Should this mortgage have been approved?

It seems that I hear the same question from my customer’s every day. The question asked the most in our current economic environment is “is there money available and are rates and cost still low”.

Money is still available to those borrowers that should be able to borrow money. It is not available to those borrowers that never really qualified but were given mortgages just a few years ago. Here is an example in the Indianapolis Star there was an article with the headline “Housing crisis has spread to well-to-do” and the article talks about a borrower in Sarasota, Florida. He bought a home for $2.5 million in 2003 and is currently behind on his $10,500 monthly payment. The article claims that he is losing his home because he lost his job at an auto-sales chain.

Let’s look at the facts. When qualifying a borrower for a mortgage the first item we look at is the income to debt ratio. The first ratio is the new mortgage payment (which includes principle, interest, taxes, insurance, and homeowner association dues) we use 26% as the guideline for this ratio. The back ratio is made up of the mortgage payment plus all other minimum debt payments. We like the back ratio to be 36%.

Let’s look at the front ratio for this Sarasota, Florida borrower. We take the $10,500 mortgage payment and divide it into gross monthly income ($250,000/12 = $20,833). The equation looks like this $10,500/$20,833 = 50.4%. This means that this person was spending over 50% of his gross income to make his mortgage payment. That ration is way too high and this borrower should have never been allowed to borrow this much money. They did not lose their home because he lost his job they lost the home because they could not afford the home on their income.

This mortgage would not be made today.

Now let’s talk about rates and closing costs. Rates have increased artificially due to the market. Freddie Mac and Fannie Mae just added a .50 adverse market condition fee which raised mortgage rates a 1/4%. Costs have not gone up at our Bank but I have seen many lenders raising closing costs. There is no reason for these increases that I can see but you should be aware of the situation.

Should you refinance your mortgage?

Most mortgage loan officers would tell you that you should. They will tell you even more so now with mortgage rates coming down. But it is never that easy to answer this question. There are so many variables that go into making the correct decision. However; I will go through the basics.

On the home we would look at the current amount owed including all mortgages on the home and the payments associated with those mortgages. We would also look at the value of the property; it is important to know the equity position on the home.

On the situation we need to look at; how long the homeowner expects to stay in the home and if they need cash for other purposes.

On the borrowers we need to look at debt and credit information and risk tolerance.

You should look at the new rate and the closing costs. Never forget the closing cost.

Almost every call I receive from someone shopping for a mortgage starts with this question from the caller. I answer the phone and they say something like “I am calling around looking to refinance my home and I wanted to know what your rates are.” The reality is that rates are relative. Today you have adds to the rates for credit score, cash out, loan to value, second mortgages, when closing will occur, and loan amounts. So no one can quote you an accurate rate until they have a little information from you.

I heard a radio ad the other day and they quoted 5.5% on a 15 year fixed rate with an APR of 6.187%. Does that sound like a great deal? If you just hear the 5.5% fixed you would think it is an excellent deal. But to get that 5.5% if the APR is 6.127% on a 150,000 mortgage amount would cost $6800 in closing cost. Do you know how long it would take to get your money back on a deal like that? Let’s look at it.

You could get 5.875% on the mortgage with only $325 in closing costs.

The payment at 5.5% would be $1220.04
The payment at 5.875% would be $1249.56 or $29.52 more.

You take the closing cost for the 5.5% of $6800 and subtract out the closing costs from the 5.875% of $325 and you would pay $6475 more in closing cost for the 5.5%.

You then take the cost difference of the 5.5% of 6475 and divide the monthly savings of $29.532 into it or 6475/29.52 which give you 219. 35. The 219.35 is the number of months it takes to receive your money back from the additional cost. Yes it would take 219 months or just over 18 years to get your money back. Since this is a 15 year mortgage you would never recoup your cost. In this case you would want the higher rate with the lower cost.

Always look at the cost compared to the benefit. Since we are talking about money the benefit is almost always in the money.

There is a lot more to this which I will discuss at a later time.

Mortgage rates are poised to drop!

Non-farm Payrolls were expected to come in with a loss of 75,000 jobs the actual number was a loss of 84,000 jobs. That’s a big miss. Along with that number we had the unemployment rate increase to 6.1% much higher than the 5.7% predicted. These bad economic reports are likely to move mortgage rates lower.

Currently rates are steady and this is due to profit taking in the 30 year mortgage back security bond market. Over the next few months I expect fixed rates (10 year term or longer) mortgage rates to drop near or below 6%.

Additionally there is very little chance that the Federal Reserve will change the federal fund rate this year. This means Prime would not increase. This should be good for home equity lines and credit card rates.

I think great days are ahead and it might behoove you to look at refinancing now or in the near future.

Rates will go up and they will go down

“Rick what do you think rates are going to do” that was the questions from one of my newer loan officers. From the corner of the room we heard Keith one of my old timers yell “rates are going to go up and they are going to go down” and then he laughed. He laughed because he knew my answer.

He was correct too then I follow his mimicking of me with my standard example - “when I was in construction we gave one guarantee on concrete, we guarantee it will creak”. It is the same with rates the one guarantee is that rates will change. They will go up and they will come down.

But right now, today, rates are poised to drop.

With a little luck, and the fed’s keeping their noses out of the market we have a great opportunity for rates to lower.

Why, inflation. With oil settling down and the dollar gaining some traction, inflation looks to be under control. If all this comes to pass then rates should improve.

Keep your fingers crossed.

Mortgage Market Rollercoaster Ride. Thrilling!!!

The mortgage market has been like a rollercoaster this year with huge swings up and down but at the end of the ride you end up exactly where you started.

This week was no exception. We opened the week on the 30 year mortgage backed security bond market at 97.5 and ended the week at 97.875 just 37 basis points higher. But here is what happened during the week, on Wednesday the market moved from 97.5 to 98.625 that’s a whopping 112 basis points. That is huge. Even more remarkable the low for the week was 97.406 and the high was 98.625 that’s a change of 122 basis point. Remember when the bond market raises fixed rate mortgages rates decrease and as the bond market decreases mortgage rates increase.

As you can see just like a rollercoaster we go up, we go down, and end up right where we started.

You are probably wondering what happened to mortgage rates. We started the week with 30 year mortgage rates at 6.875% and ended the week at 6.75%. That’s not much of a movement. The biggest benefit of the swings this week is we broke a very strong resistance level which has turned into an equally strong support level and it keep the bond market from falling even further on Friday.

So stay tune, we may have an even rougher rollercoaster to ride next week.