“Do you think an adjustable rate mortgage is a good idea?” The answer, of course, is, “It depends.”

Over the long term (years) rates are expected to creep higher. So a key factor in deciding upon an adjustable rate mortgage is how long a borrower will be paying a higher rate of interest in the future with the ARM versus what a borrower would pay with a fixed rate mortgage today.

The obvious advantage of the ARM is the lower interest rate and payment for the initial period the rate is fixed before it converts to an adjustable rate. Note that the straight ARM, one that can adjust every month, is pretty much gone from the market place. The ARMs that are available in the current market are what are known as hybrid-ARMs in that the initial rate is fixed for a period of time, 3, 5, 7 or 10 years, and then adjust annually thereafter.

Borrowers should be asked, “Are you a good money manager?”, “Are you in a profession where your income is not always the same, perhaps commission based or self-employed?”, “Is your intention to take advantage of the lower initial rate to pay down your mortgage more rapidly than the fixed rate mortgage?”, and “Is there a reasonably strong certainty you will be selling the home before the fixed rate term of the ARM expires?”

The payment on an ARM is typically significantly lower than on a 30 year fixed – often hundreds less every month depending on loan amount and rate. And if this savings is carried out over several years, the savings would be in the thousands. But after five years, or seven years, will the borrower still be in the home? And will they able to afford the higher payments IF rates move higher and IF they didn’t refinance?

ARMs received a bad reputation as part of the housing and mortgage market melt downs, but much of this was due to the misuse of the ARMs by lenders and borrowers. For many who took out ARMS prior to the meltdown they have benefited from very low rates as their loans convert(ed) from fixed to adjustable and were a good tool. For others who miscalculated on future income, future appreciation or used the ARM to highly leverage into a property they otherwise would not have been able to afford the choice was perhaps not the best one.

Every borrower should discuss their options with an experienced loan officer.

Still Puzzled By Mortgage Rates and Pricing?

Jul 27
Category | General

Despite the government’s best efforts, borrowers still are occasionally puzzled by mortgage rates and pricing. They are not as simple as comparing the price of a gallon of regular unleaded gas. (But when gas companies advertise their additives for higher grades, things become more complicated.) But is there an easy way to discuss rates?

When a borrower shops for a home loan, they want to know about mortgage rates and should look at the “APR” or annual percentage rate. The APR includes both the annual interest rate as well as some — but maybe not all — non-interest charges paid at closing. The APR will be higher than the nominal interest rate because it includes additional costs. Most loan quotes include both the interest rate and points (the cost of doing the loan, often considered the up-front compensation to the lender). Points are paid up-front, in cash (or a higher loan amount) at closing. If the borrower expects to be a short-term owner then maybe the loan with a higher rate and fewer points is better; if the borrower expects to be a long-term owner then paying points and having a lower fixed-rate can be very attractive.

Experts and those in the industry usually prefer “par pricing” – par is a price of 100.00 (nothing paid, and nothing to be paid). In this situation all loan quotes show the interest rate with zero points. Now it’s very easy to compare rates. An FHA mortgage at 4.4 percent and an FHA mortgage at 4.6 percent are the same financial product with different costs. Why would you pay more?

So borrowers should ask lenders for a mortgage quote at par; that is, an interest rate with no points. Par pricing remains the easiest way to compare similar loan products, say a conventional loan from ABC Mortgage versus a conventional loan from XYZ Mortgage. The loans are the same, so the only issue is which lender can offer a better price.

As the jumbo loan and refinance market begins to pick up, it’s important to remind consumers of important tips to ensure their credit is and remains in good standing before applying for a mortgage – and what to do if they are turned down for a mortgage. 

In general, lenders have more flexibility when qualifying borrowers for a jumbo loan ($417,000 in most areas and $625,000 in some high-priced areas) since mortgages below that threshold must meet stricter standards for conventional loans. Borrowers who are denied a mortgage because they do not meet qualifications must be sent an “adverse action notice” or a statement of credit denial providing the denial reason, which is typically sent within 48 hours after verbal notification. 

Another important tip for the consumer is to avoid opening any new credit cards or a car loan as this can raise their debt-to-income ratio for 90 days before applying for a mortgage. Limiting deductions can also help maintain a lower debt to income ratio, as self-employed borrowers may want to limit deductions on the past two years of tax returns to indicate higher annual income. Jumbo borrowers with either a bankruptcy or foreclosure will also need to wait to apply for a mortgage for 4 to 10 years depending on the lender, even if their financial situation has improved.

As always, communication is critical – borrowers need to spend time with a trained loan officer finding out the process and answering the “what if’s”!

What is “mortgage insurance”? Does it affect me? Mortgage insurance, commonly known as “MI”, is insurance on your mortgage. In other words, basically it is insurance payable to a lender and is used to offset any losses in the event that you, as the borrower, are not able to repay the loan AND the lender is not able to recover its losses in the event of a foreclosure. Just like life insurance, which depends on the insured’s health, age, etc., or automobile insurance, which depends on the vehicle, the owner’s driving record, etc., MI depends on the loan’s loan-to-value (LTV), the loan term and type, the coverage amount, and how often the payments are made. The majority of loans under $729,750 with an LTV greater than 80% require mortgage insurance. And the cost of mortgage insurance is determined by the loan amount, LTV, occupancy, credit score of the borrower, etc. One option that borrowers may use, in the event that the loan’s LTV is greater than 80%, is a 2nd mortgage rather than pay for mortgage insurance.  Your loan agent can work with you on explaining this.

Depending on the plan, the MI may be payable up front when your loan closes, or it may be capitalized onto the loan in the case of single premium product. Once the LTV is reduced to less than 78%, or less, based on the original appraised value or purchase price, either through paying down the principal or the home appreciating, the MI is often no longer required. This can occur via the principal being paid down, via home value appreciation, or both. The company or person servicing the mortgage usually makes the request. Some programs involve the lender paying for the MI rather than the borrowers, and may involve adjusting the original interest rate of the loan to cover those costs. FHA loans also have mortgage insurance, so it is not restricted to only conventional (Freddie & Fannie) loans.

What are top originators telling their clients about the appraisal process? Some have created a table of helpful information that those refinancing can provide that will make things go more smoothly. Recent regulations have prohibited borrowers from trying to influence their appraiser, but it is important for the borrower to provide information that is important for the appraiser to consider in valuing the home. Communication is critical, as is the quality of that information.

Appraisers are primarily concerned with recent market sales, but it is important for borrowers to remember that this is only part of the valuation. Appraisers usually use three approaches in determining the value of a house. The first is the cost approach (the buyer will not pay more for a property than it would cost to build an equivalent). The second is the sales comparison approach (comparing a property's characteristics with those of comparable properties that have recently sold in similar transactions). And the third is the income approach (similar to the methods used for financial valuation, securities analysis or bond pricing).

There are questions appraisers often ask homeowners. Homeowners should save information about any renovations. Borrowers should try and be specific about the upgrades and when the remodeling was done, such as upgrading the AC unit, adding insulation and painting the interior of the house. A refinancing borrower can certainly inform the appraiser of the reason why they bought the home and things about the neighborhood that may attract buyers. The other information about the neighborhood section can be utilized for further explaining any relevant changes to the neighborhood such as parks, streets, land uses, businesses, etc. 

The key to this process is sharing enough facts to the appraiser so they can accurately assess the property. Once again, the information provided is in no way intended to sway the appraiser a certain way, it’s merely informational, as this will be pertinent information the appraiser will ask the borrower whether or not it is provided upfront. Showing initiative in data gathering will aid the appraiser’s process and may even speed up their assessment which will benefit everyone involved in the transaction.

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