Archive for August, 2008

And the winner is…

August 25, 2008

The Olympics are over and the medal results are final.  The U.S. finished with 110 total medals.  China finished with only 100 medals, but had 15 more golds than the U.S. (51-36).  So, which country performed better?  The U.S. with 10 more medals than China or China with 15 more golds than the U.S.?  I guess it depends on how you look at it.

I get a similar question from customers on whether to pay or not pay closing costs.  Which is better?  Well, the answer is similar to the medal count. How do you look at it? More specifically, how does the loan fit into your specific situation?  Let’s take a look at the options available in regards to closing costs.

The question of to pay or not to pay closing costs typically arises when someone looks to refinance their current home.  With a refinance, there are three options to choose.

Note that the purpose of this post revolves specifically around closing costs and not prepaids or escrow accounts.

— Option 1:   you could pay for the closing costs in cash at closing. This rarely occurs.

— Option 2:   you could increase the loan amount to cover the closing costs.  Advantages involve getting a lower rate (versus a no-closing cost loan) and no cash is needed for closing costs.  The drawback to this is over the life of the loan you will pay back more from the interest on the closing costs added to the loan amount.

— Option 3:  you could increase the interest rate on the mortgage in order to cover all of the closing costs. This loan is a ‘broker- or lender-paid closing cost’ option.  It is more commonly known as the infamous “no closing cost loan” that you hear on the radio.  In this scenario, the borrower accepts a higher-than-market interest rate to cover the closing costs. This higher rate causes the investor to pay the mortgage broker enough money to cover all of the closing costs. This means the loan does have closing costs, but they are not being directly paid by the borrower. The borrower “pays” closing costs over time through the higher interest rate. The good news is that closing costs are not paid for with cash at closing or through the loan amount. This makes the new loan amount equal to the payoff amount of the current mortgage.  The bad news, the monthly payment on the new loan will be higher than the previous two options due to the higher interest rate.

Back to the question of this post, who wins – paying closing costs or not paying closing costs?  The answer to the questions below should clear this up.

Note that these questions also apply when you purchase a home. The only difference being you can’t roll closing costs into the loan amount on a conventional loan. Some FHA loans allow rolling closing costs into the loan amount.

— How long to you plan to stay in the home?  The length of time will determine which loan is the better option in the long run. A general rule to use is the shorter you plan to stay in the home, the more you should consider not paying closing costs, and vice-versa.

— Are you open to future refinances? If the answer is yes, you could refinance with a no-closing cost option today.  When interest rates move lower, you can refinance again (either with or without closing costs) and not kick yourself for spending money on the previous refinance.

As my favorite math teacher from 7th grade always said – “clear as muddy water?” It’s like trying to decide if the America’s total medal count is better than China’s gold medal count.

And the winner is U.S.A. or China?

um, so exactly who won the Olympics?

To really understand which options is best for you, get in touch with a mortgage consultant who review your specific situation and run numbers to determine which option is best for you.  If you don’t have a reliable mortgage broker, I will be glad to give you a referral :-). By talking to a professional, you can pull the options apart and bring your refinance options into focus.

Clay Jeffreys is a Mortgage Consultant with Hillside Lending, LLC and writer for “Blog Pertaining to the Acquisition of a Mortgage to Purchase a Domicile.” Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing. For more information about available programs and interest rates, please visit www.hillsidelending.com.

Is FHA the new subprime?

August 19, 2008

I’ve joked a few times with some friends and colleagues about FHA (Government) loans being the new subprime loan. It is a joke that is now becoming all too true. Why? Most borrowers fall into the subprime category due to lower credit scores. With FHA traditionally having less stringent credit requirements and while also accepting non-traditional forms of credit, it is a natural fit.

I love statistics and now, thanks so the Mortgage Bankers Association, here are some figures to validate my too-close-to-reality joke.

-Application volume for Government loans up 133% versus 1 yr ago as demand for conventional loans dropped 50%

-30% of ALL home loans were in the FHA realm in July 2008 versus only 8% in July 2007

-The level of conventional to FHA refinance endorsements is up over 268% over the same period last year

-FHA refinance applications up 317% over the same period last year with much of the refinances coming from the subprime arena

The numbers support the increase in the popularity of FHA loans and borrowers from the subprime realm moving into these loans. Does this mean we should expect another foreclosure meltdown in a few years from FHA loans? Probably not and here are some reasons why.

First, FHA programs are fully documented loans. Borrowers must provide financial documents to prove they can afford the purchase price, down payment, and monthly payments of the home they are trying to purchase. No more no-doc loans!

Also, most FHA loans are of the fixed variety. Say goodbye to exotic adjustable rate mortgages! Borrowers know how much their monthly payments will be and the fixed payment means that figure will never change through the life of the loan.

Finally, even though there are fewer credit requirements for FHA programs, there are a few things that must be met on the credit report in order to qualify. This tends to eliminate borrowers with ridiculously low credit scores who fail to make payments on car loans, student loans, credit cards, etc.

There is one area of potential concern, and that revolves around credit history. One of the reasons for the subprime meltdown was borrowers with a bad credit history were given these riskier mortgages to buy a home – kind of like combining two combustible liquids and being surprised at an explosion. Sure enough, the bad credit history continued.

All that to say, with that “type” of borrower included in the new wave of FHA loan applicants, one could theorize it will be a problem in the long run. By no means am I saying this would not happen, but the documentation, fixed loans, and credit report requirements to qualify for an FHA loan tend to lessen the risk of history repeating itself.

This brings us to a very timely topic this year — should I apply for a conventional or FHA loan? If you are new to this blog, well, this is your lucky day!  A Blog Pertaining to the Acquisition of a Mortgage to Purchase a Domicile contains a series on that very topic — Conventional and FHA loans — that should provide some insight into the pros and cons of those loan programs.

With any mortgage decision, you should speak to a professional who can provide the insight and advice needed to ensure you get the loan program that is best for your situation.

Clay Jeffreys is a Mortgage Consultant with Hillside Lending, LLC and writer for “Blog Pertaining to the Acquisition of a Mortgage to Purchase a Domicile.”  Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing.  For more information about available programs and interest rates, please visit www.hillsidelending.com.

 

 

Conventional and FHA loans — the saga continues

August 8, 2008

Like an awful horror movie franchise that just won’t go away, here is the sixth post in the Conventional and FHA series. I thought I concluded this five part series over two months ago, but what difference two months can make!  The passing of the Housing and Recovery Act of 2008 (known as HR-3221) will bring significant changes to FHA loans.

and you thought part 3 was bad, sheesh

and you thought part 3 was bad!

— Elimination of some Down Payment Assistant (DPA) programs:  The new law eliminates all programs that allow the seller to provide the down payment for an FHA loans.  Part 4 of this series provides more details of how the seller can provide the borrower with a down payment. Moving forward, anyone with a vested interest in the purchase of the home cannot contribute to the buyer’s required minimum down payment.  Why the change?  It turns out the default rate on these programs is about 3 times higher than the default average on other FHA loan programs.   Borrowers can still receive a gift from a relative, a donation from a non-profit company, a church, etc. — just not the seller “through” a non-profit company.

— Down payment requirements:  The minimum down payment for an FHA loan will increase to 3.5%.

— Up-front Mortgage Insurance Premium Fee:  Part 2 and Part 3 of the series touched on this aspect of FHA loans.  In short, on all FHA loans with less than a 20% down payment, there is an up-front fee for mortgage insurance figured at 1.5% of the loan amount.  That fee is now increasing to 3% of the loan amount.  A $200,000 loan would create a fee of $6,000.  The up-front mortgage insurance fee is financed into the loan amount (meaning the borrower does not have to provide the $6,000 in cash at closing), but that is still an extra $6,000!

— Hope for Homeowners:  The bill provides up to $300 billion in new 30 year fixed FHA loans for “at risk” homeowners to refinance their current subprime loan into an FHA loan.  There are many, many requirements that must be met in order to qualify.  It is estimated that this measure will help a little over 300,000 home owners.  That isn’t a lot of people, but it is better than nothing!

There has been one significant change to conventional loans in regards to down payment requirements.  First 100% financing disappeared, and then 97%.  For a short amount of time, even 95% financing disappeared from Fannie Mae for declining market areas in Georgia (Freddie Mac kept 95% financing).  However, as of last week 95% financing is back with both Fannie and Freddie in Georgia. One lender we work with at Hillside Lending even has 97% financing available again.

While it is definitely not 100% financing, this could still be a significant moment.  It marks one of the first times Fannie and Freddie have loosened guidelines instead of tightening them in the past year and a half.

Back to the Housing and Recovery Bill… there are almost 800 pages to this bill. Needless to say, there is a lot of reading, interpreting, and implementing to be done. I will keep you posted as this story develops.  It seems the Conventional and FHA franchise will continue to churn out more sequels. Let’s hope they are better than Jaws 4, The Revenge!

Clay Jeffreys is a Mortgage Consultant with Hillside Lending, LLC and writer for “Blog Pertaining to the Acquisition of a Mortgage to Purchase a Domicile.” Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing. For more information about available programs and interest rates, please visit www.hillsidelending.com.

Brave new world

August 5, 2008

I must say that the ability to create a blog post on the iPhone is really neat. However, as technology evolves, I sometimes wonder when enough is enough.

With telecommuting from anywhere in the world, working from home, and information constantly at our fingertips, the lines of our professional, personal, social lives continue to be blurred.  As cool as it all is, when and where do we stop? Could a WALL·E-like existence be on the horizon?

I have no easy answer and I’m not really looking for that answer.  It is just something that crossed my mind as I try using the WordPress application on my iPhone.  I’ll get back to mortgage-related posts soon.

Clay Jeffreys is a Mortgage Consultant with Hillside Lending, LLC and writer for “Blog Pertaining to the Acquisition of a Mortgage to Purchase a Domicile.” Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing. For more information about available programs and interest rates, please visit www.hillsidelending.com.