Let’s look at my perspective. If we assume a loan amount of $300,000 and a current rate at 6.00%. The principal and interest payment would be $1,799. Principal and interest.  Principal, assuming value stays the same or increases, will become equity. An amount that you own. Interest is a cost. You pay it, and lose it.  Anyway, if you were to refi with a 5.00% rate, your new principal and interest payment would be $1,610.  Lowering your monthly payment $189 per month. $2,268 per year. $11,340 for 5 years. Not bad.

And…to me, more importantly, you lower your cost. At 6.00% your yearly interest that you pay is $18,000. At 5.00%, it’s $15,000. In this scenario, you’d be saving $3,000 per year ($250 per month)! Pure cost. Over five years, you’d be saving $15,000.

Remember, there’s two payments to keep in mind: monthly payment as well as cost (interest).

In the example that is presented, where we do not know the loan amount, the borrower is spelling out that the monthly tax and insurance payment has increased, which it would anyway, but the P & I payment would be lowered by $144 per month. Not bad. And the net closing costs were around $2,000.

Is it worth $2000 to refinance? A couple things. First, it is accurate that a borrower can pay the closing costs at closing or can role this amount into  the loan (add it to the current loan amount). This, then, means they are paying interest on the additional $2000.  Here, they are paying an additional $100 per year in interest on the $2000 amount added to the loan amount. Good thing or bad thing? A small thing, but something to think about. In five years that’s $500. My thinking, if you have the $2000, why not pay it at closing and save the money that would be paid on interest. The whole point of refinancing.

Also, this borrower brings up an important point to remember. When refinancing, you will have to re-establish a tax and insurance escrow account. Unfortunately we can’t roll the old account into the new one, so the borrower will have to bring money for the new account, and then the current lender will reimburse the borrower for the money that is being held in the old escrow account, usually within a few weeks of closing. In addition, the borrower will pay the accrued interest for the current loan to the current lender, and will then pay prepaid interest (paying the interest that will accrue, for the new loan, usually through the end of the new month, just as you would do in a purchase), and then you will skip a month for the new, first month’s payment.

But wait:  was it work paying $2000 in closing costs? Look at it this way, from a payment perspective, if you divide the monthly lower payment amount ($144) into the cost ($2000), it will take just under 14 months to break even, and then these borrowers are truly saving their $144 per month. Sound good to you?

Last, they are also paying more than the required minimum, as part of their goal is to pay down their loan faster to pay less interest for the life of the loan.  To me, neither bad nor good. It makes them comfortable and happy. That’s the important thing.  I like happy people.

Remember that Fannie and Freddie increased conforming loan limits–in certain geographic areas–so that borrowers with larger loans could benefit from lower, conforming interest rates and, to some extent, conforming loan underwriting qualifications.

However when these jumbos came out the interest rates weren’t so favorable.  Lower than most “true” jumbo loans, but still relatively higher than conforming loans.

The key is to make sure that your property is located in an area where these jumbo conforming loans are allowed.

He seems to be upset because banks/lenders are using systems to offer higher rates to current, valued clients. Hmmm….. At first glance I would agree and be upset. Yes, you want to give your best customers your best products and rates.

He then goes on to suggest that people who are going to need a mortgage should assume that the lender is trying to “screw” them and shop “hard.”

I am not clear what he means by shopping hard, but I think I have a sense.  Talk to as many people as you can, use one lender’s rate against the others, and have them negotiate. Hmmm….

I have always felt that it is perfectly fine to talk with a few lenders. Only if you feel completely comfortable and confident that they are professional, ethical loan officers. If the answer is yes, then you should be getting the “best offer” upfront.  And let’s remember how tight the mortgage programs have become, and interest rate is really one of the last items to worry about.

Regarding the mortgage industry, one item stands out.  If the President signs the bill, there is a good possiblity that the conforming loan limits will increase.

It is estimated that conforming loan limits for 1 unit properties will go from the current $417,000 to (an estimated) $729,000! For many people who are going to be buying properties and would be stuck with jumbo loans (i.e. much higher interest rates), this is big news.  And many people will be able to refinance from two loans, often with higher-interest second mortgages, into one loan with better interest rates.

Look for updates.

It has been common, when buying a home and putting down less than a 20% down payment, to use a 2nd mortgage. This is common to avoid PMI (aka Private Mortgage Insurance–what people seem to think of as The Evil Empire). 

So…for those who obtained a 1st and 2nd mortgage in purchasing their home, and now want to consolidate both into one loan, not a problem (so long as they qualify for the loan itself). But what about those who obtained one loan, at any loan-to-value, and then got a new 2nd mortgage after the purchase, and now want to refinance both?  This could be a problem.

Basically, in mortgage lingo, if you want to refi a 1st and 2nd mortgage that was obtained for a purchase, this would be considered a rate and term refi.  Its more risky cousin, a cash-out refi, where you are refinancing a 2nd mortgage that was obtained after the purchase, is riskier in that it is as though you are paying off credit card debts or literally taking cash out. So rates may be higher and some programs may not allow you to even refinance if the loan-to-value is too high.

So, some people who did say thanks are now saying “thanks a lot!” if they can’t get a loan. Be careful about when you get a second mortgage.

A client, interested in making an offer for a new construction unit, referred to me by a previous client, called last week and wanted to know “my best 30-year fixed, and my best 30-year fixed interest only, doing a 100% LTV loan.” He did not want to give me any income or asset information, and certainly did not want to give me his social security number to evaluate credit history. He just wanted his rate. 

I can’t do anything. Well, I could do something:  I could just give unrealistic, low rates, try to lure this person in, and then change things as we get near the closing date.  But that would be ’somewhat’ unethical, at the very least.

I am not alone.  Tony Gallegos, in a recent post, refers to a really wonderful post about the same idea. One of the main points:  don’t choose your loan officer by (only) interest rates. If you want the lowest payment, an interest only program may be for you, though that 5-year ARM with an interest only payment will have a higher interest rate than the same ARM with a principal and interest payment. There are many, many examples of choosing a program with a higher interest rate

Again, a higher interest rate may be in your best interests.

Secure your loan and interest rate. Now.

Rhonda Porter does such a fabulous job in explaing how this all happens and how to work with your loan officer correctly, that I think you should go directly to her post. An excellent, thorough post.

And notice what she writes at the end, “What ever you do, please do not select the person who will be assisting you with your largets investment (your mortgage) by interest rate alone.”

Someone should write a book about this.

There is always a better chance that the market (rates) will get worse than get better.

As of today there is no such program, but there is a 50 year program. So…is this a good thing? My stock answer: it depends.

Before the 50-year loan, there was (and still is) the 30-year fixed rate mortgage and its cousin the 15-year mortgage. For those who wanted to pay off their loan faster and pay less interest–a cost–over the life of the loan but have a higher monthly payment, there is the 15-year. For those who want a lower payment but will pay more interest over the life of the loan, yes, the 30-year. And shopping by interest rate alone? Big mistake, as the 15-year will have a lower rate but a much higher payment. So interest rate is deceiving here. 

So the 50-year mortgage allows you to have an even lower payment for a fully amortized loan. Again: compared to a traditional 30-year fixed rate mortgage, the rate for the 50-year will be higher but the payment will be lower, and if you were to keep the loan for 50 years the total interest that you would pay would be much greater.

Hope I can still blog when I am 143….

The property is one of the most important investments and thus decisions that most people will make. Perhaps, for some people, that ketchup decision–as well as the fruit, meat, toothpaste,etc. decision–is very important, but equal to the mortgage plan?

There is no one “30 year fixed rate” on any given day. All those risk factors like credit score and history, down payment amount, debt-to-income, assets and reserves dictate what programs and interest rates will be available. Shopping for rates. Buyers should just think about this phrase.  It makes me scared. How about: shopping for attorneys? shopping for cardiac surgeons? 

Instead of shopping, how about thinking it as consulting. And this requires time, discussion, and thought.

And I actually wound up not using the ketchup analogy. Ketchups, I even find, are not the same.  I ended up using bleach. (Little did I know that there is regular and there is lemon scent.)