Do Mortgage Payments Increase?

Mortgage Q&A: “Do mortgage payments increase?”

While this sounds like a no-brainer question, it’s actually a little more complicated than it appears.

You see, there a number of different reasons why a mortgage payment can increase, aside from the obvious interest rate change. But let’s start with the obvious and go from there.

And yes, even if you have a fixed-rate mortgage your monthly payment can increase.

While that might sound like bad news, it’s good to know what’s coming so you can prepare accordingly.

Mortgage Payments Can Increase with Interest Rate Adjustments

  • If you have an ARM your monthly payment can go up or down
  • This is possible each time it adjusts, whether every six months or annually
  • To avoid this payment surprise, simply choose a fixed-rate mortgage instead
  • FRMs are actually pricing very close to ARMs anyway so it could be in your best interest just to stick with a 15- or 30-year fixed

Here’s the easy one. If you happen to have an adjustable-rate mortgage, your mortgage rate has the ability to adjust both up or down, as determined by the interest rate caps.

It can move up or down once it initially becomes adjustable (after the initial teaser rate period ends), periodically (every year or two times a year) and throughout the life of the loan (by a certain maximum number, such as 5% up or down).

For example, if you take out a 5/1 ARM, it’s first adjustment will take place after 60 months.

At this time, it could rise fairly significantly depending on the caps in place, which might be 1-2% higher than the start rate.

So if your ARM started at 3%, it might jump to 5% at its first adjustment.

On a $300,000 loan amount, we’re talking about a monthly payment increase of nearly $350. Ouch!

Simply put, when the interest rate on your mortgage goes up, your monthly mortgage payments increase. Pretty standard stuff here.

To avoid this potential pitfall, simply go with a fixed-rate mortgage instead of an ARM and you won’t ever have to worry about it.

Or you can refinance your home loan before your first interest rate adjustment to another ARM. Or go with a fixed-rate mortgage instead.

Or simply sell your home before the adjustable period begins. Plenty of options really.

Mortgage Payments Increase When the Interest-Only Period Ends

  • Your payment can also surge higher if you have an interest-only loan
  • At that time it becomes fully-amortizing, meaning both principal and interest payments must be made
  • It’s doubly expensive because you’ve been deferring interest for years prior to that
  • This explains why these loans are a lot less popular today and considered non-QM loans

Another common reason for mortgage payments increasing is when the interest-only period ends, an issue that was common prior to the last housing crisis.

Typically, an interest-only home loan becomes fully amortized after 10 years.

In other words, after a decade you won’t be able to make just the interest-only payment.

You will have to make principal and interest payments to ensure the loan balance is actually paid down.

And guess what – the fully amortized payment will be significantly higher than the interest-only payment, especially if you deferred principal payments for a full 10 years.

Simply put, you’ll be paying the entire beginning loan balance in 20 years instead of 30, assuming the loan term was for 30 years, because interest-only payments mean the original loan amount remains untouched.

This can result in a big monthly payment increase, forcing many borrowers to refinance their mortgages.

Just hope interest rates are favorable when this time comes or you could be in for a rude awakening.

Mortgage Payments Increase When Taxes or Insurance Go Up

  • If your mortgage has an impound account your total housing payment could go up
  • An impound account results in homeowners insurance and property taxes being paid monthly
  • If those costs rise from year to year your total payment due could also increase
  • You’ll receive an escrow analysis annually letting you know if/when this may happen

Then there’s the issue of property taxes and homeowners insurance, assuming you have an impound account.

Even if you’ve got a fixed-rate mortgage, your mortgage payment can increase if the cost of property taxes and insurance rise, and they’re included in your monthly housing payment.

And guess what, these costs do tend to go up year after year, just like everything else.

A mortgage payment is often expressed using the acronym PITI, which stands for principal, interest, taxes, and insurance.

With a fixed-rate mortgage, the principal and interest amounts won’t change throughout the life of the loan. That’s the good news.

However, there are cases when both the homeowners insurance and property taxes can increase, though this only affects your mortgage payments if they are escrowed.

Keep an eye out for an annual escrow analysis which breaks down how much money you’ve got in your account, along with the projected cost of your taxes and insurance.

It may say something like “escrow account has a shortage,” and as such, your new payment will be X to cover that deficit.

You can typically elect to begin making the higher mortgage payment to cover the shortfall, or pay a lump sum to boost your escrow account reserves so your monthly payment won’t change.

Fortunately these annual payment fluctuations will probably be minor relative to an ARM’s interest rate resetting or an interest-only period ending.

Ultimately, it’s usually quite nominal because the difference is spread out over 12 months and typically not all that large to begin with.

But it’s still good to be prepared and budget accordingly as your housing payments will likely rise over time.

The takeaway here is to consider all housing costs before determining if you should buy a home, and make sure you know how much you can afford well before beginning your property search.

You’d be surprised at how the costs can pile up once you factor in the insurance, taxes, and everyday maintenance, along with the unexpected.

At the same time, mortgage payments have the ability to go down for a number of reasons as well, so it’s not all bad news.

And remember, thanks to our friend inflation, your monthly mortgage payment might seem like a drop in the bucket a decade from now, while renters may not see such relief.

Read more: When do mortgage payments start?

Source: thetruthaboutmortgage.com

What Is a Mortgagee? Hint: It’s Not a Typo

Are You a Mortgagee or Mortgagor?

It’s mortgage Q&A time! Today’s question: “What is a mortgagee?”

No, it’s not a typo. I didn’t leave an extra “e” on the word mortgage by mistake, though it may appear that way.

Despite its striking appearance, it’s actually a completely different word, somehow, simply with the mere addition of the letter E.

Don’t ask me how or why, I don’t claim to be an expert in word origins.

Seems like a good way to confuse a lot of people though, and it has probably been successful in that department for years now.

You can blame the British English language for that, or maybe American English.

Anyway, let’s stop beating up on the English language and define the darn thing, shall we.

A “mortgagee” is the entity that originates (makes) and sometimes holds the mortgage, otherwise known as the bank or the mortgage lender.

They lend money so individuals like you and I can purchase real estate without draining our bank accounts.

It could also be your loan servicer, the entity that sends you a mortgage bill each month, and perhaps an escrow analysis each year if your loan has impounds.

The mortgagee extends financing to the “mortgagor,” who is the homeowner or borrower in the transaction.

So if you’re reading this and you aren’t a bank, you are the mortgagor. It’s as simple as that.

Another way to remember this rather confusing word jumble; Who is the mortgagee? Not me!!

Mortgagor Rhymes with Borrower, Kind Of

mortgagor

  • Here’s a handy way to remember the word mortgagor
  • It kind of rhymes with the word borrower…
  • Or even the word homeowner, which is also accurate if you hold a mortgage on your property

I was trying to think of a good association so homeowners can remember which one they are, instead of having to look it up every time they come across the word.

I believe I came up with a semi-decent, not great one. Mortgagor rhymes with borrower, kind of. Right? Not really, but they look and end similar, no?

Anyway, the real property (real estate) acts as collateral for the mortgage, and the mortgagee obtains a security interest in exchange for providing financing (a home loan) to the mortgagor.

If the mortgagor doesn’t make their mortgage payments as agreed, the mortgagee has the right to take possession of the property in question, typically through a process we’ve all at least heard of called foreclosure.

Assuming that happens, the property can eventually be sold by the mortgage lender to a third party to pay off any attached liens, or mortgages.

So if you’re still not sure, you are probably the mortgagor, also known as the homeowner with a mortgage. And your lender is the mortgagee. Yippee!

What makes this particular issue even more confusing is that it’s the other way around when it comes to related words like renters and landlords.

Yep, for some reason a landlord is known as a “lessor,” whereas the renter/tenant is known as the “lessee.” In other words, it’s the exact opposite for renters than it is for homeowners.

But I suppose it makes sense that both landlord and mortgage borrower are property owners.

What About a Mortgagee Clause?

mortgagee clause

  • An important document you may come across when dealing with homeowners insurance
  • Stipulates who the lender (mortgagee) is in the event there is damage to the subject property
  • Protects the lender’s interest if/when an insurance claim is filed
  • Since they are often the majority owner of the property

You may have also heard the term “mortgagee clause” when going through the home loan process.

It refers to a document that protects the lender’s interest in the property in the event of any damage or loss.

It contains important information about the mortgagee/lender, including name, address, etc. so the homeowners insurance company knows exactly who has ownership in the event of a claim.

Remember, while you are technically the homeowner, the bank probably still has quite a bit of exposure to your property if you put down a small down payment.

For example, if you come in with just a 3% down payment, and the bank grants you a mortgage for 97% of the home’s value, they are a lot more exposed than you are.

This is why hazard insurance is required when you take out a mortgage, to protect the lender if something bad happens to the property.

Conversely, if you buy a home with cash, as opposed to taking advantage of the low mortgage rates on offer, it’s your choice to insure it or not.

But more than likely, you’ll want insurance coverage on your property regardless.

In summary:

Mortgagee: Bank or mortgage lender
Mortgagor: Borrower/homeowner (probably you!)

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for 15 years.

Source: thetruthaboutmortgage.com

New Fannie/Freddie Refinance Option Drops Adverse Market Fee, Offers $500 Appraisal Credit

Posted on April 28th, 2021

In an effort to undo some of the damage the Federal Housing Finance Agency (FHFA) basically caused itself, it’s throwing a bone to so-called low-income families to save on their mortgage.

It all spurs from the adverse market fee the very same agency implemented back in August 2020 to contend with heightened losses related to COVID-19 forbearance and loss mitigation.

The 50-basis point fee, which went into effect on September 1st, 2020, applies to all new refinance loans backed by Fannie Mae and Freddie Mac.

While it’s not a .50% increase in mortgage rate, the fee does get passed along to consumers in the form of either higher closing costs or a slightly higher mortgage rate, perhaps an .125% increase all told.

Either way, it wasn’t well received at the time, and still isn’t today, and this announcement is a somewhat bittersweet one, as it only applies to a certain subset of the population.

Still, the FHFA believes families who are eligible for this new refinance initiative could see monthly savings between $100 and $250 on average.

Who Is Eligible for Adverse Market Fee Waiver and Appraisal Credit?

  • Applies to homeowners with incomes at or below 80% of the area median income and loan amounts at/below $300,000
  • Must result in savings of at least $50 in monthly mortgage payment, and at least a 50-basis point reduction in interest rate
  • Must currently hold an agency-backed mortgage (Fannie Mae or Freddie Mac)
  • Property must be a 1-unit single-family that is owner-occupied
  • Borrower must be current on their mortgage (no missed payments in past 6 months, 1 allowed in past 12 months)
  • Max LTV is 97%, max DTI is 65%, and minimum FICO score is 620

Perhaps the biggest eligibility factor is the borrower’s income must be at or below 80% of the area median income.

This new refinance program specifically targets what the FHFA refers to as low-income families, which director Mark Calabria said didn’t take advantage of the record low mortgage rates.

Apparently more than two million of these homeowners did not bother refinancing, even though it would have been advantageous to do so (and still is).

He noted that this new refinance option was designed to help eligible borrowers who have not already refinanced save somewhere between $1,200 and $3,000 annually on their mortgage payments.

That’s actually a requirement as well – the borrower must save at least $50 per month in mortgage payment, and their mortgage rate must be at least .50% lower.

For example, if your current mortgage rate is 4%, you’ll need a rate of at least 3.5% to qualify.

Additionally, you must currently have a home loan backed by either Fannie Mae or Freddie Mac, and your property must be owner-occupied and no more than one unit.

I assume condos/townhomes work as well, as long as it’s your primary residence.

The adverse market fee is waived as long as your income is at/below 80% of the area median AND your loan balance is at/below $300,000.

If your loan amount happens to be higher, my understanding is you can still get the $500 appraisal credit.

You’ve also got to be current on your mortgage, meaning no missed payments in past six months, and up to one missed payment in past 12 months.

Lastly, there is a maximum loan-to-value ratio of 97%, a max debt-to-income ratio of 65%, and a minimum FICO score is 620.

Most borrowers should have no issue with those requirements as they are extremely liberal.

Is This New Refinance Option a Good Deal for Homeowners?

  • It’s an excellent deal for those who haven’t refinanced their mortgages yet
  • You get a slightly lower mortgage rate and/or reduced closing costs
  • And with mortgage rates already super cheap it could be a double-win to save you some money
  • Even though who don’t qualify for this new program should check to see if a refinance could be worthwhile

As Calabria said, many higher-income homeowners probably already refinanced, or are currently refinancing their mortgages to take advantage of the low rates on offer.

Meanwhile, lots of lower income borrowers haven’t for one reason or another, perhaps because they’re not aware of the potential savings or had a bad experience with a mortgage lender in the past.

Whatever the reason, those who haven’t yet and meet the income requirement can take advantage of a refinance without the pesky adverse market fee.

That means they could get a mortgage rate maybe .125% lower than other borrowers who aren’t eligible for this program.

Additionally, they’ll get a $500 home appraisal credit from the lender, assuming the transaction doesn’t already qualify for an appraisal waiver.

Either way, eligible homeowners won’t have to pay for the appraisal, which is another plus to save on the refinance itself via lower closing costs.

It’s actually a great deal for those who haven’t refinanced yet because you might wind up with an even lower mortgage rate and reduced closing costs.

And because your new mortgage payment must be at least $50 cheaper per month, there’s less likelihood of it being a meaningless refinance.

All in all, this is good news for the so-called low-income homeowners who’ve yet to refinance, but bittersweet for everyone else.

Still, mortgage rates remain very attractive for everyone, so even if you have to pay the adverse market fee (and the appraisal fee), it could be well worth your while.

The FHFA said the new refinance option will be available to eligible borrowers beginning this summer, though it’s unclear exactly what date that is as of now.

Read more: When to a refinance a mortgage.

Source: thetruthaboutmortgage.com

HAMP Gets Extended for Another Two Years

Today, the Treasury and U.S. Department of Housing and Urban Development (HUD) announced the much anticipated extension of the Home Affordable Modification Program (HAMP).

The program, which was originally launched in March 2009, was set to come to a close on December 31, 2013, but thanks to this most recent extension it will be open to homeowners until December 31, 2015.

Of course, one has to wonder who hasn’t taken advantage of the widely available loan modification program four years after its launch, but I digress.

1.1 Million Homeowners Have Received Assistance

HAMP default

Since HAMP was launched, more than 1.1 million struggling homeowners have received a permanent modification via the program.

The median monthly savings for borrowers is $546, or 38% of the previous mortgage payment, which is supposedly larger than the median savings with private loan mods, per OCC data.

The total amount saved equates to a whopping $19.1 billion, which ain’t too shabby.

However, more than two million trial modifications were started through HAMP since its inception, meaning nearly half of borrowers couldn’t even keep up with modified payments set to a front-end debt-to-income ratio of 31%.

Additionally, the default data on HAMP loans is pretty bad. If you take a look at the chart above, you’ll see that a good chunk of HAMP loans were either 60+ or 90+ days delinquent in seemingly no time at all.

Sure, the numbers have been getting better over time, but they’re still highly elevated, and one has to wonder if the improvement is more the result of the housing market’s resurgence than anything else.

For example, 41.5% of HAMP loan mods that became permanent in the third quarter of 2009 were 90+ days delinquent after three years.

Conversely, of the HAMP loan mods that went permanent in the third quarter of 2011, just 18.8% were 90+ days delinquent after 18 months.

So the default figures are trending lower, which is a positive for the program that has failed to live up to expectations from the get-go.

Part of that could have to do with an increase in principal reductions, seeing that borrowers will be more hopeful if they actually have a chance of getting above water.

Earlier HAMP loan mods were mainly interest rate reductions and/or mortgage term extensions, both of which didn’t seem to entice homeowners facing steep home price declines.

HARP the Real Winner

refinances

Another key component of the Making Home Affordable Program is HARP, the Home Affordable Refinance Program, which was also extended until 2015 last month.

Since April 2009, about 2.4 million homeowners have benefited from a mortgage rate reduction through the program. As you can see from the graph above, HAMP holds a small share of total refinance activity.

Most HARP homeowners hold underwater mortgages, some with loan-to-value ratios well north of 125%, which was the original LTV cutoff.

This program appears to be a lot more successful, seeing that borrowers can snag today’s ultra-low mortgage rates.

Additionally, HARP borrowers must be current on their mortgages, so the success rate is clearly going to be better than HAMP.

One has to remember that HAMP borrowers must have a financial hardship, so even if they default on the HAMP loan, it’s possibly a better alternative to a short sale or foreclosure.

Still, instead of focusing on HAMP, lawmakers may want to actively pursue an extension for HARP, that is, allowing newly originated mortgages to take part, as opposed to just those sold to Fannie and Freddie before May 31, 2009. HAMP has the same eligibility cutoff.

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for 15 years.

Source: thetruthaboutmortgage.com

Don’t Be a Desperate Home Buyer

It’s no secret the housing market is hot at the moment, so much so that just about everyone is wondering when the next housing crash will take place.

The few homes that are out there are flying off the shelves, and bidding wars are becoming more and more common, if not a foregone conclusion.

Instead of home sellers delivering price reductions to prospective buyers, as they did just a couple years ago, properties are going way above asking.

While some are quick to scream “Another housing crisis!,” for me it just reinforces the housing market dynamic we’ve seen over the past year and change.

One driven by limited housing supply, low mortgage rates, and rising salaries for prospective buyers, all of which increase both home prices and purchasing power.

At the moment, it’s clear the home sellers have all the leverage, but that doesn’t mean you still can’t negotiate or get a better deal.

Sure, the past few years have been crazy – but you shouldn’t have to write a letter to the seller begging them to accept your offer.

And while it’s still easy to get caught up in all the excitement, don’t forget that you have power too as the home buyer, no matter the market conditions.

Simply put, don’t be a desperate home buyer. Or a desperate buyer of anything. If you are, you’ll likely get ripped off, or at the least pay more than you need to.

Here are some things to consider to avoid being that desperate buyer, which might lead to a lower price and better choice of property.

Buy a Home at the Right Time for You

First off, make sure it makes sense to buy a home at any given time, not just for financial reasons.

I’m not talking about timing the market – I’m talking about not rushing into homeownership unless it makes sense for YOU.

This is part personal based on your life goals, needs, etc., and partially to do with the housing market in the area where you want to live.

While we can’t all control the timing, there’s no need to rush in when we’re talking about a costly home purchase.

It’s a big deal, and as such a lot of time, thought, and preparation should go into it. Forget about what those iBuyers are attempting to do.

Once you actually know homeownership is for you, there are some seasonal patterns to consider that could provide an edge.

One tip here is that spring tends to be the worst time to buy a home because it’s a time when the most prospective buyers are active.

While there might be more listings to offset the surge in buyers, it can be in your best interest to shop for a home during fall or winter, when competition is generally lower.

You could have an easier time negotiating with the seller, snagging a price reduction, getting repair requests approved, and so on.

The mortgage process might also be smoother if your lender, loan officer, underwriter, appraiser, and escrow officer aren’t totally swamped.

In summary, less stress and potentially a lower sales price if you can exercise some patience.

Get Pre-Approved for a Mortgage Before You Shop

This is a no-brainer, and one I’ve mentioned on many occasions. Without a pre-approval letter in hand, sellers won’t take you seriously, especially in today’s hot market.

The real estate agents won’t either, knowing a mortgage isn’t a sure thing. So take the time to get pre-approved first.

In fact, look for a mortgage before you search for a house!

This will also help you narrow down your property search to ensure you only consider homes in your price range.

It’ll also let you determine if you can bid a little extra if need be, knowing you’re approved for larger loan amounts.

Tip: With bidding wars common at the moment, lower your maximum purchase price in the Redfin/Zillow apps to allow for above-asking offers.

Set Aside Cash for Down Payment and Closing Costs

One key component of a mortgage approval is cash on hand. Without it, you won’t have funds to cover the down payment and/or the closing costs.

Sure, there are lots of loan programs that require very little, such as Fannie Mae HomeReady or the FHA’s flagship 3.5% down mortgage, and even zero options from the VA or USDA.

But it helps to have money in the bank so you can present a stronger offer to the seller, and give yourself the ability to negotiate.

If I’m a seller in a hot market, I’m going to want the buyer who can put 20% down on the purchase versus the buyer scraping together just enough funds to close.

That extra cash could also come in handy if the appraisal comes in low, which is probably happening more often as the market eases and overinflated prices drift back down to earth.

[What’s the Best Mortgage for First Time Buyers?]

Always, Always Negotiate, Even in a Seller’s Market

Speaking of negotiating, do it. Always. It doesn’t matter if it’s rent, a mortgage, or you’re getting a cavity filled. Always ask for a lower price.

Most times, folks will oblige just due to human nature, even if it’s a nominal discount.

It irks me that most people are happy just to accept whatever price is thrown at them. Or whatever price the listing agent says the seller is willing to accept.

You can almost always go lower. In most cases, the seller is going to be more desperate than you, even if they’ve supposedly got multiple offers.

They likely need to sell their home because they’ve made the commitment to do so, and you don’t need to buy their particular home.

The same is true for a brand new property, even if you’re told by the home builder that prices are firm.

Of course, it depends how much demand there is for their properties; if there’s a lot, they might not budge on their price. But it’s always worth a try regardless.

There will always be other homes on the market, so keep that in mind.

Don’t Show Your Hand to Anyone

A key tactic in the negotiating department is never showing your hand. And I mean never, ever, showing it, to anyone.

This includes your own real estate agent. If they know you’re in love with a particular house, they might not fight as hard to ask for credits or a lower price.

Sure, they should and might, but if you make it appear that you’re more than happy to walk, they’ll be on the phone with the listing agent warning them that the buyer is ready to walk.

That could be enough to get the sellers to act, and give into the buyer’s demands.

Basically, whatever you express to your own agent will likely be passed along to the listing agent.

Another approach is to peruse listings without a buyer’s agent, then simply contact the listing agent directly if you come across something you like.

This could provide an edge above other bidders if you’re represented by the listing agent’s brokerage.

Just be sure they have your best interests in mind and you don’t overpay for the house.

Be Willing to Move On No Matter What

Lastly, it is perfectly okay to walk away, whether it’s at the car dealership or the negotiating table with your real estate agent.

There are plenty of houses in the sea, and while it’s easy to get hung up on one particular property, it’s amazing how we often fall in love again and again.

More often than not, if a first property falls through or you don’t win the bid, you may look back grateful that it didn’t work out.

Typically, I hear something along the lines of “I’m glad we found this house.” Not “I wish we hadn’t missed out on that other home.”

Try to remember that when shopping homes and making offers.

It’s decidedly a seller’s market at the moment, which isn’t great for those entering the market, but that doesn’t mean you can’t employ the tactics above.

While home prices might appear steep, they aren’t so bad when you consider real housing prices adjusted for inflation.

And with mortgage rates so cheap, it could be a great time to lock in an absurdly low rate for the next 30 years.

Read more: When should you start looking for a house?

Source: thetruthaboutmortgage.com

New Study Blames Cash Out Refis for Mortgage Crisis

A new study from Fed researcher Steven Laufer puts a lot of the mortgage crisis blame on cash out refinancing, which swelled in popularity as home prices increased in the early 2000s.

Of course, when home prices took a turn for the worse, many who extracted home equity paid the price by acquiring an underwater mortgage.

At this point, we all know homeowners relied on their homes as ATM machines during the housing run-up, but some of Laufer’s figures are pretty startling.

For example, when focusing on a sample of homeowners from Los Angeles, he found that nearly 40% who defaulted on their mortgages were earlier buyers who purchased their homes prior to 2004.

What’s interesting is that more than 90% of these defaulters would have had outstanding mortgage balances below their current home values had they not extracted home equity, which would have left little motivation to default.

But as we all know, scores of homeowners turned to second mortgages and home equity lines of credit to squeeze out every last drop of value in their homes, much to the delight of lenders and Wall Street investors.

As a result, even those who purchased homes at relatively cheap levels found themselves in negative equity positions, thanks to the loose lending guidelines that allowed cash out refinancing to 100% LTV or higher.

This explains why you’ll see a long-time homeowner selling their home short, even though they purchased it decades ago.

Had these homeowners not extracted home equity, many would have LTV ratios under 60%, and few would be underwater.

But these early buyers cashed out at a rate of approximately once every three years, ostensibly as home prices marched ever higher.

refi mix

Just take a look at this chart of the types of new mortgages originated during the 2000s for Laufer’s sample.

Rate and term refinances (no cash out) were popular until about 2004, at which point the product mix shifted to pretty much all cash out refinances and second mortgages.

Roughly one in 12 homeowners took out an additional mortgage or withdrew cash via refinancing each quarter from 2004 to 2007.

Late in the rally, cash out refinances became nearly non-existent because homeowners simply didn’t have the equity to extract.

Then came the rise of rate and term refinances again as borrowers looked to take advantage of the lower mortgage rates available, with many needing HARP to get the job done.

What If Homeowners Couldn’t Cash Out?

After highlighting the problem, Laufer presented a few scenarios that could have prevented some of the defaults.

If the max LTV ratio for cash out refinancing had been lowered to 80% (a rule that has been in place in Texas for years), he estimated that the amount of equity extracted would have fallen by 23%, and the default rate would have been 28% lower.

(He also presented a more extreme scenario that prohibited equity extraction entirely, which led to 80% fewer defaults among the early buyers he focused on.)

However, if homeowners were limited in their ability to tap equity to 80% LTV, home prices would also fall by an average of 14%, thanks to the reduced collateral value of housing.

This principle explains why home prices in Texas, where LTV limits are capped at 80% for cash out refinancing, aren’t nearly as extreme as the rest of the nation.

Their housing boom and bust was a lot more muted than say the booms seen in Phoenix and California, where the sky (and LTV) was the limit.

So essentially placing more stringent limits on equity extraction would take some of the speculation (investing, gambling, upside, downside) out of housing.

With less potential upside, fewer individuals would be interested in real estate, and home price movement would probably be pretty boring.

Still, Laufer noted that the welfare gain of such a restriction for new homeowners would be equivalent to 3.2% of consumption thanks to the lower prices at which they could purchase homes. In short, cheaper homes, smaller monthly mortgage payments.

But it’s a little too late to undo what’s already been done – the Fed has made the decision to prop up home prices via ultra-low mortgage rates, and there’s no turning back now.

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for 15 years.

Source: thetruthaboutmortgage.com

Watch Out for the Adjustable-Rate Mortgage Pitch

Over the past couple weeks, mortgage rates have risen roughly 1% across the board.

If you look at Wells Fargo’s mortgage rates, which I highlighted late last week due to their meteoric rise, you’ll notice the 30-year fixed is now pricing at 4.875%, up from 4% about 10 days ago.

Consider the fact that back in early May, a rate in the low 3% range was the norm for the 30-year fixed.

The 15-year fixed has climbed similarly, from 3.125% to 3.875% in about 10 days. A month earlier, it was around 2.5%. In other words, conditions aren’t good in mortgage land, to put it more than mildly.

It’s not much different for adjustable-rate mortgages either – the popular 5/1 ARM is now pricing at 3.125%, up from 2.5% a week or so ago.

Mortgage Payments on the Rise

What this all means is that mortgage payments are rising, even if you’re refinancing your existing mortgage to a much lower rate.

The payment you could have secured earlier this month will now be significantly higher, to the point where your refinance may not even make sense anymore.

[The refinance rule of thumb.]

If you’re looking to purchase a home, your purchasing power has been severely reduced. Check out my mortgage payment chart to see what you can afford based on today’s rates.

And as mortgage rates continue to rise, banks and lenders will increasingly look for ways to soften the blow, of course, without actually lowering rates.

So all those ads touting record-low fixed-rate mortgages will quickly and quietly make the switch to a 5/1 or 7/1 ARM instead.

Why? Because they know rates on ARMs will sound a lot more appealing to homeowners and prospective buyers who have been staring at rates in the 3% range for months now.

Nobody wants to hear that their interest rate is now 4.5%, or worse, somewhere in the 5% range. It’s embarrassing. What will their friends think?

It could even be enough for a prospective home buyer to have a change of heart about buying a property to begin with, especially if it requires getting into a bidding war and paying well over list.

Choose Your Mortgage Wisely

While it may be tempting to go with an ARM instead of a fixed-rate mortgage, there is a whole lot of risk, especially right now.

Everyone pretty much expects mortgage rates to keep rising over the next decade, so your ARM will most likely be more expensive in the near future, once that first adjustment date rears its ugly head.

At the same time, rates on fixed mortgages, despite their recent upward trajectory, are still pretty darn cheap. Just ask anyone over 50 what they think.

And locking in a mortgage at today’s rates isn’t a losing endeavor, it just doesn’t sound as sweet, seeing that rates were a heck of a lot cheaper just weeks ago.

But in hindsight, you might be pretty happy with a 30-year fixed in the 4% range, especially if they make their way past 5% and up in to the 6’s. It’s not unlikely over time.

So if your loan officer or mortgage broker tells you they can put you in a 5/1 or 7/1 ARM instead of a fixed product (and save you lots of money!), question their motives.

They want the loan to sound more attractive to you, and a lower rate with a lower payment will certainly accomplish that.

But don’t discount the fact that the rate will eventually rise, once the fixed period comes to an end in five or seven short years (they go by faster than you think).

Read more: How long do you plan to keep your mortgage?

(photo: Hasan Diwan)

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for 15 years.

Source: thetruthaboutmortgage.com

Bank of America Panned for Unattractive Refinance Offer

Last updated on February 2nd, 2018

Anytime someone is looking to save you money, you should probably be skeptical, really skeptical.

After all, it’s one thing to seek savings on your own, but if someone is doing the work for you, there’s a good chance they’ve got their own best interests in mind.

Yesterday, a few publications, including American Banker, grilled Bank of America for its recent refinance pitch to a New Jersey customer.

The borrower, who currently has a 20-year fixed mortgage set at a very low 4%, was offered a new 30-year fixed mortgage at a rate of 3.75%.

[How are mortgage rates calculated?]

At first glance, it sounds like a slightly better deal, though not all that significant in regard to rate.

But BofA smartly chose to highlight the mortgage payment savings of $362 of month, and $4,344 annually.

Unfortunately, if you actually bother to read the fine print, beyond the headline screaming at you to refinance, you’ll notice that the APR is 4.105%, higher than the borrower’s existing mortgage rate.

The APR is that high because Bank of America is helping itself to two mortgage points to get the deal done, and those must be factored in and presented to the borrower.

[Mortgage rate vs. APR]

Additionally, because Bank of America is recommending the borrower refinance into a 30-year loan, they effectively add 10+ years to their loan term, which will cost the borrower more money in interest as the loan amortizes that much more slowly.

In fact, the offer would add $37,188 in additional interest over the full term of the loan, which doesn’t seem to be in the large print, or any print for that matter.

The best part of the offer though, as highlighted by American Banker, was the following Q&A:

Q: “What kind of new loan will I have if I refinance?”
A: “The loan that’s right for you.”

Tip: The APR can sometimes be lower than the interest rate if it’s an ARM loan, but it’s not as attractive as it may look.

Watch Out for Mortgage Offers That Come to You

Look, at the end of the day, Bank of America is permitted to pitch deals like this to their customers, and the company was quick to point out that it disclosed everything properly.

If you focus solely on monthly mortgage payment, which is ostensibly what BofA wants you to do, there are savings of nearly $400, which could help a struggling borrower looking to minimize expenses.

Just because a homeowner will pay more over time doesn’t mean they won’t want to save in the near-term, especially if they have more pressing matters.

We also don’t know what the borrower has in mind – perhaps they don’t want to pay off their mortgage that quickly (or at all), though if they have a 20-year fixed, there’s a good chance they’re more in the “I want to pay it off” camp.

[Pay off mortgage or invest?]

But the issue here is that the bank is coming to you with an offer they’ve carefully constructed to be appealing, even if it doesn’t make a whole lot of sense, let alone save you money.

For this reason, you should always take offers that come your way with a huge grain of salt.

The individual assembling the offer has the advantage of sitting back and coming up with a scenario that will appeal to you, as opposed to a more objective process where you sit down and run the numbers yourself.

Perhaps that’s why it’s called marketing, or more specifically, inbound marketing. Targeted marketing even.

If you do receive an offer that sparks your interest, be sure to do some shopping on your own to see how it stacks up. Chances are there will be something out there that’s better, and possibly much better.

And be vigilant because as rates rise and the mortgage market slows, loan originators will become increasingly desperate to drum up new business, even if it doesn’t make all that much sense for the borrower.

Read more: 10 tips while mortgage rate shopping.

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for 15 years.

Source: thetruthaboutmortgage.com

HARP Refinance Program Extended Until 2015

As many had predicted, the popular Home Affordable Refinance Program (HARP) was extended today until December 31, 2015.

The program was set to expire at the end of the year, but apparently the FHFA isn’t satisfied with the more than two million homeowners who have already refinanced via HARP.

FHFA Acting Director Edward J. DeMarco said in a release that the program is being extended to reach more underwater homeowners so they can benefit from the lower mortgage rates currently on offer.

HARP Nationwide Campaign Coming Soon

While I don’t know if we’ll see HARP commercials on TV during the NBA playoffs, it is possible.

The FHFA plans to launch a nationwide campaign to inform homeowners about HARP, even though the program has been around for several years now.

For the record, I’ve never seen any advertisements about HARP specifically, though I have seen ads for Hope Now and other mortgage assistance programs.

And I’m sure there are scores of homeowners who are eligible for HARP, but either don’t realize it or think it’s all just a scam.

The aim of the campaign is to educate homeowners about the benefits of HARP in order to motivate them to take action. This will not only help them, but also the banks behind the loans and the economy at large.

21% of Refis Went Through HARP in January

HARP totals

The FHFA also released its latest Refinance Report on Monday, which revealed that HARP activity remains strong despite the program being four years old.

During the first month of the year, a total of 97,600 refinances were completed via HARP, accounting for roughly 21% of the 470,000 total refinances during the month.

Amazingly, HARP seems to be the only game in town in certain states. For example, 66% of all refi volume in Nevada went through HARP in January – the same was true for 56% of refis in Florida.

This is really the lone route for many homeowners in these states where home values plummeted after the housing crisis reared its ugly head, washing away all traces of home equity.

Last year, a total of 1,074,754 refinances were completed through HARP, and if January’s numbers are any indication, 2013 could be an even bigger year.

The total number of refis completed via HARP now stands at just over 2.2 million.

Additionally, many of the refis completed through HARP were for high loan-to-value (LTV) loans, those that tend to be most at risk of default.

In January, 47% of HARP refis were for LTV ratios above 105%, meaning those with no home equity could enjoy a lower mortgage rate thanks to the program.

And 25% of loans refinanced via HARP had LTV ratios greater than 125%, a godsend for the many deeply underwater homeowners out there.

Shorter Terms for HARP Borrowers

Finally, it should be noted that many HARP borrowers seem to intend to stay in their homes and weather the storm.

HARP term

In January, 18% of HARP refinances for underwater borrowers were for shorter loan terms, either 15-year fixed or 20-year fixed mortgages, as opposed to the traditional 30-year fixed.

This not only bodes well for the homeowners who elected to take the shorter terms, but also for the housing market as a whole.

Ideally, it will mean fewer foreclosures and a healthier group of homeowners, even if home prices falter over the next few years.

While this all sounds like good news, there will be those that are disappointed HARP hasn’t eased guidelines or allowed for things like “reHARPing.”

Additionally, HARP is only good for Fannie Mae and Freddie Mac borrowers – those with private-label mortgages are still out of luck.

However, a recent report from Fitch Ratings claimed that nearly half of all private-label mortgages have been modified.

So maybe most who need help are getting it, or are at least being offered assistance.

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for 15 years.

Source: thetruthaboutmortgage.com