The other day, Get Rich Slowly published 14 Smart Money Moves to Make Before the End of the Year which I liked enough to share on my Facebook page and to also included here on my blog. There are a couple “smart money moves” that are missing on this post that I would like to suggest for home owners.
The greater Seattle – Bellevue competitive housing markets have been experiencing a higher amount of buyers paying “all cash” for homes. Refinancing after you’ve paid cash for a home is also referred to as “delayed financing”. Delayed financing may also take place when a person is buying a foreclosed home at auction at the court house. Historically, “all-cash” buyers who want to refinance after closing to re-coup the cash they used to purchase their homes had to wait six months after the purchase before they can do a “cash-out” refi. Now, home buyers who used “all-cash” to buy their home no longer have to wait months to refinance to get their cash back.
According to Housing Wire, it looks like HARP (aka the Home Affordable Refinance Program) may once again be extended through 2016. The HARP program was created for home owners who have conventional Fannie Mae or Freddie Mac mortgages and who had lost equity in their homes due to the mortgage meltdown, making it impossible to refinance. With HARP, appraisals are often not required and over the past few years, underwriting guidelines have become more relaxed with this program. So why the “so what”?
With the appreciation homes are seeing in the greater Seattle – King County area, home owners who purchased their home a couple years ago using an FHA mortgage may now be able to refinance into a conventional mortgage. FHA mortgages are often used when a home buyer needs a lower down payment option or if credit scores are lower. FHA jumbo mortgages offer home buyers lower down payment with higher loan amounts than what conforming mortgages will permit. There are many reasons why someone might opt for an FHA mortgage when buying a home.
HARP (aka the Home Affordable Refi Program or HARP 2.0) is set to expire at the end of 2015. HARP is a refinance program that was designed to help home owners who have good credit, income and job stability and would qualify for a refi except for the reduced value on their home.
HARP is available to home owners who have a conventional mortgage securitized by Fannie Mae or Freddie Mac (this is different than where you make your mortgage payments to).
Over the past few years, home owners have enjoyed deducting private mortgage insurance (pmi) premiums from their income tax. This is also true for government forms of mortgage insurance (aka funding fee or guarantee fee) with FHA, VA and USDA mortgage loans. This benefit is coming to an end effective on 2014 tax returns.
If you have been waiting for Congress to pass HARP 3.0 or have been previously turned down for a refinance because of lost equity in your home, you might consider trying to refinance again.
Mortgage rates are still ridiculously (artificial) low rates thanks to our governments continued support. Mortgage interest rates have been trending higher since late last year and may have some who have been “sitting on the fence” to lock in a 30 year fixed in the low 3’s as though they have missed out. A 10 year ARM may be worth considering.
A 10 year adjustable rate mortgage is fixed for 10 years and then at 120 months, the interest rate will adjust based on the current 12 month LIBOR plus a margin. The rate will then adjust again on the anniversary of the first adjustment date for the remainder of the term of the mortgage.
Let’s compare a 10/1 ARM to a 30 year fixed conforming mortgage. The quotes below are based on pricing as of 8:30 am this morning for a $400,000 loan amount, rate-term refinance for a Seattle area home owner with 740+ credit and a loan to value of $500,000 (80% loan to value).
I’m pricing both scenarios as close to “par” as possible – meaning with as little discount points or rebate rate credit as possible. If a borrower wants to lower the rate, they can pay more in discount points and if they want to reduce closing cost, they can increase the rate to create rebate pricing.
30 Year Fixed: 3.750% (apr 3.807) with net closing cost of $2335 and a principal and interest payment of $1852.46.
In 10 years, the principal balance of the 30 year fixed mortgage mortgage is scheduled to be $312,447.43 with $222,295 in mortgage payments over 10 years.
10/1 ARM: 3.250% (apr 3.305) with net closing cost of $2553 and a principal and interest payment of $1,740.83.
In 10 years, the principal balance of this 10/1 ARM is scheduled to be $306,917.21 with $208,899.60 in mortgage payments over 10 years.
The 10/1 ARM has caps of 5/2/5. “Caps” limit how much the interest rate can adjust up or down. To determine the new rate, the margin (2.25%) is added to the 12 month LIBOR at the time of adjustment.
The 10 year ARM currently offers a monthly savings of $111.63 compared to the 30 year fixed during the 10 year fixed period.
In 10 years, after the fixed period is over, the most the rate can adjust up or down is 5%. The highest the rate can be in 10 years is 5 plus 3.250% = 8.250%. Worse case scenario, the principal and interest payment would adjust to $2,615.14. The rate could not increase the full 5 percent, stay the same or drop as low as the “floor” which is the margin of 2.25 or anything in between.
If you are not planning on selling or refinancing your home before the 10 year fixed period is over, your risk is the uncertainty of where LIBOR will be 10 years from now.
The 10/1 ARM is also available for home purchases too.
If you have questions about buying or refinancing your home located in Washington state, or would like a rate quote, I’m happy to help.