Mortgage Rates Dip to Lowest Ever!

The Associated Press released an article I found in the Columbian yesterday indicating that America's major mortgage indices had bottomed out to the lowest levels in history. 30 year fixed rates in the very low 3s and even some high 2s are available to highly qualified borrowers. This is a great time for even those with weaker credit profiles to jump in, as rates across the board should be lower. Rates that were reserved for the 750+ FICO crowd a few months ago are now garden variety rates available to average credit score individuals.

A rate change from 4% yields a principle and interest payment on a $300,000 mortgage of $1,432 versus a 3% payment on the same mortgage of $1,265 a $167 per month savings and a savings of more than $60,000 over the life of the loan! Another way to look at these low rates is the buying power. A borrower limited to a principle and interest payment of $1,432 per month can borrow $300,000 at 4% but at 3% they can borrow $339,750! Nearly $40,000 MORE house for the same payment! 

Buyers be aware that rates vary around the country and a borrowers credit and financial profile can lead to a wide range of rates spanning at least a 1/2 percent for a borrower with an average to below average score and other loan related financials. Where a "golden" borrower might get a rate at 2.875% someone with a more typical 680 score and tighter monthly budget might be at 3.375%. Always check with your trusted loan professional before making any decisions but remember even if you can't get the LOWEST rate out there the rate you CAN get now will be the best it could possibly be since rates are lower than ever before, right now!  

Buyers that have recently felt priced out of the market, may have just been priced back in. Mortgage raters can be fickle and that means buyer on the pricing bubble need to act quickly. Even a 1/4 point rate bump might price some buyers out again.

Low Rates Spur Refinances, Caution is Advised

Many people may see super low interest rates on mortgages and think about a refinance. I spent an entire chapter in my 2010 book, "Don't Panic" about the math behind a refinance and that sometimes, a refi isn't as good as it looks. Mortgage interest is "front loaded." This means you pay the bulk of the interest in the first 10 years of the loan. When you refinance you often end up paying MORE interest even if your rate and payment is lower.

I am not saying that a refinance is "bad" but rather a refinance should be carefully thought out, especially if the homeowner is taking out cash. I have done many mortgage refinances over the decades with numerous properties. I have done them wrong and I have done them right. One should be cautious of what they use the money for when doing a refi. I absolutely DO NOT recommend taking cash out of a primary residence to fund things like cars, boats, or vacations. This is always a bad idea.

I am also very cautious about taking cash out of a primary residence to consolidate short term debts. If the debts are manageable the homeowner may be better off just whacking those debts down with heavy payments. The only thing that hurts a consumer more than a high rate of interest is a long term of payment. So a car payment at 7% interest with 3 years to go is better left alone than refinancing that debt over 30 years and taking valuable and secure equity from your home. Lets say the car was 0 down, $40,000 originally financed at 7% for 6 years. If the car is halfway through the loan cycle, the bulk of the interest is already paid. The balance is down to $16,408 after three years. There is only $1,100 remaining in interest on the loan. Refinancing that $16,408 over 30 years even at 4% will cost the debtor TEN TIMES as much interest! $11,792 in interest over 30 years. If money is tight and the car payment has gotten difficult to manage, it is often possible to refinance the car.

I am a strong proponent of using mortgage cash to improve the property. That doesn't mean buying furniture by the way. Remodel the kitchen, put in new landscaping, new siding and paint, etc. This improves the value of the house and thus helps to maintain the homeowners equity position despite increasing the balance owed. If the homeowner uses credit cards to purchase the home improvements, then refinances to pay that short term debt off, that works fine. Doing the improvements up front will at least result in a better property appraisal and possibly a lower rate on the new mortgage due to a potentially lower LTV.

Typically a cash out refinance will cost the homeowner either up front fees or a higher interest rate. Often that rate can be 1/4 to 1/2 percent which adds up to thousands of dollars over the life of the loan.

Ultimately if a homeowner intends to stay in the house for more than 5 years and can improve the rate of interest by a full percentage point, a refinance makes good sense particularly if doing a rate and term loan with no cash out.

Remember that every situation is unique and I am only suggesting that careful thought and study goes into the refinance decision. Furthermore find a local loan professional you can sit down with and go over the facts and figures. Don't do something as important as a mortgage with some shady online firm that teases you with a seemingly low rate. Mortgage rates are simply not that far apart in the real world. Mortgages are traded on wall street and investors are not paying a very big spread so when one bank shows a rate that is 1/2 percent lower than most others, you WILL be paying for that somewhere in the fee tree! There is absolutely NO FREE LUNCH in the lending business, no matter what the sleazy spokesperson says. Mortgages are highly complex devices and as such it is easy to "pull the wool over the eyes" of even the most brilliant people.

When I refinance a house, especially my primary residence, I look at more than just the rate. I look at what my current principal payment is each month at the time of refi, what the new principal payment will be, how much total interest did I add to the end of loan. Why am I concerned about principal reduction? Because home equity is the VERY reason buying is better than renting. When a home owner erodes the equity in the home, they erode the value of ownership, it should not be taken lightly.

Remember that when someone refinances a house they are in a loan already and they have paid that loan down to some extent. If someone is 5 years into a mortgage and they refi at 30 years they are postponing the eventual payoff by another 5 years. That adds total interest to the mix. When I do a rate and term refi, I also calculate the amount of time the new lower payment takes to cover the expense of doing the loan. If the loan fees are $3000 and I am saving $100 per month then I recover those fees after 30 months. If I refi the house again or sell it in less than 30 months I lost money on the refi! A good loan officer will go over these types of details with every prospect and that is worth far more than any slight difference in rate one might pay at a less quality firm.

Interest Rates a bit Lower to start the Month

While I was away in the UK it seems that the mortgage rates decided to drop a bit. This is always welcome in the real estate business. After all it is challenging enough to buy a house, getting a bonus reduction in monthly payment is going help bring some buyers back to the game.

With rates still readily available in the 4's and some area and situations may even land a buyer into the upper threes on interest rates, this could be the time to start looking again for that dream house you got priced out of earlier this year.

While I was away in the UK I found that they have popularized a 25 year mortgage loan and the rates there are under 2%! Holy moly, that's a low rate. I wonder if the government is subsidizing that? Well anyhow, back here in the states, we are enjoying a booming economy and some pretty low rates as well.

With rents still pushing up higher than a comparable mortgage payment, why not fire the landlord and buy your own place?

Just to keep it all in perspective, mortgage rates dropped over the last two weeks by about a 1/4 point. That 1/4 point rate drop saves a typical borrower about 50 bucks a month for the next 30 years on a $300,000 mortgage! That's about $18,000 over the life of the loan. The cost to buy down a mortgage by a 1/4 percent is usually around 1 point although it is entirely market dependent. But that same $300,000 loan would cost about $3,000 up front to buy the rate down two weeks ago to what it is today.

Hello $300k buyers the world just gave you three grand :)

Not all lenders are created equal

Don't be fooled by adverts for this rate or that lack of fees or any other puffed up marketing baloney. The overwhelming majority of lenders are all selling their loans to one of two primary entities and the actual real world difference in pricing and costs between them is typically benign. The real difference is the people working behind the scenes to get your loan closed.

There are so many crappy lending companies just churning paper as fast as possible leaving many borrowers in the wake of doom. A good loan officer will spot potential problems well in advance and reduce the chance of a catastrophic failure (that's where you get to the end of the process and then don't close). If the loan officer is giving you the hard close, you probably should find a different lender.

The lender that gives you a pre-qual letter without running your credit and getting some supporting documents from you is not helping you. In the end the underwriter will sniff out every detail and if there is any omissions or items that don't fit the lender's guideline they will abruptly kick you to the curb. They don't care about the $400 you spent on an inspection or the $800 you coughed up for an appraisal, nor will you get that money back if they can't close the loan. The rates and fees and such have all fallen pretty closely together since the major lending overhaul in 2011. Don't be lured in by the rate barkers. 

Loans are complicated. There are a great many ways to show a lower rate that really isn't lower at all. A 4.5% loan with 2 points of upfront fee is probably not as good a deal as 4.75% with no points. And 2 points for a 1/4 point rate reduction is too much. Most people don't know what a fair buydown is, and it is a moving target that ebbs with the economic conditions. But for many people that 4.5% looks good. In reality a $100,000 loan at 4.5% is $507 a month and at 4.75% it's $522 a month. That's $15 a month difference. Now if you stay in the loan to the very end you will come out ahead, in fact the 2 points on 100k is $2000 you come out ahead after about 11 years. The average mortgage loan however only makes it to about 7 years before refinancing or selling the house. So unless you are staying in the loan for a long, long, time the seemingly lower rate may not be lower at all.

So don't fall for the gimmicks and the sleazy ads, find someone who will actually look at what is best for your specific scenario. That person will also very likely be mindful of the potential pitfalls in the process and guide you through to a successful close. The loan is the most complicated part of the deal, despite what some real estate agents might think, you know... the ones that think they are the center of the universe. Unless the buyer has a wheelbarrow full of cash, or seriously heavy bank accounts, the loan is the heart of the deal. The loan officer is the most important person in the room.

I have found a few really solid, honest, and hard working lenders locally in Vancouver, WA over the years including:

Mike Roy, Pinnacle Capital, 360-798-8339

Elione Miller, Security National Mortgage 503-577-1974

Tom Clark, Guild Mortgage, 971-409-5750

Banks Seem to Be Working Faster

I have noticed over the last few months that mortgage lenders seem to have streamlined some of the processes in funding home loans. This is more than a welcome anecdote. The loan is the most complex and time consuming aspect of a home purchase. There are just so many little fingers are dipping into the sauce that makes up a home loan. I have noticed a bit of streamlining this year in that process. More and more lenders are getting back into a pre Frank-Dodd timeline. Perhaps it just took them a few years to figure out how to implement the thousands of pages of new Fed regs into a process that is smooth.

The good news for home buyers is that the idea of having to ask for a 60 day close for an 'ordinary' loan seems to be fading into the annals of history. There will be no complaints from this Realtor®. A speedy lender working with a buyer that follows directions and is prompt will lead to the classic 30 day close. 45 days for government loans and or otherwise unusual properties is advised.

The comment above about buyers following directions and in a prompt fashion should not be overlooked. Buyers can be their own worst enemy. There are times when mortgage loan officers will ask for documents or other pertinent information that seems trivial or even redundant. Buyers need to set that aside and follow the directions promptly. When an underwriter asks a loan officer for documents or other information, that loan officer has a short window of time to get that info back while that file remains in front of the underwriter. Delays will lead to the underwriter moving the file back into the "stack" and working on another file. Thus causing delays in the process.

No matter how frustrated buyers get at the seemingly endless list of documents in some files they must remember the 'golden rule of finance'; he who has the money, makes the rules. Unless a buyer has a few hundred grand sitting in the bank, they need the lender's cash to buy a house. You have to follow their rules.

A good loan officer / mortgage company and a responsive buyer can get a conventional loan deal closed in 30 days and a government loan (FHA/VA) in less than 6 weeks.  Sometimes even faster if the stars align.

Buyers: follow directions and do it fast.

Last Chance for Tax Prep

Did you buy a house this year? Did you do a major refinance of you personal residence this year? If you did either you should meet with your tax guy before the end of the year. Home mortgage interest can play a significant role in you tax burden and you may have had a big enough change to itemize deductions where you previously did not. This means lots of things to deduct against you tax bill. It is already the 22nd of December and you better get crackin'

Once a taxpayer has reached the point where he or she can itemize deductions on the 1040 form, there are many legitimate deductible expenses that can be taken. It may even be worth while to make a few legitimate business purchases based on what you professional tax guy says.

The new tax law passed by the Congress earlier this week may change your ability to itemize deductions so this year could be the year you want to make deductible purchases. The new law will increase the standard deduction by roughly double. This means many people that are itemizing now, may not need to starting next year. Your tax guy can explain the details, but I suggest you find out before the end of the year.

Many homeowners benefit from itemizing deductions and if you own a home with a mortgage you should seek professional tax help to make sure you are not paying MORE than you fair share to Uncle Sam. Let's face it, the IRS is more like a crazy uncle when you think about it. Our elected representatives are not exactly spending YOUR money wisely, so keep as much as you can fairly under the law. Talk to a pro, you only got 4 business days left!

Happy Holidays to all!

Enjoy This Blast from the Past!

Rates continue to remain super low. We have been talking about a low rate bubble for quite some time and it looks like things will stay the same until at least early next year when a new presidential administration will take over.

Originally posted October 16th, 2015, by Rod Sager

Holy Rate Basement Batman! Banks are Practically Giving Money Away!

Have you looked at the mortgage rates lately? Most lenders are offering qualified borrowers a 30 year fixed rate loan at around 3.5% These may not be the lowest rates ever but if not, they are very close to the lowest ever. I have discussed the notion that interest rate is far more important than purchase price especially if one intends to stay in the property for a long term period of seven or more years. Imagine borrowing $240,000 from the bank at 4.5% over 30 years fixed. By all measures this is a good loan at a great rate. The principle and interest payment (PI) would be $1,216 per month. But right now you may very well find lenders offering 3.5% 30 year fixed loans. Now the $240,000 mortgage payment looks more like $1,078. That is a whopping $138 per month less! That is a savings of $16,560 over ten years and nearly 50 grand over the life of the loan! In the heavily paraphrased words of the immortal Doctor McCoy, my God man, why aren't you buying a house!

Seriously my friends, these are truly fabulous times. Sellers will get the strongest offers when rates are low because more buyers will qualify at the higher price. Buyers will get the most bang for their buck at 3.5%. Buyers can also qualify for a lot more money. The same buyer that qualifies to borrow $240,000 at 4.5% will qualify to borrow $270,500 at 3.5%. These super low rates will allow buyers to essentially get 12.5% more money for the same monthly payment. 4.5% is a great rate, 3.5% is a OMG rate! Be sure to check with your favorite mortgage professional as there are a few variables that banks look at such property taxes, mortgage insurance, etc. But in general these are pretty accurate figures.

Yes prices have crept up and many entry level buyers have found themselves in a pickle. But there is a window of opportunity to effectively take 12.5% off the price of a house. Seller wins, buyer wins, everybody wins, except the bank. That my friends is a good scenario. Happy hunting!

New Lending Rules Are in Place

The dreaded new lending rules took effect earlier this month and local lenders seem to be reasonably well prepared. In general these new regulations have created a closing delay. This is no fault of the local loan officers or their staff. This is a delay that is essentially mandated as part of the legislation passed by the Congress.

It is important for both buyers and sellers to be aware that closing times are going to be extended on any transaction involving a mortgage. For the short term these could be delays up to 10 extra days. I would imagine that things will get streamlined as time wears on. The new law addresses among other things, the amount of disclosure required by the lender to the borrower, additional time for the borrower to review the lending documents and a post signing period by which the buyer can cancel the transaction. All of this adds up to additional time to close.

A thirty day closing on a home sale transaction involving a mortgage was always a tough nut to crack. Sure, it could be done and many lenders made bold promises. But often they could not be kept. The days of the thirty day close are most likely in the rear view mirror.

This is important mostly because sellers are often in contract to buy another home upon the sale of their home. If they agree to close on the new home in thirty days and the buyer of their home is unable to close on time then they have two problems that could be expensive. Real estate transactions are governed by serious contractual obligations by all parties. No matter what the lender promises on closing times, always give extra closing time on the contract. The seller is rarely obligated extend the closing date. Generally the seller will do so to keep the deal afloat, but they are not necessary contractually require to do so, with few exceptions.

The bottom line is to be patient and just write the offer with a 45 day close or maybe even a little longer. Here in Washington you can write an offer with a "on or before" closing date. This is an effective way to build in extra time to close even if your intention is to close quickly. If the buyers have challenging issues associated with the loan such as marginal credit scores or high debt to income ratios, additional time WILL be required. I spent a fair amount of time on the wholesale side of the mortgage industry and believe me, when the borrower is up tight against the minimum requirements, the underwriter looks at every little detail in that file. No matter what the optimistic loan officer says, that file will take longer to close.

The bottom line is to be prepared for a longer closing cycle and everything will be just fine.

Holy Rate Basement Batman! Banks are Practically Giving Money Away

Have you looked at the mortgage rates lately? Most lenders are offering qualified borrowers a 30 year fixed rate loan at around 3.5% These may not be the lowest rates ever but if not, they are very close to the lowest ever. I have discussed the notion that interest rate is far more important than purchase price especially if one intends to stay in the property for a long term period of seven or more years. Imagine borrowing $240,000 from the bank at 4.5% over 30 years fixed. By all measures this is a good loan at a great rate. The principle and interest payment (PI) would be $1,216 per month. But right now you may very well find lenders offering 3.5% 30 year fixed loans. Now the $240,000 mortgage payment looks more like $1,078. That is a whopping $138 per month less! That is a savings of $16,560 over ten years and nearly 50 grand over the life of the loan! In the heavily paraphrased words of the immortal Doctor McCoy, my God man, why aren't you buying a house!

Seriously my friends, these are truly fabulous times. Sellers will get the strongest offers when rates are low because more buyers will qualify at the higher price. Buyers will get the most bang for their buck at 3.5%. Buyers can also qualify for a lot more money. The same buyer that qualifies to borrow $240,000 at 4.5% will qualify to borrow $270,500 at 3.5%. These super low rates will allow buyers to essentially get 12.5% more money for the same monthly payment. 4.5% is a great rate, 3.5% is a OMG rate! Be sure to check with your favorite mortgage professional as there are a few variables that banks look at such property taxes, mortgage insurance, etc. But in general these are pretty accurate figures.

Yes prices have crept up and many entry level buyers have found themselves in a pickle. But there is a window of opportunity to effectively take 12.5% off the price of a house. Seller wins, buyer wins, everybody wins, except the bank. That my friends is a good scenario. Happy hunting!

Lenders Follow the Money, Very Closely!

If you are buying a house and using a mortgage loan it is very important to follow the direction of the Loan Officer even when it seems redundant or even stupid. Ever since the 2008-09 crash the government has been putting banks beneath an ever watchful eye of regulators and under the oppressive thumb of the government. Every significant deposit or withdrawal into any account the borrower uses is carefully analyzed. The bank needs to know where the money came from and where it went.

Make no mistake about it, the bank will kill your deal and leave you standing at the proverbial altar with out so much as a Dear John letter if they can't "follow" the money trail to a happy place. by all means do not hide money under the mattress! Cash that magically appears from fairy dust will kill your deal faster than Superman saves Lois Lane.

Any funds used in the transaction should be well seasoned, in the account for several months or deposited from reliable traceable sources such as a payroll check, government agency, insurance company, pension fund, etc. Any larger deposits or withdrawals totaling more than a couple hundred dollars should be logged by the borrower so they can explain to the bank if needed. Also any funds used for the purchase of the home should be taken from the same account the borrower has reported to the lender. No funds should ever be sourced from an account the lender has not vetted.

So in short, your moving and decide to have a garage sale. You do well selling off your unwanted junk. You net a cool and crisp $600. So you deposit the cash into your account. Keep a log of where that $600 came from. A loan underwriter is trained to assume that anything unknown is corrupt. Did ISIS give you that $600? Did your uncle give it to you because you can't really afford to buy this house? Do you moonlight as cat-burglar and this was the loot money? I am not kidding. They are very concerned about the comings and goings of your finances. Remember they are about to loan you hundreds of thousands of dollars based on your promise to pay them back. You are going to have complete control over the very asset that is collateralizing the loan. It is serious business and it is not difficult to comply, but you must comply if you want to play in their vault.

Unfortunately we had some loose regulations prior to 2008 that lead some people and companies to be dishonest and deceitful in their business practices. This helped create a very bad financial collapse that cost the American taxpayers dearly. As is typical with government, there was a gross overreaction that has lead to somewhat oppressive regulations that now create a new series of headaches for the American people.

It is very important to understand the age old adage "Those that have the money, make the rules". Banks have the money and if you want their cash, you play by their rules. The banks have to play by the government rules for a similar reason.

So be mindful and get your dream house.

Why Interest Rate is more Important than Purchase Price

So many buyers get wrapped up in the notion of securing the lowest price on a house. This is part of the natural buying process. We all want a great deal right? The funny thing is that we are generally selective with that desperately seeking deals mentality. Houses, gasoline, electronics, and cars are items that Americans will shop to death until they find the golden deal. Other things like groceries, clothing, and shoes not so much. I see people buying Campbell's soup at whole foods. $2 for the same exact product Winco sells for 99 cents. Whole Foods offers many top grade products that are not available at discount markets, like Winco. So Whole Foods has its place. Funny thing that is. Oddly purchase price on items we pay cash for is paramount. It is the only thing that matters so long as the product is the same. Houses have many variables. The largest of these is interest rate. I think it is very important to recognize what the difference is between even subtle rate changes.

Two scenarios interesting results:

200,000 home 30 years fixed FHA at 4.5% with 3.5% down.

• Down payment is $7,000
• PITI payment is $1,371
• Total of payments over 5 years is $82,260
• Total interest paid over 5 years is $41,609
• Balance on loan after 5 years is $175,935

210,000 home 30 years fixed FHA at 4.0% with 3.5% down.

• Down payment is $7,350
• PITI payment is $1,368
• Total of payments after 5 years is $82,080
• Total interest paid after 5 years is $38,960
• Balance on loan after 5 years is $183,291

Using a fixed annual appreciation of 4% (actually lower than we are seeing now) we can calculate a future value for both houses. The first house would be valued at $243,331 and have an equity position of $67,396. The second would be valued at $255,497 with an equity position of $72,206. The lower interest rate on the loan allows for a more rapid pay down in principle and places the buyer in a stronger position to sell later. We always want the best price but not at the expense of a higher rate of interest. Right now rates remain very low, lower even than I used in these scenarios. Buyers may miss a golden opportunity if they wait to long to buy. Many buyers continue the effort to barter down prices in a seller's market. With each house they fail to buy due either to being out bid or flat out rejected by the seller, they run the risk of an interest rate hike. Even if they get the "deal" they are seeking, in the long run they may very well still end up paying more and they probably "settled" on a less than prime home. 

Let's look at two more scenarios with a larger down and long term implications added:

$200,000 home 30 years fixed at 5.0% with 20% down

• Down payment is $40,000
• Amount borrowed is $160,000
• PITI payment is $1,116
• Total of payments after 30 years is $309,209
• Total interest paid after 30 years is $149,209
• Total of payments after 5 years is $66,960
• Total interest paid after 5 years is $38,461
• Balance on loan after 5 years is $146,925

$210,000 home 30 years fixed at 4.5% with 20% down  

• Down payment is $42,000
• Amount borrowed is $168,000
• PITI payment is $1,108
• Total of payments after 30 years is $306,443
• Total interest paid after 30 years is $138,443
• Total of payments after 5 years is $66,480
• Total interest paid after 5 years is $36,219
• Balance on loan after 5 years is $153,145

Here I used twenty percent down so the difference is less dramatic. The striking fact here is the house that cost $10,000 more has a slightly lower payment since the interest rate is a half point lower. The fact is the half point better rate buys 5% more house. Too many buyers hold out for the best price only to find that rates go up or that prices go up and the deal they are seeking never materializes. Notice how much less interest is paid in the first five years on the more expensive house. The buyer of the $200,000 home will pay $2,200 MORE in interest over the first five years with the higher rate. 

Let's assume again the real estate market appreciates at an annual rate of 4% over the first five years in each of these transactions. This time lets handicap the more expensive house by suggesting it was slightly over price and the "cheaper" house was slightly under priced. Let's say the target value of the scenario one house is is $202,500. Scenario one represented a $2,500 "deal" and scenario two was $2,500 above market so its base value is $207,500. In general the market doesn't allow for much fluctuation. And buying a fixer and fixing it up versus buying a move in ready home is an unfair comparison. After five years the market value of the houses is $246,372 and $252,455. All else being equal, scenario one (less expensive house) has $99,447 in equity and scenario two has $99,310. The more expensive house did have a higher down payment of $2000 and a higher loan amount by $8,000 and yet after five years the equity position is about the same. If the scenarios were not handicapped the equity position in the less expensive house would be $96,405 versus $102,353. In my experience they are rarely any "deals" in real estate. There are too many buyers competing for the same houses. Some buyers find "deals" by looking at houses that need a little TLC. They don't show as well and thus don't generate as high an offer. Once the TLC is done the buyer reaps the benefit of the now higher value.    

The moral of the story is that the lower price is nowhere near as important as most buyers think and interest rates determine how much house you can buy or more importantly how quickly you reduce principle on your loan balance.