Lending Integrity Seal of Approval

May 29, 2008 by 2 Comments

Lendingintegrity

I recently received permission from NAMB to post the Lending Integrity Seal of Approval which you may have noticed on the left side of my blog.   This logo isn’t something that just anyone can post or promote, it must be approved by the National Association of Mortgage Brokers.

In order to display the Lending Integrity Seal of Approval, a broker or loan originator must:

George Hanzimanolis, President of NAMB feels this seal will "soon become to the mortgage industry what the Good Housekeeping Seal of Approval is to the makers of consumer products."   George, by the way, is a heck of nice guy.  My husband and I had the opportunity to meet and have have dinner with him last week when he was in town with my brother-in-law, John Porter.

For more information, click here.

Filed Under: Mortgage, People, Testimonials

Gimme Five! Comparing Today’s 5 Year ARM to a 30 Year Fixed

May 24, 2008 by Leave a Comment

Highfive

There is currently about a 0.75% difference in rate between the conforming 30 year fixed and 5/1 ARM and 0.625% in rate with conforming-jumbo loans.  Is that enough for you to opt for an adjustable rate mortgage?

Beyond the obvious question: "how long do you plan on retaining the mortgage or staying in your home?"   Here are some other stats to consider based on rates I quoted Friday morning using a purchase of $500,000 with a loan amount of $400,000.   The closing costs on both loans are identical.

30 year fixed at 5.75% (APR 5.902%) has a principal and interest payment of $2,334.

5/1 ARM at 5.000% (APR 6.759%) has a principal and interest payment of $2,147.  This is a monthly savings of $187.

The 5/1 ARM is fixed for 60 months and will then the rate is re-calculated.   The 5/1 used in this scenario is a 5/1 LIBOR with a margin of 2.25% and caps of 5/2/5.   For now, lets review your savings over the 60 month period.

The 5/1 ARM will save $11,220 over the 30 year in five years in payment alone. 

30 year fixed at 5 years has paid $28,951 towards principal and has an estimated balance of $371,049.   $111,106 has been paid towards interest (no benefit towards your prinicpal, however it may be a tax benefit).

5/1 ARM at 60 months has paid $32,663 towards principal and has an estimated remaining balance of $367,337.   $96,228 has been paid towards interest.

Over a five year period, the net (interest) savings of the 5/1 ARM over the 30 year fixed assuming you do not make any additional payments towards principal is $14,878.

So what happens if someone decides to select a 5/1 ARM and 60 months later, they’re keeping the home?  They can refinance or not based on what the current market and what their finacial plans are.  The monthly savings over 60 months is plenty to cover the typical cost of a refinance ($2000-$2500) assuming rates are not favorable enough to opt for a "no cost refi".

If you decide to retain the mortgage, you will add the margin of 2.25% to the current 1 Year LIBOR rate when your mortgage is adusting.  (As of today, the 1 Year LIBOR is around 3.067%).   Your mortgage is reamortized based on the remaining term (25 years at the first adjustment).   The caps with this particular ARM are 5/2/5 meaning that the highest your rate can adjust is to a steep 10% and the lowest your rate will be at the first adjustment is 2.25%.   That’s a huge range and whatever your rate will be depends entirely on LIBOR.   Some 5 year ARMS offer caps of 2/2/6 which would limit the first adjustment to 2%–the initial rate is typically slightly higher.   Do learn exactly what your cap, margin and index are before you accept any adjustable rate mortgage.

I suggest considering the following:

What is your risk tolerance?  Will having a mortgage with the potential to adjust in 5 years give you a rash or cause you to lose sleep at night? 

How long do you plan on staying in the home or retaining the mortgage?  If you have a tendancy to refinance when rates improve or if this is a home (such as a starter home) where you may not keep it for 5 years, you may want to consider the ARM. 

Picture your life and where you and your family may be five years from now.   Is your income stable or growing?  Do you have retirement in your sights?

How disiplined are you?  $187 per month could make an impact on paying off non-tax preferred debt, paying down principal or building your savings.  Pay yourself the $187 per month in an interest bearing account at 3% and you’ll have $12,000 more in 60 months in addition to the other savings.

Regardless of what program you select for your mortgage…the choice is yours and it is your responsibility to learn as much as you can about the program–ask questions! 

Do you have an existing mortgage you’re unsure of?  Has your loan originator left the mortgage industry?  I’m happy to help Washington State home owners with their mortgage needs–including reviewing your existing financing, such as ARMS.  My mortgage adoption program does not require any refinancing or new mortgage.

Filed Under: Adjustable Rate Mortgage (ARM), Financial Planning, Mortgage, Residential Purchase

Why Your Loan Originator Needs a Complete Application BEFORE Locking a Rate

May 19, 2008 by Leave a Comment

A home owner contacted me wanting to know how their rate could change so much from their original lock with his current lender for his refinance.   He thought this was his scenario:

15 Year Fixed Rate at 5.375% (I’m assuming that he was paying a point–I cannot tell from this lenders lock confirmation).  Here are the other factors this rate was based on for a $417,000 loan amount:

  • Rate Term Refinance (no cash out, he’s actually bringing cash to closing in order to bring his loan amount down to the conforming level).
  • 700 Mid Scores
  • 62% Loan to Value

The LO locked in the rate based on this information about two weeks ago and just provided a "lock confirmation".  It’s actually a lock request with the lender she’s brokering the loan to.   Two weeks later, the borrower finds out that his loan is being priced based on the following:

15 Year Fixed Rate at 5.75% or 15 Year Fixed Rate at 5.375% plus 1.50 additional points.  Why the change?  After 2 weeks, the LO lets the borrower know that the loan is repriced due to:

  • Cash Out Refinance = 0.75% Hit to Fee.  He has a second mortgage that is being paid off with the refinance that was not from when he purchased his home. Fannie/Freddie classify this (paying off a non-purchase money second) as a "cash out" refinance, even though he’s bringing cash to closing.
  • 627 Mid Credit Score with a 70% loan to value = 0.75% Hit to Fee.  This came to a surprise to the borrower who actually thought his scores were much higher.  With Fannie/Freddie’s credit score (risked based) pricing, this is another whammo to the borrower.

Cash out and the borrowers credit scores should have been known to the Loan Originator if not prior to locking the loan, then mere moments afterward.  The LO should have immediately notified their client of the differences between the information used to lock the mortgage and reality.

Loan to value can be tricky for a LO to know with certainty…especially these days.  We often have to rely on our clients to give us an honest estimate of what they feel their home is worth based on what other homes like theirs have sold for in their neighborhood.   Until we have the appraisal, we do not know how the home will be valued.    

I’m sharing this story because there are valuable lessons here for us to learn from.

Borrowers:

  1. If you’re serious about locking in a mortgage rate, complete a loan application for your Mortgage Professional and allow them to run your credit.
  2. Obtain a written Lock Confirmation within 48 hours of locking in your rate.
  3. If you smell something fishy…it’s probably shark.

Loan Originators:

  1. If you have bad news (lower credit score, repriced lock, low appraisal, etc.) deliver it right away.  Don’t wait…it’s not going to go away.  Let your client know in full detail what you’re having to deal with and what steps you’re going to take to remedy with.
  2. Whenever the terms or cost of the proposed mortgage change, contact your client and provide them with an updated Good Faith Estimate. 

Currently, this borrower feels the LO gambled his mortgage interest rate.  After reviewing the documentation I’ve been provided, I think it’s more likely that she was just really a really poor communicator.   Perhaps she was hoping rates would improve enough to absorb the significant 1.5% hit to fee…I can really only guess.

This is far more than a getting a "rate quote" and saying, "that sounds good, lock it".  When you’re locking in your interest rate, you are commiting to the Loan Originator and the Loan Originator is making a commitment to the lender that the loan will be funded.  Your lock is only as good as the information used when it was submitted to the lender. 

Filed Under: Mortgage, Predatory Lending, Refinance, Residential Purchase

How to Apply On-Line for a Mortgage Preapproval

May 6, 2008 by Leave a Comment

I recently had this excellent question from one my readers who is interested in getting preapproved:

I began filling out the loan application on the web, but stopped once I reached the part about the specific property, as I don’t currently have a property in mind.  I believe what I am seeking to do [is] a true preapproval letter.  I did read your post which clarified the difference between prequalification and preapproval.  Is there a way to submit the full-doc information to you electronically to start the process for preapproval?

Mortgage Porter’s On-line Application (under Favorite Links) allows you to apply for mortgage preapproval before you have a property address.   This is question is very valid because there is not a formal way to select that the property has not yet been found.  Ideally, home buyers should get preapproved before they make an offer on a home.  Anyhow, where the application asks for a property address, simply enter:

123 TBD St., Your City, WA, Your Zip  (NOTE:  I’m only licensed to help those who need a mortgage in Washington State).

During these historic times in our mortgage industry (and actually, in any time) it’s crucial to get preapproved BEFORE you begin to shop for your next home.

I’m really glad that I was emailed this question so I could address it…otherwise, I might not have caught this.   Thanks!

Filed Under: Mortgage, Residential Purchase, Tech/Tools of the Trade

What’s a Lock Confirmation?

May 1, 2008 by Leave a Comment

A lock confirmation is a written document that your Mortgage Professional should provide you once your interest rate is locked.   In fact, if you don’t receive a Lock Confirmation once you have instructed your loan originator to lock, demand one.  No skirting from the Loan Originator allowed!

Your Lock-In Agreement/Confirmation should include the following information:

  • Date the loan was locked
  • Borrowers Names
  • Property Address
  • Loan Amount
  • Lock Expiration Date
  • Interest Rate
  • Origination Fee
  • Discount Point
  • Whether or not there’s a Prepayment Penalty
  • ARM information (Margin, Index, Adjustment Caps, Life Cap and if it features a Conversion Option)
  • Any lock in fees (including non-refundable) if any.  This generally applies towards locks with longer lock periods.
  • Terms of the lock (see below)
  • Signature place for borrowers
  • Signature of Loan Originator
  • Name and Address of Mortgage Company

Why is this so important?  For starters, once you agree to lock in a certain interest rate, a clock begins ticking and counting down towards the lock expiration date.  If you get too close to that date, you may need a lock extension which could have a fee depending on what the pricing is at that time.   

Equally, and possibly more important, you want to make sure that your Loan Originator has in fact locked your mortgage rate.   There are some Loan Originators out there who will say they have locked in your rate when in fact, they have not.  They’re gambling the market with hopes of still locking in your rate at what they have told you, but they’ll make a little extra on the back end OR the rate you want isn’t quite available so they’re gambling the market will improve and they’ll lock you once that rate appears.   But what if it doesn’t?   Having a document that shows that the Loan Originator committed that rate to you may help you should you need to make them honor the rate (you may have to seek their manager or higher).

It’s quite possible, especially in this volatile of a market where we are averaging two rate changes per day, that you may give the LO permission to lock in your rate and when they go to do so (even if it’s the moment you hang up the phone), the rates may be changing.  A Mortgage Professional will be upfront with you and let you know if this has happened (for better or worse).   An actual Lock-In Agreement/Confirmation should not be provided until the rate is actually locked in. 

Changes to the loan application may also impact the mortgage rate which would then change the lock.  For example:

  • Credit score changes during the transaction discovered from a new report may impact the rate for better or worse.
  • Changes in loan to value (after the appraisal is received).
  • Change in level of documentation for the loan.
  • Loan programs being terminated or guidelines tightened.
  • Investor pricing changes with less time permitted than what the lock will allow.
  • Information on loan application not accurate, misrepresented or changes (such as employment or the Underwriter determines occupancy to be different than stated on application).

Again, a Mortgage Professional will notify you of these changes and how they impact you as soon as they become aware.

Some lenders also offer a Forward Lock Agreement which is different than a confirmation…I’ll give you the scoop on a Forward Lock in another post soon.  Stay tuned!

Filed Under: Mortgage

Is it a Primary Residence, a Second Home or Investment Property?

April 23, 2008 by 437 Comments

Is it a primary or second homeEvery so often, someone will be interested in financing for a home they will not be living in 100% of the time…they want the best rate which is “owner occupied”.   It’s crucial to know the difference in your lenders eyes and to be completely upfront so you avoid committing fraud.  Bottom line, the property and situation needs to make sense to the underwriter.   Here are some basic definitions:

[Read more…]

Filed Under: Family Opportunity Mortgage, Investment Property, Mortgage, Second Home, Underwriting and Qualifying Tagged With: , , , ,

The Current Value of a Preapproval Letter

April 1, 2008 by Leave a Comment

Fellow Rain City Guide Contributor, Tim Kane wrote an interesting post while I was on vacation asking if preapproval letters are worth their ink in our current market.  Truth be told, this was a valid question prior to our current market conditions and has been for years.   The true worth of the preapproval letter prior to the mortgage "melt down" was based on the merit of the loan originator who was preparing the letter.   I’ve addressed this issue before here and here.   Anyone can type a letter or issue a fancy certificate; has the borrower really submitted supporting documents verify their income, employment and assets required per underwriting (i.e. the borrower has been credit underwritten)?   

The fact is, in today’s current mortgage climate, where loan programs are terminated, guidelines tightened, private mortgage insurance restricted and geographical areas are being deemed soft: a preapproval letter is not any sort of guarantee that a home buyer will be able to close on a proposed home purchase.   

So why bother with preapproval letters?  Here is the current value of a true preapproval letter:

  • It demonstrates that the buyer has completed loan application and is preapproved at that moment for a specific product.   
  • There is a level of commitment that a buyer has if they have provided all of their documentation to a lender over one who has not taken the steps to become preapproved.
  • You know who the loan originator and lender is that the buyer is working with.   I’ve recommended before, and especially do now, that Selling and Listing Agents give the Loan Originator a friendly phone call to introduce yourself…allowing you to see if the LO passes "the smell test".

What can you do if preapproval letters are worth less than they were before?

  • I recommend that all buyers with a credit score below 700 and/or using less than 20% down have a "Plan B" for their mortgage scenario.   Consider "what if" the mortgage scenario they are current approved for is terminated with no notice from the lender or if the area they are buying a home in is considered soft?  Is your Loan Originator able to offer FHA or VA financing?  Note:  FHA and VA jumbos are quite attractive.
  • Home buyers should start even earlier in the home buying process (six months to a year is fine).  A Mortgage Professional can help improve credit scores and provide advise on how work on where they may need more strength to be on the best position possible to buy a home.
  • Allow more time for preapprovals from lenders.  Underwriting (and appraisals) are taking more time in this climate.   Everything is being reviewed under a microscope.
  • Review your current preapproval with your Loan Originator.  There have been recent pullbacks with private mortgage insurance (including LPMI, Fannie Flex and Freddie Mac higher LTV products).
  • Home Buyers should discuss with their Real Estate Agent (not the Listing Agent) the "what ifs" of losing their financing and how it may impact their earnest money deposit.
  • Listing Agents should have their preferred Mortgage Professional review the preapproval letter should their be any doubt regarding the letter in question.  The preferred Mortgage Professional can at the very least provide some valid questions for the Listing Agent to ask the loan originator and Selling Agent.

This market demands that you select a Mortgage Professional based on ability, expertise, commitment and available products.   Trying to get the lowest rate in a market where rates change up to 3 to 5 times per day is insanity.  A true Mortgage Professional will provide you with the most competitve rate available considering your current mortgage plan. 

Filed Under: Current Affairs, Mortgage, Mortgage Insurance, Residential Purchase

Not a Friend of this Family: Part 2

March 31, 2008 by Leave a Comment

In part one of this story about Michael and Pam investigating a refinance with Woo Who, we uncovered how the bank Loan Officer was not willing to provide a copy of the Federal Truth in Lending to Michael and Pam.   It was not until after Michael insisted that it was his right to receive this document, that it appeared disclosing a prepayment penalty that he was not informed of. 

The story gets better.  As I mentioned, Michael and Pam’s existing adjustable rate mortgage is scheduled to adjust this June.  I reviewed the Note with Michael showing him that the index his mortgage rate is tied to is the Monthly Treasury Average (MTA).  The Monthly Treasury Average is just that: a 12 month average of the monthly average yields of the US Treasury securities.  The 12 month average is determined by adding together the Monthly Yields for the most recently available twelve months and dividing by 12. As it is based on a 12 month average, the rate does not move drastically.  This could act as a benefit when rates are moving upwards and is less beneficially when rates are dropping.   Here is the 411 on Michael and Pam’s current loan:

  • 5/1 Adjustable Rate Mortgage current rate 5.125%.  Principal and interest payment of $1154.31.
  • 1st adjustment on June 1, 2008.  Adjusting annually thereafter. 
  • Index: Monthly Treasury Average – projected value on June 2008: 2.948%
  • Margin: 2.600%
  • Lifetime Cap:  11.950%

Based on this information, their new rate is estimated at 5.548%.  The new rate is rounded up to the nearest 0.125% = 5.625%.   The new mortgage would reamortize at their balance at that time (estimated at $196,000) based on the remaining term providing Michael and Pam a principal and interest payment of $1218.29.   This is without refinancing–no closing costs–no loan approval.  Simple.

Woo Whoo’s proposal is a 5/1 ARM with a prepayment penalty at 5.375% with a principal and interest payment of $1108.74 and closing costs of $2283.74 (not calculating how many years and what the penalty is for the prepay).

When Michael and Pam understood their options, they elected to stick it through with their existing ARM.  Their rate should drop lower when it adjusts again next June.   Michael was puzzled (to put it mildly) as to why the representative from Woo Whoo Bank didn’t explain this to them.  Especially since the loan that would be refinanced was with Woo Whoo.   

It’s painfully simple.  The Loan Originator would not be paid for giving free advice.  It’s real easy for LO’s and mortgage companies to target those with adjustable rate mortgages and plant fear of the adjustment.  Or perhaps the Whoo Who Loan Originator didn’t even consider how Michael and Pam would fair not refinancing.   

This is why it’s so important to review your mortgage Note and understand how and when it adjusts (if you have an ARM).  If it all seems like too much to figure out, contact your Mortgage Professional to help you.  If your loan originator is neglecting you (perhaps they’ve left the industry or do not care for clients after the transaction is closed), I’m happy to adopt your Washington State mortgage…no refinance required.

It’s all about understanding all of your options and sometimes, that option is: do nothing.

Filed Under: Adjustable Rate Mortgage (ARM), Mortgage, Refinance
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