Bob 's Blog

*Rates:

30 yr conforming: 6.25%               

30 yr jumbo: 6.625%       (to $600k)

7/1 jumbo: 5.875%         

OR Vet: 5.50%

State Bond FHA: 5.75%

This installment of comparing Good Faith Estimates strays from its main theme but covers a topic that all borrowers need to understand. Look at the below loan quotes and decide which is better (let's assume that the garbage fees are similar).

6.00 with 1 point;  6.125  with 0.50 points;  6.25 with 0.00 points.

As you will recall from my first installment in this series, since .125% in rate equals .50% in points, all three of these quotes are pretty much the same. So which one is best?

The answer isn't a simple one because it depends on a number of factors. You can over-analyze this too and, believe me, I have done that. Let's first look at a what I call a cash-on-cash comparison.  Assume the loan amount is $200000. The first option has a payment (fully amortized) of $1199.10 with a point cost of $2000 (1%). The 2nd option is $1215.22 w/cost of $1000, the 3rd is $1231.43 with zero points. The difference between each option is $16 per month for every $1000. Take that $1000 divided by $16 and it takes 62 months to break even. That's a little over five years. This is a very simple analysis. So I always ask client what would you rather have - a payment of $32 more per and $2000 in the bank or vice versa. The problems with this analysis: the lower the rate the more that goes to principle at the beginning of the loan. The first option has about $199 going to principle, the 3rd option has $189. That can impact the breakeven point. Tax deductions play another role. The first year deduction will be much better with the first option on purchase loans (assuming you deduct all of the points up front - on refi's you usually amortize the points) but in subsequent years the deduction will be lower (since the rate is lower). Opportunity cost of the money paid up front can come into play. If you spend the $2000 on the points, it's gone. If you kept it you can earn some interest on it. More importantly, if you kept it and needed it later to spend and didn't have other funds you might need to resort to using a credit card - which obviously has a much higher rate. That is one main reason why we tell our clients that we want to see them keep money in reserves after buying a home. I'd rather see a client take the higher rate and payment and keep the $2000 in the bank if that was all they had.

On a purchase loan, having the seller pay costs can impact this decision. It might make sense to use the seller's money to buy the lower rate. Obviously, the borrower's monthly budget needs to be taken into consideration. Can they handle the higher payment. Normally it's not that big of an issue but what if the buyer is buying at the very top of his or her limit?

As I said before, you can over analyze this - and I pretty much did with all of the info above. I tell clients if they get confused then take the middle ground - the .50% point option. That's easy. But, if they are only going to keep the loan for a short time period (less than a couple of years) then the zero option is always best.  As always, send me a note if you have any questions.

Rates:

30 yr conforming            6.25%

30 yr jumbo                  6.625%  

7/1 jumbo                    5.75%

OR Vet                        5.5%

OR Bond FHA               5.75%

There is still a lot of volitlity in the market place. The rates down a little off of this weeks high.  We are still expecting the Fed and ECB will lead the way to higher rates in the future, we don't look for any central bank to begin tightening until later this year. The action in the bond market yesterday and today is taking back a lot of the selling that was instigated by the view last week the Fed was about to move.

 In this week's installment on Good Faith Estimates (GFE) I am going discuss my take - and that's my take only - on Annual Percentage Rate or APR.  First of all, I think that the APR, even though it's a regulatory requirement, is a terrible way to compare loan programs. APR's are very difficult, if not impossible, to calculate without a computer. In fact, I don't know anyone in our business who can calculate an APR by using only a calculator. I have been in this business for almost 30 years and, although I learned how to a long time ago, I can't calculate one without my processing software program. I would say that most in our business don't truly understand what goes into the calculation and how it relates to the Truth-In-Lending form. To me, though, it doesn't matter. The last two previous Weekly Updates clearly explained how a borrower should compare GFE's and not once did I mention APR's. I think that most in our industry understand that the APR disclosure needs to change but getting a consensus on how it should change has been very difficult to accomplish.

 A couple of problems with the APR. As I previously mentioned, if most don't understand how then APR is calculated, then how can they tell if it is accurate and what changes it? The APR takes certain costs and fees charged on a loan (Prepaid Finance Charges) and includes these certain charges into an amount called Finance Charges (which also includes the interest paid on the loan over it's term).  These Prepaid Finance Charges are removed from the loan amount with the remainder being labeled the Amount Financed. Then the Finance Charges are calculated back into the Amount Financed and you get your APR. Sound confusing? You betcha! There are things that will change the APR. Prepaid interest can change the APR - which means that the date the transaction closes will change it. What we estimate for some third party fees (escrow charges) will change it. I do primarily purchase transactions. If the seller contributes money to the buyer's closing costs, this will change the APR. I just ran one scenario where the seller paid most of the buyer's closing costs (this happens frequently) and the APR came back lower than the actual interest rate. That's because the seller paid an amount in excess of the prepaid finance charges - part of the closing costs aren't considered Prepaid Finance Charges.

 YOUR THOUGHTS?

Rates:

 30 yr conforming              6.125    

30 yr jumbo                      6.375 (to 600k)

7/1 jumbo ARM                  5.625

OR Vet                              5.250

State Bond FHA                   5.625

As you can see, we had an increase in rates for conventional loans. The bond market dropped over the last few days taking mortgage rates up. I mentioned a few weeks ago that ARM's were much lower than 30 year fixed. The big rate difference has changed. With our Fed commenting that they are more concerned with inflation rather than the economy, the Treasury and rate markets jumped. Especially at the short end - and that is where the 3 and 5 year ARM's are priced. This week's consensus is that rates will start a new range - from 6.00% to 6.50%. Of course, that consensus can change next week.

Underwriting guidelines are still being restricted but we are hoping that we have seen the end of the tightening. Fannie and Freddie recently announced their changes and the MI companies have already announced theirs (some of the effective dates aren't until next month). Hopefully this is the end for them as there are signs that things are stabilizing. The recent pending sales report from NAR showed an unexpected large jump and a foreclosure report showed that the rate of foreclosures has slowed two months in a row. This is leading many to think that the bottom, if we are not already there, is just around the corner. Some of our lenders, however, have placed new restrictions on their guidelines. One large national bank has just announced loan-to-value restrictions (max. 90%) for our Tri-County area and another national lender has cut their second mortgages down to a max of 85%. We will still see some tightening by individual lenders but most of us think that the big guys (Fannie, Freddie, et al) are finished.

This  installment on my Good Faith Estimate (GFE) theme deals with what I call "garbage fees". Personally, what I call garbage fees are all fees charged by a lender or broker that are not points. As you may recall from last week's discussion on the different terms used for points (origination, discount, mortgage broker fee), I consider points as part of the interest rate comparison. Garbage fees have many, many names. Some are very legit, others are ways to increase the bottom-line (for the lender, of course). Fees for credit reports, tax service and flood certs are legit. The total of these are usually about $100 or so and are charged by practically everyone. Appraisal fees are part of this too but those can range from $150 - $600 or more, depending on the type of transaction.  Title insurance, county taxes and recording fees, total escrow charges, property taxes and hazard insurance costs are from third parties. These charges often show up as different amounts when comparing GFE's but these are just estimates of what others will charge for their services. When comparing a GFE, these latter charges shouldn't be included in your analysis. When a GFE is completed, we lenders estimate what these other service providers will charge. Regardless of our estimates, those other providers will charge what they need for their services. Typically, lenders have nothing to do with those charges. So, to complete a comparison of a GFE, you review rate, lock term, points, and garbage fees.  When I review a GFE, I look for fees labeled as processing (almost all lenders have some form of processing fee), underwriting, document preparation (doc prep), warehouse, administration and review fees. Sometimes, you'll see other creative fees. It's very common to see a lender charge a processing fee and a doc prep or underwriting fee. For instance, a mortgage broker will normally charge a processing fee to package and process the loan. Once completed they will forward the file to a wholesale lender who will underwrite the file and disburse the funds. The wholesale lender will always charge an underwriting or document fee of their own. Seeing those two fees would be normal. Some lenders can and will charge excess fees. For example, I reviewed a GFE recently and the broker had charged .50% origination (which is fine), a processing fee of $595  an underwriting fee of $495, an Administrative fee of $295, and a document preparation fee of $495. When all totaled, it was on the high side. Although the .50% origination fee sounded good, when all of these other fees were added, the total cost of the loan made it uncompetitive. On a loan of $100,000, those fees added up to be almost 2%.

When talked with last week's update, a borrower should be able to make a complete and accurate comparison between two or more GFE's. As always, if you have questions just shoot me an email.

PLEASE FEEL FREE TO GIVE FEED BACK. I WOULD APPRECIATE IT.