20 with a prepayment penalty, etc.) you just might want to contact the Loan Originator to make sure the preapproval is still valid. If that client has a credit score below 620, they may (1) not be approved any longer or (2) be approved for an entirely different rate (much higher).
Subprime lenders are either eliminating their zero down products all together or are raising the credit score requirements. Previously, a 580 – 600 mid-credit score was no problem for 100% financing. They were beating down our doors to do these loans! Now, the new standards for mid-score (with the lenders I work with) seems to be 620. This is a significant jump that will delay some rentsers from buying homes until they improve their credit. Which again, I think this is good.
I’ve mentioned this before, but this is so important. If you have clients who have used subprime financing who have purchased homes in the past 1-2 years, this could be a good reason to pick up the phone and call them. Hopefully they received good counseling from their Mortgage Planner AND they took the advice to heart…working on cleaning up their credit usage, managing their spending, etc. With the subprime market tightening, if those subprime borrowers have credit scores below 620 when their prepayement penalty is up and their fixed payment is adjusting towards the sky, they may be are in a very tough situation.
Jillayne, this post is all ready a bit long… I promise I’ll have your zero down rates posted soon!
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It’s hard to believe that just six years ago today, the Nisqually Earthquake rattled our cages. I was just getting ready to quote interest rates for a purchase at my office when I was so shook (literally) that I accidentally quoted rates for a 15 year amortized mortgage instead of the 20 year amortized that my client was interested in…needless to say, I honored my quote. You never know when an emergency might happen, whether that’s an earthquake, a tree crashing through your roof or a illness or death in your family. Life happens to all of us when we least expect it. The anniversary of this event reminds me of being prepared for such emergencies.
A few months ago, I read an article from the Financial Planning Association which, among other things, discussed creating a simple three ring binder that contains your important financial information. I thought this was brilliant. In the event you need to leave your home quickly or if you have your partner in the hospital, you need to be able to access your important information quickly instead of running around your house or riffling through filing cabinets, etc.
The three-ring binder is intended for you to create a central source of answers and personal information that can help provide direction and instill hope following a disaster or other family emergency. Unfortunately, a disaster could result in death and incapacity. Accordingly, the binder is an ideal place to record your memoirs, personal wisdom, parting thoughts, and answers to questions that only you can answer. It’s important to keep this information in your binder current and always handy. It should include
- Instructions for whom to call first, what to do first, and where to find things.
- Personal family information: names, dates of birth, Social Security numbers, and other ID numbers and pertinent information about family members.
- A family medical history that includes doctor contact information, current medications, allergies, and so forth.
- A current telephone and e-mail directory that lists family members, friends and advisors.
- A current inventory of your financial assets, including all account numbers.
- Estate information that includes details about end-of-life wishes and arrangements.
- A list of service contracts and warranties.
- Detailed information about your business (if applicable).
I know…you all ready have the emergency kit with three days of water and food on your to-do list! This is just food for thought.
This morning, I read a commentary on seattlepi.com from columnist, Christy L. Thomas called Seattle too pricey for normal people. It’s regarding her move from Boise and how she and her boyfriend are considering whether or not they can afford to buy what they would like to have in Seattle.
The part that struck me, being a Mortgage Planner, is that they are selecting a 15 year fixed mortgage for their financing. That avenue would be an expensive choice for anyone. She mentions trying to find a home priced around $320,000 based on what she sold her Boise property. I’m assuming that Christy and Tom (her boyfriend) are conservative folks since they’re looking at a 15 year fixed mortgage…so the following comparisons are based on putting approx. 20% down. I’m also using the rates I quoted on Friday.
Same payment with each scenario…except you’re able to buy $132,725 more home using a 40 year fixed over the 15 year fixed and $107,750 more home with the 30 year fixed mortgage. With an interest only product, such as a 30 year fixed rate with a 10 year interest only payment, the savings (or how much more home they could buy) would be even more substantial.
I hardly ever recommend 15 year fixed mortgages to my clients…unless they’re doctors or someone who makes so much money that their mortgage deduction is reduced and they all ready have all the investments they need.
Even if Christy and Tom’s case where they want to “look around and buy the home where, if we’re lucky, we’ll grow old together”. Why pay off your mortgage and lose one of your best income tax deductions?
Christy, Seattle is not too pricey for normal people…your 15 year fixed mortgage is.