Adjustable Rate Mortgages, also referred to as ARMs, come in many shapes and sizes. This post will be focusing on fixed period ARMs, such as the 3/1, 5/1, 7/1, 10/1…etc. that feature a fixed rate period before adjusting.
ARMS Defined
April 8, 2007 by 2 Comments
The Low Down on Fannie Mae Flex
March 28, 2007 by 2 Comments
Update: This is a classic example of the trouble with writing about mortgage programs…some are no longer available. When researching about mortgages on the internet, please be sure to check the date of the article.
With many of the zero down options tightening up, it's time to return to the mortgage programs that were popular a few years ago before the 80/20s were all the craze. One such program worth considering is the Fannie Mae Flex (97 and 100). This is truly a low down program offering either a minimum $500 borrower contribution or 3% flexible contribution.
The Fannie Mae Flex allows for flexible sources of funds for closing costs and prepaids:
- Borrowers own funds (including loans against a 401(k) account or cash-valued life insurance policy.
- Gift or unsecured loan from a relative.
- Grant from non-profit or employer.
- Interested party contributions (to be applied to closing costs and prepaids) such as a Builder or Real Estate Agent.
The Flex program utilizes automated underwriting so minimum credit scores, reserves and qualifying ratios are determined by Desktop Underwriter.
There are no income limitations, such as with My Community programs. The program is limited to conforming loan limits (currently $417,000 for a single family dwelling).
There is private mortgage insurance with this program. However, with a credit score of 620 or higher, a borrower may qualify for LPMI (Lender Paid Mortgage Insurance). The rate with LPMI may or may not pencil out, depending on the credit score and loan to value. Also, private mortgage insurance is tax deductible this year if you meet income limitations.
Sorry folks, this program will not work for manufactured homes.
Currently, I'm helping a couple buy their first home with this program. They are utilizing a gift from their parents for the down payment and the real estate company they are working with rebates part of the commission which will cover their closing costs (including a 1% discount towards their interest rate). The couple will not have to dip too deep into their savings or 401(k). The current interest rate for the 30 year fixed rate is in the low 6%s with a loan to value of 97%. They will pretty much be getting into their first home with the earnest money investment of approx. $2,500 (special thanks to Mom and Dad).
Here's a quick re-cap of the Fannie Mae Flex program:
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Low down payment
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Higher debt to income ratios allowed
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Forgiving of credit scores
Remember, always check with your Mortgage Planner to see which strategy for your home financing best suites your personal needs.
Don’t Refi Your Second Mortgage…Yet
March 20, 2007 by 4 Comments
This is the advice that I just gave one my clients who closed a loan with me in 2005 with (gasp) New Century Mortgage. She was going through a transition in her life and she is not a "subprime" borrower, but a divorce can create subprime situation. What was her nasty rate that I provided her via New Century? Here is her scenario:
- 100% LTV using two mortgages (80/20).
- 1st Mortgage is a 3 year fixed 5 year interest only with a rate in the mid 5% range with a three year prepayment penalty (not optional to waive).
- 2nd Mortgage is a 30/15 in the mid 9% range.
Yesterday I sent out an email to my entire database of clients to provide information about the subprime mortgage industry. Since her mortgage is with New Century, she was naturally concerned and called me. While talking to her, she told me that she is in the process of refinancing her second mortgage to a 10 year fixed rate mortgage. She just wants to lower the rate and pay it off–great intentions!
Here’s the possible problem. When you refinance two mortgages, if the second mortgage is not a "purchase money second mortgage" (the original mortgages from purchasing your home) it is then priced as a "cash out refinance" even if at that transaction, no cash is received by the borrower. This can really impact pricing on the first mortgage when it’s time to refinance.
"Loan to value " is just one of the factors in pricing a rate for a mortgage. With a cash out refinance, if your loan to value (new loan amount/value of home) is:
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70-80% LTV may equal 0.50% to fee (or approx. 0.125 – 0.250% to rate)
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80-90% LTV may equal 0.75% to fee (or approx. 0.325 – 0.625% to rate)
Here’s my advise for this client:
Her prepayment penalty will be over next summer and since she does want to stay in her home, I advised not refinance the second mortgage. The refinance proposal from the credit union does provide a better interest rate and would shorten the term of her second mortgage to a 10 year over a 30 year amortized with a 15 year balloon, and it would increase her mortgage payment over $100 per month. I suggested that she keep the current second mortgage and apply the $100 extra she’s willing to pay towards the principle of her existing second mortgage.
Then, next year when her prepayment penalty is over, refinance both mortgages at that time and receive the best rate possible (non-cash out) for her new mortgage. And reduces her closing costs to one mortgage next year instead of closing a refi for the second mortgage this year and again for refinancing the two mortgages next year.
Alas…something good to come out of contacting my clients about the current subprime scenario!
Your ARM May Not Be Broken
February 26, 2007 by Leave a Comment
You may have noticed on the evening news and the local papers all the bad press about mortgages lately. Specifically sub-prime, negative amortized ARMs a.k.a. payment option plans (which I am opposed to for 99% of the population), 100% financing and interest-only ARMs…to name a few. Many sub prime lenders are restating their earnings and are suffering losses. Some are closing their doors and the remaining are changing their underwriting guidelines. It use to be very easy to obtain 100% financing with a credit score of 600…some lenders would even consider 580. Now, the benchmark is 620. Throughout history, lenders change underwriting guidelines based on market conditions.
Recently at Rain City Guide…
February 19, 2007 by Leave a Comment
I have been meaning to highlight post over at Rain City Guide on a more regular basis…I’m slipping! Here are a few I thought you might benefit from reading (or just click on over and check them all out).
Earlier this month, Jillayne tackled why you should not shop interest rates by APR. This is a must read if you are a "rate shopper".
There have been a couple post forecasting the future of our local real estate marketing, including this one from Ardell and Jon featured two posts that inspired reactions from the "Bubble Bloggers".
If you’re considering buying home at a new construction site, then Ardell’s post is a good read for you regarding dealing with site agents and when lots are released.
Yours truly added two post to RCG dealing with zero down buyers and the future for subprime borrowers.
Enjoy!
Not a Good Option
January 16, 2007 by 7 Comments
Yesterday, one of my clients asked me about Pay Option ARMs. These loans are 
probably the most heavily advertised products promoted on the radio. I cringe every time I hear the announcer boast about the low start rates of anywhere from 1 – 3%. Pay Option ARMs are marketed by many different names, such as pick-a-payment or cash flow ARMs.
A newer Option ARM program features a fixed period for the minimum payment and a fixed rate for a five year term. Every month, when the mortgage payment is due, the borrower has the choice of what kind of payment they would like to make typically based on four different selections.
Here’s an example of what a fixed period Option ARM could look like.
Option 1: Minimum Payment–an interest only payment at 3% under the note rate available for the first five years of the loan (NEGATIVE AMORTIZATION).
Option 2: Interest Only–an interest only payment based on the note rate available for the first 10 years of the loan term.
Option 3: 30 Year or 40 Year Fixed–A full principle and interest payment amortized over either a 30 or 40 year term.
Option 4: 15 Year Fixed–A full principle and interest payment over a 15 year term.
Sounds great, right? Wrong. I know a lot of lenders offer this product. And, at least this option ARM offers a controlled minimum payment for a five year term. However, how many people are going to make a principle and interest payment when they receive their mortgage coupon?
Negative Amortization (deferred interest is the nicer term) is the difference between your note rate payment (the actual payment due) and the minimum payment (the low teaser rate). In this case, every time you opt to make the lower payment, the difference is tacked on to your mortgage balance. There are ceilings in place that will prevent all of your equity from being gobbled up from your mortgage called “negative amortization cap”. This loan particular program (option ARMs vary from lender to lender, and this is just one that we could offer, if I don’t persuade you otherwise) features a cap of 115%. This means that once you’ve made minimum payments long enough to increase your original mortgage balance by 15%, your loan terms will change and you no longer have the minimum payment available as one of your options (this is referred to as “recasting”).
Option ARMs can also impact your credit scores for the worse. Credit scoring modules give more favorable scores when balances are decreasing and worsen if balances are shown above the credit limit. If your original mortgage is $200,000 and due to negative amortization, the current balance is $215,000 (for example) your credit scores will be dinged as it appears to the scoring system that you’ve extended beyond over your credit limit on your mortgage.
These loans may work for seasoned investors who do not plan on utilizing the minimum payment option unless, perhaps, they have a rental without a tenant. However, the majority of homeowners who have Option ARMs don’t fully understand how this animal works or that they are trading equity for lower payments until it sneaks up on them. It’s not a program that I recommend for my clients when there are so many better programs available that won’t jeopardize home equity.
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