Dennis' Mortgage Blog

August 15th, 2014 2:29 PM

Question: How much should my down payment be?

Answer:  With most questions I get from clients and real estate professionals their question triggers several questions from me in order to work our way to the answer that is best suited to the client. Such is the case with our question of the week, how much should your down payment be when you are purchasing your new home.

In the last two weeks we covered piggy-back transactions and compared piggy-back transactions with transactions using mortgage insurance for buyers who are purchasing with less than 20% down payment.

Many buyers are limited as to how much down payment they need for a transaction due to the limit on how much money they have. Other buyers have more flexibility with down payment from the minimum required for the mortgage program for which they are applying to putting 20%, 30% or more into the purchase.

If you are fortunate enough to be in the latter category the instinct for many people is to put as much down as possible to get the lowest mortgage possible. An aversion to debt, to monthly payments, to paying interest is not uncommon—especially following the mortgage and housing market collapses several years ago.  However, is converting a significant amount, perhaps all or almost all, your liquid assets into illiquid equity in property the best financial move for you in the long term? Would you be better served with a lower down payment, higher mortgage balance and higher monthly payment? Perhaps, but let’s answer some questions first.

First we need to begin with the understanding that getting cash out of a bank account, or many different types of investment accounts, is a lot easier and cheaper than converting your equity into cash at a later date. To access equity from you home you either need to obtain a second mortgage or HELOC that has transaction fees and a either a higher fixed rate or an adjustable rate, fund a cash out refinance of your primary mortgage which has transaction fees and possibly a higher rate than what your rate would be in today’s market or sell your home.

With this in mind here are some of the questions to be answered to determine your down payment:

Do you have a definite need for a large sum of cash in the near or medium future? Child(ren) attending college? Planned major remodeling project on your new home after moving in? Opportunity to buy into ownership or partnership at your business?

With your new housing payment and expenses what will be your ability to put aside money for savings, investments, retirement? Will this ability be severely impacted by a higher mortgage payment and retaining a large sum of money in those accounts you currently have?

How long do you intend to be in the property? Is it a five to ten year plan until your children finish high school and you will down size or move out of the area? Are you planning on retiring in ten to fifteen years at which point you will be selling the home? Is your intention to live in the home for several years and then retain it as a rental/investment property and then purchase a new primary residence?

When making major financial decisions, such as how much of a mortgage to carry on your new home determined by how much of your savings you use for down payment, it is important to consider all of your “what-ifs” and do the math on those what-if propositions. If you have one or more children heading off to college in the near future will you have enough money to cover tuition, housing, books, and incidentals? If you are retiring in seven years and will be selling your home and moving out of the area and/or downsizing will you be better off in the long run retaining more money in your investments earning compound interest and dividend reinvestments? If your intention is to purchase a new home in several years and rent out the current home will you be able to save enough for the down payment on the new home in the time frame you have given yourself—keeping in mind real estate prices will probably be higher?

Maximizing your down payment may be the best option for you and your family, but it may not be depending on your goals and objectives in the future. Before committing to your down payment and mortgage amount let me help you analyze your needs, goals, objectives and abilities to help put together the best mortgage program for you and your family.

Have a question? Ask me!   

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

A few major pieces of economic data this week. Leading the way was release of retail sales data for July, which was a disappointment for the second month in a row showing zero growth for the month. Auto sales declined for the second month in a row. Following a pretty good second quarter of consumer spending the third quarter is off to a poor start which will revise some estimates for GDP growth for the quarter lower. Lower retails sales is positive for lower interest rates as it shows low consumer spending which composes 65-70% of the economy.

Weekly unemployment filings for last week increased 21,000 to a total of 311,000 people filing initial claims for unemployment insurance. This is the highest number of filings since late June. High unemployment filings are positive for lower mortgage rates.

Today we received the data for the July Producer Price Index (PPI) which is what producers pay for their goods and services, essentially the wholesale cost of items. The index saw an increase of only 0.1% for the month following a stronger 0.4% growth in June. Lower PPI generally leads to lower CPI (Consumer Price Index, what you and I pay for goods and services) which generally leads to lower mortgage rates. Tempering the PPI data was a fairly strong increase in manufacturing in July, which pushes rates higher as it is an indicator for stronger economic growth and employment.

Rates for Friday August 15, 2014: Frequent readers of the Weekly Rate & Market Update are aware of trading ranges that define markets for Mortgage Backed Securities (MBS) which determine our rates. Prices for MBS bounce around inside a trading range for a period of time and then based on investor demand or sentiment due to market conditions, economic or political news and profit and investment objectives we can see a breakout above the range (leads to lower rates) or below the range (leads to higher rates). Two weeks ago I mentioned we saw a break below the long trading range MBS had been within and then trading came back within the range. Last week I mentioned MBS had broken out of the range on Friday to the high side and if sustained into the week could lead to a new, higher range and a drift down in interest rates. Well the breakout did not hold on as MBS opened lower on Monday and Tuesday. Wednesday on the retail sales news we started to see prices creep up. Today with the PPI numbers MBS broke through the top of the range again, but with strength and momentum. As usually happens with such breakouts to the high side lenders will hold off on passing through all of the gains to borrowers with lower rates, however there is some lowering on rates with the big move.

30 year conforming                               3.875%             Down 0.115%
0 year high-balance conforming           4.00%               Down 0.125%
30 year FHA                                         3.375%             Flat***
30 year FHA high-balance                     3.75%               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 credits available for closing costs at these rates and higher.


I made the comment earlier in the week that a lot of productivity was lost this week as people logged into YouTube to watch sketches, scenes and routines of Robin Williams. His brilliance made him one of the top comedians of all time. Quite often when someone passes away there are the obligatory “what a great guy…” comments, some you may read with skepticism. With Williams however the volume of stories from people in and out of the industry about how he treated everyone, from people on the street to the crews on his movies and backstage at events tell of a man who was a great guy. He will be greatly missed.

Of the many clips I have used to pare my own productivity this week was this one that I hope you enjoy as it speaks to many levels of Robin Williams the man and the entertainer. Robin Williams with the troops in Kuwait, 2007.   

Have a great week,


Posted by Dennis C. Smith on August 15th, 2014 2:29 PMPost a Comment (0)

August 8th, 2014 12:59 PM

Question: Should I use mortgage insurance for my transaction or a “piggy-back” mortgage?


Answer:  Following up on last week’s explanation of what is a piggy-back, this week we compare the piggy-back to using mortgage insurance for those with less than 20% equity in their purchase or refinance transaction. (For those unfamiliar with mortgage insurance or who want a detailed explanation here is Weekly Rate & Market Update from October 18, 2013 explaining mortgage insurance and how it works.)


The answer to the question, whether it is better to use mortgage insurance or a piggy-back is the same to many question and one my kids could probably give: Do the math!


It is a bit more complicated than just a math problem as other factors need to be accounted for in the decision, such as comfort with changing payments, ability to pay additional amount above and beyond minimum payments, expectation for future home values are just some to consider.  Let’s dive in.


Before looking at the math let us consider that mortgage insurance for conventional loans has three options, as discussed in the Update linked above: lender paid mortgage insurance with a higher interest over the life of the loan, single premium financed mortgage insurance with a higher initial loan balance, and monthly mortgage insurance with a monthly premium. Of the three options only the final option, monthly premiums, has the ability to go away in the future.


This is an important factor when deciding if you wish to obtain mortgage insurance or use a piggy-back. The standard guideline is that if you have had your mortgage for twenty-four or more payments and payments have been made on time and (AND) your mortgage loan to value is less than 80% of the then current market value as determined by a report from an appraiser who is approved by the lender, then you can have the mortgage insurance removed from your monthly payment.


On the piggy-back transaction the monthly payment will not go away until the debt is paid in full. As well most piggy-back transactions use a Home Equity Line of Credit (HELOC) as the financing vehicle for the second, or piggy-back, mortgage. Unlike a fixed rate second a HELOC has a variable rate tied to the Prime Rate and typically there is a margin added to the rate. Our most popular and successful HELOC used for a piggy-back transaction has a rate of Prime + 2.24%. Today the Prime Rate is 3.25% add the margin of 2.24% and the rate is 5.49%.


One feature many homeowners like, at least initially, is that the minimum payment on the HELOC is interest only. This minimum payment typically continues until ten years into the mortgage when the payment changes to fully amortize the mortgage for ten remaining years. This causes the payment to increase dramatically as it becomes principal plus interest, unless you have paid down the principal.


Because the interest rate is tied to the Prime Rate the rate you will pay is adjustable, whenever the Prime Rate changes so does your interest rate and your minimum payment. The question on the Prime Rate is not if it will go up, but when, which begs the question, by how much? Common wisdom is the rate will begin to go up next year and many feel we will see a series of increases totaling approximately 0.50% per year (one-half of one percent).


The math problem if one has the option between financing with mortgage insurance or a piggy-back is based upon monthly payment. Which option will give me the lower payment? And for how long? 


Below are three charts that compare options for a couple purchasing a $450,000 home with 10% down with a 30 year fixed rate mortgage at 4.25%. For the mortgage insurance option the couple will have one mortgage of $405,000; for the piggy-back option the couple will have a first mortgage of $360,000 and a HELOC for $45,000 (totaling $405,000 in mortgages).


As you can see in the first chart (Mortgage Insurance) the payment for principal and interest on the mortgage and the MI payment are constant through the first 48 payments. The assumption I have made is that the home will increase in value at 2% per year so the couple will be able to eliminate their MI payment after 48 payments due to the decline in principal of their mortgage and increase in home value. Then after providing approved appraisal to their lender they drop their mortgage insurance and save $165.38 per month (almost $2000 per year).


Looking at the second chart (Piggy-Back) I assumed the Prime Rate would increase half a percent per year for three years, from payment 13 through 48. As you can see the payment goes up modestly per year, a little under $20, and over four years the payment increases just over $55 per month. However as you can see the balance on the HELOC remains at $45,000.


Chart three (Monthly Payment Differential) compares the monthly payment difference between having a monthly MI payment or a monthly piggy-back payment, as you can see the piggy-back has a lower monthly payment through the thirty-sixth payment. The far column shows the cumulative savings of having a piggy-back versus using mortgage insurance for your purchase. As you can see after you have lived in the home for four years you have saved over $5000 by making interest only payments even if rates have increased 1.5% during that time. However, you still have a $45,000 balance.


The final chart (Pay Differential Into HELOC) looks at what happens to your HELOC balance if instead of putting the monthly savings into your pocket each month you instead put it into your HELOC payment. As you can see by making the same payment as you would if you had an MI payment after four years you would lower your mortgage balance by over $7000. However, after making $18,000 in payments you would still owe almost $39,000.


Back to our question, should you finance using mortgage insurance or with a piggy-back? As you can see from the charts the answer to that question lies in what you strongly feel will be your financial position in four to five years and realistically, not “well…maybe…”, how long you may own the home.


Other factors to consider are your income path, if you have the ability to pay down large chunks of the HELOC with bonuses or commissions, and your honest assessment of your financial discipline.


As with most of the questions asked about mortgage situations there is no quick and easy answer, nor is there usually one that is clear cut for every client.


Have a question? Ask me!  


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


Light economic news week, which afforded a bit more space to the MI v Piggy-Back information above. The only economic news of significance to the mortgage markets was the weekly release of unemployment claims, for which 289,000 were filed last week. This is near the post-recovery low in weekly claims and the four week average is the lowest since before the Great Recession. Ordinarily this news would be negative for mortgage rates but investors are only mildly interested in such data at the moment.


Moving markets is once again geopolitical events. President Obama’s announcement that he has authorized air strikes in Iraq to protect civilians trapped on a mountain top by Islamic State fighters has investors wary of a wider conflict, disruption to markets and as such engaged in the traditional “flight to safety.” (“Flight to safety” is the basis for investors to move out of stocks which carry greater risk than bonds and into bonds. American bonds, be it U.S. Treasuries or Mortgage Backed Securities (MBS) are considered among the safest investments and at times of international crisis or economic uncertainty investors increase their purchasing of bonds which results in lower interest rates). Obama’s announcement coupled with the end of the temporary cease fire between Hamas and Israel coupled with continued concerns of the situation between Russian and Ukraine have the global markets less concerned with how many Americans filed unemployment last week and more concerned with how and where there can protect their assets.


Rates for Friday August 8, 2014: Last week we broke out of our long term trading range for Mortgage Backed Securities to the downside and then creeped back into the range. Today MBS have broken out of the range to the upside on the news of possible (actual?) airstrikes in Iraq. The trading went to the highest levels since early June, when the position lasted for three days before dropping and creating the range we have been in. Already today investors have taken profits and moved MBS close to falling back into the trading range we have experienced. If the market can stay above the trading range through closing today, and if MBS prices can hold above the current trading range well into or through next week we should see lower rates next Friday. Keywords: “if” and “should”  My instinct is that profit taking will occur and we will slip back into the trading range. Lenders cautiously holding onto the MBS increase in pricing and have not put into lower rates on their rate sheets, rates flat from last Friday.



30 year conforming                               3.99%               Flat

30 year high-balance conforming           4.125%             Flat

30 year FHA                                         3.375%             Flat***

30 year FHA high-balance                     3.75%               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 credits available for closing costs at these rates and higher.


Forty years ago today President Richard Nixon addressed the country announcing he was resigning as President of the United States. I was twelve years old and on a backpacking trip with other kids at our camp and two counselors, Terry and Jeff. We were on Isle Royale, an island and national park in Lake Superior. On the night of August 8, 1974 our campsite was on the shore of Lake Superior and there was a large pier where a very large luxury yacht was docked. A few days before when we were in Gran Portage, Minnesota where we boarded the ferry to Isle Royale and saw news that Nixon’s Presidency was nearing an end.


Not long after we had set up camp that afternoon either Terry or Jeff walked out the luxury yacht. Upon returning we were told that President Nixon was going to make a statement that night and it could be his resignation and the owner of the yacht had said if we wanted to watch from the dock we could. I was the only camper interested in the process and that evening walked out the pier and stood on the dock watching the President announce he was resigning from office. It was surreal for anyone, especially a twelve year old.


As we walked back to the camp with the darkness creeping across Lake Superior Jeff said, “we’ll never forget this.”


Thankfully we live in a nation where regardless of how the office is transferred from one occupant to the next, be it election, resignation or assassination the transition has always been peaceful.


Here is the speech, the famous line occurs at 2:58, most sets probably clicked off at 3:30. 


Have a great week,



Posted by Dennis C. Smith on August 8th, 2014 12:59 PMPost a Comment (0)

August 1st, 2014 11:05 AM

Question: What is a “piggy-back?”


Answer:  A “piggy-back” is a mortgage transaction that involves two loans. Popular in the lead up to the housing melt down in 2008, the piggy-back transaction is making a comeback, albeit very minor compared to its popularity as the housing bubble grew.


I will explain what a piggy-back is and how it works and then its uses in today’s market.


A piggy-back transaction is a primary mortgage, the first, funded with a secondary mortgage that usually has a much smaller loan amount. Typically the second mortgage is a Home Equity Line of Credit, or HELOC, but it can also be a fixed rate mortgage. The loans are funded at the same time and called a first and a second not because of the size of each loan but because one loan is recorded first, and therefore has first priority on title should there be a default and the property goes into foreclosure.


An example: You are purchasing a $600,000 with 10% down payment. You may get one loan for $540,000 or your may decide instead to opt for a piggy-back transaction with a $480,000 first and a $60,000 second mortgage.


Why would you decide to utilize a piggy-back transaction? In the current market the primary use of the piggy-back has been for “jumbo” transactions---those transactions where the primary loan would be higher than the Fannie Mae/Freddie Mac high balance loan limit ($625,500 for much of Southern California) and the borrower has available 10% down payment, or if a borrower has 10% down payment and wishes to avoid mortgage insurance (next week I will discuss mortgage insurance).


There are few lenders in the market that will lend over $625,000 for a 30 year fixed rate mortgage without at least 20% down payment. Therefore is you are buying a $750,000 home and have $75,000 for your down payment you can get a $625,000 30 year fixed rate mortgage and a $50,000 second mortgage. You have the advantage of a 30 year fixed rate mortgage, you have the advantage of leverage and you have the advantage purchasing the home you want within your financial capabilities.


Increasingly we are seeing some clients who opt for the piggy-back transaction to avoid mortgage insurance, for instance purchasing a $650,000 home, putting $65,000 down, getting a 30 year fixed rate mortgage for $520,000 and a second mortgage for $65,000. Next week I will provide comparisons for the two options and the benefits and detriments of both.


To recap, a “piggy-back” transaction is one in which two loans are used to purchase, or possibly refinance, your home instead of just one mortgage.



Have a question? Ask me!  


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


Roller coaster week for mortgages as economic news, international events and Fed speak all caused major moves in equity and bond markets. Headline news has been the drop in the Dow Jones Industrial Average which dropped 300 points yesterday and is down 3.5% from Tuesday and closed yesterday at its lowest level since early May. While the Dow has been dropping for the most part so have Mortgage Backed Securities (MBS), until today (MBS prices drop rates go up). This is a bit odd as usual as typically when stocks go down so do rates and vice-versa, this week there were a few days when both investors sold off both stocks and bonds and went into cash.


There are many causes, excuses, for the action this week. Economically we had some minor news early in the week, pending home sales (decent number of homes but down 1.1% from May), consumer confidence (very strong mostly on higher income expectations), Case-Schiller home prices for May (down 0.3% for month and up 9.3% from last May—but the year over year is declining monthly). On an ordinary week these pieces of data would have an impact on mortgage rates, this week however there were merely inside the paper below the fold news items.


Wednesday was the source of the tumultuous week. Early in the day when the Bureau of Economic Analysis released the initial 2nd Quarter Gross Domestic Product (GDP) data. You may recall that the first quarter showed a decline in GDP of 2.9%. The second quarter showed a very strong rebound from the weather impacted first quarter contraction with very robust 4.0% growth for the quarter. This news alone pushed MBS prices down (rates up) as investors took it as a sign that the Federal Reserve would raise short term interest rates sooner rather than later.


Piling on the Wednesday news was the release of the minutes from the recent Federal Reserve Open Market Committee meeting (FOMC) in which the Fed governors discuss their policies and future moves. There was nothing in the comments that were unusual—the Fed did not announce that they would be increasing rates in December or May, but investors pushed by the GDP data and declining markets accelerated their selling pushing markets down further.


From a rational viewpoint (yes, I am putting myself up as “rational”) the FOMC announcement is a carbon copy of the last few months’ announcements. Policy rates (Fed discount rate) unchanged (Fed will keep discount near zero), Fed will continue to taper its purchases of mortgages and Treasuries (which it has been doing for months), policy rates are to remain low for a “considerable time” after the bond purchases end (stated in every announcement since 2008 I think), emphasis on labor market which while improving “there remains significant underutilization of labor resources” (labor markets aren’t that great), housing seen as remaining slow (repeat of prior months’ comments). Add it all up and Fed speak was same-old-same-old. Absent any other news and mortgage rates might drop on the comments, however with antsy investors looking to beat the market the sell windows were active.


Some stability returned today, at least to the mortgage and bond markets, as the Labor Department released the employment report for July. After an increase in almost 300,000 jobs in June the economy slowed job growth in July adding 209,000 jobs to the economy with only 198,000 in the private sector. In July the unemployment rate rose to 6.2%. So one day after the Fed comments on a strengthening labor market data comes out that belies some of the comment to verify the concerns that the Fed has in “underutilization of labor resources.” Investors took the news as not pushing the  Fed to increase rates sooner rather than later and as a result we have seen a strong rebound in MBS markets today wiping out most of the losses incurred since Tuesday’s close.


Rates for Friday August 1, 2014: We broke out of trading ranges this week to the low side (higher rates) which created the opportunity for continued decline and establishing a new trading range lower than our recent, and long, range for MBS prices, and therefore rates. The market bounced however which put trading back into the prior range. Remaining in the range through early next week will be key to continuing our long run of stable mortgage rates.



30 year conforming                               3.99%               Flat

30 year high-balance conforming           4.125%             Flat

30 year FHA                                         3.375%             Flat***

30 year FHA high-balance                     3.75%               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 credits available for closing costs at these rates and higher.


I commented early in the week for those in Southern California if you closed your eyes you could picture yourself in Lahaina….mid 80’s for temperature and low 70’s for humidity….except we were not in Lahaina. We, Leslie and I, were prepping our house for full fumigation (i.e. the circus tent covering entire home) which meant bagging food, medications, of course the booze in the bar, moving plants outside and off porches, all in the nice subtropical heat with no air conditioning. And of course moving it all out means moving it all back in. The good news is our friends at Euro Termite did a great job and we discovered our “cooling” systems worked as evidenced by our shirts saturation.


We had not had our home fumigated since we moved in August 1998, and that is probably a bit too long to go in Southern California without knocking out the little critters. If you have been in your home for some time without having a termite/pest inspection I recommend you have it done and despite the considerable “un-fun” aspect of the process protecting your structure with eradication measures.


On the plus side you do throw out a lot of stuff that accumulates.


Happy, happy weekend for the Smith Family as our daughters return on Sunday after being at camp in Minnesota since July 7th. Be nice to lose control of the television, hear “oh Daddddd” twelve times a day and be reminded that I’m weird!


Have a great week,



Posted by Dennis C. Smith on August 1st, 2014 11:05 AMPost a Comment (0)

July 25th, 2014 2:47 PM

Question: Following up on the homeowner insurance topic the past two weeks (single family residences here; condominiums here) a brief word about the deductible on your homeowner’s policy.


Answer:  Like with auto insurance and many health insurance policies, homeowner’s insurance policies have a deductible. To refresh the deductible is the amount of money you have to per incident or per year before your insurance kicks in and your company pays for the incident. For example if you have a $500 deductible on your auto policy and get into a fender bender the insurance company will have an adjuster review your claim and damage and estimate it will cost $750 to fix the damage. You go get the damage fixed at the local (and reputable) collision repair shop and your insurance company will send you a check for $250; the $750 estimate in repairs less your $500 deductible. If six months later someone sideswipes your car in the street and it has $1400 in damage your insurance will now pay the entire $1400 in damages as you have already met your deductible.


As with auto insurance, the higher the deductible you choose the lower your insurance premium is going to be. If you choose a policy with a $1000 deductible policy you may pay $400 per year for homeowner’s coverage, if you choose $5000 deductible your annual premium may be only $300. DISCLAIMER: these numbers are strictly for example purposes and do not correlate directly to any direct relationship between premiums and deductibles. Mandatory disclaimer aside, the point to understand is that you can lower your annual insurance costs by increasing your mandatory insurance obligation if you have a claim.


Should you get a higher deductible and pay a lower premium? This depends on many factors. First do the math, in the above instance you can lower your premium by $100 per year by increasing your deductible by $4000; if you have no claims for 40 years (40 x 100 = $4000) then you “win” by having the higher deductible. Second consider the likeliness of a claim, and remember a homeowner’s claim is not just fire damage but also theft, injury—postal carrier slips on your porch and breaks a pelvis, and other damage that may be covered.


There are limits from most lenders as to maximum amount they will allow for your deductible. If you are buying a $350,000 home, make $75,000 per year and after close will have reserves of only $5000 then an underwriter may have a difficult time approving a policy with a $7500 deductible; on the other hand if you are buying a $2 million home, make over $500,000 per year and will have reserves in the hundreds of thousands of dollars an underwriter may not blink at a $20,000 deductible.


For most homeowners we encourage a lower deductible to protect against an assault on assets if you have a claim—that is after all what insurance is for. However there are occasions when we may be very close to the qualifying point and need a lower insurance premium to ensure we can qualify and purchase the home, in which case we suggest a higher deductible policy for the first year.


Insurance is a major factor in purchasing and maintaining your home, too often it is treated as an afterthought in the process. When you are purchasing or refinancing your home it is also a good time to review your insurance policies and coverages and see what else may be on the market, weighing your long term relationship, service and costs with other policies that may be available. When getting insurance quotes always get quotes for the one product (i.e. just homeowner’s or just auto) and also if the policies were bundled; most companies have discounts for the more policies they hold as well as length of relationship and number of claims.


Have a question? Ask me!  


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


Another week that was light on economic data, but the data released carries weight. International events continue to weigh on markets, as has the announcements of corporate earnings for the second quarter. The major news was the release of the Consumer Price Index (CPI) for June, which depending on how you dissect the numbers either was good news for continued low rates or good news for those who feel rates should be higher (labelled “hawks”). The overall number was a modest 0.3% increase in prices to consumers, down from the 0.4% increase in May. Year over year the inflation number is 2.1%, just over the 2% level that many use as a benchmark that the Fed should use to determine higher interest rates. Dissecting the data and we see that if food and energy are stripped from the number (because hey, who buys food or energy?) for what is known as the “core inflation” number prices only increased 0.1% for the month and 1.9% year over year.  This indicates the increase in the overall number was due to higher food and/or energy prices, and it was the latter  hat pushed the overall inflation number. Food prices in June only increased 0.1%, but gasoline prices that typically rise in summer months spiked 3.3% for the month—annualized that would result in almost 40% increase in prices at the pump, thankfully it is a one month measure and not annual which actually saw pump prices decline 0.3% in rate to an increase of 2.0% year over year.


What does all this mean? Last week we saw that wholesale prices (PPI), those paid by producers of goods and services, increased 0.4% led by higher energy costs. The PPI outpaced the CPI in June but is usually a leader for consumer prices, leading one to suspect that consumer prices in July should rise by more than June’s 0.2%. If this is the case then investors should be reacting based on a higher chance that the Federal Reserve will increase its discount rate, and therefore start the trickle effect through other interest rates, sooner rather than later. The rate hawks are concerned about inflation and that it will start to grow in the economy faster and stronger than the Fed may be able to manage. Those who feel the hawks are correct and see higher producer and consumer prices will begin to bet on higher rates, and self-fulling prophecy holds that rates will increase. In the short term due to the mixed nature of Tuesday’s report the overall impact on mortgages was not significant.


Of greater importance to most readers of the Weekly Rate & Market report was the National Association of Realtors release of existing home sales data for June. After declining each month in the first quarter homes sales increased each month in the second quarter with a gain of 2.6% in June from May (May up 5.4% from April) and year over year sales are down only 2.3% from June 2013, which was the first closing month following the sharp jump in rates in May 2013. Increased activity in sales did not have a large impact on prices, the national median home price increased 5.3% in June to $223,300 (as an aside, this was approximately the average loan amount of my clients around 2000). As existing home sales increase, and home prices increase, the expectation would be for mortgage rates to increase as well. Stronger home sales indicates a strengthening economy which leads to higher interest rates.


Yesterday’s release of unemployment claims was a big one. Typically unemployment claims increase in the summer as auto manufacturers layoff workers to retool plants for new models. The decline in recent weeks topped off by the large decline last week to only 284,000 new claims being filed either indicates that auto makers are slow to begin retooling this summer, or that other industries have drastically reduced layoffs. If this is the case then labor markets would appear to be strengthening faster than anticipated. The news pushed rates up as the Fed has stated that employment is the key focus for raising rates, and lower unemployment claims means higher rates are that much closer.


Rates for Friday July 25, 2014: A large drop in stock prices today and push up in Mortgage Backed Securities prices (rates down) on some disappointing earnings statements from some major companies and a flow into cash and bonds for the weekend due to ongoing international events. After moving down a bit early in the week, rates climbed yesterday and at opening today before easing back down during trading today on the poor stock performances. Net result is another flat Friday from the prior week, this puts the 30 year fixed conforming on the same number, 3.99%, for nine of the past eleven weeks. I’d call that a narrow trading range.



30 year conforming                               3.99%               Flat

30 year high-balance conforming           4.125%             Flat

30 year FHA                                         3.375%             Flat***

30 year FHA high-balance                     3.75%               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 credits available for closing costs at these rates and higher.


My apologies to those who went to visit the link to the Jimmy Valvano speech I hyped last week only to give you a link to a canoe trip our oldest daughter will be going on this coming week in Minnesota—I dialed up the trip link to send to Leslie so she could show family members and copied that instead of the Jimmy V speech—file under we all make mistakes.


Here is the link, the speech is still excellent and I continue to encourage everyone to watch! (Yes, I tested the link and it works!)


Taking advantage of our daughters’ month long absence as they enjoy camp in Minnesota, Leslie and I took a long weekend to San Luis Obispo last week. What a gorgeous part of our state. For those who have not been, or not been in a while I encourage you to plan a weekend get-away—if you want any recommendations don’t hesitate to ask!


Have a great week,



Posted by Dennis C. Smith on July 25th, 2014 2:47 PMPost a Comment (0)

July 18th, 2014 3:13 PM

Last week you wrote about insurance for homeowners, what about insurance for condo owners?


Answer:  Great question as some transactions do not have lender required insurance policies and some do. Why?


Let’s start with what needs to be covered if you do own a condominium unit. Condos are joint ownership of land and structure, when you own a condo you own an undivided interest in the entire complex, and a divided interest in the unit which you purchased. If the structure is jointly owned how can you own your unit?


The Homeowners’ Association owns the main structure and you own what is attached to that structure. For instance the HOA owns the struts that make up the walls, you own the drywall. The HOA owns the structure that is your floor, but you own the flooring. The HOA owns the plumbing to your unit but you own the fixtures. Essentially anything you can see inside your unit you own, anything past that is joint ownership with your neighbors.


The question for insurance on your mortgage transaction is coverage of the interior of your unit. Lenders require coverage that insures the interior of the unit, if you have a kitchen fire and the cabinets, walls, fixtures, etc need to be replaced many HOA master policies will not cover the loss. If this is the case then you need to obtain your own policy that covers the part of your unit that you own and for which you are responsible.


When we are financing a condominium unit we contact the HOA management company and request a copy of the master insurance policy, that tells us if your unit is covered as part of the policy or if you will need a separate, “HO6”, policy to cover the accidents that may occur damaging part or all of your unit.


If you do need to obtain an HO6 policy the coverage requirement is significantly less than the price (or value if a refinance) of your property and premiums are much lower than a policy for a detached single family residence.


If you own, or are buying, a condominium unit it is a good idea to review the master policy to see what is and is not covered and what your liability is should something happen. As well you may wish to see if the HOA has separate earthquake coverage and if so what is covered in regards to your unit and possessions.


Have a question? Ask me!  


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


Economic news this week was light on data and heavy on testimony.  Major news for the week started with disappointing retail sales figures for June, rising only 0.2% dragged down by auto sales which declined 0.3% from May. Slower retail sales usually push rates lower as it can be a leading indicator for a slowdown in the economy as consumer spending is 65-70% of the total economy.


Wholesale prices jumped in June, up 0.4%, after declining 0.2% in May, however most of the increase was due to higher energy costs. Some price increases on the wholesale level are good for the economy and the 1.9% year over year increase was within that healthy range. As long as wholesale prices increase in moderation the impact on rates should be to slightly to higher rates, large increases in wholesale prices push rates higher as higher wholesale prices usually lead to higher consumer prices, and higher inflation brings on higher rates.


Unemployment claims continue to decline with 302,000 initial claims filed last week. Continuing claims also continue to decline, at post-recovery lows. Lower unemployment can be negative for mortgage rates if it is accompanied by higher employment and not dropping because people are dropping off the unemployment roles due to expiration instead of finding work. The Fed has pegged employment as a key factor in its decision to raise rates in the future, dropping unemployment claims puts upward pressure on rates.


The biggest impact on rates this week was the semi-annual testimony to the Senate Banking Committee by Federal Reserve Chair Janet Yellen. Two days of testimony regarding the Fed’s economic outlook and future for interest rates. Yellen said that she is concerned with the housing markets that have not had a strong rebound from the slow down after rates increased last May. On employment Yellen said there is “considerable slack,” which is Fed speak for despite the positive recent news on the jobs front there is a long way to go for recovery in employment. Yellen confirmed that the Fed will wind down its purchase of mortgages and Treasury debt in October. The big question that does not seem to be asked is then what? What happens to the mortgages and Treasury debt that will still be coming to market that has been absorbed by the Fed? What happens to the Fed’s huge balance sheet loaded with long term securities? Everyone seems to keep asking when the Fed will begin to raise its discount rate, and though the  consensus is mid-2015 for these increases the focus continues to be on when the Fed raises rates. I am more concerned with when, how, whether the Fed starts selling the trillions of dollars of assets it is holding in mortgages and Treasury debt which can have a far greater impact on you and me than increases in the discount rate. Mortgage rates headed up with Yellin’s testimony due to the media and investor focus on rate comments.


The economic news this week was over-shadowed by the tragic shooting down of the Malaysia Airlines plane over the Ukraine on Thursday and Israeli troops entering Gaza. Following the news of the disasters Mortgage Backed Securities began to climb (lower rates) and by days end erased losses from the first three days of the week. The incident increases tensions in the region and internationally, which causes investors to flee to safety, which means U.S. long term investments like mortgages and bonds. If the situations in the Ukraine, Israel and Gaza, Syria, Iraq continue to escalate rates will drop steadily as investors pull money out of foreign markets and invest in United State Treasuries, mortgages and other bonds. Bad news, either foreign or domestic moves interest rates, and therefore mortgage rates, down.


Rates for Friday July 18, 2014: As mentioned above, international events caused retreat for mortgage rates after climbing earlier in the week, as a result no change from last Friday. We have spent the last twelve weeks within 0.115% of today’s conforming rates. Stability is very welcome in our industry!



30 year conforming                               3.99%               Flat
30 year high-balance conforming           4.125%             Flat
30 year FHA                                         3.375%             Flat***
30 year FHA high-balance                     3.75%               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 credits available for closing costs at these rates and higher.


I often post links in this space, and I know many (most?) do not follow them. I think if you follow this week’s link you will be glad you did and I’m willing to be that most of you who watch the video will forward it to others.


I believe I post this every year at this time, when ESPN has their Espy’s Awards show. I was very fortunate to see the speech linked below in real time, I happened to be home and flipping the channels and caught the introduction of Jimmy Valvano acceptance speech for the Arthur Ashe Award the first year the Espy’s were held. For those of you not familiar with Jimmy V, he as a college basketball coach who took a Cinderella team through the NCAA tournament ultimately winning the tournament, playing much better teams every round. After coaching he became a commentator for ESPN on college basketball and the sports community was stunned to learn he had been diagnosed with brain cancer. Just before it became impossible for Valvano to get around or have any energy he was able to give this speech. Without hyperbole, I consider this to be one of the greatest speeches given in my lifetime.


I strongly implore you to take the ten minutes this video runs, grab your loved ones, kids, grandkids and watch this speech. His message, the message of a dying man, resonates throughout time and is one I think of not infrequently when I think I am having a challenging day. His motto, “Don’t give up, don’t every give up” is timeless. He definition of a good day should be remembered by each of us as we rise in the morning and lay down at night.


Here is the link


Have a great week,



Posted by Dennis C. Smith on July 18th, 2014 3:13 PMPost a Comment (0)


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