Costs and Fees category archives

Government loans, such as those backed by Fannie Mae, Freddie Mac, and the FHA, are slated to get more expensive and harder to qualify for, assuming changes recommended by the Treasury are implemented.

The agency released their recommendations for a complete overhaul of the mortgage market today, essentially calling for less attractive government-backed mortgages to restore the largely absent private market.

Among the changes they’d like to see are higher down payment requirements for Fannie and Freddie backed loans (10% down) and costlier annual mortgage insurance premiums on FHA loans (up .25%).

That, along with higher guarantee fees on loans securitized by Fannie and Freddie, should get the private market for mortgages up and running again.

Additionally, Treasury has recommended that the conforming loan limit fall to $625,500 from the current elevated level of $729,750 in the most expensive regions of the country on October 1, 2011.

All of these measures are aimed at reducing the government’s share of the mortgage market, which could prove a burden to taxpayers if not dealt with.

But the move could push mortgage rates higher, which are already at 10-month highs, according to the latest release from Freddie Mac.

And the fear is that such changes could throw a wrench in a possible housing recovery later this year.

The report noted that more than nine out of every ten new mortgage are guaranteed or insured by the government.

(photo: thetruthabout)

The top mortgage lender in the country has called for borrowers to come up with 30% down if they want to avoid higher mortgage rates and more restrictive lending tied to the “risk retention” requirements related to the Dodd‐Frank Wall Street Reform and Consumer Protection Act of 2010.

Essentially, the government wants to ensure that banks and lenders who write higher-risk mortgages actually retain some of that risk (5% to be exact), instead of selling it off to investors and wiping their hands clean of it.

After all, this originate-to-distribute model was arguably how we got into this mortgage crisis to begin with.

However, since the legislation was introduced, banks and industry players have come up with a number of ways to be exempt from this new rule, including:

“requiring documentation of income and assets, setting debt-to-income ratio standards, and restricting things like prepayment penalties, balloon payments, and negative amortization.

But Wells wants to take it one step further and ask that both those purchasing and those refinancing have 30 percent down payment/home equity.

Critics (including most other banks and lenders) believe this will lead to a large pool of loans subject to the five percent risk retention rule, greatly increasing mortgage rates.

In fact, the MBA believes rates could be as much as three percentage points higher on loans subject to the rule.

FHA loan lending would also increase because it’s not subject to the risk retention rule, putting more strain on taxpayers.”

Wells Fargo argued that half of mortgages already carry a 30% down payment, but critics believe the move could shut out smaller lenders and increase market share for the top banks, who already have plenty.

If down payment requirements/mortgage rates do rise, it could throw a wrench in the housing recovery everyone’s hoping will get underway this year and next.

(photo: thetruthabout)

New Conventional mortgage changes on the horizon for 2011. In most cases, conventional loans will become more expensive come April 1st, 2011.  There will be pricing adjustments in the form of points and not to the rate. Now, the interest rates could actually change if the pricing hits are incorporated into the interest rates. It just depends on which avenue you take, pay the extra costs upfront or take a higher interest rate.

These new pricing changes have to do with the borrower’s credit scores and the percentage of the down payment. The new pricing hits will be any where from 25 bps to 50 bps. This means on a $200,000 loan amount, it could cost you an additional $500 to $1,000 or the interest rate could increase any where from 1/8 to 1/4 percent in interest rate. This is all dependent on the actual spread between the interest rates.

Chart – The chart below goes into effect on April 1st, 2011. (Click To Enlarge)

Link to the Chart and more information  - Keep in mind, there are some loan officers that were making FHA loans sound more expensive after the new mortgage insurance changes in October of 2010.  Even before these pricing changes take place in 2011, in many cases, FHA loans are cheaper. I do many comparisons between FHA loans and conventional loans. What one needs to understand are the borrowers future goals, their credit scores, and their down payment. All of this needs to be taken into consideration to properly make the right decision and not based on what others blurt out. In many cases, if you are putting down less than 10 percent and have credit scores under 680, FHA loans are usually cheaper all the way around.  Some of this has to do with the increase in private mortgage insurance, PMI, when it comes to the credit scores. Many PMI companies won’t do less than 10 percent down if the borrowers credit score is below 680. These are all factors that aren’t usually talked about.  This is where you need to speak to a qualified loan officer that understands all of the differences.  So when shopping for mortgages, the borrower shouldn’t always be concerned about the best interest rate, but hoping that they are working with an upfront and competent loan officer that will actually close the loan and not on false promises.

Failure to communicate is one of the greatest reasons for complaints in any transaction.  Truly it makes no difference what type of transaction is conducted if expectations and important facts are not properly conveyed the end result can be disappointment or worse. With mortgages it can be even more crucial due to the often higher anxiety levels especially for first time home buyers or owners under some form of financial pressure.

Mortgage industry insiders who use terms in their daily life which are only used near the time of closing of a home loan can be guilty of tossing out words without a simple explanation to the client. Examples daily heard in a mortgage office may be acronyms like DTI – debt-to-income ratio which in itself needs a short explanation. Another may be approved versus qualified.

One of the most sensitive factors going to the closing table to consummate a home loan involves how much money a client is bringing to the closing. Unfortunately there have been, and still are, several bad actors who love to use the terms “no closing costs”. The harsh reality is there is no such loan. Every loan has closing costs and every home owner or home buyer in one way or another pays those closing costs. Until attorneys, appraisers, processors, couriers, title agents, and several others are willing to work for free there will always be closing costs and the seller, owner or buyer will always pay them.

Deciding to use the terms “no cash to close” would be accurate in those cases where no closing costs are touted. It is possible, in many cases of refinance or purchase, to have a closing with the mortgagor bringing little or nothing to the closing table. It works by a combination or choice of several opportunities to use funds resulting from the transaction to cover those costs.

• “Overages” from the sale of the loan or the spread between the interest rate charged and the cost of the money to the lender or broker.
• “Adding back” or “rolling in” the closing costs to the new loan amount.
• Government funded down payment programs
• Seller contributions to the costs of the loan

Another important fact to note is the down payment is not regarded as a cost of the loan and therefore is not considered a part of the closing costs but is included in the cash to close. This is often confusing when industry insiders use the term closing costs and do not explain what closing costs are in relationship to cash to close. Additionally any cash required to close the loan must be sourced and seasoned according to the guidelines of the particular loan being used to fund the transaction.

When shopping for a loan with at least three lenders, which you should always do, make sure you are aware of the difference between their closing costs and how much money you will need to bring to the closing table. Less is not always better.

My previous blog suggested that the Homepath Renovation loan can be a better option than a 203K streamline.  Which I still believe but wanted to go into more detail on the costs associated with the two programs. 

The actual closing costs between the 2 programs are pretty similar so to break down those costs may be a bit overkill so I will focus on the major differences.

Downpayment:  FHA requires a 3.5% down payment while the Homepath Renovation loan only requires a 3% down payment.

Interest rate: You will almost always find that and FHA 203(K) loan will have a lower rate compared to Homepath.  However that lower rate comes at a cost.  The 203(K) loan requires 1% upfront mortgage mortgage insurance to be charged.  That fee is typically financed into your loan amount.  Your loan amount will be higher.

In the example I provided (Total Cost Analysis),  the FHA loan amount is increased by $3,008 and your monthly payments are based on the higher loan amount.   In Addition, (using the same Example) the fha loan also requires monthly mortgage insurance of $225.67 per month.  Mortgage insurance is dropped on an FHA loan when the loan balance reaches 78% of the original loan to value.  Mortgage insurance will remain on the example I provided for roughly 124 monthly payments ($27,983.08), unless the borrower pays additional to principle.

The homepath loan would require the consumer to pay 2.125% in points, which will add an additionl $6,393.85 to the closing costs associated with the homepath loan.  If you do not have enough in assets to cover this additional costs then the 203(K) loan will be your better option.  If you do have the assets the home path loan may be the better option.

Difference in Principle Balance

The first difference you need to account for is your principle balance.  Initially your loan balance will be $1,414.45 higher with the FHA loan (meaning you have less equity in the home with an FHA loan than a homepath loan).  The difference in the loan balances will get closer with each payment because of the difference in the rates.  You will be making a bigger principle payment with the 203K loan (but you have a higher loan amount).  The balance will be roughly the same after the 42nd payment.

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Since FHA decreased the UFMIP (up front mortgage insurance) premium and increased the Monthly MI (mortgage insurance) premium, I have seen an uptick in the number of Homepath renovation loans I am originating and I thought I would share why.

Whenever you make a comparison between loan programs you have to start with some Assumptions or a scenario:

Purchase Price:                    $200,000

Cost of Renovation:            $30,000 (if the cost of Renovation exceeds $30,000 no need to compare Homepath is not an Option)

Fico Score:                              660 (if your Fico score is less than 660 no need to compare Homepath is not an Option)

Property Type:                     Single Family or Condo (If the condo is non-warrant-able and cannot be FHA Approved no need to Compare FHA is not an Option)

Max Financing:                     FHA 96.5% LTV and Homepath 97%

What is the Difference in the rates? 

Homepath:With the above scenario I would have to charge 5.25% with 2.125% in points.  The homepath program has a number of loan level price adjustments that total 5.375% in points which include: 1.25% for loan to value and FICO score, 3.625% for No MI, .50% for 97% Loan to Value.  Those adjustments can be paid in cash as additional closing costs or paid by the lender by charging a higher rate.  The highest rate on my rate sheet today is 5.25% and that will allow me to pay 3.25% of the 5.375% in LLPAs leaving 2.125% that will need to be charged as points.

FHA 203(K) Streamline: With the above scenario I would be charging a rate of 4.75% with 0 points.  FHA does require UFMIP of 1% that is typically added to your loan amount in addition to requiring an additional .5% down payment. 

So…The real difference is about .50% in a rate and .625% in  points!  the monthly payment is about $100 less per month with the Homepath loan than the 203K streamline.  Closing costs and paperwork between the two programs are pretty similar.

Take a look at this Total Cost Analysis that I prepared comparing the two programs.

As always with this kind of pseudo-crystal-ball post, take what I say here with a healthy dose of counsel from your own mortgage professional.  You do have one of those, right?  If so, call him and talk this over.  If not, Zillow is a great place to find one.

Tonight we find out one big piece of the rate puzzle, in figuring out which of the two major parties in US politics is going to control the US Congress for the next two years.  The Republicans are almost surely going to take over the House of Representatives, but if they do not take the Senate as well – and the smart money right now says close, but no cigar – that will probably mean gridlock until the next presidential election, in 2012.  Gridlock may sound like a bad thing, but for markets, it’s great.  Markets love certainty.  They love consistency.  If the Congress disappeared altogether, that would suit them fine.  This would be as close to that as we could get.

Your first indication will be at 7pm EDT, when the first polls close.  If the GOP defeats John Spratt in South Carolina’s 5th District, be prepared for a gigantic Republican win in the House.  For the Senate, watch West Virginia’s race, polls closing at 7:30pm EDT.  If Joe Manchin hangs on to win there, the Democrats are likely to hang on to the Senate.  If he loses, we may have GOP majorities in BOTH houses.

What does that mean?  Out on a limb here, but the Republican wave appears built on small-government, almost libertarian types.  If that wave comes in big, it will likely mean a reduction in regulation of the mortgage markets over the next couple of years, and that would mean lower closing costs on mortgage transactions.  However, that same budgetary hawkishness is also likely to be focused on encouraging the Fed rate to rise, and if that happens, mortgage rates are going to go with it.  So a mixed bag, there.

The second piece of the rate puzzle is the bigger one, and that comes at 2:15 EDT on Wednesday, when the Fed announces its plans for the next round of quantitative easing, or QEII, described in detail here.  This one is easy to call.  If the Fed says that it’s going to buy $500 billion of treasuries starting right away, you can float all day long.  Rates will fall, and probably as much as .25%.  If, however, the Fed says it’s going to buy in the region of $300 billion over some months, you better have your lock in place.  The markets will hate that news and we’ll most likely see a large correction higher in rates.  If the Fed is in between, the markets will still move, but nobody can say how.  There is a lot of news coming out tomorrow, and absent a surprise by the Fed, that news could do its own moving of our mortgage rates.

Either way, if you’re looking at refinancing or closing on a purchase, CALL YOUR MORTGAGE PROFESSIONAL NOW.  Get ready.  Forewarned is forearmed.  Luck favors the prepared.  All that stuff.

I am often asked about title company fees and if the pricing varies from one company to another. Some title companies offer deep discounts. This is another situation where you “get what you pay for”. Horror stories are emerging regarding title companies failure to record deeds within a timely manner. And the problems do not stop there.

The title company handling the loan transaction essentially handles the legal side of the deal. Lien releases and recording of new documents are handled by the title company. Many times these duties are subcontracted out to companies that concentrate on abstracts and deed recording. In other words, ownership needs to legally be transferred from one owner to another at the courthouse. Larger title companies have in house staff that handle these activities.

Title Insurance that covers the lender is required on all new mortgages. Reissue rates are many times available but not always offered. Ask your mortgage banker or title company if they offer reissue rates. Owners title insurance policies need only be purchased one time, in most cases at time of purchase, but it is not required. This is where a highly experienced title company makes a difference. Be certain to understand your options. They may vary from to state to state.

Another major step in the process for a title company is paying off the current lien. Most mortgage transactions, purchase or refinance, require another lien involved to be paid off. The title company receives money from the new lender in which a portion of the funds are intended to pay of any liens that currently exist on a property. Title companies have been known to defraud lenders..

The title companies I work with are typically attorney owned. Is this always a necessity? No, but I always recommend it. It is especially important on purchase deals and more involved real estate transactions that stray from the normal closing. Many times the title company isn’t given the attention it should as part of the transaction. It should. Consumers have the legal right to choose their own title company but rarely exercise that opiton. Do your due diligence and research the title company that is recommended to you. It’s a good idea to ask friends and family for a referral to one they have used and were satisfied with. A title issue can come back to haunt you years after your transaction.

As always, seek high quality advice.

Shopping for interest rates can be confusing at times, especially when you hear different opinions from different experts.

The most common advice? Shop interest rates. Shop and compare the APR (annual percentage rate). Shop fees.  So which is it?

Let’s define both Interest Rate and Apr. – This comes from Wikipedia -

Interest Rate – “is the rate at which interest is paid by a borrower for the use of money that they borrower from a lender.”

APR – “is a finance charge expressed as an annual rate.”  In simple terms, it’s the cost of your credit expressed as an annual rate.

The APR rate will usually be higher than your note rate, which is your interest rate. Why is this?  Because the APR includes certain fees which are calculated into the actual rate. The problem with this is that so many people tell you to use the APR as your measuring tool when shopping with other lenders. But not every lender calculates APR the same. Each lender by law is required to send you a Truth in Lending disclosure which shows you the APR.

Keep in mind, your note rate is what is used to calculate your monthly mortgage payment, not the APR rate.

So why can comparing one lender’s APR with another be misleading or incorrect?  Because some lenders can leave some fees out that aren’t mandatory. The rules are not clearly defined.  Sound confusing?

So, what fees are included in the APR?

These fees are generally included :

• Points – both origination and discount
• Underwriting, loan processing, and document prep fees
• commitment fee
• attorney and or title closing fees
• PMI (private mortgage insurance) or MIP for FHA (Mortgage insurance premium)
• Prepaid interest – Interest that is paid from the time that you close to the end of the month. The problem here is that some lenders put 1 day or 5 days down on your good faith estimate. Even if they don’t know your closing date.

Sometimes included :

• Application fee
• Tax related service fee

Generally not included :

• Appraisal fee
• Credit report fee
• Title fee
• Recording fees

Conclusion : What is the overall function of the APR? It’s supposed to measure the ‘true cost’ of the loan. Its supposes to create fairness and a level playing field amongst other lenders. In my opinion, it’s why comparing the APR could be a negative thing.

Another issue about the APR is that it’s based on the length of that mortgage. If you are applying for a 30 year mortgage, it will be based on 365 months. Keeping in mind that the average person moves out of their house in 6.7 years and/or would refinance their mortgage in 4 to 7 years. Overall, it’s extremely rare that someone would keep that same mortgage for the full length.

My opinion? Use the TIL (Truth in Lending) disclosure as a helpful tool to ask questions as to why it might be higher or lower than another companies’ disclosure.  How would do this? By breaking down the lenders’ true costs and compare the interest rate.  I would advise learning to shop your interest rate and mortgage properly.

Photo Credit: RambergMediaImages

There are a lot of reasons to refinance a home, and a lot of reasons (probably the same number) NOT to do so.  Mortgages Unzipped has provided a good number of analyses recently, including really good ones from Evan Vanderwey and Ken Cook. This post isn’t meant to explore all of the reasons, just to offer one possible calculation for those out there that are hesitant to refinance because doing so 1) resets your mortgage to 30 years again and 2) sticks another dollop of closing costs onto the loan.  Maybe it’s because I do lending in Utah, but it seems that for many people these days, their fondest dream is not to have a mortgage at all.  That’s fine, and I encourage my clients to think that way.  That does not mean, however, that you shouldn’t refinance.

Instead of looking at your loan as a new set of requirements, look at how to fit your new loan into your current requirements.  Stay with me here.  This is going to require you to do some actual forward planning.  But it won’t hurt much, I promise.

First, figure out when you want your home paid off.  Yes, put an actual date on it.  If your 30-year mortgage closing was in October of 2009, that means that you’ll pay the loan off more or less in October of 2039.  Sound like forever?  Okay then, shorten the time.  Put that date anywhere you like.  At this point, it doesn’t matter.

Second, now that we have a date, we have to figure out what payment pays the loan off on that date.  Alternatively, we have to figure out what lump sums at what points will pay the loan off on that date.  The earlier additional funds are paid on the principal balance, the greater the impact those funds will have.  There are excellent calculators out there that can help you do this math.  For instance, on a $200,000 loan, if you want to cut your 30-year, 5% loan down to 18 years, you pay an additional $316/mo, and there you go.  You can accomplish the same thing by putting $3500 down every year in a lump, plus $5000 right at the beginning.  And so on.

NOTE: You’re thinking this is backward.  You’re thinking that what you should do is figure out how much money you can put toward your mortgage, then see how fast it will be paid off.  And of course you can do that, but I wouldn’t.  This is not how savvy people do this calculation.  They know that if they have a target to hit, they’ll move Heaven and earth to hit it.  So they set a date, then they figure out how to arrange things to make that date.  This process makes it much more likely that the plan will work.

Third, now that we have the payoff date set and the payment calculated, let’s find out if the refi gets us to that date faster, or with less cash expended.  Using the same scenario above, the current loan already has a low interest rate, and it has already been paid for 11 months.  That’s an advantage for the current loan.  However, what happens if you refinance it to the current rate, say, 4.5%?  The principal balance after one year is about $197,000.  We’re going to add $5000 in closing costs to that, making it $202,000.  Since you’re looking to pay off, not to drop your payment, we’re going to take the payment you skip (all refinances have a payment skip built in) and pay it as a principal reduction on the new loan.  That drops our principal to $200,900.  Then we have monthly payment savings of $56/mo (from reducing the interest rate).  Doesn’t sound like much.  But over time, it is the difference-maker.  If you target your 18-year payoff, as above, you can pay $30 less per month and still hit it.  If you keep the payments at the same level, the refinanced loan pays off one year sooner and saves you $10k in interest.

And that means (in this case) that you should refinance, if your goal is to get to zero in the shortest time, with the least cash expended.

Now, you can do these calculations yourself, but I wouldn’t.  Your mortgage professional – you do have one of those, right? – can do those numbers in seconds, while you’re doing what you do for a living.

If you need to lower your payment, then this calc won’t help you.  But for those that are aggressively seeking zero, as we say, this is a handy way to figure out how best to get there.

Photo Credit: RambergMediaImages