Dennis' Mortgage Blog

September 23rd, 2016 11:51 AM


Question: Why shouldn’t I get 20% discount from retailer to apply for a credit card?

Answer: This question came up in a backdoor sort of manner with a client who has a blemish on his credit report from a credit card company that mismanaged his account. The reason he had the account was he received a discount from a retailer when he applied for the card as he was paying for his purchase.

Stores are starting to put up Christmas decorations (remember when they waited for Thanksgiving, and then they at least waited until after Halloween?) and that means many of us will be wandering the malls looking for that perfect reindeer and Santa sweater for Aunt Nellie and the moose slippers for Uncle Burt. Once we reach the register the dutifully trained sales associates will inquire if we want 10% off our purchase by applying for a credit card, with possible additional incentives of higher discounts for first five purchases, etc.

Instincts tell most people to say “sure!” because who doesn’t want to save 10% off?

My advice has always been, and will continue to be, say no to the new card. This is for several reasons.

First, most of the sales associates you see in stores at the holidays are temporary hires. While many of them are outstanding people, some are not as upstanding and it is easy for them to take your personal information you are giving them for the credit card application to use on their own in the future—social security number, address, driver’s license number, etc. It happens and you do not want to be a victim of identity theft.

Second, if you charge your items on your new card at point of purchase the bill will come in several weeks with a nice option to make the minimum payment due, or make no payment until after the holidays.

When the bill come you think, “Hey, it’s the holidays, I’ll make the minimum payment now and catch up and payoff the remainder of the balance in January.” Next thing you know you carried the balance until you receive you tax refunds in April, while paying 21% interest on the items you saved 10% on at the register.

Third, the inquiries that have the biggest impact on your credit score are inquiries for credit cards and department store cards—auto loan and mortgage inquiries have no to minimal impact. That 10% savings on some sweaters, scented candles and slippers may knock down your credit score below a threshold that kicks in a higher interest rate on your new mortgage or auto loan. That higher interest rate over time can cost you more over time than the 10% savings on your purchase.

Finally, 10% sounds like a lot but if you break it down the savings is often not that great. I have stood behind people at the register getting their 10% off of a total bill of $80, saving $8.00. How much are you really saving?

Faithful readers of the Weekly Rate & Market Update know that retail sales have been a bit sluggish this year, up only about 1.5% in 2016 and about the same form August 2015 to August of this year. Since Christmas is approximately 20% of most retailers sales for the years they need to move inventory between now and the end of the year. With retail sales having been somewhat flat it stands to reason that there could be some significant discounts this holiday season. Take advantage of the discounts being offered on the shelves and do not apply for that point of purchase credit card to save a few dollars more.

And didn’t you get Uncle Burt moose slippers last year, maybe a Rams sweatshirt this year?

Have a question? Ask me!

Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.

Weeks were we get any Fed news any other economic news is usually ignored until the Fed speaks. This week was no exception. There was a data release however that is important to the mortgage and real estate industries and that was the existing home sale figures for August released by the National Association of Realtors. For the second month in a row sales of existing home sales dropped nationally. The slowdown is primarily caused by higher prices and limited inventory. Existing, or previously owned, home sales are about 90% of the market nationally and earlier this year reached the highest since 2007. Sales are up 0.8% from last August and the median price is 5.1% higher nationally. In the Los Angeles Metropolitan Area sales are up 3.8% from July and 6.2% from August 2015 with the median price on a single family residence up to $473,950—6.1% higher than last August. Overall the news is mortgage rate neutral. Home sales have driven the economy the last few years and a slowdown could have far reaching impact on the economy but since the slowdown appears to be price and inventory driven investors ignored the data.

Not ignored by investors is any word from the Federal Reserve. On Wednesday the Federal Reserve Open Market Committee announced it was leaving its Fed Funds Rate unchanged for now. The vote for no change has narrowed however with the vote this week being 7-3 as opposed to prior meetings when the vote was 9-1. The statement in the release was somewhat mixed with most of the economic assessment the same as July. The statement gives no real reason for the Fed to increase rates in December but the consensus is growing that there will be a rate hike at that time. The immediate reaction was a bump in Mortgage Backed Security (MBS) prices causing a bit of a dip in rates, but not much as MBS trading has maintained its tight range we have seen for the past few months.

Rates for Friday September 23, 2016: Conforming rate slipped back down after spending the last two weeks above its seven week bottom on the Fed speak, while high balance has remained flat for ten consecutive Fridays. I continue my advice of locking through your escrow period to protect these incredibly low rates from any sudden increases.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS
30 year conforming 3.25% Down 0.25%
30 year high-balance conforming 3.50% Flat
30 year FHA 3.00% *** Flat
30 year FHA high-balance 3.25% *** Flat

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down (3.5% for FHA) with 740 FICO score for purchase mortgages. ***FHA rates have may have no points and credit towards closing costs, changes daily.



My favorite season is upon us. I love autumn with the cooler days and nights but still plenty of sunny days. Having grown up in different regions that experienced all four seasons, unlike Southern California where we have summer and not summer, I have always enjoyed Fall and all that comes with it, from the leaves and weather turning to the start of football season and the baseball playoffs. I am hoping this autumn we have many crisp days and nights!


Have a great week,

Dennis



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Posted by Dennis C. Smith on September 23rd, 2016 11:51 AMLeave a Comment

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September 16th, 2016 7:49 AM

Question of the week: Who pays who when I buy a home and when?

Answer: Who pays who how much and when in a real estate transaction is always negotiable between buyer and seller and those involved. In theory this can happen, in our local Southern California markets here is who customarily pays what to who and when:

Real estate agent(s): Once or twice a year after we go through the amount of money they will need to close on their new home for down payment and closing costs a first time homebuyer will ask me, “when and how much do I have to pay my real estate agent?”

The answer is nothing. Well sort of nothing.

The real estate agents are paid by the seller when the transaction closes. A seller will sign a listing agreement with an agent to represent them in the marketing and sale of their home. The agent will put the listing on the Multiple Listing Service (MLS) and will let the other agents know the amount, as a percentage of sales price, that the agent representing the buyer will be paid.

As a buyer you do pay the commission to the agents, just not directly. The commissions to the agents are paid out of the seller’s proceeds, however the amount of those proceeds is paid by you the buyer in the sales price. This is why when we assist with transactions with one party buying another off of title, for instance in a divorce or partnership split up or one sibling buying out another from the family home after parents have passed away, we discount the market value by the amount of real estate commissions. Since there are no commissions being paid then the sales price should reflect the lack of commissions.

So when you are buying a home you do not need the funds to pay the real estate agent, s/he will be paid by the seller as part of your sales price.

Loan originator/lender: Like real estate agents we get paid when the transaction is completed. In the third of my four part series that was a semi-mortgage 101 course I discussed the relationship between cash to close and interest-payment. When it comes to paying for your loan and the services of the lender you can either pay higher closing costs for points and get a lower rate, or pay lower points and closing costs and have a higher rate. Should you choose the higher interest rate and lower fees then the lender funding the loan will pay the origination costs to your loan originator after the loan is funded.

Escrow:
Everyone in the industry loves escrow because they are the ones who disperse the funds to everyone for commissions, fees, etc after the transaction closes—including themselves. Escrow fees are typically split evenly between the buyer and seller, though if one side has more work done, such as drawing multiple deeds or paying off multiple accounts or liens their cost may be higher. The standard purchase contract has a clause to which the buyer and seller agree to split the escrow fee.

Title company: Buyer and seller have separate costs for title insurance. The buyer pays a lower cost for the coverage required by the lender to insure the position of their lien on title and the seller pays a higher fee for insurance that the title being transferred to the buyer is clean, or not clouded—i.e. when you buy the home you are the owner and no one can come along later and claim ownership, if they do and are correct the title company will pay to correct the claim.

The title insurance company is also paid when the transaction closes.
The two services that the buyer commonly pays for outside of escrow and before the transaction are for a physical inspection of the property and the appraisal.

All fees are negotiable as to who pays, as I mentioned at the top, but it usually depends on overall market conditions. When properties are slow to sell and it is a buyer’s market it is not unusual for us to see purchase agreements where the seller agrees to pay closing costs for the buyer. In a market as we have now in Southern California with multiple offers on many properties a buyer cannot expect to have a seller agree to pay their closing costs.

As a buyer when you meet with us and we show you the fee worksheet for the purchase of your new home you will have listed all the costs you will pay, with the exception of the home inspection. The bottom line of funds needed to close is what you need to close, no additional funds for escrow or title—as those fees are included in our worksheet; no additional loan fees-as those are included in our worksheet; no fees for real estate commissions as those are included in your sales price and paid by the seller.

Have a question? Ask me!

Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.

Not a lot of positive economic news on Thursday. Both retail sales and the Producer Price Index data for August were released. Retail sales in August dropped 0.3%, since a lot of back to school shopping typically done in August this makes the news a bit troubling. Since consumer spending is 65-70% of our economy a drop in retails sales does not support a growing economy. Another gauge of a growing economy is rising prices, which is not what the PPI data showed for August. Producers’ prices were flat in August, after dropping in July, and flat from August 2015. The combination of dropping retail sales and flat prices for producers is positive for low interest rates.

Friday provided some positive data. This morning’s release of Consumer Price Index data showed some life as prices increased 0.3% in August from July and are up 1.1% from last August. While under the Fed’s target range for inflation the price growth is positive for the economy and somewhat negative for interest rates.

At this point investors are holding tight waiting for next Wednesday when the Federal Reserve Open Market Committee will announce if there they decided to increase the Fed Funds rate. The consensus is that they will not for a myriad of reasons, even political, but the basic reason there is no reason to push up the rate is that the economic data does not show any substantive reason for higher rates.

Rates for Friday September 16, 2016: Rates are flat from last Friday. Mortgage Backed Securities spent the week jumping around on rumor, innuendo and speculation about the Fed’s move next week but in the end the trading was confined to a tight range and we see no change in our rates. My advice remains eliminate any upside risk as there is not much to gain with lower rates and lock when you can.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS
30 year conforming 3.375% Flat
30 year high-balance conforming 3.50% Flat
30 year FHA 3.00% *** Flat
30 year FHA high-balance 3.25% *** Flat

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down (3.5% for FHA) with 740 FICO score for purchase mortgages. ***FHA rates have may have no points and credit towards closing costs, changes daily.



Five friends and I have had the same football pool format for over twenty-five years. Before fantasy sports became popular and everyone from the science teacher to the church administrator were picking players for their fantasy my friends and I drafted teams at the beginning of each season and through a complicated formula of weekly wins, losing to undrafted teams and playoff performances have had the same pool going for a few decades plus. There are three of us in Southern California and one player each in Washington, Oregon and Florida.

This weekend we are getting together for the first time in five or six years, gathering in Denver for a guys’ sports weekend going to the Rockies baseball game on Saturday night and the Broncos and Colts game on Sunday.

So if my return phone call or email is a bit delayed through the weekend you now know why!


Have a great week,

Dennis

P.S. For those wondering what five teams I drafted this year: Green Bay, Indianapolis, Oakland, Chicago and Philadelphia.

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Posted by Dennis C. Smith on September 16th, 2016 7:49 AMLeave a Comment

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September 9th, 2016 12:11 PM


Question of the week: Why should I pay more than the seller is asking?

Answer: Because you want the home.

We are currently in a sellers’ market in most Southern California housing markets. Buyers are writing offers on homes and being told by their agents that there are multiple offers on the property, which could mean you and someone else offer or ten others with offers on the property. It is not unusual for us to send several pre-approval packages out for clients as they write offer after offer trying to get one accepted.

Which brings up the question of the week: why should you pay more than the seller is asking? In many markets that is what it takes to get your offer accepted.

Here are some common scenarios:

Seller has multiple offers and listing agent lets agents with buyers know. One, or more, of the offers comes in 2, 3, 5% over listed price from very well qualified buyer who has the funds to close the transaction even if appraisal comes in at original list price.

Seller has multiple offers and sends counter out to all qualified bidders to send in “best and final” offer. This leads to multiple offers over listed price from which the seller can choose that which is highest of the best qualified.

Seller has multiple offers and send counter offer out to one or two they like best for price over the list price. If buyer turns down counter then seller sends same counter to next buyer on their list.

This begs the question, if homes are going over list price why are sellers not listing their homes for higher prices to start? Because they would get fewer offers and less competition is one reason. Home in neighborhood that prices out very solidly at $500,000—recent sales of $495,000, $505,000, $490,000. Agent puts house on market for $499,999 and five or so offers come in. Buyers up their offers and house enters escrow at $510,000. This is a real scenario that we had a buyer go through last week and was the “winner” of the bidding.

Why should I pay more than the seller is asking, that does not sound like much of a deal. Let’s take the scenario above where our client paid $10,000, or 2%, over the seller’s asking price. First, we anticipate the appraisal to come in very close to the sales price, meaning an independent valuation determines the price paid is market price. Second, if property values average 2% growth in the neighborhood for the next ten years the home will be worth approximately $620,000, your gross profit is $110,000. Does that seem like a good “deal” to you?

“But if I had bought it for $500,000 then I my profit would be $120,000.” Yes, “if” you bought it for that price but you could not buy the property for $500,000 as it took $510,000 to buy it.

A “deal” in the current market may be buying a home, while it may be higher than what the seller was asking, it is probably less then what it will be worth in the future.

The Weekly Rate & Market Update of August 8th touched a little on the issue of future value and the potential cost of waiting to buy. The reasoning in August also applies to our question of the week in September.

If you are in a market with multiple offers on every home for sale that is in your price range, neighborhoods you desire and condition you are willing to accept then be prepared to outbid your competition, which may mean buying your new home for more the list price when it went to market.

Have a question? Ask me!

Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.

Not a lot of data this week to move interest rates. Mortgage Backed Securities (MBS) spent the early part of the week drifting up (higher price = lower rates, for those who missed my series on how mortgages work go to my blog page and read entries for last four weeks, 8/12, 8/19, 8/26 and 9/2). Yesterday afternoon and through this morning however we saw a reversal and MBS prices started falling (lower price = higher rates).

The primary causes for the decline in MBS prices are demand in bond market and Fed officials speaking. the Japanese taking a break from buying U.S. Treasuries ( lower demand leads to lower prices, lower prices = higher rates) and some speculating that other foreign nations may also slow their purchase of our debt. This morning one of the Federal Reserve bigwigs said in a speech that he thinks there is no reason the Fed should not raise its discount rate later this month, causing investors to quickly sell off bonds, including their MBS holdings, anticipating a rate bump. Later another voter for the rate hikes said there is no reason to raise the rate and the markets calmed down. The markets are not moving on data it seems but on speeches, this means the market is in flux and could be ready to break out of the nice steady range we have had for the past three months and begin to trend higher. “Could be…”

Rates for Friday September 9, 2016: The drop in MBS prices yesterday and today puts prices at the bottom of the trading range we have enjoyed for the past three months causing conforming rate to go up a bit from last Friday. After seven weeks in a row of flat rates it is not surprising we finally see a change, nor that the change is to the higher.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS
30 year conforming 3.375% Up 0.125%
30 year high-balance conforming 3.50% Flat
30 year FHA 3.00% *** Flat
30 year FHA high-balance 3.25% *** Flat

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down (3.5% for FHA) with 740 FICO score for purchase mortgages. ***FHA rates have may have no points and credit towards closing costs, changes daily.



It is hard to believe that it has been fifteen years since the tragic events of 9/11 that changed our country, and world, forever. I am torn annually when the anniversary of the terror attacks are front and center in the news. On the one hand I do not want to remember how I felt that morning standing in our kitchen watching the news. Leslie was watching with me as the first tower collapsed and her emotional reaction was so deep I was concerned for our baby as she was several months pregnant at the time while at the same time horrified by what I was watching.
On the other hand I know we need to revisit that day to not only remember those who lost their lives in the attacks and immediate aftermath, and subsequently the many first responders who died from effects of their responding, but also to stay reminded that unfortunately evil still exists in the world and there are those who wish to destroy us for our freedom and the liberties we all enjoy on a daily basis.

Growing up I remember knowing it was Pearl Harbor Day every December 7th, but it never really resonated with me as I did not experience it. My grandchildren may have the same reaction to 9/11, and I am hopeful that they do and that they never have to experience their own national tragedy as we have.

This year 9/11 falls on the Sunday that is will be the first game of the NFL season for almost all of the teams and stadiums will be full of cheering fans. Those cheering fans gathered together show those who would bring us harm that we are winning in the war of good versus evil and will continue to win.

Have a great week,

Dennis

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Posted by Dennis C. Smith on September 9th, 2016 12:11 PMLeave a Comment

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September 2nd, 2016 10:28 AM


Question of the week: How come when the market is bad rates drop and when market is good rates rise?

Answer: Last week we looked at the relationship between the price of a mortgage and the mortgage’s interest rate. Using a teeter-totter we saw that the lower the interest rate the higher the price and vice-versa. This week we look at another inverse relationship, that between the economy and investment markets and interest rates.

Most people know that when the economy is going well stock markets rise. Your retirement account through your employer increases in value and the news is peppered with higher earnings, higher profits and record numbers for the major indexes—the Dow Jones, NASDAQ and S&P. Correspondingly when the economy is doing poorly, as in a recession, stock markets drop, your 401(k) or other retirement account decline in value and business news talks about missed earnings and declining or negative profits.

This makes sense, if the economy is strong people are spending money, companies are selling more and more of their goods and services so they have higher profits which makes the companies more valuable, which is reflected in stock prices.

So why is it when there is good economic news and the economy is improving bond** prices drop and when there is bad economic news and/or the economy is improving bond prices rise?

**Mortgages are traded as Mortgage Backed Securities as discussed two weeks ago, MBS prices move up and down with bonds such as U.S. Treasury and large corporate bonds.

Think of our teeter-totter, when prices drop rates increase, when prices rise rates drop. So why do bond, and therefore mortgage, prices drop when stock prices increase? And vice-versa when stock prices drop mortgage prices increase?

The greater the risk the greater the return, perhaps the most basic axiom for finances and investing. Less known is the term flight to safety.

Flight to safety is one reason why interest rates drop when there is bad economic news and uncertainty for the future. Investors flee the more risky investments like stocks and purchase safer investments, like bonds, and mortgages, which pay fixed rates of interest rather than risk sudden drop in prices should they leave their money in stocks, or equities.

Another reason for interest rates dropping when there is not so good economic news is investors purchase bonds. Investors not only are motivated by the flight to quality principle, but also because the long term expectation is for interest rates to drop due to other investors buying bonds but also in anticipation of moves by central banks lowering rates to stimulate borrowing to stimulate the economy.

As investors move into bonds prices go up with the increase in demand. Increased demand in a market generally causes higher prices, higher prices in bonds means lower interest rates.

When the prospect is for a growing economy investors sell their bond holdings and purchase stocks. This causes the price for bonds to drop and interest rates to rise.

As a general rule if stock prices are increasing then interest rates are as well, if stock prices are dropping then so are interest rates. That is the general rule which has been broken in our post-recession economy as rates have dropped and remained historically low despite the sharp increase in stock prices. This is primarily due to the tremendous amount of money put into the economy by the Federal Reserve during and in the years after the recession, the Fed retaining ultra-low interest rates for the seven plus years since the recession ended, and an economy that while not in recession has grown slower than any post-war economy following a recession. In the meantime corporations have increased profits by reducing labor costs and the cheap access to capital caused by the low rates.

When our economy ends its current cycle and begins the next it will be interesting to see how interest rates react. If they historical tie between higher rates with higher stock prices returns or if the two remain somewhat disconnected as they have been for the past decade.

This wraps up our four week discussion of mortgages and what they are and how they work, I hope you have enjoyed it and I was able to increase your understanding.

For those just catching up here is the series on mortgages from the past few weeks:

8/12/16: I have a Fannie Mae loan, why am I not making my payment to Fannie Mae?

8/19/16: What are Fannie Mae, Freddie Mac and Ginnie Mae?

8/26/16: Why are there different prices for the same loan?


Have a question? Ask me!

Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.

Employment and income dominate the economic news this week. On Monday Personal Income and Outlays for July showed incomes grew 0.4% from June and spending rose 0.3% from the prior month. Spending growth slowed from June which is of some concern since consumer spending is 65-70% of our economy. Personal savings grew in the month, again not a strong positive for the economy. Prices were flat for the month giving no price side reasoning for the Fed to raise rates. Overall the data was neutral for mortgage rates.

Of bigger impact was the monthly jobs report. Being the first Friday of the month the Labor Department released the numbers for employment in August—and the news is not great. After adding 275,000 job in July the economy added only 155,000 in August, of which only 126,000 were in the private sector. August jobs reports are a bit quirky with summer employment and auto manufacturers flexing employment to retool for new models, even with the quirkiness however the news is not positive. Since the Fed has repeatedly indicated they are focused on employment for their rate decisions the data supports no move on rates by the Fed later this month.

Under-reported but having a tremendous impact on the economy is the bankruptcy of the Hanjin shipping line. Hanjin is a South Korean shipping company that is one of the major players in the Ports of Los Angeles and Long Beach. Hanjin ships carry approximately 5% of all ocean trade. Ocean shipping is 90% of global movement of goods so Hanjin impact global trade. Right now millions of containers containing billions of dollars of goods are sitting on ships in ports and harbors around the world because ports are not off-loading or on-loading Hanjin ships. Goods meant for American retailers for the Christmas season are in many of those containers. There is a ripple effect of goods not moving for one ocean line that impacts a port and causes delays for other lines containers being moved, immediately there has been a tremendous increase in shipping costs of containers on sea and land If the ripple effect multiplies it could cause some damage to not only our economy but others globally. Keep an eye on this issue.

Rates for Friday September 2, 2016: I need to do some research, but I cannot recall a time when conforming fixed rates were flat for seven straight weeks and the same for nine out of ten. It shows that there is no major news to impact investors, which means no significant good or bad news. I maintain my advice to take advantage of these rates and lock in when you can.


FIXED RATE MORTGAGES AT COST OF 1.25 POINTS
30 year conforming 3.25% Flat
30 year high-balance conforming 3.50% Flat
30 year FHA 3.00% *** Flat
30 year FHA high-balance 3.25% *** Flat

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down (3.5% for FHA) with 740 FICO score for purchase mortgages. ***FHA rates have may have no points and credit towards closing costs, changes daily.



Have a great Labor Day weekend. It will special in the Smith household as Leslie and I celebrate our twenty-second anniversary on Sunday—I celebrate every day that this wonderful woman is my wife, but glad she celebrates at least once a year!

Have a great week,

Dennis

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Posted by Dennis C. Smith on September 2nd, 2016 10:28 AMLeave a Comment

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August 26th, 2016 11:24 AM


Question of the week: Why are there different prices for the same loan?

Answer: There is a difference between price and rate, it is an inverse relationship.


On the graphic above the dollar sign, $, representing the cash needed to close your transaction, includes down payment (if applicable), loan points, loan fees, appraisal, escrow and title charges, all the costs and money needed to close. On the right is the interest rate sign, %, this represents your monthly mortgage payment; your monthly payment goes up and down as the rate goes up and down.

As you can see by the teeter-totter, if your cash to close goes up your interest rate (and payment) go down. If your interest rate (and payment) go up your cash to close goes down. A simple relationship exists between the cost of your transaction and your monthly cost of the mortgage.

So to answer the question there are different prices for the same loan because you can choose to have a lower interest rate and monthly payment, or have a lower cost for your transaction and cash needed to close by having a higher interest rate and therefore higher monthly payment.

We have all heard the ads for “no cost” refinances, there are costs but they will not be paid by you in cash but rather will be paid for you by a higher interest rate.

How does this work, who pays the costs?

We do, the lender, pays the costs. The base costs for refinances are approximately $3000 to cover loan fees, escrow fees, title fees, recording fees, etc. We do not pay these fees on a no-cost refinance just because you asked or we are really nice (we are really nice but not enough to go paying $3000 out of pocket for everyone). As the interest rate increases we are paid what is called a rebate, or yield spread premium, for the higher rate. We use this premium from the higher rate to pay the fees on the transaction.

That is one way a loan can have different costs and rates. The other is what is known as “tiered pricing.”

Not all loans are the same, nor borrowers. Because of this there are pricing adjustments for different factors in a mortgage file: FICO scores, type of property, type of transaction, loan-to-value.

A borrower with 800 FICO scores purchasing a single family residence with 30% down payment getting a $400,000 mortgage will not get the same rate at the same cost as a borrower with 640 FICO score purchasing a condominium with 20% to use as a rental with a $400,000 mortgage. Since the investment condo buyer is a higher risk his cost for the same rate will be significantly higher.

How much higher? In the current market only Fannie Mae has guidelines for the condo investor and the “add-ons” to the loan from Fannie Mae are (in points**): 3.375 for investment property greater than 75% LTV, 0.75 for condo greater than 75% LTV, 3.00 points for FICO score between 640-659 and LTV between 75.01% and 80%. The total add-ons for the condo investor is 7.125 points. ** One point is equivalent to one percent of your loan amount, so if the loan is $100,000 one point is $1,000. In the example provided 7.125 points on a $400,000 mortgage is $28,500.

Using the teeter-totter, for the same price on their transactions the 30% down home buyer with excellent credit scores would have a rate of 3.25%. At the same cost the condo investor would have a rate of 5.00%. Both have a 30 year fixed rate mortgage, but tiered pricing results in a much higher interest rate for the riskier mortgage.

One of the most basic economic axioms is the greater the risk the greater the return. Such is the case in the mortgage industry where investors in Mortgage Backed Securities (covered in the August 8th Weekly Rate & Market Update, link on right margin of this page) will get a greater return for investing in the riskier condo mortgage than the less risky homeowner transaction.

When researching your mortgage make sure the definitions of “no-cost” are the same for everyone you may speak to, some include third party fees such as escrow and title and others do not. Ignore the terminology and get information on what your cost out of pocket, or added to your loan amount, will be for what rate. When you call me I will always give you the cost and the rate options so you can see the options available on your personal teeter-totter and make a decision that is best for you and your family.

Next week we finish our series on how mortgages work with a look why rates drop when the market is good and go up when it is bad—inverse to how stock markets usually react.

For those just catching up here is the series so far (links on the right margin of this page)

8/12/16: I have a Fannie Mae loan, why am I not making my payment to Fannie Mae?

8/19/16: What are Fannie Mae, Freddie Mac and Ginnie Mae?

Have a question? Ask me!

Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.

Some mixed data this week. After leading the economy for the past few years it appears housing may be taking a breather. New home sales saw a sharp jump, a 12.4% increase from June—pushed most likely by discounted prices as the median price dropped 5.1%. The price decline pushes year over year prices down 0.5%. Existing home sales slipped in July 3.2% in sales from June and the national median price dropped 1.6% for the month—though still positive 5.3% from July 2015. The news is somewhat positive for mortgages, a slowing housing market can foretell a slowing economy since housing has been one of the few strong sectors in the economy.

A rebound in manufacturing provides a positive sign for the economy as Durable Goods Orders in July surged 4.4% after dropping 4.2% in June. Despite the jump in July orders the year to year data shows a decline of 3.3% in this index that is a key gauge to economic strength. The news is somewhat negative for mortgage rates, but only if the strong July increase is followed with an increase in orders in August.

Federal Reserve Chair Janet Yellen pulled out the same comments she has been using in 2016 when discussing future increases to the Fed’s rate to borrowing banks. To summarize: strong case to bump rates since labor markets are strengthening and economy appears to have prospects of moderate growth. When she said this in January everyone anticipated another rate increase in March. When she said it in February, March, April…everyone anticipated a rate increase in June. When she said it in July and now August….investors shrugged and asked, “where’s the wolf?”

Rates for Friday August 26, 2016: {yawn, stretch} What a boring rate market. As I have been writing for several weeks there is nothing happening in the economy to change the current investment patterns in Mortgage Backed Securities. Bond markets are floating within a very tight trading range which results in very (very) stable rates. In fact the 30 year conforming rate has been virtually flat since July 1st.


FIXED RATE MORTGAGES AT COST OF 1.25 POINTS
30 year conforming 3.25% Flat
30 year high-balance conforming 3.50% Flat
30 year FHA 3.00% *** Flat
30 year FHA high-balance 3.25% *** Flat

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down (3.5% for FHA) with 740 FICO score for purchase mortgages. ***FHA rates have may have no points and credit towards closing costs, changes daily.


School is starting next week but the season gets underway for us tonight. My kids, and many others, will be playing in the Poly High School Marching Unit tonight at Cerritos College when the Long Beach Poly Jackrabbits take on the Los Alamitos Griffins. I love Friday night high school football and looking forward to the start of the new season and the expectations that come with it. And also like seeing the hard work and results that show on the field at half time and in the stands from the Poly Band!

Have a great week,

Dennis


Posted in:General
Posted by Dennis C. Smith on August 26th, 2016 11:24 AMLeave a Comment

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