Tag Archives: Mortgage/Lending

I am a Mortgage Dispenser

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Over the past month, I’ve been combing through my database of my closed clients who have either adjustable rate or balloon mortgages.   I’m sending each and every [photopress:july55ad.jpg,full,alignright]one of them a letter reminding them of the terms of their mortgage.   Regardless of how much time I spend explaining how their mortgage program functions, as soon as someone has moved into their new home and they’re unpacking boxes—they’ve forgotten the fine details to the financing that made buying a home possible! 

The letters restate what is disclosed on the Federal Truth in Lending and their Note, including what their margin and caps are.    It also addresses when their first adjustment will take place and what the worse case rate and payment may be.   Worse case payments are currently not disclosed on the Truth in Lending.   

I began my mortgage career on April 1, 2000.   So far, 20% of my closed transactions have been adjustable or balloon mortgages and 3% of my total closed business would be classified as “subprime

LPMI, PMI and 80/20 Mortgages…Oh My!

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Note:  I should have titled this post:  “LPMI, PMI and Piggy Back Mortgages…Oh My”.  I just realized my error thanks to Bill’s comment.   My bad…my apologies!  And there’s no way for me to 80/20 in the title. 

LPMI (Lender Paid Mortgage Insurance) is one of my favorite mortgage products to use for clients with less than [photopress:wiz.jpg,thumb,alignright]20% down.   Here are some of the benefits of an LPMI mortgage:

  • Loan amounts up to the conforming loan limit (currently $417,000 for a single family dwelling).
  • Mortgage interest tax deductible for adjusted gross incomes over $100k (unlike PMI).
  • Convenience of one mortgage payment vs. two mortgage payments on a property.
  • Often provides lower payments a lower total mortgage payment than the “piggy back

Are you leaving too much on the table?

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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.

How Well Do You Know Your Mortgage?

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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:

  1. What is your interest rate?  
  2. How is the mortgage amortized?
  3. Is there a prepayment penalty?   

Is your mortgage an Adjustable Rate Mortgage?   I have some additional questions…just for you:

  1. What is the date that your mortgage scheduled to have the first rate adjustment?
  2. How will your new rate be determined?  (What is the margin and index).
  3. How much can your mortgage adjust when the fixed payment period is over?
  4. How often can your mortgage adjust when your fixed period is over?
  5. Do you have deferred interest or negative amortization?

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.     

5 Steps for Shopping Mortgage Interest Rates

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[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

It may not be your business…but it is all mine!

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Two years ago, our company switched our loan operating system to Encompass, so I have data available for the past two years (closed transactions from March 2005 – March 2007).   I’m pretty surprised at the results after analyzing my purchase transactions and so thought I would share this with you.

Mid Credit Scores

3% had credit scores between 600-619

17% had credit scores between 620-679

25% had credit scores between 680-719

47% had credit scores between 720-799

8% had credit scores above 800

25 % of clients purchased with 100% LTV Financing (80/20 or 100% LPMI)

Average zero down mid credit score = 723

7% FHA Financing

  • Mid credit scores ranging from 644 – 744
  • Average FHA mid credit score = 720

39% had 20% or more for down payment.

The most popular loan programs for my clients:

  • 47% opted for a 30 year fixed conventional
  • 26% have 5 year fixed period ARMs

So what do I make of this?   The consumers with scores under 620 will have a much tougher time, if they’re able to purchase at all.   Especially without a down payment of 5% or better.   Depending on credit history (1-2 years of no late payments), they may be able to go FHA or VA for financing.   The 3% (credit scores of 600 – 619) of my clients who I helped with financing over the past two years, would probably need to go back to drawing board and work on their improving credit scores (and, more importantly, work on changing their credit/spending habits) before being able to obtain financing for a home.   With that said, out of the 3% who were able to buy, I’m only worried about two buyers who may not have followed my advice of working on their credit and revamping their budget (and one of them has a 5 year fixed period ARM).

The 17% (credit scores between 620-679) would probably fit into FHA financing.   Over the past two years, most of my clients would opt for 80/20 or 100% (LPMI) financing over FHA for the following reasons:

  • The upfront PMI (1.5% of the loan amount) is no longer refundable on new loans.
  • Monthly PMI was not tax deductible (VA does not have PMI) for loans originated before 2007.
  • The payment with 80/20s was lower than FHA.
  • Borrowers could keep the 3% down (required with FHA) in reserves instead of draining their savings.  

This information is just a reflection of my purchase business from March of 2005 to my closed transactions as of today.   Historically, I have served more south King County families.   Just over the past year, with my move to Seattle, my business is beginning to expand to Seattle and Bellevue areas.

Before reviewing this data, I was certain that a larger percentage of my business was zero down or subprime.  Now I can see that I’ve done many zero down/subprime “prequalications or preapprovals” and they just didn’t pan out…but the effort that goes into a preapproval almost feels like you completed a transaction…especially for a subprime buyer. 

Again, I don’t represent every lender…just little ol’ me!  😉

Why Selecting a Lender by Rate Alone is Not in Your Best Interest

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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:

  1. You must shop all of the lenders at the same time on the same day.   There can be several price changes throughout a day.  You cannot compare apples to apples if 5 minutes after you receive one quote, you call the next lender and rates have changed up or down.  Brian Brady did an excellent post:  You’ll Never Get the Lowest Rate.
  2. Unless you’re prepared to lock in the rate the moment you’re dialing for dollars, the rate that is being quoted to you may very well not be the rate you receive when you decide to lock.    If it’s not a confirmed locked in rate, you don’t have it.   It’s a quote, not a guarantee.
  3. The lender who is “quoting

What's the Point?

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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

15 Year Mortgage Too Pricey for Normal People

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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.

  • With a sales price of $320,000, their loan amount would be $256,000.  A mortgage amortized over 15 years would provide a principle and interest (P&I) payment of $2108.75
  • A mortgage amortized for 30 years with P&I of $2108.75 would provide a loan amount of $356,480 and an approx. sales price of $427,750.
  • Amortize a mortgage over 40 years with P&I of $2108.75, you will have a loan amount of $377,270 and an approx. sales price of $452,725.

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.