Well, if you were to speak to the First Meridian closing department in Brooklyn, it seems that many peoples actually can get approved and are actually closing mortgage loans today!
So assuming that one can qualify for a mortgage loan, the #1 question that I am asked all the time is, what is my rate? And when should I lock in my rate and how do I know that this rate is the best possible rate?
In order for me to properly answer I have to ask questions. The rate is determined by the following 5 factors.
A. Percentage down payment or “loan to value”
B. Credit score.
C. Type of loan; Conventional, FHA or No income Verification.
D. Loan Term, 15 or 30 year and
E. Type of property- house, condo or coop.
All of these factors determine what your rate will be.
A client called me a few months ago and asked me what his rate would be. I answered him by asking more questions. He said, my credit is excellent, my income is stable and I already have a pre approval from another mortgage consultant (what is a pre-approval or a pre-qual? A discussion for a later article!). I said okay and I was about to give him the current rate when he mentioned that he owns a rental property in Lakewood NJ. I asked him, does the property show a loss? He said he thinks his accountant does a good job. I said to him, I can give you a rate but until I see your tax returns and your credit etc.. I could not write a pre-approval letter. To make a long story short, his income was fine albeit the rental losses. The problem was his credit score was 642!!
He was eligible for rates that were ½ % higher because of the credit score. The lower the score, the higher the risk to the lender so, the higher the rate. If your score is low you may not be able to put less than 20% down, you may not be able to get a mortgage at all!
Needless to say, we closed the loan, her score improved and she got a great rate!
Getting a mortgage in November 2010 is different than in the prior years. Sometimes when refinancing, the best deal out there is with the current servicer of your current mortgage. Sometimes the best deal out there is not the one that boasts the lowest rate, but the one that actually ends up at the closing table.
Sunday, November 21, 2010
Friday, November 19, 2010
Will the FED’s ‘Quantitative Easing Lower Rates . . . or Raise Them?!?!
You can’t turn on the news these days without hearing about the Federal Reserve Board’s attempt at keeping interest rates low to spur more lending (for mortgages, business lending and other consumer loans) via a plan known as Quantitative Easing part 2 (QE2).
The plan provides for the FED to purchase Treasury Bonds to take them out of the market. When the supply of Treasuries is reduced, the price will increase due to simple supply and demand. When the price of Treasuries increase, the Yield (or return) on those Treasuries decreases. The Yield is the cost of money to lenders so the lower the Yield, the lower rates will be.
Mortgage rates are based on the Yield of Mortgage Backed Securities, which are closely tied to the performance of Treasury bonds. So when Treasury prices increase, typically you will see the price of Mortgage Backed Securities increase as well. When these prices go up, the Yields go down and this is supposed to bring down mortgage rates.
Unfortunately, the immediate effect of this most recent Quantitative Easing has been the opposite. Because many investors had already expected QE2, they had priced the decreased supply of Treasuries into the market. When the announcement was made that the FED would be buying approximately $600Billion of Treasuries, the market was actually disappointed and this drove the price of Treasuries lower – in turn raising the Yield and Mortgage Backed Securities followed in kind. The market had anticipated a purchase closer to the $1 Trillion range.
In the short term, rates have increased a bit and the level of support for lower prices for Mortgage Backed Securities seems to be on the near horizon. This could certainly change so if you are in the market to buy or refinance a home, you will want to work with someone that monitors these changes on a daily basis as we are seeing swings in rates on a daily basis – and often with multiple changes in a single day.
I often equate the Mortgage Backed Securities market to someone buying a Certificate of Deposit (CD) at a bank. Right now, the rates are so low on CD’s that there really is a disincentive to purchase one and tie your money up for a prolonged period of time at such a low return. Imagine purchasing a 30 year Mortgage Backed Security and having to take such a low return for 30 years!
With returns so low for these investors, it may not be likely that they would be willing to accept any less moving forward. If this happens, no amount of Quantitative Easing will entice them to pay more for the Mortgage Backed Securities and therefore it would be unlikely that we will see any significant reduction in mortgage rates. No one can predict if rates will be headed any lower in the short term, however, one thing is certain and that is that rates will increase at some point.
The main hesitation for Mortgage Backed Security investors at this point is that they don’t want to be stuck holding these long term investments for a prolonged period of time with such a low return when rates increase. This is primarily what is keeping the rates from going lower as the FED had intended.
Let’s see what the next few weeks and months hold for mortgage rates. Either way, with rates at historic lows, it would pay to start investigating any buying or refinancing options at this time before they do go up.
The plan provides for the FED to purchase Treasury Bonds to take them out of the market. When the supply of Treasuries is reduced, the price will increase due to simple supply and demand. When the price of Treasuries increase, the Yield (or return) on those Treasuries decreases. The Yield is the cost of money to lenders so the lower the Yield, the lower rates will be.
Mortgage rates are based on the Yield of Mortgage Backed Securities, which are closely tied to the performance of Treasury bonds. So when Treasury prices increase, typically you will see the price of Mortgage Backed Securities increase as well. When these prices go up, the Yields go down and this is supposed to bring down mortgage rates.
Unfortunately, the immediate effect of this most recent Quantitative Easing has been the opposite. Because many investors had already expected QE2, they had priced the decreased supply of Treasuries into the market. When the announcement was made that the FED would be buying approximately $600Billion of Treasuries, the market was actually disappointed and this drove the price of Treasuries lower – in turn raising the Yield and Mortgage Backed Securities followed in kind. The market had anticipated a purchase closer to the $1 Trillion range.
In the short term, rates have increased a bit and the level of support for lower prices for Mortgage Backed Securities seems to be on the near horizon. This could certainly change so if you are in the market to buy or refinance a home, you will want to work with someone that monitors these changes on a daily basis as we are seeing swings in rates on a daily basis – and often with multiple changes in a single day.
I often equate the Mortgage Backed Securities market to someone buying a Certificate of Deposit (CD) at a bank. Right now, the rates are so low on CD’s that there really is a disincentive to purchase one and tie your money up for a prolonged period of time at such a low return. Imagine purchasing a 30 year Mortgage Backed Security and having to take such a low return for 30 years!
With returns so low for these investors, it may not be likely that they would be willing to accept any less moving forward. If this happens, no amount of Quantitative Easing will entice them to pay more for the Mortgage Backed Securities and therefore it would be unlikely that we will see any significant reduction in mortgage rates. No one can predict if rates will be headed any lower in the short term, however, one thing is certain and that is that rates will increase at some point.
The main hesitation for Mortgage Backed Security investors at this point is that they don’t want to be stuck holding these long term investments for a prolonged period of time with such a low return when rates increase. This is primarily what is keeping the rates from going lower as the FED had intended.
Let’s see what the next few weeks and months hold for mortgage rates. Either way, with rates at historic lows, it would pay to start investigating any buying or refinancing options at this time before they do go up.
Thursday, November 11, 2010
The fact and fiction about rehab mortgages
A few years ago a client called me. They had a small amount of money and a steady income.
They were searching for a home with a purchase price, which at the time was really low. It was what they could afford. A local realtor found them a home. it was a 90 year old, old style colonial. It was ugly, and needed a bit more than just TLC. Old kitchen, very dated bathrooms, a damp basement and drafty windows. The house comprised of very small rooms and didn't flow. It was the only home in their price range and neighborhood.
I put them into a loan, which we seldom hear about. The FHA 203K loan. This is a rehab loan. It is a great product for the client that wants either purchase a home or refinance their home to do construction. There are two challenges that come up when someone is in this situation
A. When purchasing, the client has enough money for the down payment and closing costs but not enough do to the repairs/addition/rehab
B. The house either appraises low or in poor condition. A bank will not lend on a house that is in less than good condition or if it need repairs. On a refinance, a bank will not lend over the as is value of the house. One may want to make an addition that will drastically increase the value of the house upon completion but right now as is, the value is lower so there is not enough equity to do a cash out. On a purchase, it’s almost the same. The bank will not lend over the purchase price because of work that will be done.
How does one finance these renovations? In today’s credit and lending climate, the builders and contractors don't have any venues for rehab/repair/construction funds. The days of the easy Home Equity Lines of Credit are gone.
The FHA 203k is a great option. Let me explain some the details of how this loan works and what are the options that you may have.
The 203K loan is a rehab/construction/repair loan. It does not finance new construction. If you buy a home and tear it down to build a new home, you must build on the original foundation. You can modify, enlarge it etc. but you cannot buy a lot and build a new home.
It will not finance luxury items like a swimming pool, hot tub etc
You can borrow from as little as $5,000 up to the FHA limits in our area. On a one family home, the limit in our area of $729,000. The home must be owner occupied, primary residence, not a second home, vacation home or investment property. It can be a 1-4 family or a mixed-use property if the applicant lives in the residential unit.
A normal mortgage has 2 steps. This loan is a 3 step process.
Step 1: Credit. Every loan has a credit portion; this is the analysis and approval of the applicants credit, income and assets
Step 2. The appraisal portion, every loan requires and appraisal. This is provided to the bank so that the bank can make a decision if the collateral is acceptable
Step 3. Construction/rehab/repair. This is unique to the 203K. The bank evaluates the scope of the job and bases the loan on an “after improved value”.
Very basically, the way this loan works is, the bank lends up to 96.5% of the after improved value, basing the loan on the purchase price + the rehab cost. For example, if you buy a home for $300,000 and then you want to do $150,000 renovation, and the after improved value is 450,000, under the 203K program you would get a mortgage of up to $434,250. At closing, the seller would get the $300,000 (purchase price) and the rest of the money would go into an escrow account to be disbursed as needed during the rehab period.
For more information on 203K loans and other loan products contact a local mortgage professional who knows the in’s and out’s of FHA financing. The key to a successful mortgage experience is the professional that you work with.
They were searching for a home with a purchase price, which at the time was really low. It was what they could afford. A local realtor found them a home. it was a 90 year old, old style colonial. It was ugly, and needed a bit more than just TLC. Old kitchen, very dated bathrooms, a damp basement and drafty windows. The house comprised of very small rooms and didn't flow. It was the only home in their price range and neighborhood.
I put them into a loan, which we seldom hear about. The FHA 203K loan. This is a rehab loan. It is a great product for the client that wants either purchase a home or refinance their home to do construction. There are two challenges that come up when someone is in this situation
A. When purchasing, the client has enough money for the down payment and closing costs but not enough do to the repairs/addition/rehab
B. The house either appraises low or in poor condition. A bank will not lend on a house that is in less than good condition or if it need repairs. On a refinance, a bank will not lend over the as is value of the house. One may want to make an addition that will drastically increase the value of the house upon completion but right now as is, the value is lower so there is not enough equity to do a cash out. On a purchase, it’s almost the same. The bank will not lend over the purchase price because of work that will be done.
How does one finance these renovations? In today’s credit and lending climate, the builders and contractors don't have any venues for rehab/repair/construction funds. The days of the easy Home Equity Lines of Credit are gone.
The FHA 203k is a great option. Let me explain some the details of how this loan works and what are the options that you may have.
The 203K loan is a rehab/construction/repair loan. It does not finance new construction. If you buy a home and tear it down to build a new home, you must build on the original foundation. You can modify, enlarge it etc. but you cannot buy a lot and build a new home.
It will not finance luxury items like a swimming pool, hot tub etc
You can borrow from as little as $5,000 up to the FHA limits in our area. On a one family home, the limit in our area of $729,000. The home must be owner occupied, primary residence, not a second home, vacation home or investment property. It can be a 1-4 family or a mixed-use property if the applicant lives in the residential unit.
A normal mortgage has 2 steps. This loan is a 3 step process.
Step 1: Credit. Every loan has a credit portion; this is the analysis and approval of the applicants credit, income and assets
Step 2. The appraisal portion, every loan requires and appraisal. This is provided to the bank so that the bank can make a decision if the collateral is acceptable
Step 3. Construction/rehab/repair. This is unique to the 203K. The bank evaluates the scope of the job and bases the loan on an “after improved value”.
Very basically, the way this loan works is, the bank lends up to 96.5% of the after improved value, basing the loan on the purchase price + the rehab cost. For example, if you buy a home for $300,000 and then you want to do $150,000 renovation, and the after improved value is 450,000, under the 203K program you would get a mortgage of up to $434,250. At closing, the seller would get the $300,000 (purchase price) and the rest of the money would go into an escrow account to be disbursed as needed during the rehab period.
For more information on 203K loans and other loan products contact a local mortgage professional who knows the in’s and out’s of FHA financing. The key to a successful mortgage experience is the professional that you work with.
Tuesday, November 9, 2010
BI Weekly Mortgages
I am on the radio weekly where I do a 15 minute program. In that program I discuss current mortgage trends, tips, the current interest rate environment and I address different mortgage ideas and questions. Last week someone asked me a question regarding a bi-weekly mortgage and whether it is a good idea. It turns out that this was a topic that a lot of the listeners were interested in and since this is offered to almost everyone who has a mortgage I thought it would be a good topic to discuss today, in the Front Page.
First of all, what is a bi-weekly mortgage? A bi-weekly mortgage is your PITI payment (Principal, Interest, Taxes and Insurance) divided in half and then each ½ payment is paid every 2 weeks.
The theory behind it is that a lot of people get paid on a bi-weekly schedule so it would be easier to divide the mortgage payments to match the paychecks and then a home owner could pay the mortgage payment from that check that came in.
The benefit was/is that since there are 52 weeks in a year, there would be 26 mortgage payment installments, which equals 13 payments a year instead of the normal 12 annual installments. By doing the bi-weekly mortgage, the homeowner would seamlessly pre- pay their mortgage loan and finish a 30 year fixed rate loan in 23 years because all additional payments that are made to a mortgage loan are credited towards the principal and the homeowner would be accelerating their principal payments on this schedule and therefore their mortgage would finish that much quicker.
So now: How much does it cost to set it up? Should a homeowner do the bi-weekly mortgage? What happens if you don’t want to continue the bi-weekly schedule?
Some banks will set up the bi-weekly payment initially. Most banks do not. You close on a normal 12 month annual installment mortgage and then after closing the servicing company whom you will be paying your mortgage payments to will send you an offer to convert your loan to a bi-weekly. There is usually a fee of $300-$400.
I must admit that I am not a great fan of bi-weekly mortgages, at least for every one. While it works for some people very well, it also can really tighten a homeowner’s monthly budget. When people by a home they are sometimes very tight and to make the mortgage payment monthly is not easy. While a bi-weekly sounds good, it is an extra payment. This can cause people to fall into credit card debt or to be constantly slightly short which is very stressful on a family. I believe that the most important thing to healthy family finances is not how long you will be paying your mortgage or even how low your interest rate can be, if you took a 20 or 15 year loan instead of a 30 year loan, but to keep the monthly payments manageable; Even if it means never prepaying your mortgage. When the bank approves you for a mortgage, they aren’t factoring babysitting, dry cleaning,lawn service etc. We have to be even more careful not to put ourselves in situations that are financial recipes for failure from the get go.
If you did start a bi weekly and you find that it isn’t working for you, you can back out of the program, but you have to let your mortgage company know. You can’t just sop paying the bi weekly payment. If you miss a biweekly payment you will have to pay a late charge and it will be reported as a late mortgage payment on your credit report.
I met with a new client on Sunday who want to refinance. They are currently in a bi-weekly mortgage. They asked me not to set it up again be-weekly. He said it was working great for him until he lost his job last year. Now in his new job where he is a school guidance counselor, besides him taking a pay cut, he gets paid 10 months a year, twice a month ( the 15th and 30th of every month), not every other week (bi-weekly). In the summer he gets paid for a summer program in one lump sum for the whole summer. He finds it very difficult to manage his finances with the bi weekly. On the flip side I have another client, buying a luxury townhouse condo along the Hudson River and she said she only wants a bi-weekly!!
First of all, what is a bi-weekly mortgage? A bi-weekly mortgage is your PITI payment (Principal, Interest, Taxes and Insurance) divided in half and then each ½ payment is paid every 2 weeks.
The theory behind it is that a lot of people get paid on a bi-weekly schedule so it would be easier to divide the mortgage payments to match the paychecks and then a home owner could pay the mortgage payment from that check that came in.
The benefit was/is that since there are 52 weeks in a year, there would be 26 mortgage payment installments, which equals 13 payments a year instead of the normal 12 annual installments. By doing the bi-weekly mortgage, the homeowner would seamlessly pre- pay their mortgage loan and finish a 30 year fixed rate loan in 23 years because all additional payments that are made to a mortgage loan are credited towards the principal and the homeowner would be accelerating their principal payments on this schedule and therefore their mortgage would finish that much quicker.
So now: How much does it cost to set it up? Should a homeowner do the bi-weekly mortgage? What happens if you don’t want to continue the bi-weekly schedule?
Some banks will set up the bi-weekly payment initially. Most banks do not. You close on a normal 12 month annual installment mortgage and then after closing the servicing company whom you will be paying your mortgage payments to will send you an offer to convert your loan to a bi-weekly. There is usually a fee of $300-$400.
I must admit that I am not a great fan of bi-weekly mortgages, at least for every one. While it works for some people very well, it also can really tighten a homeowner’s monthly budget. When people by a home they are sometimes very tight and to make the mortgage payment monthly is not easy. While a bi-weekly sounds good, it is an extra payment. This can cause people to fall into credit card debt or to be constantly slightly short which is very stressful on a family. I believe that the most important thing to healthy family finances is not how long you will be paying your mortgage or even how low your interest rate can be, if you took a 20 or 15 year loan instead of a 30 year loan, but to keep the monthly payments manageable; Even if it means never prepaying your mortgage. When the bank approves you for a mortgage, they aren’t factoring babysitting, dry cleaning,lawn service etc. We have to be even more careful not to put ourselves in situations that are financial recipes for failure from the get go.
If you did start a bi weekly and you find that it isn’t working for you, you can back out of the program, but you have to let your mortgage company know. You can’t just sop paying the bi weekly payment. If you miss a biweekly payment you will have to pay a late charge and it will be reported as a late mortgage payment on your credit report.
I met with a new client on Sunday who want to refinance. They are currently in a bi-weekly mortgage. They asked me not to set it up again be-weekly. He said it was working great for him until he lost his job last year. Now in his new job where he is a school guidance counselor, besides him taking a pay cut, he gets paid 10 months a year, twice a month ( the 15th and 30th of every month), not every other week (bi-weekly). In the summer he gets paid for a summer program in one lump sum for the whole summer. He finds it very difficult to manage his finances with the bi weekly. On the flip side I have another client, buying a luxury townhouse condo along the Hudson River and she said she only wants a bi-weekly!!
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