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As of March 1, 2009, The 4.5% Mortgage Rate is Finally Here

We have finally reached that stated goal of a 4.5% mortgage rate and you can get it...if you like the terms.  Here's the rub:

• it's for a fifteen-year, fixed-rate mortgage and...
• it costs 1.25% in points and...
• the loan amount has to be for $250,000 to $417,000 and...
• you have to have a 700 credit score or higher and...
• all of your monthly debts (including the new payment) can't exceed 40% of your documented income and...
• you must have at least 20% in equity if it's a purchase transaction or....
• you must have at least 20% in equity if it's a refinance of your purchase loan (no cash out) or...
• you must have at least 40% equity if it's a refinance where you took cash out of the house.

Lots of restrictions but it's here.  Contact me if you want to give it a go.

PS:  This might not be that bad of an idea if your rate is 6% or higher.  If you took out a $300,000 loan, at 6%, for thirty years, your payment is $1798. Refinancing your mortgage to a 15-year loan, at 4.5% would raise your payment to $2294.  That's only $500 a month. 

That's an extra $90,000 that you'll pay towards your mortgage over 15 years.  If you bought your home in 2006, you still have 27 years left.  If we could knock off 144 payments at $1798, you'd save $259,000.  So...

It costs you $3750 in points PLUS another $3000 in closing costs PLUS the $90,000 extra (the higher payments).  Pay out $97,000, over fifteen years, and save $259,000?  Hmmm, maybe you'd do better in your 401-k.

Then again, maybe not.  I'm just sayin'.

I'll run the numbers for you if you contact me.

Don't Fret About Foreclosure. You Can Make A Comeback.

Can’t afford your mortgage?  Call your lender and ask them to modify the loan to a payment you can afford.  The lender representative will ask you for a stack of paperwork and try to get you to keep paying “something…as a sign of good faith”.  After three or four months, you may receive an offer to reduce your rate to 2-3%, for a five year period, to “get you over the hump”.

You still owe the money you borrowed, though.

The house is worth less than what you borrowed?  Ask for a principal reduction.  I tried helping distressed borrowers with the Hope For Homeowners Program; my efforts failed miserably.  Andrew Adams told me it would flop and it did.  We did SOME good (without the H4H program)…for about half the borrowers but the program was a flop.  Now, President Obama is trying to “entice” lenders to refinance your loan to 105% of its current value and empower bankruptcy judges to “cram a reduced loan amount” down the lenders’ throats.

I’m not so certain that will work, either.

The social ramifications of what Greg Swann calls middle class welfare are far reaching.  An angry cauldron, fueled by the resentment of the folks who are current on their mortgage, is bubbling over today.  Let me give you an example:

Two houses, on the same street in Santee, CA, were bought for $500,000, in the summer of 2006.  Eileen was a move-up buyer who plunked $150,000 down on her home.  Lou bought the home with zero-down financing.  Eileen refinanced her home loan to 4.75% last month, bringing about $35,000 to the closing.  Lou hasn’t made a payment in three months, has had his foreclosure stalled, and is hoping that March 4 will bestow a bailout upon him.

Eileen is pissed off and she ain’t alone.  What worries me isn’t whether or not the Obama mortgage plan is fair, it’s that the implementation of it could result in civil unrest.  Don’t get me wrong, the bailouts of the stupid banks who financed you are perhaps the greatest evil foisted upon our economy but now we’re pitting neighbor against neighbor.

Let me recap the “bailout” for you; not the banks but YOU.  The government tried to mitigate with a program that offered hope; FLOP.  Now, you can get your mortgage refinanced….maybe…IF, you can demonstrate that you can’t make your payment and miss a few of them.  If the lenders won’t play ball with this plan, you can voluntarily file bankruptcy and hold your breath that you get a compassionate judge to force the banks to give give you another shot.

There is another option. Let me show you an example of what I see in the same street:

Lou is paying $3,500/month for those mortgages (which he can’t afford).  Tanya is renting the house next door for $1,500/month.

Here’s the solution, Lou; walk from the mortgage.  Mail your keys to the bank and rent the house down the street. If the “teaser” payment was $2,500 (and you could afford that), save the $1,000 each month, for the next three years, and buy back your old house in 2012.  The FHA 203-b loan program allows borrowers, who have a foreclosure that is older than 36 months and have re-established credit , to obtain an approval.

Walk today and buy that same house back in 2012. Do you really think it’s going to cost a whole lot more than it’s worth today?

Consider a comeback if you will. It’s a great American tradition.

Jumbo Mortgage Rates Report: February 26, 2009

Jumbo mortgage rates are "true market rates" because they lack government subsidies.  Inasmuch, they are decidedly higher than government insured loan programs.  Here are some rough breakpoints, along with corresponding rates:

Super Jumbo:  $1,000,000 to $3,000,000- 7.125%
Jumbo:  $730,000- $1,000,000- 6.5%
Agency Jumbo:  $417,000-$729,750- 5.5%
Conforming:  $417,000 and under- 5.25%

These are rough benchmarks.  The higher the loan amount, the more equity required for approval.  Jumbo loans are very sensitive so the quotes may differ from what I'm showing here.  For a tailored jumbo mortgage rate quote, call me at (858)-777-9751.

California Offers New Home Tax Credit of $10,000

San Diegans know that our Legislature ended a “Californian stand-off” last week when they agreed to approve the state budget.   While the budget was laden with pork, there might just be a little slice of bacon for you.

Buyers of “new” homes or condominiums might qualify for a $10,000 tax credit, granted over three years, in addition to the $8,000 Federal tax credit.  The Sacramento Bee gives us the details:

• It applies to new California houses or condos bought as primary residences between March 1, 2009, and March 1, 2010.
• It’s for 5 percent of the purchase price or $10,000, whichever is lower.
• The state will take $3,333 off a buyer’s state taxes starting in the year of purchase and for two following years.
• The owner must live in the new home or condo for two years or lose the break.
• Collectively, the state tax break is limited to $100 million. At $10,000 per tax break that’s 10,000 new dwellings.

What does this mean for you?  Tax breaks shouldn’t be a justification to overpay for a property.  Yet if you’re comparing apples to apples, this might just be the edge you need to choose the new home over the resale.

V.A. Mortgage Rates Report: February 19, 2009

San Diego veterans can get a VA home loan today with the following terms:

5.0% with 1.5% discount fee
5.5% with .5% discount fee
6.0% with 0 discount fee

If you plan on being in the home for more than two years, it makes sens to pay the discount fee and secure a lower rate.  Will VA home loan rates go up or down, in the near-term?  I discuss the effect of the Obama mortgage plan, on veteran borrowers, in my Long Beach Mortgage Rates Report:

The Obama Mortgage Plan isn't going to help new home buyers.  In fact, it might just hurt you a lot.  The cornerstone of the plan is to force lenders to compromise loan balances and original mortgage terms.  While that sounds all well and good in theory, in practice it sends a message to lenders;

The terms of the loans you write are rock-solid...unless they aren't, then the gubmint's gonna intervene.

San Diego Mortgage Rates Report: Wednesday February 18, 2009

What's the rate?  I commonly get asked this question in the supermarket.  While rates differ between credit, down payment, and income documentation, ""the rate" generally is understood to be a 20% down payment, conforming loan (under $417,000), with full income documentation.

A borrower looking to buy a $500,000 home, in San Diego, with a down payment of $100,000, can expect to receive a 4.875% rate, with a 1% origination fee, today.

Why Must Property Appraisers Adjust For a Declining Market?

California is considered a “declining market” by lenders, the secondary market, and appraisers alike.  Appraisers have been instructed to adjust the “comparable sales”, on a Uniform Residential Appraisal Report (Form 1004), by 1.5% per month.  What this means is that the appraiser will use an exact model match (same size, floor plan, and location in the subdivision) from December, and lower the price by 3%, for a current appraisal.  For example, if the property sold in December for $300,000, the adjusted price in February will be $291,000.

Sounds reasonable, right?  Sometimes, that’s not necessarily a fair depiction of current market conditions.

Much of the Southern California market is driven by bank-owned properties.  The banks, in an interest of disposing of the property, pursue a “fire-sale” pricing method in order to generate multiple offers.  Ask buyers in the tony San Fernando Valley how hard is is to buy a bank-owned home.  One of our borrowers has made over 30 offers, unsuccessfully, to purchase a bank-owned property,

The free market has “priced in” future market declinations and has “discovered the true bottom”.  Still, appraisers have their hands tied.  Pursuant to directives from the secondary market, the appraisers adjust those “free market base prices” because they were closed a month or two ago.  The cycle becomes never ending.  The lower adjustments provide an unnatural price pressure, driving prices even lower.  The policy then becomes a market factor.

The policy can be counterintuitive to its originally stated purpose; to provide a “true” reflection of this “declining” market.  It assumes that prices will continue on an 18% annual decline, forever.

At a certain price , a property becomes less costly to own than to rent.  Many analysts believe that price establishes a “natural” bottom for the property, in a balanced market (six months absorption rate).  The theory is that buyers would be crazy to rent the property when ownership is less expensive.  Compunction then becomes an economic necessity; if a buyer doesn’t make his mortgage payment, the alternative is more costly.

This fundamental analysis should trump the declining market adjustments, at best or become an important footnote, in the least, on the appraisal report.

San Diego Mortgage Rates Report: February 13, 2009

San Diego mortgage rates look to trend up in the next week or so.  Ambiguity about the spending/stimulus bill, combined with a massive borrowing effort by the Government, is making it difficult for mortgage rates to stay below 5%.  Economic data are still bleak and that should act as a ceiling for mortgage rates in the near-term.

If you’re buying a home, with a conventional loan, you should be able to lock-in 4.875% this morning.  I’d take that rate if you plan to close in February.  I, like Bill Gross of PIMCO, still think we’ll see mortgage rates at 4.5% again; we might have to go through 5.375% to get there, though.

If you have the time and will, hold out for a better rate.  Otherwise, all February closings are best served by locking today.

$15,000 Home Buyer Tax Credit Doomed

In an eleventh-hour negotiation, the provision for a $15,000 home buyer tax credit, in President Obama’s “stimulus package”, is most likely dead as presented. Instead, the lobbying efforts of the National Association of REALTORs and the National Association of Home Builders will most likely result in a glass half-full:

Congress seems to be near a final stimulus bill that will slash a Senate provision to give home buyers a 10% tax credit up to $15,000. Instead, Congress appears likely to eliminate a repayment requirement on a more modest $7,500 credit.

Justin McHood covered a basic outline of the proposed legislation on Mortgages Unzipped.  Many comments and questions resulted in this closing advice from Mr. McHood:

Wait until the economic stimulus bill passes. And if it does pass, at that point, we can then analyze whether or not there is any kind of tax credit - and if so, how much and what the stipulations are.

While this is a blow for the real estate industry, the measure stands to save taxpayers some $32 billion.   The median price for Southern California home remains is 3.5 times the $75,000 limit so most SoCal home buyers will lose from this recent development.  No information was available about the July 1, 2009 deadline.

Buying a home makes economic sense in some areas of the country.  Low mortgage rates and diving prices have contributed to the sharp increase in number of existing home purchases in December, 2008.  A tax-credit, while a tasty dessert for hungry home buyers, may not be the necessary main course that the free market may already be serving.

VA Home Loan v. Conventional With PMI (10% Down Payment)

Should San Diego veterans, buying a home, with funds available for a down payment, choose a VA home loan or a conventional loan with Private Mortgage Insurance?  Let's look at the differences between the two and see which makes more sense today.

Today (2/10/2009) a VA home loan is offered at 5.0% with a 1.25% fee (sometimes called a discount point).  For a $400,000 loan, that translates to a $5,000 cost to receive that interest rate.  A conventional loan is offered at 5.0% with a 1% fee (sometimes called a discount point).  For a $400,000 loan, that translates to a $4,000 cost to obtain that rate.  The "cost of credit" then is $1,000 more expensive...TODAY...to obtain a VA home loan. 
NB: Rates/terms change daily so tomorrow might have a different variance.

Conventional mortgages, in California, require a 10% down payment.  Down payments of less than 20% require private mortgage insurance to be carried by the borrower (this insures the lender against default).  This would add a monthly premium of about $210.00.  That extra cost feels like an extra .625% on the rate.

VA home loans don't require private mortgage insurance.  The VA insures the lender against default by charging a "funding fee"; they increase the loan size by the funding fee to collect it. 

Nota Bene:  The new VA funding fee schedule  (implemented November 2011) is much more advantageous than the 2009 funding fee schedule. 

Compared side-by-side, the VA loan charges a funding fee of $5,000 while the conventional loan charges $210/month in PMI.  When we add back in the extra $1,000 it costs to obtain the commensurate rate (explained in paragraph two), the total extra costs to obtain a VA home loan, with no monthly private mortgage insurance, are $6,000.  That $6,000 is recovered in 29 months.  If we assume a minimum five year holding period for the property, the VA home loan is about $6,200 cheaper than the conventional mortgage option.

RELATED ARTICLES ABOUT VA HOME LOANS:

Can More Than One Person Be On a VA Home Loan?
VA Home Loan Basics

RELATED ARTICLES ABOUT SHOPPING FOR A HOME LOAN:

Mortgage Advice for San Diego Home Buyers
Why You'll Never Get the LOWEST Rate on Your Mortgage