The Mortgage Porter

Are Adjustable Rate Mortgages Worth Your Consideration?

December 15, 2010 by Rhonda Porter Leave a Comment

Recently I talked with a Seattle home owner who's considering refinancing their 30 year fixed rate mortgage for an adjustable rate mortgage. Adjustable rate mortgages (ARMs) have fallen out of favor in recent years due to the mortgage melt-down. I've never been a fan of option ARMs, however there is nothing wrong with adjustable rate mortgages as long as the borrower understands the terms and it's suitable for that person's financial scenario. This home owner's financial plan is to be mortgage free in seven to ten years after his children are out of college. Cash flow is important right now so he would rather not do a 10 or 15 year amortized mortgage.

You very well could be scratching your head right now thinking "with how low fixed rates are right now, why on earth would anyone consider an ARM?"

With his scenario, we're looking at a loan amount of $400,000 and a loan to value of 60% with excellent credit (scores are above 740). I priced the following scenarios with zero points (origination or discount). These rates are effective as of 5:00 p.m. December 15, 2010.

4.875% for a 30 year fixed (APR 5.020). Principal and interest payment (P&I) = $2,117. With this scenario, your principal and interest payment is never scheduled to change.

4.375% for a 10/1 ARM 12 month LIBOR with 5/2/5 CAPS 2.25 Margin (APR 5.731). P&I = $1997. With this scenario, after 120 payments (10 years) the rate will adjust based on adding the 1 year (12 month) LIBOR is plus the 2.25 margin limited by the first "cap" of 5%. The rate in 120 months cannot be higher than 9.375% nor lower than 2.25% (the margin also acts as "the floor" limiting how low the rate can adjust). After the first adjustment, the rate will adjust once a year on that anniversary of the first adjustment limited by 2% up or down. The highest the rate can be on this scenario during the lifetime of this loan is 9.375%.

3.625% for a 7/1 ARM 12 month LIBOR with 5/2/5 CAPS 2.25 Margin (APR 5.742). P&I = $1824. With this scenario, after 84 payments (7 years) the rate will adjust based on adding the 1 year (12 month) LIBOR p the 2.25 margin limited by the first "cap" of 5%. After 84 payments/months, the rate cannot go higher than 8.625% or lower than 2.25% (the margin/floor). After the first adjustment the most the rate can adjust annually is 2% up or down following 12 the anniversary of the first adjustment (at 96 months) and annually thereafter. For example, worse case at the second adjustment (96 months) the rate could be 10.625% (3.625% plus 5% at 7 years and plus an additional 2% at 8 years).

Selecting a 30 year fixed mortgage provides security of a fixed and options with your mortgage payment. The home owner can pay additonal towards principal to pay down the mortgage. A 15 year fixed mortgage is also more "safe" than an adjustable if you're concerned about retaining the mortgage beyond the ARM's fixed period. However there is no flexibility with the payment (you can make a 15 year payment on a 30 year mortgage; you cannot make the 30 year payment on the 15). I'll admit I'm biased towards the 30 year fixed mortgage, however Americans currently still has a choice as to what mortgage options they prefer unless Congress changes this (as I'm afraid they'd like to).

Adjustable Rate Mortgages will reamortize based on the remaining term at their adjustment points. For example, after 120 payments with a 10/1 ARM, the payment will be based on the new rate and a 20 year amortization. With a 7/1 ARM, the payment will be based on the new rate and a 23 year amortization (7 years minus 30 years).

My client is actually considering an ARM because of the amount saved in monthly payments over the term he plans on retaining his mortgage.

Let's compare the ARMs and 30 year fixed scenarios at 84 months…of course, there is no way for us to know what the LIBOR rate will be 7 years from now to predict an 100% accurate rate.

30 Year Fixed Rate at 7 Years.  Principal Balance = $350,879. P&I=$2,117. No change.

7/1 ARM at 7 Years. Principal Balance = $341,250 providing a principal savings of $9,629 over the 30 year fixed rate. The difference in payment between the 30 year and 7/1 ARM over this time period is $24,612 (2117 – 1824 = 293 per month. 293 x 84 = 24,612.  However…the payment is set to adjust.  Worse case scenario, the rate could go up to 8.625%.  Amoritzing $341,250 at 8.625% for 23 years provides a principal and interest payment of $2,156 – worse case scenario, this is only $39 more a month than what the 30 year fixed scenario has been paying the full 7 years.

10/1 ARM at 10 Years has a principal balance remaining of $347,156.   The payment is $120 less per month than the 30 year fixed providing a monthly payment savings of $10,080. And the 10/1 ARM will continue to have a fixed payment 3 years beyond the 7/1 ARM; at 7 years, the rate for the 10 year ARM is still 4.375% with the same principal and interest payment of $1997 where the 7/1 ARM payment at 85 months is unknown.

Bottom line, it's important to review your options and to consider your personal life plans. A 30 year fixed rate mortgage if you're not planning on retaining that financing or home more than 10 years may be costly–however if you cannot stomach the thought of your rate ever adjusting, the 30 year fixed rate may be your cup of tea. It is (and should remain) the homeowner's choice.

Filed Under: Adjustable Rate Mortgage (ARM)

Dad’s Services

December 9, 2010 by Rhonda Porter Leave a Comment

Dad's services will be on Monday, December 13, 2010 at Nativity Lutheran Church in Renton at 12:00 p.m. Internment will be at Greenwood Memorial Cemetary.

Update: Here is Dad's obituary as printed in the Seattle Times.

Filed Under: People

Good Bye, Dad

December 6, 2010 by Rhonda Porter 2 Comments

My father, Ron Christopherson, passed away Friday afternoon, just as the beautiful sun was setting. He was only 64 years old and had been suffering from several heath issues, including cancer. I am thankful that he is no longer in pain and my little sisters and I miss him terribly.

I will be taking a few days off as we plan for his services.

Filed Under: Interest Rates

Loan Officers – Don’t Scrooge Your Escrow Officers

December 2, 2010 by Rhonda Porter Leave a Comment

It's come to my attention that the last day to sign refinances and have them fund by 2010 is on December 24th, Christmas Eve. Let's show our appreciation for their hard work and do whatever we can to avoid them having to work late getting our refi signings done on this holiday.

Santa's keeping a list of the LO's who are naughty or nice…so if you want to avoid a lump of coal with your next commission check, please think of your dedicated escrow officers and plan accordingly.

Happy Holidays!

PS: Here's a link to days King, Pierce, Snohomish, Kitsap and Thurston counties will be closed this month due to furloughs and holidays.

Filed Under: Current Affairs

Your Ethnicity and Race on the Loan Application: Section X

December 1, 2010 by Rhonda Porter Leave a Comment

Back on "Section X" of a residential mortgage loan application, borrowers are asked to check boxes to indicate what their ethnicity and race are.

It's not unusual when I take a loan application and the borrower wants to mark the box that it's none of the the government's business. I don't blame them…but I wonder if they're aware that when they check "I DO NOT WISH TO FURNISH THIS INFORMATION" that mortgage originators may be required to guess depending on how the application is taken.

Check out the fine print on the loan application:

"If you do not furnish ethnicity, race, or sex, under Federal regulations, this lender is required to note the information on the basis of visual observation and surname if you have made this application in person."

I can tell you from days in the escrow biz, this can be kind of awkward when you're signing someone and the person across from you says "why is this box marked stating that I'm ….?!!" Your loan originator probably had to make their best guess.

The Home Mortgage Disclosure Act (also referred to as HMDA, pronounced hum-da) along with Regulation C requires lenders to collect this information to make sure that lenders are not discriminating.

From Fannie Mae:

X. Information for Government Monitoring Purposes

This section is included to aid the federal government in monitoring compliance with equal credit opportunity, fair housing and home mortgage disclosure laws. Supplying this information is strictly voluntary on the part of the applicant, but lenders should ask all applicants to provide it, including those who apply by telephone and through the Internet, and should describe the reason for collecting this data. Race and ethnicity are separate categories, and although the lender should ask applicants to furnish information for both, applicants may furnish one but not the other. Note that there is no longer a place for applicants to indicate race as "Other" but applicants may check as many races as apply.

The Home Mortgage Disclosure Act and its implementing Regulation C generally require Lenders to collect sex, race and ethnicity data on all applications.

When an application is taken in person and an applicant elects not to provide some or all of this information, federal law requires the lender to note the applicant's sex, ethnicity, and race on the form, based on the lender's visual observation or the applicant's surname. To aid in identifying applicants who may be of Hispanic ethnicity and who elect not to self-identify, the lender may wish to consult the list of Spanish surnames developed by the U.S. Bureau of the Census. Furthermore, the lender may wish to advise the applicant that he may complete or change the information in this section after the application is approved, at any time up until closing.

And from HMDA:

If an application is taken entirely by mail, Internet, or telephone, and the applicant declines to provide information on ethnicity, race, or sex, the lender must use the code for "information not provided by applicant in mail, Internet, or telephone application."

The only way to not participate in disclosing your ethnicity or race on a loan application is to completely apply on line or mail. I'm wondering, if a person understands why this information is being collected, why would they not want to participate?

Filed Under: Underwriting and Qualifying

The Mortgage Porter’s 4th Anniversary

November 28, 2010 by Rhonda Porter 2 Comments

I'm not sure if it's an anniversary or birthday, but I do know that this blog was created four years ago today. Here's the post that launched The Mortgage Porter.

I cannot imagine not having my blog. It has become a significant part of my career. It helps me communicate with my clients, has become a resource to help educate my readers, some days it serves as a form of therapy when I can "vent" frustration and it's also brought me amazing opportunities. There are so many wonderful people whom I have had the opportunity to know because of Mortgage Porter and social media.

Thank you so much for reading Mortgage Porter.

Filed Under: Current Affairs, Events

What Determines How Much Home You Qualify to Buy: Part 1 – Your Payment

November 27, 2010 by Rhonda Porter Leave a Comment

Preapproval letters typically begin stating that a home buyer has been qualified or preapproved to buy a home priced at specific amount. What it really boils down to is how much mortgage payment the home buyer qualifies for based on the borrowers monthly income and the debt to income ratio that is being allowed by the program guidelines. Your proposed mortgage payment determines the loan amount that you’re qualified for. Add the funds to cover your down payment less the closing cost and you’ll have the sales price.