I Love Checking Out ARMs: Reviewing An Existing Mortgage

Recently a friend approached me confessing to having one of those "awful adjustable mortgages"…she thinks she needs to refinance and take advantage of today’s lower rates.   Before assuming that someone "needs" to refinance, I like to review their current mortgage and what their financial goals are.  Sometimes, people do not need to refinance…they just need to understand their mortgage terms.

Current Mortgage:  P&I Payment $3,330 (original balance $520,000).

  • 7/1 Adjustable Rate Mortgage: Note Rate 6.625%
  • Caps: 2/2/5
  • Margin: 2.25
  • Index: 1 Year LIBOR (currently 2.637% as of this the date of this post).

There is approx. 65 months remaining with the fixed period rate of 6.625% before the mortgage adjusts.   When the mortgage adjusts, the new rate will be 2.25% plus the current 1 year LIBOR rate EXCEPT the rate will be no lower than 4.625% and no higher than 8.625% due to the 2% adjustment cap. 

Best case scenario at first adjustment date with current mortgage:

Rate: 4.625% with principal and interest payments for 12 months of $2,780.   Note: If the mortgage was adjusting today, the rate would be closer to the best case scenario at 4.875% (2.25% plus 2.637% = 4.887% rounded to the nearest 0.125%).  Alas…they have 65 more months before knowing what the going rate for the 1 Year LIBOR will be.

Worse case scenario at first adjustment date with current mortgage:

Rate:  8.625% with principal and interest payments for 12 months of $3,937.

Possible scenarios that I suggested:

Refinancing into a conforming-jumbo mortgage 30 year fixed at 6.375%.  This would provide a principal and interest payment of $3,232.   With closing costs at $2900, they will break even on this scenario in 30 months.  From 30 months (the break even point) to when the fixed period of the ARM is over, the savings based on the monthly payment would be $3430.

Restructuring the existing mortgage into two mortgages with a conforming first at $417,000 at 5.875% and second mortgage paying off the balance (they can opt for a fixed second or a HELOC).   With a principal and interest payments of $3,194 and closing costs of $3,200; it will take 24 months to break even on this scenario.   From 24 months to when the fixed period of the ARM is over, the savings based on the difference between the monthly payments would be $5,576. 

LiborcompThis chart, which I created utilizing The Mortgage Coach, is factoring in the 2.25% margin to the LIBOR rate back to January 1999.  You can see there is a significant range with the rate.   Home owners with ARMs based on the LIBOR rate from 2002 to 2004 were probably grinning from ear to ear (depending on what their margin was) when you see what their rate was compared to the 30 year fixed.  Timing is everything with an adjustable rate mortgage.

What ever the home owner decides to do is completely up to them.  Of course one of their options is to not refinance and wait to see what the new rate (LIBOR) will be in 65 months.   If they wound up with a "best case scenario" new payment, it would be pretty sweet however the cost of paying the higher payment for 65 month and we don’t know what the index will be at the date of adjustment.    Understanding your mortgage and knowing your available options just starts with contacting your local Mortgage Professional. 

By the way, if you are a Washington State  home owner who has not heard from your loan originator lately or if you would like me to adopt your mortgage, please contact me.   Many LO’s have left the industry or do not provide service once the loan has closed.  I’m happy to review your ARM (or fixed rate mortgage) without any obligation to refinance. 

Fannie Mae Clarifies Conforming Jumbo Guideline for Refi’s

Great news!  I just received a memo from Fannie Mae clarifying that they will now allow purchase money second mortgages to be included in a conforming-jumbo refinance and to be treated as "limited cash out".   Previously, purchase money second mortgages (piggy back mortgages used for financing when you purchased your home) were going to be considered "cash out" and not allowed with the temporary conforming jumbos

In a nutshell, this means that if you have combined loan amounts up to $567,500 for King, Pierce or Snohomish counties, and the mortgages being paid off are from when you purchased your home, this is now a doable refinance utilizing a conforming jumbo mortgage (subject to credit scores, loan to value, documentation…etc.).   

A little easing will help many home owners who were hoping to consolidate their mortgages.

? of the Day: Could you tell me when the increase in conforming loan limits will go into effect?

I was emailed this question today:

Could you tell me when the increase in conforming loan limits will go into effect?

Believe it or not, the temporary increase in conforming loan limits is in effect.  In fact, it’s retro-active to July 2007.  Why?  This is so that Fannie and Freddie can provide some relief to Wall Street by being able to purchase loans over the true conforming limit of $417,000.   Investors have lost their appetite for jumbo mortgages, regardless of how great the borrower is, these loans did not have Fannie or Freddie’s backing.  Now that they will, we should hopefully see some relief as far as lower rates from lenders for jumbo mortgages.   The higher rates we have been seeing lately with non-conforming (jumbo) mortgages was to try to sweeten the pot on Wall Street. 

Lenders are being slow coming out with their pricing.   The first one I wrote about came out swinging with some very high "hits" to price.  I’m now beginning to see others just starting to appear with better pricing.  As more lenders enter the conforming-jumbo and fha-jumbo markets (i.e. competition), we may see rates improve.

Stay tuned!  I’ll be posting rates tomorrow.

New Conforming Loan Limit Won’t Help Refi’s w/2nds…FHA May Save the Day

Fannie Mae’s underwriting guidelines for the temporary conforming loan limits have been released and it looks like the new loan amounts are not going to be as helpful as many had hoped.   The new guidelines for loan amounts between $417,001 – $567,500 in King, Snohomish and Pierce Counties are far more strict.

The biggest whammy is that if you were hoping to combine your first and second mortgage (or heloc) into one new conforming-jumbo mortgage, you’re out of luck.  Fannie is not allowing any "cash out" refinances.  This means that even if you were just paying off the two mortgages and not receiving a nickle back at closing–it’s not going to fly. 

You must have a minimum of 660 credit scores for a fixed rate purchase for a LTV of 80% or less for a purchase using a fixed or adjustable rate.

Limited cash out refinances are allowed up to 75% loan to value with a minimum 660 credit score.  Limited cash-out means that you are allowed to roll in the closing costs to the refinance and receive no more than $2000 cash back at closing (no second mortgages/helocs can be included in the refinance).

Update:  it appears that Freddie Mac will allow cash out refinances up to a 75% loan to value with a 720 minimum credit score.

Adjustable rate mortgages are qualified at the fully amortized PITI at the higher of the note rate or fully indexed rate (worse case rate). 

Be prepared for a "full doc" mortgage.  There is no "stated income" allowed.   You will also need two months of reserves (PITI) and are limited to a 45% DTI (debt to income) ratio.

You can only have four financed properties, including your principal residence.

On Monday, I believe lenders will finally unveil pricing…which again is said to not be as exciting as consumers had hoped.  I’m hearing that the rates will fall between current Jumbo and conforming.   

Rumor has it that the FHA-jumbo will be more friendly to "jumbo" homeowners…if they can get over paying the upfront MIP (1.5% of your loan amount) and monthly mortgage insurance (0.5% of your loan amount/12 months).   For example, on a $500,000 loan amount, the upfront MIP would be $7500 (typically financed into the loan) plus monthly mortgage insurance in the amount of $208.33…even if you have an 80% loan to value.  We’ll just have to wait and see a couple more days.

Remember, these loan limits only last through December 31, 2008.

More to follow. 

Quick 4-1-1 on Jumbo Loan-Conforming Loan Limit Increase

I’m noticing that a lot of Mortgage Porter readers are finding my by googling various terms to learn more about when and how the conforming loan limits will be increased.

Here’s what I know (and what I’m speculating) so far:

I’ve heard that President Bush will be signing the bill into law this Wednesday.  Then HUD has 30 days to publish what the median home prices are for various areas.  The new conforming loan limit will be based on 125% of those values.

It’s estimated in the Seattle-Bellevue-Everett area, our new loan limit will be just shy of $500,000. 

While this process is taking place, Fannie and Freddie need to figure out how they’re going to deal with this influx of new business.  Underwriting guidelines will need to be considered and distributed to lenders.  Also, I will eat a shoe if there are no "add to rate" to loan amounts $417,001 and over.   I’m estimating the add will be 0.25% – 0.50% to the now conforming rate.   For example, if your loan amount is $417,000 your rate for a 30 year fixed could be 5.500% – if your loan amount is $417,001 your rate would be 5.75% – 6.00%.   This is still more attractive than what the current jumbo rates are.

Remember, the increase to the conforming loan limit is temporary.  It is currently only valid through the end of 2008.  Who knows, maybe Congress will extend it as they have the PMI deduction if they see it as a benefit to the American economy.

You can see this process will take a little time.  I’m assuming that Fannie and Freddie are diligently working on the guidelines/pricing issues and not waiting for HUD’s home value information.   Even so, it could very well be some time in March before this all takes place.

Stay tuned!

Conforming Loan Limits to increase soon

Being a Certified Mortgage Planning Specialist has it’s advantages.  On being up to the minute updates on legislative changes that impact the mortgage industry.  I just received this email from CMPS which is speculating that the new conforming loan limit in the Seattle-Bellevue-Everett area may be $531,377.  HUD has 30 days to publish what will be used for median home prices. Here is the memo from CMPS:


CMPS Legislative Update –  Determining "High Cost" Areas

As we reported to you yesterday, the US Senate passed an expanded version of HR 5140 – an economic stimulus package that includes a temporary increase in the conforming loan limits from $417,000 to as high as $729,750 in high cost areas.  The two things you must know in order to determine if you are in a high cost area:

1.  You must know the formula.  If 125% of the local area median home price exceeds $417,000, the temporary loan limit would be that 125% of the median home price with a cap of $729,750. 

2.  According to HR 5140, the Secretary of Housing and Urban Development will publish the median house prices within 30 days.  We contacted the Public Affairs office of HUD directly to ask if there is anything definitive to reference in the interim, and they said, "no."  The Wall Street Journal published median house prices recently, and you may want to reference this information to get an idea of which areas will exceed the $417,000 limit.  The median housing prices can be found in the second graphic on this web page. 

This will be great news for those with "jumbo mortgages" or piggy backs that need to refinance.   Once I have more "firm" information, you can bet I’ll let you know!

Senate Banking Committee Meeting Now

The Senate Banking, Housing and Urban Affairs Committee is now hearing testimony including the very hot topic of temporarily raising the conforming loan limit and Fannie/Freddie reform.

Click here to watch live.  (Requires Real Player…and it’s not working for me).

OFHEO’s testimony: Download http_www.ofheo.gov media te… 2708LockharttestimonyWeb.pdf

Stay tuned…

Update February 7, 2008  2:00 p.m.:  The Senate has passed the stimulus package.  The Bill is expect to be quickly signed off by The House and then President Bush…possibly by this weekend.

A Jumbo Question: Conforming Loan Limits

A Mortgage Porter reader asks a very timely question regarding the proposed conforming loan limit:

"I just spoke to one of the major lending institutions and he recommended that if I can wait 3 – 4 weeks we may see a change in the non conforming guidelines such as amount that is normally set t $417,000 jump to either $620,000 or $630,000. 

Would you have any information on these possible changes and time line?"

Many people are full of questions regarding what’s going on with the conforming loan limit.  Different figures and stats are being quoted from various sources.

The Certified Mortgage Planning Institute issued this statement yesterday:

CMPS Legislative Update – Higher loan limits inching toward reality!

Yesterday, the US House of Representatives overwhelmingly passed HR 5140 – an economic stimulus package that includes a temporary increase in the conforming loan limit and the upper threshold for FHA loan programs to as much as $729,750 in high-cost areas.  The temporary increase would last only until the end of 2008.  The bill would also restrict Fannie Mae, Freddie Mac and the Federal Housing Administration from guaranteeing or purchasing loans above 125 percent of the median home price for a given area.  That means that the existing $417,000 conforming loan limit for mortgages eligible for purchase by Fannie and Freddie would not increase in areas where the median home price is $333,600 or less.  The problem of course, is that as of right now, no one knows what the median home price is in different markets because this data has never been published by HUD!

Therefore, it would be up to the Secretary of Housing and Urban Development to determine the median home price for different housing markets "as soon as practicable," but no later than 30 days after passage of the bill, relying on existing commercial data where needed.  In other words, if median home prices in your marketplace are $336,000 or less, this bill won’t really affect you; and there’s no way to tell if median home prices in your area are higher than $336,000 until HUD publishes this data.  Nevertheless, jumbo relief is certainly on the way for places like California where median home prices are certain to be above $336,000.

Currently, the loan limit for FHA loan programs is between $200,160 and $362,790, depending on the county where the property is located.  The proposed higher limits for FHA loan guarantees are also set to expire at the end of this year, unless Congress passes other legislation intended to modernize FHA programs by introducing risk-based pricing and lowering down-payment requirements.

While House leaders thought they had reached an agreement with the Bush administration to include FHA modernization as part of the stimulus package, they agreed to continue working on that issue separately at the administration’s request, the Associated Press reported.

In order to make higher limits a reality, the next step is for the Senate to pass the bill and for the President to sign it into law.  The target date for final passage set by the White House and Congressional leaders is February 15, so let’s hope for the best and we’ll be sure to keep you posted as we have more information.

Sources and helpful links:

·          Inman News

·         HR 5140

·         FHA Loan Limit Search – (Current Limits)