Fannie Mae updates underwriting guidelines at the end of this month

Effective July 29, 2017, Fannie Mae will release DU Version 10.1, packed full to changes to their underwriting guidelines. These changes apply to Fannie Mae conforming mortgages (Freddie Mac has different guidelines). Here are some of updates effective at the end of this month:

50% Debt-to-Income Ratios. [Read more…]

Fannie Mae’s HomeReady Mortgage

2013-03-07_0746The HomeReady Mortgage is a mortgage program created by Fannie Mae intended to help low-to-moderate income borrowers with good credit buy or refinance a home.

Here are more details about the HomeReady Mortgage:

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The 10/1 ARM (Adjustable Rate Mortgage)

A 10/1 ARM is an adjustable rate mortgage where the interest rate is fixed for the first 10 years and then may adjust at the 121st payment (after the 10 year “fixed period” is over).

After the first adjustment on the 121st month, the rate will adjust annually on the anniversary of the first adjustment date.

[Read more…]

10 Percent Down Jumbo Mortgage

A “jumbo” (aka non-conforming) mortgage typically requires at least 20% down payment. Mortgage Master is now offering a non-conforming jumbo mortgage that will go up to a 90% loan to value (10% down payment) with lender paid mortgage insurance (lpmi). In the greater Seattle/King County area, jumbo mortgages are any loan amounts over $506,000 for a single family dwelling (this is also true for homes in Snohomish and Pierce County). In most other Washington state counties, the conforming loan limit is $417,000. Click here for a complete list of conforming loan limits in Washington state for 2014.

[Read more…]

The 7/1 ARM

With the 30 year fixed rate trending higher over the past few weeks, some may be considering an adjustable rate mortgage (ARM) for the lower rate. An ARM may be worth your consideration if you are planning on not retaining the home or mortgage for longer than the initial fixed period. When contemplating an ARM, you should also factor the CAPS which limit how much the rate can adjust when the fixed period is over and on future adjustment dates.

In today’s post, we’ll compare the 7/1 adjustable rate mortgages to a 30 year fixed – please remember that the rates quoted below are subject to change… and they WILL change (probably before I’m able to publish my post).   For your personal rate quote for your home located anywhere in Washington, please click here.

The 7/1 adjustable rate mortgage has a fixed rate for seven years. After 84 months, the rate may adjust up or down no more than 5% (this is the first “cap”).  The highest or lowest the rate may ever adjust in it’s lifetime is limited by 5%.  After the first adjustment, at 84 months, the rate is fixed for 12 months and then may adjust up or down annually, on the anniversary of the first adjustment date, no more than 2%.  The annual adjustments are limited by the lifetime cap and by the “floor” (the very lowest the rate can adjust).

Rates quoted are as of 7:30 am, June 26, 2013 and are based on a loan amount of $400,000 with a loan to value of 80% and credit scores of 740 or higher for a purchase in Seattle closing by July 31, 2013.

30 year fixed rate: 4.500% (apr 4. 658%) priced with 0.981 discount points.

  • Principal and interest payment:  $2,026.74
  • Principal balance at 7 years: $348,105.21
  • Principal and interest paid at 7 years: $170,246
  • Principal balance at 10 years: $320,357.88
  • Principal and interest paid at 10 years: $243,208

7/1 adjustable rate: 3.875%  (apr 3.683%) priced with 0.883 discount points. The highest the rate can ever be for the life of the loan is 8.875% (5 percent cap plus 3.875% note rate).  The lowest the rate can ever be is 2.25% (the margin).  The margin is added to the current index (LIBOR) at the time of adjustment to determine the new rate, subject to the limits of the caps.  As of today, the 12 month LIBOR is 0.688.

  • Principal and interest (P&I) payment: $1,880.95
  • Principal balance at 7 years: $343,240.85
  • Principal and interest paid at 7 years: $158,000
  • P&I at first adjustment period (month 85): WORSE CASE – rate adjust up to 8.875% with P&I of $2,920.71. BEST CASE: rate drops to the floor of 2.250% with P&I of $1,767.41.
  • Principal balance at 10 years: WORSE CASE is $327,543.74. BEST CASE is $311,605.70
  • Principal and interest paid at 10 years: $263,145 assuming worse case adjustments or $221,627 assuming best case adjustments.

Here is the Fed’s booklet about adjustable rate mortgages, which I encourage you to read if you are considering an ARM.

If you are considering buying or refinancing your home located in Pasco, Puyallup, Port Angeles or anywhere in Washington state, I’m happy to help you!

 

 

 

Clark Howard Suggests 5/1 ARMs for Refinancing

Clark Yesterday morning on CNN, "Money Expert" Clark Howard recommended that home owners who are considering selling their home in the next five years investigate refinancing into a 5/1 adjustable rate mortgage.  Why would he suggest such a "risky" product? Interest rates for adjustable rate mortgages are extremely low right now and if you're not going to have the home for more than 5 years, you could save a significant amount of money.

I will be using worse case adjustments for this post, assuming that the index (12 months LIBOR) has climbed incredible to where the the rates have hit the lifetime caps (ceiling) of 5% at the first adjustment and have remained their at each adjustment.  The 12 months LIBOR is incredibly low right now and those who have ARMs setting at their first adjustment are probably in a good position.

These rates as of June 15, 2011 at 10:30 am based on 740 or higher credit scores and a loan to value of 80% or lower.  NOTE: We do have several programs available if for Seattle area home owners who have diminished home equity.   This scenario is based on a rate-term owner-occupied refinance and a loan amount of $327,500.

3.00% for a 5/1 ARM (fixed at 3.00% for 60 months) with a principal and interest (p&i) payment of $1,381. APR 3.285.  The "caps" that limit how much this rate can adjust are 5/2/5 so the highest this rate can ever be is 8.00% (worse case scenario) and the lowest is the margin (2.25%).

  • At 61 months, assuming worse case scenario, the rate would adjust to 8.000% with a p&i of $2248 and an approx. principal balance of $291,600.
  • At 85 months, assuming worse case scenario, the rate would still be 8.000% with a p&i of $2248 and an approx. principal balance of $283,228.

3.375% for a 7/1 ARM (fixed at 3.375% for 84 months) with a p&i payment of $1,448. APR 3.417.  The highest this rate could ever be with 5/2/5 caps is 8.375% at the 85th payment and the lowest is the margin of 2.25%.

  • At 61 months, the rate is still 3.375% with the same payment of $1448 and the balance is approx. $293,122.
  • At 85 months, assuming worse case scenario, the rate would adjust to 8.375% with a p&i of $2270 and an estimated balance of $277,650.

4.500% for a 30 year fixed rate with a principal and interest payment of $1,659 for the entire term of the mortgage.

  • At 61 months, the balance is approx. $298,500.
  • At 85 months, the balance is approx. $285,000.

NOTE: the above rates are from June 2011 – if you would like a mortgage rate quote based on current pricing for your Washington home, click here.

What is crucial when selecting your mortgage is considering what your financial goals are. If you're not certain that you'll be selling your home in 5 years and you do not want to risk the adjustment that will take place in 61 months,  you might want to consider the 7/1 ARM, which will "buy" you two more years of a fixed period for a slightly higher rate. If having an adjustable rate mortgage is going to keep you up worrying at nights, than a fixed product, like the 30 year or 15 year is probably a better option for you. If an adjustable rate mortgage is suitable for your financial scenario, the savings can really add up.

Personally, if you're considering an adjustable rate mortgage, I would recommend seriously considering the next longest term just to "buy" some wiggle room.  I was honestly a little surprised that Clark Howard was pushing a 5/1 ARM when the 7/1 is currently just a little higher.  Whatever choice is made, it belongs to the home owner and it is their responsibility to understand the risk, rewards and terms of what ever mortgage product they select. 

If you have questions about mortgages for homes located anywhere in Washington, please contact me.  By the way, if your mortgage originator is no longer in the business (many have found new careers with the higher standards now required), I'm happy to adopt your mortgage – no refinance or transaction is required - your mortgage does need to be on a home located in Washington.

FHA 5/1 Adjustable Rate Mortgage

FHA ARMs are extra special in my eyes.  I like that they have very low caps limiting how much they can adjust after the fixed rate period is over.  Plus, FHA loans may be assumable to a qualified borrower in the future should you decide to sell your home.  Today's fixed rates have about a 1 point difference between a 30 year and a 5/1 ARM, but with a 1% rate cap, worse case scenario, the 5/1 ARM will reach today's 30 year fixed rate at it's first adjustment and keep that adjusted rate for one year.  Let's see how this pencils out. 

NOTE: for a current rate quote for an FHA ARM or any mortgage for a home located in Washington, click here.

As of 12:45 p.m. Feb.  2, 2011, based on a credit score of 720 with a sales price of $400,000 and a down payment of 3.5%, I would quote the following:

30 year fixed FHA with zero points: 4.750% (APR 5.497).  Principal, interest and mortgage insurance payment:  $2,321.16.  ($2033.69 plus $287.08 monthly mortgage insurance).

5/1 FHA ARM with zero points: 3.750% (APR 6.521).  Principal, interest and mortgage insurance payment: $2,082.58.  ($1805.50 plus $287.08 monthly m.i.). 

Based on this pricing, the difference in monthly savings with the ARM is $238.56.  Over five years, the savings is about $14,315. 

The FHA 5/1 ARM has caps of 1/1/5.  This means that the most this rate can adjust on the first adjustment date (after 60 months) is up or down 1%.  Using the scenario above, the highest the rate can adjust to is 4.75% and the lowest is 2.75%.  The rate will continue to adjust annually no more than 1% up or down for the remainder of the term or as long as the mortgage is retained.  The highest the rate can ever be 5% higher than the note rate (this is called the "ceiling").  With this scenario, that would be 8.750%; however it would take 5 years (after the five year fixed period is over) for the rate to adjust that high. 

Here's what the principal, interest and mortgage insurance (PIMI) would look like "worst case" scenario assuming your first payment is made today and the rate only adjusts upwards:

PIMI Payments from 2/1/11 – 1/1/16 at $2,082.58 at 3.750%.  (Rate fixed for 5 years).

PIMI Payments from 2/1/16 – 1/1/17 at $2,259.96 at 4.750%.  (Maximum increase in rate of 1%).

PIMI Payments from 2/1/17 – 1/1/18 at $2,454.06 at 5.750%. 

PIMI Payments from 2/1/18 – 1/1/19 at $2,650.82 at 6.750%.

PIMI Payment from 2/1/19 – 1/1/20 at $2,849.23 at 7.750%. 

MI Payment (see NOTE below) from 2/1/2020 to 1/1/2021 at $2,818.20 at 8.750% $310,638.

The rate will continue to adjust annually (on the anniversary date of the first adjustment) and will be reamortized based on the remaining term. The rate can adjust by as little as 0.125% but never more than by 1% up or down and never higher than 5% of the Note rate.

NOTE:  FHA monthly mortgage insurance drops off after the loan balance reaches 78% of the value (based on the original value of $400,000 = $312,000) and a minimum of 60 payments have been made.  Assuming all payments are made as scheduled, the home owner will reach 78% around 108 payments (9 years) with the adjustable rate mortgage.   With the 30 year fixed rate, it will actually take closer to 120 months (10 years) to reach the 78% threshold before the monthly mortgage insurance drops from the payment.  Additional payments can be made towards principal but the earliest the mi will be removed regardless of loan to value is 60 months.

The scenarios above are assuming that we finance the upfront mortgage insurance premium of 1%.  Another option is for the 1% to not be financed and paid as a closing cost…even the seller can pay for the upfront mortgage insurance premium.  At this point, Sellers can still contribute up to 6% of the sales price towards closing costs and prepaids; they cannot pay any of the down payment.  

Although my quote was based on a 720 mid-credit score.  We're currently approving FHA loans with low mid-credit scores down to 640.

The loan limits for FHA loans in King, Pierce and Snohomish County is currently $567,500 (until October 1, 2011).   

Is an adjustable rate mortgage right for you?  It depends on your personal scenario is and if you can stomach having your rate change.  The 1/1/5 caps are certainly more tolerable than the 5/2/5 caps that most conventional ARMS tend ot have.  At any rate, it's good to know what your mortgage options are.

If you are considering buying or refinancing a home located in Washington state, I'm happy to help you!

Are Adjustable Rate Mortgages Worth Your Consideration?

Recently I talked with a Seattle home owner who's considering refinancing their 30 year fixed rate mortgage for an adjustable rate mortgage.  Adjustable rate mortgages (ARMs) have fallen out of favor in recent years due to the mortgage melt-down.   I've never been a fan of option ARMs, however there is nothing wrong with adjustable rate mortgages as long as the borrower understands the terms and it's suitable for that person's financial scenario.   This home owner's financial plan is to be mortgage free in seven to ten years after his children are out of college.   Cash flow is important right now so he would rather not do a 10 or 15 year amortized mortgage.

You very well could be scratching your head right now thinking "with how low fixed rates are right now, why on earth would anyone consider an ARM?" 

With his scenario, we're looking at a loan amount of $400,000 and a loan to value of 60% with excellent credit (scores are above 740).   I priced the following scenarios with zero points (origination or discount).   These rates are effective as of 5:00 p.m. December 15, 2010.

4.875% for a 30 year fixed (APR 5.020).  Principal and interest payment (P&I) = $2,117.   With this scenario, your principal and interest payment is never scheduled to change.

4.375% for a 10/1 ARM 12 month LIBOR with 5/2/5 CAPS 2.25 Margin (APR 5.731). P&I = $1997.    With this scenario, after 120 payments (10 years) the rate will adjust based on adding the 1 year (12 month) LIBOR is plus the 2.25 margin limited by the first "cap" of 5%.  The rate in 120 months cannot be higher than 9.375% nor lower than 2.25% (the margin also acts as "the floor" limiting how low the rate can adjust).  After the first adjustment, the rate will adjust once a year on that anniversary of the first adjustment limited by 2% up or down.  The highest the rate can be on this scenario during the lifetime of this loan is 9.375%. 

3.625% for a 7/1 ARM 12 month LIBOR with 5/2/5 CAPS 2.25 Margin (APR 5.742).  P&I = $1824.  With this scenario, after 84 payments (7 years) the rate will adjust based on adding the 1 year (12 month) LIBOR p the 2.25 margin limited by the first "cap" of 5%.  After 84 payments/months, the rate cannot go higher than 8.625% or lower than 2.25% (the margin/floor).  After the first adjustment the most the rate can adjust annually is 2% up or down following 12 the anniversary of the first adjustment (at 96 months) and annually thereafter.  For example, worse case at the second adjustment (96 months) the rate could be 10.625% (3.625% plus 5% at 7 years and plus an additional 2% at 8 years).

Selecting a 30 year fixed mortgage provides security of a fixed and options with your mortgage payment.  The home owner can pay additonal towards principal to pay down the mortgage.  A 15 year fixed mortgage is also more "safe" than an adjustable if you're concerned about retaining the mortgage beyond the ARM's fixed period.  However there is no flexibility with the payment (you can make a 15 year payment on a 30 year mortgage; you cannot make the 30 year payment on the 15). I'll admit I'm biased towards the 30 year fixed mortgage, however Americans currently still has a choice as to what mortgage options they prefer unless Congress changes this (as I'm afraid they'd like to).

Adjustable Rate Mortgages will reamortize based on the remaining term at their adjustment points.  For example, after 120 payments with a 10/1 ARM, the payment will be based on the new rate and a 20 year amortization.  With a 7/1 ARM, the payment will be based on the new rate and a 23 year amortization (7 years minus 30 years).

My client is actually considering an ARM because of the amount saved in monthly payments over the term he plans on retaining his mortgage.  

Let's compare the ARMs and 30 year fixed scenarios at 84 months…of course, there is no way for us to know what the LIBOR rate will be 7 years from now to predict an 100% accurate rate.

30 Year Fixed Rate at 7 Years.  Principal Balance = $350,879.  P&I=$2,117.  No change.

7/1 ARM at 7 Years.  Principal Balance = $341,250 providing a principal savings of $9,629 over the 30 year fixed rate.  The difference in payment between the 30 year and 7/1 ARM over this time period is $24,612 (2117 – 1824 = 293 per month.  293 x 84 = 24,612.  However…the payment is set to adjust.  Worse case scenario, the rate could go up to 8.625%.  Amoritzing $341,250 at 8.625% for 23 years provides a principal and interest payment of $2,156 – worse case scenario, this is only $39 more a month than what the 30 year fixed scenario has been paying the full 7 years.  

10/1 ARM at 10 Years has a principal balance remaining of $347,156.   The payment is $120 less per month than the 30 year fixed providing a monthly payment savings of $10,080.  And the 10/1 ARM will continue to have a fixed payment 3 years beyond the 7/1 ARM; at 7 years, the rate for the 10 year ARM is still 4.375% with the same principal and interest payment of $1997 where the 7/1 ARM payment at 85 months is unknown.

Bottom line, it's important to review your options and to consider your personal life plans.   A 30 year fixed rate mortgage if you're not planning on retaining that financing or home more than 10 years may be costly–however if you cannot stomach the thought of your rate ever adjusting, the 30 year fixed rate may be your cup of tea.  It is (and should remain) the homeowner's choice.