Archives for June 2011

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.

My First Post “In Flight” on Alaska Airlines

I'm actually in route to Denver as I type this post.  I'm a speaker at the first ever Mortgage Tech Summit which will be taking place tomorrow. I'm going to be showing fellow mortgage professionals how I create "talking" rate quotes and good faith estimates.  If I've helped you with a refinance or buying a home in the past few years, then you're familar with this tool that I provide my clients.  I've received wonderful feedback since my clients can refer back to their talking quotes and good faith estimates at their convenience and share them with their trusted financial advisor, real estate agents or family members.  It's been an instrumental part of my business practice.

Even if I wasn't invited to speak at this event, I'd be on my to Denver for this event. I'm looking forward to all of the sessions and to learning from mortgage professionals from across the country whom I respect. 

It's not too late to sign up if you're interested in joining us and you can follow the event by watching #MTS11 on Twitter.

I will be checking email and voice mail on breaks and will be back in Seattle on Friday.

How Much Does My Home Need to Appraise with a Refinance?

This is a question that I'm reviewing for a client in Seattle who's current mortgage was a non-conforming loan amount in 2005. Non-conforming (aka jumbo) mortgages do not qualify for the home affordable refinance program which offer expanded loan-to-values. The current mortgage balance is $400,000 (in 2005, the conforming loan limit was $359,650). In King County, the current high balance loan limit is $567,500 (soon to be reduced to $506,000 on October 1, 2011).

Here are some examples of what programs are available based on how much the home may appraise for (loan to value) with a mortgage payoff of $400,000.

  • appraised value of $508,000 or higher = 80% loan to value and no private mortgage insurance = conventional mortgage with closing costs and prepaids financed.
  • appraised value of $500,000 or 80% loan to value = conventional mortgage with closing costs and prepaids paid out of pocket or with rebate pricing.
  • appraised value of $475,000 or 85% loan to value = possible combo mortgage with first mortgage at 80% loan to value or lower (to avoid private mortgage insurance) and second mortgage at combined loan to value at 85%. Yes, second mortgages are starting to come back. This scenario would require a minimum mid-credit score of 720.
  • appraised value of $450,000 or 90% loan to value = mortgage insurance
  • appraised value of $415,000 or 97% loan to value = FHA insured mortgage with upfront and annual (monthly) mortgage insurance.
  • appraised value below $415,000 means that the borrower will need to consider a cash-in refinance if they want to proceed.

NOTE: If the mortgage that was being paid off was eligible for home affordable or if it was an FHA underlying mortgage, there would be more options…because it was originally a jumbo loan in 2005, the options are limited.

How much this home appraises for will impact whether or not a refinance is possible…I really believe that if Congress is sincere about a housing recovery, we need to eliminate appraisals on certain rate-term refinance where the borrower qualifes based on their income, employment and credit.

Would you like a mortgage rate quote for your home located anywhere in Washington? Click here.

Financing a “Kiddie Condo” for your College Student


A few weeks ago, I helped a Kent couple purchase a condominium located in Seattle for their daughter to live in while she attends college at Seattle University. They were prequalifed with their credit union, however the credit union was treating the transaction as if it were an investment property even though the couple (we’ll call them Mr. and Mrs. Kent) were not going to rent the property.

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