Helping Washington State homeowners learn more about their mortgage options.
UPDATE 5/2/17: Fannie Mae has changed guidelines for refinances of recently listed homes.
So you tried selling your home in this market and were not able to find a buyer. Now, you want to take advantage of our current low mortgage rates and refinance to reduce your payments or perhaps take some equity out to improve your home now that you’re not moving anywhere. Not so fast! Most lenders will not refinance a recently listed property. [Read more…]
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:
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.
When I helped Micheal and Pam with the financing of their home almost five years ago, it was a challenging transaction. They were excellent borrowers, except for the particular type of Visa he had (they’re Canadian). Long story short, we wound up doing a 5/1 ARM through Woo Whoo Bank as they were only planning on staying here for about 5 years. About four months ago, Micheal met with me to review his Note and to see about refinancing. They may be staying a few years longer if they have their choice…Michael is having a challenge extending his Visa. Michael wanted to refinance and was concerned about his ARM adjusting. With our current mortgage climate and his current situation with his Visa, I could not refinance him. We reviewed how his ARM and discussed how it functions and at that time, I told him that he has time–he did not to refinance yet. He was still feeling pressured to do something–letting his ARM adjust was not sinking in. He went directly to Woo Whoo to investigate a refinance. Michael forwarded me the first good faith estimate from Big Bank. The rate seemed too high to me; especially compared to his current mortgage. I again encouraged him to wait out a few more months to see what rates do and that by that time,he would have more information on the status of his Visa. Fast forward to the present.
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.
If you have a second mortgage (home equity line or fixed term), and you are not going to pay it off during a refinance; it needs to be “subordinated”. This is because of lien position with your mortgages…who gets to be first. Lien position is determined by when a document (such as a Deed of Trust) is recorded at the county. If you have two mortgages and are only refinancing the first mortgage, the second mortgage will need to be “subordinated”. The subordination agreement is a recorded document with the second mortgage lien holder and the borrower that the second mortgage will go back into second position after the new first mortgage is recorded. If this document was not recorded, than the old second mortgage would be in “first lien position” and the new refinance would be in “second lien position”. This boils down to which mortgage has more rights in the event of a foreclosure…everyone wants to be first as the further down the line you are, the higher the odds are that the lien may not be cashed out (again, in a worse case scenario).
Prior to our current mortgage crisis, a subordination agreement typically was not an issue. We send a request for subordination along with a copy of the appraisal from the refi. The second mortgage lien holder would review the request, consider the amount of equity remaining in the property and 9 times out of 10, agree. This process would take a couple days.
With more banks being concerned about depreciating or soft values, they are now taking much much longer to consider if they will all allow a subordination to take place. In fact, I recently closed a transaction where the bank took over 10 business days (this eats away at your lock) for a borrower with 800 credit scores and a loan to value of just over 50% to subordinate a HELOC that with a zero balance. An Account Manager from a bank that does a large amount of second mortgage recently sent out this memo:
“UPDATE on SUBORDINATIONS: Please get your files in early… the subordination dept is running approx 20 business days. I do not have any contacts for rushes etc. They are trying to work date sensitive deals, but they have not been able to get caught up…”
Folks…20 business days is a month!
If you are refinancing and have a second mortgage or HELOC that will not be included in the refinance, make sure your loan originator is aware and that they know how long subordinations are taking so they can lock your rate in appropriately. A 30 day lock with a 20 day subordination is not going to cut it. You’ll be looking at having to deal with a lock extension.
If your loan to value is higher, there is a possibility that the subordination may be declined. Discuss this with your loan originator upfront. Lenders are looking at any way to protect themselves from additional risk during these historic times. If your loan amount qualifies and you have enough equity, you just may have to include that second mortgage in your refinance.
OFHEO just released the temporary conforming loan limits (through 2008). It does not appear as though that every county that received an increase in FHA limits received one with conforming. Here is what I show for Washington State:
King, Pierce and Snohomish Counties
1 Family – $567,500
2 Family – $726,500
3 Family – $878,150
4 Family – $1,091,350
Kitsap County
1 Family – $475,000
2 Family – $608,100
3 Family – $735,050
4 Family – $913,450
Clark and Skamania Counties
1 Family – $418,750
2 Family – $536,050
3 Family – $648,000
4 Family – $805,300
San Juan County
1 Family – $593,750
2 Family – $760,100
3 Family – $918,800
4 Family – $1,141,850
Jefferson County
1 Family – $437,500
2 Family – $560,050
3 Family – $677,000
4 Family – $841,350
This data is still very new and I’m just making it available to you as soon as I receive it. More information will follow.
Great news! HUD has announced the new FHA loan limits for our area:
King, Snohomish and Pierce Counties
Single Family: $567,500 (up $204,710 from $362,790)
Two Family: $726,500
Three Family: $878,150
Four Family: $1,091,350
San Juan County
Single Family: $593,750 (up $230,960 from $362,790)
Two Family: $760,100
Three Family: $918,800
Four Family: $1,141,850
Kitsap County
Single Family: $475,000 (up $114,000 from $361,000)
Two Family: $608,100
Three Family: $735,050
Four Family: $913,450
Jefferson County
Single Family: $437,500 (up $105,000 from $332,500)
Two Family: $560,050
Three Family: $677,000
Four Family: $841,350
Clark County
Single Family: $418,750 (up $113,800 from $304,950)
Two Family: $536,050
Three Family: $648,000
Four Family: $805,300
Clallam County
Single Family: $383,750 (up $158,600 from $225,150)
Two Family: $491,250
Three Family: $593,800
Four Family: $738,000
Island County
Single Family: $381,250 (up to $91,500 from $289,750)
Two Family: $488,050
Three Family: $589,950
Four Family: $733,150
Whatcom County
Single Family: $375,000 (up to $90,000 from $285,000)
Two Family: $480,050
Three Family: $580,300
Four Family: $721,150
Skagit County
Single Family: $373,750 (up to $89,767 from $283,983)
Two Family: $478,450
Three Family: $578,350
Four Family: $718,750
Thurston County
Single Family: $361,250 (up to $86,700 from $274,550)
Two Family: $462,450
Three Family: $559,000
Four Family: $694,799
Kittitas County
Single Family: $328,750 (up $79,000 from $249,750)
Two Family: $420,850
Three Family: $508,700
Four Family: $632,200
Chelan and Douglas Counties
Single Family: $323,750 (up $78,200 from $245,550)
Two Family: $414,450
Three Family: $500,950
Four Family: $622,600
Mason County
Single Family: $310,000 (up $74,400 from $235,600)
Two Family: $396,850
Three Family: $479,700
Four Family: $596,150
Benton and Franklin Counties
Single Family: $275,000 (up $66,085 from $208,905)
Two Family: $352,050
Three Family: $425,550
Four Family: $528,850
Adams, Asotin, Columbia, Cowlitz, Ferry, Garfield, Grant, Grays Harbor, Klickitat, Lewis, Lincoln, Okanogan, Pacific, Pend Oreille, Spokane, Stevens, Wahkiakum, Walla Walla, Whitman and Yakima Counties
Single Family: $271,050 (up $70,890 from $200,160)
Two Family: $347,000
Three Family: $419,400
Four Family: $521,250
According to the Wall Street Journal, these figures will also be our temporary conforming loan limits.
"The upper mortgage limits also will apply to loans purchased or guaranteed by government-sponsored mortgage companies Fannie Mae and Freddie Mac, FHA officials said."
More information will follow as I receive it. Remember, these higher loan limits are only through the end of 2008.
The promise of not having to write a check for your mortgage payment for two months seems so tempting that many home owners chomp on the bit when a Loan Originator dangles that bait to lure in a refi candidate. The truth is you’re not skipping anything.
Typically when your close on a mortgage, your first mortgage payment is the following month after 30 days have passed. So for example, if your mortgage was closing on February 22, your first mortgage payment is due on April 1. Although it seems like you’re “skipping” a month, what’s happening here is that the mortgage interest on the new loan is prorated from the day you close. Based on this scenario, your interest is starting on February 22 and is prorated until the 28 (or 29 in a leap year such as we have this year). The 6 extra days of interest is charged to you at closing under the prorated interest on your HUD-1 Settlement Statement. Mortgage payments have 30 days of interest in arrears because of this and this is why your payoff is always higher than your monthly statements by about one mortgage payment (30 days of interest).
In order to do the “Skip Two Mortgage Payments” tango, your refinance needs to close as close to the 15th of the calendar month as possible and you, dear home owner, do not make your mortgage for that month. So using our same example, if you closed your mortgage on February 15 and do not make a mortgage payment for February, your new mortgage payment is still not due until April 1. You will have 15 days of prorated interest due at closing (half of a mortgage payment). Did you skip anything? No. You only saved writing a check. The interest is still there and nothing is free.
When home owners try “skipping” payments, they also risk late fees being assessed by the bank who is being paid off. If they do not receive the payment by the 15th, the borrower will have a late fee. Even if the escrow company wires the payoffs to the underlying lender, there’s no guarantee they will receive it in time.
Click here for a refi rate quote for your home located in Washington.
I was helping a couple with a potential refinance and they were very interested in skipping two month’s payments. This would have been especially costly for them as we were paying off a FHA mortgage. FHA mortgages do not prorate the interest when they are being paid off. It only makes sense whenever possible to close them at the end of a calendar month so that the home owner isn’t paying double interest. If they would have closed on February 15, they would have felt like they were “skipping” however their mortgage payoff would have had interest through the end of February AND they would have paid 15 days of prorated interest on their new mortgage.
Loan Originators who use “skip two months payments” are hoping to skip all the way to the bank. In fact the LO who was trying to lure the couple I helped last month was charging them 3 points for the same rate that I was offering priced with 1 point. This lender is not from Washington State and has to rely on deceptive mailers in order to get new business…I’m sure it’s because no one who has obtained from them would return or refer their friends and family to them.
There’s nothing wrong with scheduling your closing so you have the illusion of skipping two payments, just know going in what it takes to make this happen and what your risks are (late fees).
Click here for a refi rate quote for your home located in Washington.
Rhonda Porter is a Licensed Mortgage Originator MLO121324 living in the greater Seattle area. Rhonda began her career in 1986 in the title and escrow industry and began her mortgage career in 2000. She enjoys helping people understand the mortgage process and started writing The Mortgage Porter in late 2006. Read More…
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