Helping Washington State homeowners learn more about their mortgage options.
Editors Update: Loan limits are different than what’s reflected below from when this article was originally written. Check with your local FHA approved Mortgage Originator to see what your loan limits are (or click on the link in the second paragraph).
Rate shopping to select who will be assisting you with your next mortgage is similar to playing “liars poker”. The Loan Originator who is the most successful at bluffing wins. The fact is, unless you’re locking in the rate at the moment you’re shopping, you don’t have that rate. It’s a rate quote–that’s all. Mortgage rates change throughout the day. They are based on mortgage backed securities: bonds. Some lenders I work with offer “live pricing” and others issue rate sheets; sometimes we can have several rate sheets offered by a lender during one day.
One of the Realtors I work with sent a Seller to me since they were having second thoughts about the lender they were working with for the property they were buying in Arizona. I reviewed their estimate and discovered their proposed loan had a prepayment penalty that they were not aware of. Long story short, they decided not to buy (not just because of the lender…I believe their house did not sell in time and they were "bumped"). I’ve told their story in a previous post.
They recently contacted me wanting to know if they should refinance. They have 5 years left on their 7 year ARM which is currently at 5.5%. Since their mortgage is not set to adjust until the summer of 2012 and they still hope to move from their current residence, I recommended that they do not refinance at this time. Even though I’m not her original loan originator, she asked me if I would mind watching her rate and keeping tabs on her ARM. Managing mortgages is part of my standard business practice for my clients. I added her information to my database and told her I will gladly add her to the mortgages that I care for…even though I did not originate her current mortgage.
It got me thinking… if you or someone you know have an adjustable rate (or actually mortgage) and you don’t have a Mortgage Professional who is helping you manage that debt (watching current mortgage interest rates and trends, keeping tabs on when your mortgage payment may adjust), and you’re in the beautiful Washington state, I’m glad to include include your existing mortgage to my database. No refinance required. If you’re satisfied with your Loan Originator, then ask them to manage your mortgage for you. I’m sure they’ll be happy to do so (again, no refinance is required).
Now if I could only figure out a way to be paid for all the times I’ve talked people OUT of refinancing! Seriously, if you have an adjustable rate mortgage, please contact a Mortgage Professional to review the terms.
A gentleman from Bremerton called me wondering if he should refinance out of his VA adjustable rate mortgage. The start rate is 5.125%, however it’s scheduled to adjust in a few months. VA ARMs (and FHA) have the best caps available at 1%. The most his ARM could adjust worse case scenario would be to 6.125%. And his VA loan does not have any mortgage insurance (unlike an FHA loan, which could possibly justify refinancing).
He’s also considering possibly selling in a year or so.
The adjusted rate is very close to what I could currently offer him with a new conventional loan (a new VA loan would provide a higher rate). If he was considering living in this home "forever" and the thought of having an adjustable rate mortgage was causing him emotional grief (low risk tolerance); then I might recommend a different strategy.
His estimated mortgage balance is $224,000. I did not ask if the existing ARM is a 3 or 5 year fixed (I was driving during our conversation). Here’s some figures to consider:
If the VA borrower has the 5/1 ARM scenario, it would take him just over 4 years to break even on the closing costs of the new refinance. If the VA borrower has the 3/1 ARM scenario, it would take over 9 years to break even using the conventional refinance.
What would you recommend?
UPDATE: EFFECTIVE ON FHA CASE NUMBERS ISSUED AFTER DECEMBER 31, 2008, THIS PROGRAM IS NO LONGER AVAILABLE.
Since Mortgage Master Service Corporation has been a FHA endorsed lender since our inception, we are also approved for FHASecure. This program is designed to help home owners who after their non-FHA ARM resets, have become delinquent.
Here's more info:
This program is not intended for home owners to stop making their mortgage payments once their ARM adjusts. In fact, this is straight from the HUD Mortgagee Letter 2007-11:
"FHA reserves the right to reject for insurance those mortgage applications where it appears that a loan officer or other mortgage employee suggested that the homeowner could stop making their payments…"
I'm pleased to be able to offer this program and thankful that Mortgage Master has maintained their status as a HUD Approved Mortgagee.
The best option is to refinance prior to your ARM adjusting (before you're delinquent). As always, I suggest that you contact your Mortgage Professional if your ARM is scheduled to adjust within two years or less in order to make sure you're in the best position possible to refinance.
The answer is yes, the rate is fixed…BUT… The rate is fixed for 30 years however depending on if you select the 10 year or 15 year interest only period, once the interest only period is over, the mortgage will be amortized at the same rate for the remainder of the term.
For example, let’s assume your mortgage balance is $350,000 and the rate for the 30 year fixed with interest only payment is 6.50%.
The interest only payment is: $1895.83
If you have the 10 year interest only product (usually a slightly better rate), the payment will adjust to a fully amortized mortgage based on the remaining 20 year term. The new payment would be: $2609.51
If you opt for the 15 year interest only product, the fully amortized mortgage based on the remaining 15 year term be: $3048.88
Both of the above scenario’s are assuming that there are no additional payments made towards the principal during the interest only period. NOTE: borrowers may need to qualify at the fully amortized payment (not the interest only payment).
Here is the email from the reader:
"Currently, we have a subprime loan with a 2-year penalty which expires March 2008. We were told that it is a 40 year fixed at 8.83% and if we refinanced prior to the 2-year penalty expiration date, there will be a 6-months of interest penalty. However, we recently reviewed our loan documents and with a better understanding called the lender. The lender confirmed that we have a subprime loan and the rate will be adjustable after the two years.
We are considering the 30-year fixed, 10 year interest only, but want to be sure that the rate is definitely fixed for the full 30 years. We are in our mid-40s and have no intentions of selling our home, and consider this home to be our retirement home. From your financial expertise, do you think this is a good option for us?"
It’s difficult to provide advice for someone when you don’t have their entire financial picture. This couple does not live in Washington State (where I’m licensed to practice).
Here are factors that I would consider if I were their Mortgage Professional:
I would caution against doing "band aid" loans that will need refinancing when you’re at retirement or close to then. Depending on what you anticipate your income to be, should you need to refinance out of a 15 or 20 year term mortgage because your income is less, you may not be able to qualify. You may want to consider a traditional 30 year fixed or a Fannie Mae or Freddie Mac 40 year fixed rate (without the balloon or adjustment that you have with your current mortgage).
Here are the rates I quoted last Friday (just to give you an idea of how these rates may vary from product to product):
30 Year Fixed: 6.125% (APR 6.281%). Payment per $1000 = $6.08.
30 Year Fixed with 10 Year Interest Only: 6.500% (APR 6.653%). Payment per $1000 = $5.42.
40 Year Fixed: 6.500% (APR 6.646%). Payment per $1000 = $5.85.
I give them huge kudo’s for reviewing their loan documents and contacting their lender and for getting second opinions. Their Mortgage Professional should review all possible mortgage options with this couple and make sure they understand the terms and any consequences.
The other day, one of my past clients asked me:
“I was wondering if there are issues that could arise if this credit crisis continues in a downward spiral? The market hasn’t been doing well in the past week with concerns about the “credit crisis”.
Is there any reason for concern that we could have our home loan called in early if our mortgage company gets into trouble? Are there other issues that we should be thinking about if this causes a ripple affect to other areas of the economy?”
If you currently have an adjustable rate or balloon mortgage that is scheduled to adjust within the next 12 months, I strongly encourage you to contact a Mortgage Professional as soon as possible. Especially if you are considering keeping your home beyond the adjustment date.
Don’t wait. Here’s why:
This is truly an urgent situation that requires your immediate attention. The more time you can give yourself and your Mortgage Professional to determine the best strategy for your next mortgage, the better off you’ll be. And, if you know that your friends or family members have ARMs that are due to adjust anytime soon, please encourage them to contact a Mortgage Professional as well.
Take control of your ARM or it just may leave you stinging.
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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