Mortgage Market Commentary

Refinance or pay extra on mortgage?

2010-12-14T11:42:00.000-08:00

By Don Taylor, Ph.D., CFA, CFP • Bankrate.com

Dear Dr. Don,

I bought my apartment in Brooklyn in 2003 with a 30-year fixed mortgage rate of 5.25 percent on approximately $310,000 with monthly payments of about $1,705. I would like to own my home outright in 15 years, and I am therefore considering refinancing. I think a new 15-year mortgage would add about $350 per month to my payments. I am reasonably sure I can afford an extra payment of about $350 per month. But is it worth it, or should I just pay an extra $350 a month to the current mortgage?
-- James Juxtaposer

Dear James,
Seven years in on a 30-year fixed-rate mortgage, you're right to consider shortening the term of the loan when refinancing. The table below estimates your existing loan balance, and shows the difference between refinancing and just making additional principal payments on the existing loan. You can use Bankrate's amortization schedule calculator to tighten up these numbers to reflect your exact situation.

The estimated after-tax expense assumes that you can fully utilize the mortgage interest deduction on your taxes and estimates a federal marginal income tax rate of 25 percent.

Refinancing vs. additional principal payment
Existing
mortgage Existing mortgage
with additional
principal payments Refinance
15-year fixed Difference

Loan balance: 274,000.00 274,000.00 274,000.00
Interest rate: 5.25% 5.25% 4.25%
Loan term (months): 276 200 180
Monthly payment: 1,711.84 2,408.50 2,061.24 349.40
Total interest expense (pretax): 198,469.17 137,202.33 97,023.71 (101,445.45)
Estimated after-tax expense (25 percent): 148,851.87 102,901.75 72,767.78 (76,084.09)

The advantage of making additional principal payments is that you don't have to pay closing costs on a refinancing. The advantage of refinancing is that you've locked in a mortgage interest rate about 1 percent below your current rate. For the 15-year fixed-rate mortgage, I used 4.25 percent in the table above because it came the closest to the $350 difference in payments you mentioned in your letter.

If you're planning on staying in the apartment long term, then refinancing is the way to go. You sound a little unsure about your ability to make the increased monthly mortgage payment. If that's true, then consider refinancing into a 20-year mortgage instead of the 15-year and then make additional principal payments on that mortgage. The monthly payment will be about what you're paying now. That way you've captured the lower rate in refinancing, you haven't extended out past your existing mortgage and you can make additional principal payments when there's room in your monthly budget.

Don't Shop for a Loan, Shop for a Loan Officer

2009-04-29T15:32:00.000-07:00

Below is a good article about choosing a mortgage based on the quality of your loan officer not just based on the terms of the loan:

I have said this before and I will say it again…There are no magic lenders, no magic loans & no magic rates!

Everyone wants to get the best available deal they can. Folks always have and they always will. In the hey day of mortgage lending back in 2003 or so loans became a commodity. If you had a pulse you could essentially get a loan…
Those days are over but many folks still shop for loans as if getting the loans was as easy as it was back in 2003. Obtaining financing is more complicated than it was just 12 months ago. When looking for a loan it is more important to work with a loan officer that can help you navigate the ever changing guidelines and obstacles that seem to be popping up every day. If you don’t choose a lender that understands the changes and how to work through the different obstacles…it will cost you in the end.
A good loan officer will give you a good deal regardless how the loan has to be structured. We all have access to the same sources of funds and essentially the same pricing. What a loan officer is willing to work for will vary, but is won’t vary based on your loan structure. Decide on who to work with rather than a loan.

P.S. If another lender happens to offer a program that they don’t have access to and it’s in your best interest…They will be happy to help you get that loan. Just read Justin’s blog. He had to deal with a very difficult situation and his ultimate goal is to help his client get the loan they want. In this market it’s not as easy as it once was….Even worse is sometimes it looks good on paper and you face hurdles in underwriting. I have never spoke to Justin before…but based on that blog I have no doubt he is the type of loan officer you should be looking to hire…I know it’s the type of loan officer I would hire.

Quotes & Locks

2009-04-29T15:29:00.000-07:00

A quote is a quote.

A lock is a lock.

What Is The Difference Between A Quote And A Lock?

That is perhaps the most important question you need to know the answer to before submitting your information for your free mortgage quote at the Mortgage Marketplace. A quote is nothing more than a loan officer saying “if you were to lock right this second, this is what your scenario would look like”. A lock means that the loan officer can actually deliver the proposed scenario because the interest rate has been “locked” with the lender for a set period of time.

How Long Is This Quote Good For?

When you get a quote from one of the lenders at ZMM, how long is the quote good for? It depends. It might be good for days - or it might be good for 15 seconds after the loan officer submitted his quote. It all depends on the market, but it is important to realize that many times rates change multiple times per day.
This means that if you are looking at a quote from a lender that is 3 days old… it may or may not still be relevant and accurate.
Which is why one of the first questions you should ask your potential loan officer “when can I actually lock my rate?”

When Can You Lock?

Each lender has different lock policies, which is why you want to ask the loan officer up front. Some lenders let you lock for free, others charge a fee. Some lenders let you lock at time of phone application, some require that your signature be on the initial disclosure packet.
When the lender lets you lock in the process is not near as important as it is that you are just aware of when you can actually lock. Being aware gives you the power, whereas not knowing leaves more of an opening to chance something out of your control and bad happening.

When Is The Best Time To Lock?

The best time to lock is ________________. Insert whatever you want there. Once you have your application in, chances are that your loan officer will advise you whether to lock or “float” your rate. Regardless of whether you choose to float or lock, be aware that just about every expert I know is wrong about 50% of the time.
The most important thing to recognize is that by asking the question of “when can I lock?” you will increase the chances of your expectations being aligned with reality rather than wondering why your quote says 4.5% from 5 days ago and your loan officer now wants to lock you in at 5.25% because he says that “rates moved”.

Revealing Story

2009-04-16T14:00:00.000-07:00

Came across this story and thought it gives really good insight into dealing with the FHA. Title agents and attorneys will really feel this guys pain:

http://activerain.com/blogsview/23661/Title-Insurance-God-Lawyers

Buying Real Estate with IRAs

2009-04-09T12:39:00.000-07:00

Buying Real Estate with IRAs
A good starting point for those who are thinking of buying investment properties with their IRAs:

http://www.marketwatch.com/news/story/six-reasons-buy-real-estate/story.aspx?guid=%7bD93040B6-317B-4103-9E84-2D90CAC3B8A4%7d&siteid=yahoomy#comments

From the article:
Here are six reasons why buying real estate with an IRA is a potentially lucrative and wise move today:

1. A solid alternative to stocks
2. An investment well-suited for long-term investors
3. Purchasing a significantly undervalued asset
4. A steady income generator
5. A safer means to play the stock market
6. The ability to flip real estate with no tax bite

Purchasing a significantly-undervalued asset is not easy. There are many investors in the market currently, and the lower-end properties are selling fast and furious.

This year there have been 41 houses sold that were listed under $200,000, and the SP:LP ratio is 100.16%.

For those who click on the link to the article, also check the comments section below it - heated debates on both sides, with a number of people saying it is the worst thing you could do. We’ve mentioned here below the perils of maintaining the properties, and managing the tenants. Proceed with caution.

95% Conventional is Back...for now.

2009-04-06T13:49:00.000-07:00

As it stands, we are able to offer 95% MI Coverage with minimum 700cs, maximum 41% DTI through MGIC and RMIC. This is available starting Monday, April 6th. Please beware that this is subject to change if the MI companies conform to other companies who have already reduced this to 90%. The MI certs are not guaranteed so make sure the file is strong and has good compensating factors. Plus, the MI companies might require a 2nd underwrite by their underwriters depending on the comfort level of the file.

Mortgage Rate Update for Holy Week

2009-04-06T12:51:00.000-07:00

So far this morning, MBS are slightly higher but not enough to encourage lower mortgage rates. Early reports from fellow mortgage professionals are showing par rates between 4.625% and 4.875% for well qualified consumers. To get a par rate on your mortgage you must have credit scores over 740, fully document your income and pay all closing costs associated with your mortgage including 1 point loan origination.

Great Waco Picture

2009-03-29T18:40:00.001-07:00

I thought this was a great picture of Waco. I really love what is going on downtown and I am excited to see a potential hub of commerce and culture emerging in a long overlooked area.

52 Year Low- Time to Move

2009-03-27T10:04:00.000-07:00

Mortgage rates hit a 52 year low according to CNN Money (http://money.cnn.com/2009/03/26/real_estate/mortgage_rates/index.htm). If you have not already looked into refinancing, now might be the time to do it. I just locked-in a rate on my own home and went from a 30 year note to a 15 year, with little to no increase in my monthly payment. This move will save me over $50,000 in interest over the life of my loan. Saving money is good!

Fed Move

2009-03-20T10:09:00.001-07:00

Thanks to a Fed announcement (see below) which exceeded all expectations, it was a big week for mortgage markets. Mortgage rates ended the week down significantly, falling near the lows reached in January. The stock market and Treasury market also performed well during the week.
Following Wednesday's meeting, the Fed shocked investors with an aggressive expansion of its mortgage-backed securities (MBS) purchase program. In addition to the previously announced $500 billion in MBS purchases which began in January, the Fed will buy an additional $750 billion this year, bringing the total to $1.25 trillion. To put this in perspective, $1.25 trillion represents more than half of the estimated total mortgage issuance in 2009. Similar to its November announcement about the initial $500 billion MBS purchase program, the Fed achieved its desired reaction with an immediate decline in MBS yields. Since mortgage rates are largely based on MBS yields, mortgage rates moved lower as well. The Fed has identified the stabilization of the financial system and the housing market as key elements of an economic recovery, and lower interest rates will help achieve these goals. Inflation data released during the week contained no reason for inflation to be a concern in the short-term. With yet another increase in government spending, though, investors will be keeping an eye out for signs of higher future inflation.

Mortgage rates sink; likely to fall further

2009-03-19T08:49:00.000-07:00

Freddie Mac survey shows mortgage rates near record low, expected to fall more
Thursday March 19, 2009, 10:37 am EDT

WASHINGTON (AP) -- Rates on 30-year mortgages plunged this week to the lowest level since January, and are poised to fall further after the Federal Reserve launched a new effort to prop up the flailing housing market. Mortgage finance giant Freddie Mac said Thursday that average rates on 30-year fixed-rate mortgages dropped to 4.98 percent this week.
That was down from 5.03 percent last week. It was the lowest since the week of Jan. 15, when it was at 4.96 percent. The rate quotes included in Freddie Mac's survey were taken before the Fed said Wednesday it will pump $1.2 trillion into the economy in an effort to lower rates on mortgages and other and loosen credit. That is expected to drive mortgage rates down further.

Mortgage Insurance Changing Conforming Guidelines

2009-03-15T19:22:00.000-07:00

Effective March 15th, Mortgage Insurance Companies have made the following guideline changes to conforming mortgages:

Max LTV 90%
417k Max Loan Amt
Minimum Fico- 720
41% Max DTI
Primary Residence only
Loan type- Purchase only
Number of Units- 1

I will keep you posted with how these changes will effect borrowers.

First Time Homebuyers Tax Credit

2009-03-11T09:16:00.000-07:00

$8,000 Home Buyer Tax Credit at a Glance:

The tax credit is for first-time home buyers only.
The tax credit does not have to be repaid.
The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $8,000.
The credit is available for homes purchased on or after January 1, 2009 and before December 1, 2009.
Single taxpayers with incomes up to $75,000 and married couples with incomes up to $150,000 qualify for the full tax credit.

www.FederalHousingTaxCredit.com

End of the Week Recap on Interest Rates

2009-03-01T12:38:00.000-08:00

Friday 2/27… End of Week Recap
Today turned out to be another rather boring trading day for mortgage backed securities. We opened to the plus side but throughout the day we gave back all the gains and closed down just a couple ticks. There was a big turn around in treasuries which put pressure on mbs to move lower. For the week, mortgage rates increased by about .125% to .25% in rate. The best rates of the week where seen on Monday and Tuesday with rates moving slowly higher the rest of the week. The main cause of treasuries moving lower in price and higher in yield is the upcoming government spending. The only way for the government to come up with the money for the huge budget introduced by President Obama, and for the huge stimulus/spending bill is to sell treasuries. With the record amount of new treasuries available to investors, it is driving the price of the treasuries lower which increases the yield or rate of return that the investor earns. With treasuries paying a higher yield it is attracting more buyers away from mbs and into treasuries. Thus, when treasuries have been selling off they have been taking mbs with them to higher yields.

Attention Realtors: Reassure Worried Buyers...

2009-02-25T11:16:00.000-08:00

Job Loss Insurance for your buyer. "If you lose your job, You won't lose your home!" This insurance product will cover up to six months worth of a buyers mortgage payment in the event of a sudden job loss. MHBC is all about getting a prospective buyer off the fence so you can get him or her a mortgage. MHBC is designed to give potential buyers a sense of peace as the worries of losing their job is taken care of by the Involuntary Job-Loss Insurance. Give me a call if you would like more information...

Tax Credit for First Time Homebuyers

2009-02-25T09:55:00.000-08:00

Treasury Department Touts Expanded Tax Credit for First-Time Homebuyers
Credit Offers Up to $8,000 to Qualifying Taxpayers Now
Latest Move in Swift Implementation of Administration's Recovery, Stability, Affordability Plans

Washington, DC – In an ongoing effort to deliver on swift implementation of the Obama Administration's recovery, stability and affordability plans, the U.S. Department of the Treasury touted today the availability of an expanded tax break for first-time homebuyers – a provision under the American Recovery and Reinvestment Act of 2009 that will make up to $8,000 available now to qualifying taxpayers who buy homes this year.
First-time home buyers represent a significant portion of existing single-family home sales. In 2008, nearly one out of every two homebuyers were buying for the first time, and the expansion in the first-time homebuyer credit will make it easier for first-time home buyers to enter the housing market this year.

"The expansion of the first-time home buyer tax break as part of the President's recovery agenda gives money to taxpayers when they need it most, while also targeting an important group of buyers," said Treasury Secretary Tim Geithner. "We view our economic recovery plan, our financial stability plan and now this homeowner affordability plan as three legs of the same stool – an integrated whole that represents our immediate response to the current crisis. We remain committed to swift, efficient and effective implementation of all of these components."
The announcement comes on the heels of the first Recovery Plan Implementation meeting led by Vice President Joe Biden at the White House this morning; Secretary Geithner was among several Cabinet secretaries to attend and offer updates on implementation efforts in progress at Treasury and its bureaus. Vice President Biden is overseeing the Administration's implementation of the Recovery Act's provisions.

The Internal Revenue Service (IRS) has posted on IRS.gov a revised version of Form 5405, First-Time Homebuyer Credit to incorporate provisions from the American Recovery and Reinvestment Act. Under the new law, qualifying taxpayers who buy a home this year before December 1 can claim up to $8,000, or $4,000 for married individuals filing separately, on either their 2008 or 2009 tax returns. Unlike the prior first-time homebuyer credit, this is money individuals do not need to pay back.

Obama's Response

2009-02-25T09:17:00.000-08:00

Before President Obama takes center stage tonight....Let's recap the objectives of the Homeowner Affordability and Stability Plan and provide some clarity on what we are waiting for...The key components...Affordability: Provide Access to Low-Cost Refinancing for Responsible Homeowners Suffering From Falling Home Prices Enabling Up to 4 to 5 Million Responsible Homeowners to Refinance
"The Obama Administration is announcing a new program that will help as many as 4 to 5 million RESPONSIBLE homeowners who took out conforming loans owned or guaranteed by Fannie Mae or Freddie Mac to refinance through those two institutions." This initiative is focused on adding disposable income to a very specific group of consumers...those who have proven their ability to remain responsible borrowers during the downturn and are able to qualify for a government issued mortgage (as determined by AUS). These are the consumers who will be ABLE to SPEND the additional money...these consumers have been targeted to stimulate the economy. A few challenges need to be addressed if this objective is to be successful. The most obvious is that home values have fallen and loan to value ratios have increased. This adds significant impediments for borrowers whose LTV has increased to over 80%. As widely discussed by our reader community mortgage insurance has become difficult if not impossible to obtain. In order for this program to properly persuade borrowers to refinance their current loan, Mortgage Insurance needs to be LESS EXPENSIVE and MORE AVAILABLE. When further details arise we expect to hear about some form of PMI waiver or Mortgage Insurer Guarantee Program that will assist in government efforts to lower the cost of mortgage borrowing. Another hindrance (less than MI) is the increasing upfront delivery fees and LLPAs charged by the GSEs. These fees have increased over the past year and add to the cost of borrowing for refinancers. Unfortunately there wasn't any attention paid to this problem in the Executive Summary released by the White House...so any changes to these fees would be a surprise...if anything the GSEs may do this on their own via better direct pricing and increased investor incentives. There has also been much debate surrounding the "appraisal waiver" issue to allow underwater borrowers to avoid GSE LTV restrictions. Again there wasn't any consideration given to this topic in the Executive Summary so any statement on the subject would be a surprise. Do you think appraisal waiver's exemplify responsible lending?
For MBS this implies accounts will move their positions down in coupon. REMEMBER: TO INCREASE DISPOSABLE INCOME THE GOVERNMENT WANTS MORTGAGE RATES TO BE LOWER so borrowers who can AFFORD to refinance WILL REFINANCE. A steady government bid in the short end of the stack will allow lenders to price mortgage loans at lower rates. The "up in coupon" profit takers strategy therefore goes into a holding pattern...but don't rule that trading tactic out of the question for future MBS positions. MBS market participants are skeptical of the speed and order that a "it that shall not be named" will occur..this doubt opens the door for further MBS risk taking. Until borrowers start refinancing this trade will remain a viable option...the extent to which it is utilized depends on the details offered up by the Obama Administration. In order for the recent "up in coupon" strategy to be eliminated the details offered up have to convince the MBS market that prepayment behavior will be consistent. Then borrowers have to start "pulling the trigger".
Supporting Low Mortgage Rates By Strengthening Confidence in Fannie Mae and Freddie Mac
Ensuring Strength and Security of the Mortgage Market
"Using funds already authorized in 2008 by Congress for this purpose, the Treasury Department is increasing its funding commitment to Fannie Mae and Freddie Mac to ensure the strength and security of the mortgage market and to help maintain mortgage affordability"
This plan outlays an additional $200bn for the Treasury to increasing its Preferred Stock Purchase Agreements with the GSEs. After the GSEs were placed into conservatorship investors lost confidence in Fannie Mae and Freddie Mac. The additional funds being laid out for the GSEs will help to restore confidence and ease the credit premiums that are presently baked into MBS coupons and GSE debt issuances (extra yield demanded to account for perceived weakness of GSE balance sheets).
It was also announced that Fannie and Freddie's portfolios would be allowed to grow to $900bn each....which is a $50bn increase in size. This isn't a big MBS positive but it is constructive. The more important feature of the proposed plan was that the Treasury Department pledged their continued participation in the Agency MBS market. This add funds to the demand side of the MBS market and fosters low mortgage rates.
Stability: Create A $75 Billion Homeowner Stability Initiative to Reach Up to 3 to 4 Million At-Risk Homeowners
Helping Hard-Pressed Homeowners Stay in their Homes
"This initiative is intended to reach millions of RESPONSIBLE homeowners who are struggling to afford their mortgage payments because of the current recession, yet cannot sell their homes because prices have fallen so significantly"
This part of the plan targets borrowers who are struggling to make their monthly payment, servicers who are losing cash flow on every missed payment, and lenders who have been burned by a multitude of side effects. The most obvious benefit of this initiative relates directly to housing supply. Plain and Simple we need housing to hit bottom...until homeowners relocate their moral responsibility to make their mortgage payment (many simply don't care, they prefer to go into foreclosure) the housing downturn will be prolonged and bank balance sheets will continue to be muddled by non-marketable securities. The glaring objective of this portion of the plan is to limit deliberate defaults and increase EVERYONE'S incentive to modify mortgages. Unfortunately this program will most likely not add production to individual loan officer's pipeline...we however await the guidelines of the loan mod program. FDIC/Indy Mac model will be used as foundation for regs.
So the BIG question (mystery) is....HOW MANY BORROWERS WILL THIS PROGRAM HELP?????
This is where the UNKNOWNS arise.
We know some of the guidelines already...more details to come March 4 (and maybe tonight?) The program applies to borrowers whose LTV is between 80% and 105%. Borrowers will have to meet DTI requirements and the plan will only benefits BORROWERS WHOSE LOAN IS GUARANTEED BY FANNIE AND FREDDIE. (There are a few more too)
When further considering WHO/HOW MANY this program will benefit one must also account for the appreciation of home values. Equity will be determined by when you bought your home....anyone who bought a home/refinanced in 2003, 2004, 2005 should have SOME equity in their home...the borrowers who bought/refinanced in 2006/2007/2008 will most likely fall into the 80% to 105% category and some will fall into the +105% territory.