MortgageSmart Blog

After thoroughly thumping the interest rates on an equivalent 5-year ARM since December, the 30-year fixed has reclaimed its honor as "Most Expensive Mortgage Product". The chart shows the difference as a half-percent, but real-life pricing puts it closer to 1.000%.

Right now, adjustable rate mortgages are very attractive to the right type of homeowner:

· First-time home buyer that expects to move within 7 years
· Has an existing 30-year fixed with plans to move in the next 7 years
· Active home buyer with a pattern of moving every 10 years or fewer
For people meeting the above criteria, locking in with a 30-year fixed rate mortgage may be plain overkill; an expensive insurance policy in the event you don't move or don't refinance within those first 7 years.

How expensive? Over the first 5 years, it's $3,660 per $100,000 borrowed.

Them's big numbers.

But just because ARMs may make financial sense -- psychologically -- they aren't for everyone. Some folks lose sleep at the thought of a pending ARM adjustment and there is no amount of cash savings in the world that can make up for that kind of dyspepsia. If you fit that description, you know exactly what I'm talking about.

For everyone else, though, take a real good look at today's 5-year and 7-year ARMs. The pricing is attractive and the product could be a real money-saver for you over the long-term -- especially if you know you're not going to need your mortgage for more than 7 years or so.

If you're considering an adjustable-rate mortgage and want to know more about how they work or how they might work for you, send me an email anytime. I'd be happy to help.

Posted by egmaldonado at 04:30 PM | Permalink | Comments (0) | TrackBacks (0)

If you've ever wondered why a loan officer can't give you an "advertised rate", it's not necessarily because of an intricate bait-and-switch scheme. Most likely, you're being offered a higher mortgage rate because of something called Loan-Level Pricing Adjustments.

Riskier loan characteristics increase the risk of a default claim. Fannie Mae and Freddie Mac created the LLPAs to help offset that risk. A few of the risk-based characteristics that can change a person's mortgage rate

include:
        Condo loans with less than 25% equity in the home
        Credit scores less than 740
        Living in a 2-unit, 3-unit or 4-unit home
        Using the home as an investment property
        Doing a "cash out" refinance with less than 40% equity in the home
        Having a second mortgage to subordinate

The most important thing to remember about LLPAs, though, is that they're not discretionary lender fees; sources of profit or padding by the loan officer or the bank. They are specific fees assigned to specific loan characteristics.

Fannie and Freddie insure against losses in the country's conforming mortgage portfolio and Loan-Level Pricing

Adjustments are the fees they charge to insure against extra risk.

The Fannie Mae Loan-Level Pricing Adjustment chart is as thorough as it is punitive.

As a borrower, you can choose to pay your LLPAs as a one-time, at-closing fee. For most people, this is the more economical solution but it does requires an up-front cash payment and not everyone is comfortable doing that. The more common alternative is for people to build the LLPA into their interest rate.

In general, each quarter-percent LLPA loan fee can be offset via an increase of 0.125% on the offered interest rate. In the near-term, this is often the cheapest option but, over the life of the loan, an extra 0.125% can really add up.

It's especially true for real estate investors whose LLPA factors can range as high as 3.000 percent. Higher interest rates eat up the cash flow it takes to make a rental property work -- paying the fees at closing is often the best course.

It doesn't take much to trigger the risk-based pricing matrices of Fannie Mae and Freddie Mac; a lot of conforming mortgage applicants do. If you've read the Fannie Mae LLPA chart and don't know what to make of it, send me an email and I can help you figure it out. The math is simple once you know what you're looking for.

Posted by egmaldonado at 04:21 PM | Permalink | Comments (0) | TrackBacks (0)