Darwin's Finance » Mortgage

Mortgage Rates Dip Below Key 5% Level – How to Get Yours Even Lower

Darwin — Fri, 12 Feb 2010 12:56:51 +0000

Mortgage rates dipped below the key 5% level for 30 year fixed rate mortgages again this week. While many had predicted that rates would rise by mid-2010, it’s looking as though they may stay low at least through the year. The government intervention and reluctance to raise rates given a near 10% unemployment rate has suppressed rates to historically low levels.

How to Beat the Average Rate

A year ago, the benchmark rate was at 5.2% and the record low from December is 4.7%. I had locked into a 4.625% conventional 30 year mortgage with no points in 2009. How? I had the credit score. The key is having a top credit score in order to beat the averages cited above. There’s only one score that counts – the FICO score and there’s only 1 way to get it free (Details HERE). Other scores by other companies aren’t shared cross-company and are useless otherwise, and to pay for them is a complete waste.

No Money Down Loans in 2010?

The new homebuyer tax credit allows first time buyers to realize the $8,000 credit up through a binding contract date of May 1, 2010. Aside from attempting to beat the mortgage averages by having a great credit score, you can actually still get a no money down mortgage. Amazing, right? Well, under an obscure government program, the USDA Farm Loan program allows many people in relatively typical neighborhoods to apply. It was formed under the guise of “rural lending” but many of the suburbs that are eligible are anything but.

40 year Term Mortgage Loans?

If you have the money for a down payment but the monthly payments are going to be tight, there are 40 year mortgages and even longer terms like 50 and 60 year if you can believe it. The longer terms probably aren’t right for most people, especially if paying a higher interest rate, but if the plan is to move or it’s the only way to pull off a payment, perhaps it makes sense.

How to Choose Between Mortgage Options?

I had developed a Net Present Value model for just this situation and I share with spreadsheet with anyone who asks. Check it out since you may have to choose between a better rate or lower points and want to confirm which is the better option in present dollars.

If you’ve already locked into a mortgage rate and these lower rates are enticing, you may be thinking whether to break your mortgage lock. Many people do it and the article within outlines pros and cons.

USDA Home Loan Program – The 0% Down Bonanza You’ve Never Heard About

Darwin — Tue, 24 Nov 2009 03:18:09 +0000

The USDA loan program is offering, and has been for years, home loans at incredible terms even following the housing collapse, under the edict of rural lending (farm loans) given the challenges faced in finding a mortgage loan or deriving high income in sparsely populated areas. The surprise is – many of the zip codes enjoying the benefits of the USDA rural development program are in relatively typical suburbs of major cities.

Incredible Benefits of the USDA Rural Loan Program

The only actual NO Money Down Loan you can get anymore
NO PMI
No Loan Amount Limits
No Assets needed to qualify

How does the USDA Farm Loan Program Work?

All mortgages are conventional 30-year fixed rate mortgages
Both new and existing home purchases are eligible
Credit Score of 580 is needed (see the ONLY way to get a Free Credit Score)
The income limits for the Guaranteed Loan Program vary by state

Here’s the amazing bonus opportunity – if you’re eligible for the home buyer tax credit, you can actually MAKE money on your home purchase, right? If you keep your transaction costs down and pick up say, a $6,500 tax credit, this can actually be a money maker right from the start! Think about it – 0% down, a few grand in moving/closing fees matched with several thousand back on a tax credit. It’s a pretty incredible deal.

While the program is supposed to be geared toward low income families, some of the state limits I found during a cursory search showed pretty high limits, especially for a large family.

While some will inevitably question whether this loan program is another bubble waiting to burst due to the preponderance of no down payment loans going into default now, USDA officials have argued that their program is much less prone to speculative buying and their underwriting criteria are much more strict than the Wall-Street model of buying and selling loans from anyone willing to sign on the dotted line regardless of assets, income or liabilities.

Does this sound too good to be true? Normally, when it does, it is. However, in this case, if your family qualifies, it’s the real deal. Thousands of Americans are qualifying and the government’s endorsing it, so if you’re lucky enough to qualify, you might as well take advantage of the USDA Farm Loan Program.

If you don’t qualify, you can always check out a 40 year loan for a lower monthly payment than a 30 year conventional or check the refi/mortgage info page for more on how to find the best mortgage rate, avoiding the lender traps and how to perform your own NPV to confirm you’re going with the best deal.

40 Year Mortgages – And 50 & 60 Year Mortgages While We’re at it

Darwin — Thu, 28 May 2009 04:57:07 +0000

I’ve been seeing more ads lately for 40 year mortgage loans and once my curiosity was piqued, I also found that there are 50 year and 60 year mortgage loans out there. On one hand, I found this to be rather unorthodox and novel since you never hear about “40 year mortgage rates breaking new records”, etc. in the press – it’s always the 30 year conventional loan followed by the 15 year conventional. Conversely, the notion that these new longer duration mortgages would start to flourish in this environment is logical upon further consideration. Where there’s a will, there’s a way. Let me explain:

With the current underwriting scrutiny and backlash over the ridiculous lending practices that led to the recent housing bubble, it’s not as easy to qualify for a mortgage as it used to be. Now, you have to demonstrate the ability to pay your mortgage with actual income (what a concept!). For many people, even at today’s lower home prices, they can’t afford the payments on a conventional 30-year mortgage. While Interest-Only Adjustable Rate Mortgages are an option, with rates this low, I’d be remiss to lock into a record low rate now with the assumption that it isn’t going to jump substantially when the Fed eventually has to raise interest rates significantly in order to stave off inflation, taking mortgage rates with it (indirect correlation, not a direct relationship; these resets are based on LIBOR). Therefore, lenders and prospective homeowners alike are rushing to fill a vacuum. The vacuum is created by the removal of the old risky loans with the insertion of new longer duration, “more easily affordable” 40 year, 50 year and even 60 year mortgage loans. As outrageous as these longer term loans sound, let’s investigate the pros/cons a bit more – who said a 30 year mortgage was right? That sounds long to me as well. It also seems short to me given life expectancy in the US. It’s all a matter of perspective.

Benefits of a 40 year, 50 year or 60 year mortgage:

Longer duration = Lower Payment – Similar to the difference between the common 30 year and 15 year conventional mortgages, by extending your mortgage term out, your monthly payment drops accordingly.
Flexibility - While you may start with a 40 year mortgage, you could easily turn that into a 30 or even less by employing any of the common ways to reduce your mortgage term like making bi-weekly payments, making one extra payment per year, etc. The rationale here would be to start off early with a lower payment based on your ability to pay and as your income grows while the mortgage payment remains roughly fixed (nominal increases for tax and homeowners annually), it would be easier to make the additional payments in the future or flat out refi into say, a 15 year down the road.
More House for your Money - While this is the mindset that got so many Americans into trouble to begin with, let’s face it, we want what other people have. You see the neighbor down the road who doesn’t make as much money but has the new car and bigger home. You have a family member you’re jealous of because they have more “stuff”. People want to push the limit of what they can afford, and often exceed that limit with our various generous debt instruments. As such, a 40, 50 or 60 year mortgage allows one to have much more house than they’d normally be able to afford in a conventional 30 year mortgage.
Example 40 Year Mortgage Calculator - If you have a $300,000 loan with a conventional 30 year mortgage vs. a 40 year mortgage, even though you’ll pay say, .25% higher in the 40 year mortgage, your monthly payments will be about $100 less per month. That doesn’t seem like much, but this might put you either in or out of your debt/income ratio to afford the house of your dreams. Use Quicken Loans to see what lenders in your area are willing to offer you on various mortgage terms. I began my search for the best refi deal on the internet in similar fashion – comparison shopping!

Risks of a 40 year, 50 year or 60 year mortgage:

40 year mortgage rates are higher than conventional 30 year rates. It’s worse for 50 and 60 year mortgages. This is logical, as you’ve probably noticed that 15 year rates are lower than the 30.
You’ll Likely Never Own your Home – Let’s be realistic here on the 60 year mortgage especially. Since it’s unrealistic to start a mortgage until in 20s and life expectancy is 78 (according to wikipedia, we’re #45 in the World – pretty bad for a “superpower”), for those extending the full term, they may never live to see the day they own their home outright. Consider it renting, but with a minimal tax deduction in the tail end years. Put another way, you’ll build equity in your home at a much slower rate due to the way mortgage loan amortization works – primarily interest up front and slow equity build which eventually translates into a higher equity build and lower interest payments at the tail end of a loan, which for 40 year mortgages and beyond, is very much further out than conventional options.
Much More Interest Paid Over Time - This is true. You’ll pay what appears to be a huge number more in interest over time. However, I think the “interest over time” argument is often over-hyped, especially by these outfits advocating for you to save all this money by pre-paying your mortgage (see this criticism of UFirst Financial’s Money Merge Account). What it really comes down to is Net Present Value. There’s a current value of money and a future value of money. Once you understand what your cost of cash is and what your interest rate is, the spread is what you’re paying out of pocket across a day, a year, or 40 years. It’s all about NPV (see this NPV explanation and model with respect to determining your optimal mortgage to select).

My Take on 40 Year Mortgage Loans and beyond

I have mixed feelings on these longer duration mortgages. While I think the 50 and 60 year mortgages are pushing lunacy, the 40 year mortgage loan may not be the worst investment for a 20-something looking to get started and maintain a cash cushion with the extra money they’re saving each month. I know people are going to attack me for saying it, but is it really any different than people starting out with an Interest-Only loan and then refinancing into a conventional 30 year mortgage at some point in the future? After all, in the early part of the loan, you’re barely paying down any equity anyway. In this case, at least the 40 year mortgage loan involves some equity paydown early on right? Like I said below, various options present themselves to this homeowner. Five years into the loan, perhaps due to a changed financial situation, the homeowner can now either start making a few voluntary payments along the way to bring it down to a 25 or 3o, or they could simply refinance into a new loan later (assuming rates are attractive).

Conversely, my vacuum argument holds that while there may be 10% of the population who utilize the loan in a prudent manner in which I outlined above, we’ll have another 90% of the population who rely on 50 and 60 year loans to fund real estate that they couldn’t afford. What’s next, rather than the sub-prime meltdown, we’re going to have the 50-year loan meltdown bailout?

An argument I won’t use: Businesses enter into 99 year leases all the time in the likes of Singapore, Dubai, etc. If you can’t own the land, you enter into a lease that’s practically long enough that the business will be completely morphed by the time the lease is up. Whoever signed that initial lease deal will be gone anyway, right? Let’s not confuse a business deal like this with the place you have to live and possibly rely on as part of your nest egg.

What Would You Tell Someone Looking to Get Into a 40 Year Mortgage or Longer?

Is it Ethical to Re-Lock your Mortgage Deal when Rates Drop?

Darwin — Mon, 23 Mar 2009 03:17:14 +0000

With mortgage rates hitting record lows last week following the news that the Fed would buy up to $300 Billion in Treasury securities on the open market, there was a mad rush to lock in the best rates and inevitably, there was a fair amount of “mortgage envy” on behalf of borrowers who had recently locked. If you just locked in a rate at 5.0% earlier in the month and your neighbor’s getting 4.75% for the same closing costs for a similar mortgage (and you have similar creditworthiness), that raises an ethical and financial question:

If You Already Locked in a Rate with a Mortgage Broker, is it Unfair or Unethical to Seek to Re-Lock or start comparing mortgage rates again?

Argument Against: On one hand, you made a deal, right? After you locked, how would you feel if because rates went up noticeably, your lender called up and said they needed to raise the rate on your due to market movements? You’d be furious, right? What was the point of locking? After perhaps a nominal fee to lock your mortgage rate and start the approval process, there are tons of man-hours that go into assessing your financial statements, credit reports, income verification, etc. They run a risk each time they start this process since the deal isn’t closed until closing itself and in theory, you could walk – so they’re going on faith that you’re going to honor an agreement you made to go through this the deal.

Argument For: On the other hand, are consumers supposed to put aside a 30 year savings totalling perhaps tens of thousands of dollars over a commitment they made to someone or some company they don’t have any actual connection with? Would the person on the other end do it for them? Heck, people are walking away from their homes altogether because they’re underwater; this would pale in comparison. In this day and age, you hear more and more often, “You have to look out for yourself”. The Net Present Value of your mortgage difference could be enormous, even if you have a lower monthly cost 40 year loan.

I’d be interested in your opinions and then I’ll share my opinion on the matter.

Mortgage Rates Dropping to Record Low – Time to Refinance?

Darwin — Fri, 20 Mar 2009 02:49:48 +0000

Mortgage rates dropped again last week to below 5% for conventional 30 year mortgages and will possibly break the recent record set in January when mortgage rates briefly dipped below 5% and then popped back up again. Fifteen year mortgages averaged 4.61% last week, down from 4.64% the week before. Based on recent market conditions and actions by the Fed and Treasury, the next few weeks may offer the best timing to refinance or purchase a new home that we’ve seen in decades, and perhaps for decades more.

What’s driving the rapid decline in rates?

The market had widely anticipated that the Fed was going to enact monetary policies favorable to mortgage rate declines, which has been depressing rates enough to drive mortgage refi deals at a breakneck pace. Note, that the recent decline is from last week’s data, PRIOR to the unanticipated timing of yesterday’s announcement that it would buy up to $300 Billion in Treasury securities on the open market. I would anticipate that the weekly numbers for this week come in even lower. The Fed also plans to purchase an additional $750 Billion in mortgage-back securities from Fannie Mae.

This announcement took the market by such surprise that the yield on 10-year Treasurys plummeted a half percent, which hasn’t occurred in over 20 years. Given the rapid reaction, instruments that short treasuries took it on the chin yesterday; perhaps setting up an optimal entry point to short Treasuries moving forward via leveraged short Treasury ETF/Fund options that exist. This play has worked well this year, one of the only asset classes up for the year in a down market.

If you’re Not Refinancing now, What are you Waiting For?

While the near term refinance rate environment looks good, it may not last and rates may not go much lower. Interestingly, when refinancing activity picks up like it has recently, the volume can actually overtake the staffing and lenders are sometimes reluctant to offer the lowest possible rate, so they can stay afloat, especially given the thinning of the ranks that has occurred following the housing bust.

Consider This!

If you’re considering refinancing, you’ll want to use a Mortgage Calculator, check out how to use Net Present Value calculations to perform and apples to apples comparison of the various mortgage offers out there since they come in all shapes and sizes, with different fees, closing costs and rates. Apparently, even the 50 year loan is becoming popular with its much reduced monthly payment structure. And more importantly, you’ll want to check out what the reading community is saying about how they’re getting the lowest refinance rate based on their experiences. I’m partially through the process now and will report back once everything is finalize – as of now, it’s looking like a great deal!

Net Present Value: Why You Should Use it in Everyday Life

Darwin — Mon, 09 Mar 2009 02:37:11 +0000

I was working on a Refinance this week and was confronted with various options: Different rate/point combinations, different lender fees, etc., and this got me thinking – I should just build a Net Present Value model to see which loan offered me the “best deal”. Without objectively assessing all the cash flows in and out, “best” is subjective. However, if you consider what the “present value” is of each offer and apply consistent criteria to each option, you can objectively assess the optimal solution. Therefore, I constructed a Net Present Value (NPV) model for my various options at hand. Present Value is simply the series of cash flows over time in terms of present dollars. It factors in inflation and what you could make investing your money elsewhere.

Demonstration

The following 3 options exist for a conventional 30 year mortgage refinance:

5.25% rate, zero points, $4500 in closing fees at Lender 1.
4.75% rate, 1 point, $4500 in closing fees at Lender 1.
4.875% rate, zero points, $2900 in closing fees at Lender 2

Can you look at these 3 options and clearly determine which is the “Best Deal”?

*Ignore the escrow for taxes and insurance since you should end up paying in roughly what you’ll get back from your existing lender at closing. Assumes a point costs $3000 due to a $300,000 mortgage.

How to Construct your own NPV model

The first thing you need to do is determine what your discount rate is. The discount rate is the return that could be earned on an investment in the financial markets with similar risk. Whereas business use a much higher number like say, 12%, individuals should use a much lower number which reflects the true expected return on what they’d be doing with the money otherwise. In my case, I’m using 4.5%, since it’s roughly the return you can get on intermediate term CDs and Money Markets over the long haul. I realize rates have dropped dropped dramatically in the past few months, but as recently as last year and for the several preceding years, you could easily earn 4-5% in such investments. In a past life, I would have considered using 8% matching something closer to the long run return in stocks, but I no longer consider that to be a consistent assumption.
Next, you need to consider your time horizon. I’m going to construct my model as a series of years, but you can use months, days, whatever you want, as long as you set the discount rate to match the same time period (i.e. if you were using months, a 12% annual discount rate would be entered as 1%). I’m going to look a 10 year year example. It’s a 30 year conventional mortgage, but a 10 year horizon is usually plenty of time to assess a situation. Heck, I might move within 10 years or CD rates may skyrocket to 7% and the discount rate I had used is no longer relevant.
Finally, you must consider your cash flows. In our case, there will be an upfront cash flow out for the points and closing fees. Subsequent years will be considered cash inflows due to the decreased mortgage payments. I simply subtracted the savings each month for the lower rate, annualized it and plugged in an annual savings number as my annual inflow. I realize it’s a bit more complicated, like consider the tax impact of interest mortgage deduction and the change in interest/principal amortization over time, but for the example I’m presenting here, I’ve simplified it a bit. I didn’t share my specific model since I’m switching from an ARM to a conventional and I had to include several other factors which really would have complicated the explanation.
The NPV Function in Excel requires you to input the discount rate first, followed by the annual cash flows (positive or negative). You can hold and drag the mouse to capture all the values. I’ve displayed the formulas in blue in snapshot below if you want to try to recreate your own file.

Now for the Formulas and Results:

Option #3 Wins Out!

Explanation:

In “Present Dollars”, it turns out that option 3 has the highest value to the decision maker. While it may sound tough to believe, by making a decision today with a few hours of paperwork and some upfront investment, your present value increases by over $13,000 over the next 10 years; more than double that over 30. This is no different than someone putting $13,000 in your pocket today. If it is different, than your assumptions were incorrect. Other than not having $13,000 to spend immediately, these discounted cash flows coming back to you via lower mortgage payments are worth that much. It’s that simple!

Additional Uses of NPV in your own Personal Finances

NPV can be used for myriad situations you’ll face in life. Check this out – the day you buy a new puppy, you may have just set yourself back $70,000 in present day value!!! – Dog Cost Analysis. I used a similar method when I bought a tractor for mowing the lawn. I figured in what I’d be spending per year for a lawn service vs. buying a tractor and paying for gas. While I didn’t factor in what my time was worth and frankly, I would never pay someone else to mow my lawn anyway, it was still a neat exercise to show that my 10 year savings would be something around $6800, which discounted back, would still be several thousand dollars in NPV. NPV is really most useful in decided between various options as I highlighted in the Refi example.

You should consider getting some quick quotes from reputable lenders quickly and effortlessly from outfits such as Quicken Loans.

UPDATE 4/29/09: I actually ended up getting an incredible Refi deal. Get this:
– 4.625%
-30 year conventional
-no points
-reasonable fees (actually, the lowest fees of all the options I considered as well).
Upon comparing with several other options (including my existing originator which was horrendous) and using my NPV model, none of them held a flame to what I was able to achieve with the mortgage consultant I worked with. Since I’m pleased with all aspects from the communication to the accuracy of the good faith effort to the expediency of closing the deal in less than a month, I can honestly say that I endorse Jeff Harris for anyone considering a refi. We live in different states and did everything remotely and efficiently, so anyone considering a refi should at least put him on your list of top options to evaluate; worked out great for me!

Here’s his contact info:

1-800-962-4145 or visit Jeff’s Webpage

Do you have any similar examples of decisions you need to make where NPV would be valuable?

Lowest Mortgage Refinance Rate Comparison by the Readers!

Darwin — Fri, 20 Feb 2009 03:50:24 +0000

After perusing the web for the best mortgage refinance deal out there, it’s evident that the rates, points and fees required by different lending outfits are all over the map. Even worse, in corresponding with some loan officers on a refinance that I’m considering, I’ve found the practices to be rather deceptive (didn’t we learn from recent history? – more on that later). I have yet to actually come across a single repository of the best rates for either a new mortgage or refinancing. Therefore, I’m going to kick it off here. I’m going to post some refinance data I’ve come up with during my research and I’ll ask that readers report here on their findings. After enough entries, I’ll go back and research the best companies in real time and do a new post since rates are subject to change. Directionally, you’d think that the best deal today will still be a good deal in a week or two, comparatively speaking.

UPDATE: Check out 40 and 50 Year Loans as well – I never even knew these existed! Monthly payments are MUCH lower.

I’ll Start:

CountryWide:

Interest Rate 5.00%

Mortgage Term – 30 yr

Points Paid - 2 points

Total Other Fees – $2205

Analysis: This one doesn’t look so attractive when considering two points. That’s effectively paying well over $10,000 in total closing fees for me.

Bank of America

Interest Rate 4.75%

Mortgage Term – 30 yr

Points Paid - 1.875 points

Total Other Fees – $6219

Analysis: This is ridiculous. The site touts a “no out-of-pocket cost option”, etc., but it’s really just rolling exhorbitant costs into your mortgage.

Enough is Enough – Let’s hear about your best deal!

List your recent Refinance deals or research in the following order:

Interest Rate
Mortgage Term
Points Paid (especially interested in zero and 1 point options to baseline this analysis)
Total Other Fees (exclude escrow items, but include all title, appraisal, processing fees, etc.)
Source! Don’t forget to list the company or link

Now, It’s Your Turn!

Some extra considerations:

Good Faith Estimate: Make sure you pester the loan officer for a formal Good Faith Estimate. If you don’t see a fee on a line that you’d expect to see one, ask if they can confirm there’s no fee for that entry. For instance, my first GFE had nothing for title, which is normally a pretty big fee (I had refinanced twice before in the early 2000’s). He eventually came back and said it was “an oversight” and added in that fee and another. Imagine my frustration at closing to find out I owed an extra $1000 in fees!
Perform a Break-Even or NPV Analysis: You’ll want to understand how long it will take to pay off the fees you’re going to incur as a result of this refinance. It’s a simple excel exercise in which you divide your total fees by your savings per month. In my examples, I’m anywhere between 20-40 months on my payback. If you want to get fancy (which I did), factor in the effective savings by considering the lower interest deduction and any other factors that slightly impact the model. Of course, if you’re considering moving, don’t bother. You want to be 95% sure you’re going to remain in your home to at least recoup your investment (nothing in life is 100%).
Pay-Back Period isn’t Everything! You’ll want to compare apples to apples though. You may have a mortgage with a shorter payback period that isn’t the best for you long term though. If you have a 20 month payback at 4.75% and a 25 month payback with a 4.5% rate, over several years, that lower interest rate is going to save you tens of thousands on a decent sized mortgage. Even in present day dollars, you’re much better off going with the lower rate if the the payback period is only a difference of a few months. Included here is a link to a Net Present Value Analysis that takes this one step further and allows you to assess the true value in present day dollars that you’re realizing by going with a particular deal – especially useful in comparing multiple options.
Research, Research, Research – That extra hour you spent looking for the lowest rate can end up saving you several hundred dollars per year for 30 years! But hopefully, the research here will save you the trouble!

Please, help our readers to beat the maze of deception here and save everyone some time. Let’s get to the point. For a given mortgage, where is the first place to go?

Again,

Interest Rate

Mortgage Term

Points Paid (especially interested in zero and 1 point options to baseline this analysis)

Total Other Fees (exclude escrow items, but include all title, appraisal, processing fees, etc.)

Source! Don’t forget to list the company or link