Dennis' Mortgage Blog

February 24th, 2017 12:12 PM



Question of the week: I’m doing my taxes, what is deductible from my mortgage transaction last year?

Answer: This has become an annual question for the Weekly Rate & Market Update.

NOTE! I am not a Certified Public Accountant, nor a professional tax preparer. Depending on your situation the following items may be deductible when you file your taxes:

• Mortgage Interest
• Origination/Discount Points
• Mortgage Insurance Premiums
• Property Taxes

Each of these is subject to not being eligible for deductions depending on the nature of your transaction (purchase, cash-out refinance, home improvements, etc) and your income.

My standard answer to this question was answered in the first sentence; I am not a tax professional. I have a hard enough time trying to keep up with the changes Congress, the Fed, HUD, DRE, Fannie Mae or other government agencies have regulated, I certainly have not been able to keep up with all the changes in the state and federal tax codes these past few years.

Note that the mortgage insurance premium deduction has been on a year-to-year extension by Congress and is subject to limitations based on income. Congress extended deduction in 2016 for 2016 but as of this point in 2017 the deduction is not part of the tax code—yet. This may change however, and the deduction could become a permanent part of the tax code not requiring annual renewal is H.R. 109 – Mortgage Insurance Tax Deduction Act of 2017 is passed by Congress and signed into law by the President. The bill sponsored by Rep. Brownley (D-CA-26) simply states, “This bill amends the Internal Revenue Code to make permanent the tax deduction for mortgage insurance premiums.” (Sidebar I have long advocated that every bill presented in Congress must be hand-written by the sponsoring member of Congress, not put together by staff or cut and paste from lobbyists, but pen to paper written by the member. This would lead to less complicated laws that are easier for everyone to understand. End Sidebar)

Whether this bill, currently in the House Ways & Means Committee, makes it through, and makes it through with the simple declarative sentence, remains to be seen, but if passed those paying mortgage insurance will have deductibility annually—possibly subject to income limitaions.

If you purchased, sold or refinanced property last year I strongly advise you to take copy of the HUD-1 closing statement from your escrow documents to a professional tax preparer or CPA. S/He will be able to assist you in maximizing your deductions while staying out of trouble with the IRS and State Franchise Tax Board.

Provide your tax professional with your IRS Form 1098 showing mortgage interest paid, and if applicable mortgage insurance paid and amount paid in property taxes for the year. (Note, if you paid under $600 in interest to a lender you will not receive this form—which is why your HUD-1 statement will be needed if you refinanced or purchased in 2016.)

If you need a recommendation for a tax preparer do not hesitate to contact me.


Have a question? Ask me!

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

Housing data headlined economic reports this week. In a tale of two markets, existing homes sales and new home sales, the existing home sales in January were very strong while new home sales softened. Existing home sales across the country were up 3.3% from December and 3.8% from January 2016. Nationally the median home price is up 7.1% from last January, the West showed an 8.4% year on year increase. Housing has been driving economic growth and stronger housing will lead to more growth—which means higher rates. These conflicting reports result in neutral overall effect on mortgage rates.

Locally the price data shows a dip and a jump. The dip is in prices from December to January statewide and in all Southern California Counties, the jump is in prices from January 2016 to 2017. In LA County the median price for a single family home was $509,320 in January, up 5.9% from 2016, Orange County is up 5.7% for the year to $740,000. Both counties saw sales drop over 26% from December but up 6.7% in LA County from 2016 and down 1.1% in Orange County from last year. The best return on investment in California in 2016 on the median single family home? Del Norte County (most northeastern county, from Oregon border to below Klamath, Pacific to western part of Klamath National Forest), where if you bought the median priced home last January and sold in January you would have seen a 48% return, your buy price having been $157,000 and your sale price was $232,250.

Rates for Friday February 24, 2017: Our range is shifting up a bit for Mortgage Backed Security (MBS) prices (higher prices mean lower rates), not a lot but there is some momentum and if it holds we could see rates dip a bit next week. “If.” For now rates are flat from last week with downward momentum.


FIXED RATE MORTGAGES AT COST OF 1.25 POINTS
30 year conforming 4.00% Flat
30 year high-balance conforming 4.125% Flat
30 year FHA 3.50% Flat
30 year FHA high-balance 4.00% 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.



Somehow I am not getting any older but our youngest daughter turned 15 this past weekend—I keep telling myself that. When I started the Weekly Rate & Market Update as a monthly email to real estate agents her older sister was still an only child. We have seen a lot of changes in our industry during her lifetime, I wonder what changes will occur in her next decade and a half.

The Oscar’s are this weekend and we’ve seen four of the Best Picture nominees (I wish they would go back to just five films nominated—but I’m a grumpy old guy who’s not getting older). Of the four we saw my ranking for the Oscar would be: winner: “Lion” A great story that is wonderfully told, great acting, very moving and everything that makes going to the movies a great experience. Just behind, “Arrival” I am not a sci-fi guy, Star Wars, Star Trek, etc are not a genre I like very much. “Arrival” is not of that type sci-fi, but an encounter movie that is fantastic. A mind bender with great acting and writing. I need to see it again as I understand it better after Leslie explained it to me and patiently answered my “but what about….” questions. In third place is another great movie with a wonderful story that is well told, and like “Lion” a true story, “Hidden Figures.” Perfect movie: story, acting, production, casting, every box for what makes a movie great is checked, I just liked the other two better. Finally, a very good movie that was very enjoyable and I can see how some would consider it a winner but I found fell short of the other three is “La La Land.” I have always loved musicals, from the big production Rogers & Hammerstein shows to Fred Astaire, Bing Crosby, Doris Day smaller scale but movies with great stories, humor and songs—I watch them all. La La is great in that maybe Hollywood will get back to making good family musicals again, but not quite there.

I realize by putting this list together I probably cursed “Lion” but hope not, it is very deserving.

Have a great week,

Dennis


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Posted by Dennis C. Smith on February 24th, 2017 12:12 PMLeave a Comment

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February 17th, 2017 12:16 PM



Correction: or rather addition, to last week’s question and answer about using assets for qualifying income. An important factor I did not mention is that many lenders require you have at minimum of at least $500,000 in assets in order to use assets for qualifying income.

Question: Why is the cost for a loan with 20% down more expensive than a loan with 10% down?

Answer: Doesn’t make sense does it?

It does if you are a mortgage lender, or Fannie Mae or Freddie Mac who is backing those 80% and 90% loan-to-value mortgages. Because if you are Fannie or Freddie you want to make money not loose money and one part of achieving that objective is to mitigate risk.

But isn’t it more likely that someone who puts 20% down less likely to walk away from their home and create a foreclosure than someone who puts 10% down? Yes, the person with more down payment is less likely to let their home go into foreclosure. However, as we saw during the housing crisis many families who lost their homes had purchased with 20% down, or more. Because of the cost of foreclosure to a lender, typically greater than 30% of the loan amount, the losses to a lender for a loan that originated as an 80% mortgage are greater than the losses for a loan that originated with a 90% mortgage.

Why? Mortgage insurance.

If your mortgage has a loan-to-value of 80.01% or greater the lender will require mortgage insurance. The purpose of mortgage insurance? Reimburse the lender a certain percentage of the loan amount should you go into foreclosure—that reimbursement is typically to 65% of the original loan balance.

Let’s say that Fred and Barney are purchasing homes next door to each other for $400,000. Fred is putting 20% down for a $320,000 mortgage and Barney is putting 10% down for a $360,000 mortgage. Barney is required to have mortgage insurance that adds $132 per month to his payment, but covers the lender for 25% of the original mortgage ($90,000).

Most studies show that a foreclosure costs a lender approximately 30% of the loan amount. In the above example the cost to the lender should Fred be foreclosed on is about $96,000. Add the cost of the foreclosure to the loan balance and the total is $416,000. Even if the loan balance has decreased and the home value has increased there is very little room for the lender to get out of the transaction at a break even. Should Barney go into foreclosure the cost to the lender will be about $108,000—but the lender will get a check for $90,000 and the lender will lose $18,000. But this is if Barney defaults on the first day of the loan and there is no change in property value.

Most foreclosures occur because there is not enough equity for the borrower to sell the property and pay off the loan. In the above example let’s assume that the biggest employer in town where Fred and Barney both work, Slate Rock and Gravel, shuts down. Thousands of residents in Bedrock have lost their jobs and unable to make mortgage payments. Prices fall 10% on Fred and Barney’s homes and each of them have paid down about $10,000 on their mortgages as the closing comes a few years after they bought homes and became neighbors.

Now Fred and Barney’s homes are worth $360,000, Fred owes $310,000 and Barney owes $350,000. Fred’s foreclosure costs the lender $93,000, plus his loan balance of $310,000 and the total cost to the lender is $403,000 on a home worth $360,000—the lender is looking at losing $43,000.

Barney’s loan balance is $350,000 and the foreclosure cost to the lender is $105,000, total for the lender is $455,000. The lender gets a check from the mortgage insurance company for $90,000 (25% of original balance), lender is now into the loan and foreclosure for $365,000, the lender is losing $5000 on the value of $360,000.

Why is the cost of the 90% loan less than the 80% loan? Because the loss exposure to the lender is less due to mortgage insurance. The lower the risk the lower the cost of the loan.

Have a question? Ask me!

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

Lots of rate moving information this week. On the data side we had reports on the Producer Price Index, Consumer Price Index and Retail Sales for January. The big number for PPI was higher than expected and supports higher inflation, up 0.6%. However the support is a bit eroded when the numbers are dug into as the bulk of the increase was a spike in energy prices in January (up 4.7%). The year over year PPI growth remains steady at 1.6%. The Consumer Price Index data also exceeded estimates, also increasing 0.6%--also pulled up by energy costs. The big news in the CPI data is the year over year number showing price increases of 2.5%, above the Fed’s target of 2.0%. Retail sales in January were very strong, up 0.4%, despite a drop in auto sales. The retail sales jump is reflecting higher consumer confidence. Adding strength to the retail sales report was a very large revision upward in December sales to 1.0% growth for the month. The three reports provide very strong support to the Fed to raise its Fed Funds rate at its March meeting, and following the releases of the reports on Tuesday and Wednesday we saw a strong drop in Mortgage Backed Security (MBS) prices—which means rates increase.

Adding to the higher rate momentum was Fed Chair Janet Yellen’s tour of Senate and House committees giving testimony and answering questions. Her comments were about as close as a Fed Chair will come to saying “we are raising rates at our next meeting” as well she indicated the data appears to support multiple rate increases from the Fed this year. Ordinarily this would pop rates up, however we saw a Fed rate increase priced into the market during the rate run-up in November and December.

Rates for Friday February 17, 2017: Week to week stability remains the norm as we are unchanged for the third straight week as MBS rally on Thursday and Friday following the mid-week drop. The low prices in MBS (higher rates) on Tuesday and Wednesday equaled lows for the past six weeks and are showing as a point of resistance, we are in a tight range for rates so there is no advantage to floating and trying to beat the market at this point—lock when you can.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS
30 year conforming 4.00% Flat
30 year high-balance conforming 4.125% Flat
30 year FHA 3.50% Flat
30 year FHA high-balance 4.00% 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.




We got lucky with our French exchange student as we toured LA last weekend in perfect weather—she was Snapchatting and Instagramming to her friends in cold, wet France beautiful sunny beaches in Venice and Santa Monica and pictures showing the ocean and snow capped mountains from the top of the ferris wheel at the pier. This weekend, her last as she leaves for home Sunday, she is feeling a bit more at home with the weather.

Big storms are something I have always liked, and this weekend it appears I will be liking a lot. A reminder that with all the rain and storms this weekend and early next week, if you are thinking about buying a new home in the near future this is the time to look. Next weekend appears to be somewhat dry but in looking at homes you will find evidence of how they weathered the storms, any leaks, evidence of water coming onto the property or not draining properly around the house. Take advantage of the inclement weather to spot possible flaws in a home you may be considering to buy.

Enjoy being cozy with old movies and a fire this weekend as Mother Nature does what she does!

Have a great week,

Dennis

Missed a Weekly Rate & Market Update? You can catch up as all the updates are posted on my website at http://www.denniscsmith.com/MyBlog .

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Posted by Dennis C. Smith on February 17th, 2017 12:16 PMLeave a Comment

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February 10th, 2017 11:23 AM


Question: Can I use my assets for income?

Answer: Possibly.

This question comes up from time to time with high net worth individuals who do not have a lot of income—perhaps they get retirement income or other payments that are not enough to qualify for a mortgage, but they have significant funds in investment accounts.

Fannie Mae and Freddie Mac both have formulas to use asset accounts for income. The qualification process has several moving parts and I will see if I can clarify. Note that using assets for income is limited to owner occupied 1 and 2 unit properties with a maximum of 80% loan to value for a purchase or rate and term refinance (65% if taking cash out).

The first step is to determine if the account(s) that is being used for income qualifying is a retirement account or a “normal” account that is subject to taxes for capital gains, interest and dividend payments.

If the account is a retirement account, an IRA or 401(k) for example, then we must then determine if you have started taking annual distributions. If you are over 70 ½ then you are obligated to take minimum distributions based on tables provided by the IRS.

If you have already begun taking distributions then whatever amount you have already taken annually will be used for your income, unless you can show that an automatic payment of a certain amount has been set up and in place with your account holder. As well the account must have sufficient funds to show payments for five years. For example if you have an IRA with $500,000 and for the past two years you have taken out $24,000 then we will credit you for $2,000 per month in income.

If you have not yet begun taking distributions and are not yet obligated to do so then we apply a formula to your retirement account to calculate the amount used for income. First we determine if you will be assessed a 10% early withdrawal penalty by the IRS if you are under 59 ½ years old. Then we calculate if you will need any of the funds for down payment or closing. Then we determine if the funds are held in cash or stocks and mutual funds.

For simplicity sake let’s assume your account has $500,000 in it, you are 62 years old and the funds are fully invested in mutual funds, your funds for closing are coming from the sale of a current residence so you do not need the IRA for cash to close.

The first step is to multiple the balance by 70% to account for potential swings in the market in the future: 500,000 x .70 = $350,000.

We then divide the amount by 360 to get monthly income: 350,000 / 360 = $972.22 is the qualifying income.

What if your funds are in a “normal” account? First the funds must be seasoned for more than one year. So if you inherit a large sum of money or win the lottery you must wait to use the funds for qualifying income.

Then the same rules apply for qualifying, if funds are invested then use 70% of the balance then divide by 360 months. In some cases we have a client with a large amount of funds in cash as well as invested in this case we split the calculation.
Let’s assume you have $100,000 in cash and $400,000 invested. In this case we add the $100,000 to 70% of $400,000 = 100,000 + (400,000 x .70) = $380,000.

Divide by 360 and we get monthly income = 380,000 / 360 = $1055.56 per month.

If you or a family member is considering buying a new home, or needs to refinance their current home, and may be tight on income, give me a call and we can work through all the numbers, including assets, to determine if we can increase the qualifying income using retirement or other asset accounts.

Have a question? Ask me!

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

Rates for Friday February 10, 2017: Very little economic news this week that impacts mortgage rates. Most of the movement in rates this week were tied to the equity markets as investors moved their money between bonds and stocks. There was some movement during the week but we end up this Friday flat from last Friday and the Friday before. Ah, some stability…

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS
30 year conforming 4.00% Flat
30 year high-balance conforming 4.125% Flat
30 year FHA 3.50% Flat
30 year FHA high-balance 4.00% 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.




Our student from France, Mallory, is still with us and ready to take us on a Southern California tour. The kids have Monday off so this weekend the plan is to explore LA, possibly Venice Beach, Santa Monica Pier, Rodeo Drive, cruise down Sunset to Malibu, and then on Monday they will head up to Universal Studios while I recover back at work! I hope you have a great weekend wherever you are!

Have a great week,

Dennis

Missed a Weekly Rate & Market Update? You can catch up as all the updates are posted on my website at http://www.denniscsmith.com/MyBlog .


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Posted by Dennis C. Smith on February 10th, 2017 11:23 AMLeave a Comment

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February 3rd, 2017 12:23 PM



Question:
Should I get a Home Equity Line of Credit, if so how does it work?

Answer: This question has come up frequently in the last few months, usually as part of a bigger question regarding remodeling your home and how to pay for it. Last January I discussed options for paying for a remodel of your current home, and encouraged you to weigh going through the remodel against buying the home you desire.

Those options are still there: new cash out mortgage, a Home Equity Line of Credit (HELOC) or paying cash, or a combination.

Of the available options the most mysterious to many homeowners is the HELOC, what is it, how does it work? When looking for a HELOC what are the factors I should consider?

A HELOC works very much like a credit card. You are approved for a credit limit and you can use and pay down, and use and pay down and use…through what is known as the “draw period.” During this period your minimum payment is typically interest only. Interest is calculated by taking the published Prime Rate (lender will let you know which bank’s or publication’s Prime Rate it is using to establish your rate) and to the Prime Rate a margin will be added. If the draw period is not equal to the term of the credit line then when the draw period is up the ability to obtain funds from the HELOC is no more and the lender will generally fully amortize your payments for the remainder of the loan.

Let’s put some numbers to the explanation and make it a bit clearer for you:

You apply for and are approved for $100,000 HELOC. The lender says the terms are Prime + 1, the draw period if for ten years during which you must pay interest only on any outstanding balance and the total period of the loan is twenty years.

Currently the Prime Rate is 3.75% so the rate on any outstanding HELOC balance is 4.75%, until the Prime Rate changes at which point your rate will decrease (unlikely in short/medium term) or increase (very likely short/medium term).

You want to put in a new garage door and add cabinets to the garage, the cost is $10,000 and you decide to use your HELOC to pay for the work. After you take the funds out you get your statement for the first month and it shows you have a $10,000 balance and $90,000 still available for use. The rate is 4.75% on $10,000 so the interest due for the month is $39.58 (10,000 x 0.0475 = $475 for 12 month period, or $39.58 for the month) which is your minimum payment.

Having some additional funds you pay the interest plus another thousand dollars for a total of $1039.58. You do not use any more funds in the coming month so your statement shows a balance of $9,000, but right at the billing cycle the Federal Reserve raised their Fed Funds rate by 0.25%, as a result the Prime Rate also increased so your rate is now 5% (Prime = 4% + margin of 1%). Your account has accrued interest of $37.50 which is the minimum payment due and you have available credit of $91,000. You pay just the interest this month as you use additional funds you have for the month on fixtures, etc for the refinished garage.

Having finished the garage you realize that the exterior paint doesn’t look as good as it did before the new garage door so you hire a painter to paint and patch your home and the cost is $18,000 which you put on your equity line.

Your monthly statement comes and it shows you have an outstanding balance of $27,000, the Fed raised rates again by 0.25% so your rate is 5.25%, the interest you have accrued for the month is $118.13 which is the minimum payment due. You have available credit of $73,000.

And so it goes for the ten year draw period. You borrow the money on the HELOC, make your minimum interest payments some months and others when you have more funds available make payments to lower the principal balance. During the period rates fluctuate up and down and your monthly interest rate adjusts accordingly.

At the end of the ten year period you have a balance of $62,000 on the HELOC and the Prime Rate is 6.25%, your interest rate is Prime + 1 so your rate is 7.25%. The bank has informed you sixty days before that your draw period is coming to an end and in two months you loan will become fully amortized for the remaining ten years of the loan.

To amortize the loan the lender will take your outstanding balance, the number of months left on the HELOC and the current interest rate and calculate what the payment would need to be to make the same payment every month so at the end of 120 monthly payments your balance will be zero.

With $62,000 balance and a 7.25% rate your monthly payment the first month of no longer having the interest only option is $727.89, of which $374.58 is interest and $353.30 is principal. You make the minimum payment.

Coincidentally once again, the Feds raise the rate on the same day of your billing cycle to 6.5%, you HELOC rate is 7.5% and your balance is now $61,646.70 and you have 119 months left to pay off the balance. Your payment for the month is $735.89, a bit higher due to the rate increase.

For the next ten years your payment will adjust depending on the Prime Rate and your outstanding balance and the number of months you have left on your HELOC before it is to be paid in full.

Even if we were not coming off years of historically low interest rates, when getting any type of adjustable loan you should assume your interest rate will go up during the life of the loan. What may be a comfortable payment today may not be next month, year or in five years. As well since the rate is adjustable you should pay down the principal as much as you can as soon as you can to mitigate future rate increases.

Most banks and credit unions offer HELOCs, so what factors should you consider when looking for a HELOC and considering where to apply?

The primary factor is what is the margin over the Prime Rate for the interest rate you will be paying? Does the margin vary depending on how much you apply for, i.e. is the rate lower for $150,000 credit line as opposed to $75,000? Does the margin vary if the combined total of my current mortgage and my new HELOC exceeds a certain percentage of my home’s value, i.e. is the rate higher if the combined totals of the loans exceeds 80% of the value of my home?

Next what are the terms of repayment? Is the draw period short or long? After the draw period is up is the remaining balance amortized or can you still pay interest only? How long is the period the loan may be amortized?

Finally, what is the cost up front for the HELOC and what, if any, is the annual maintenance fee?

For many clients calling over the past few years inquiring about HELOCs I have suggested they contact their credit union instead of a major bank. While Stratis Financial does have some equity lines available I find the terms for many/most credit unions are better than what we can offer, and better than any of the major banks in the region. Particularly in the amount they will lend as a percentage of the value of your home and typically with the margin over Prime as well. If you don’t belong to a credit union research them anyway as these days many credit unions allow members beyond what their traditional charter called for—for instance I have accounts with a credit union that used to be exclusively for tele-communications workers, and in the past have had accounts with local teachers credit union, even though I have never been either.

I think equity lines are a very good financial tool to have handy if used wisely. They provide access to relatively cheap funds and due to their nature you can control your balances within your financial abilities.

My biggest piece of advice with having a Home Equity Line of Credit is to concentrate on paying down principal as soon as you are able so you are not caught in a difficult financial position many years down the road.

Finally, if you do have a HELOC and sell your home it must be paid off with proceeds from the sale, a lender will not let you carry it to your next home. As well if you are refinancing your current primary mortgage the total loan limit of the HELOC will be a factor in determining ability to qualify and possibly your interest.

Have a question? Ask me!

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

December saw moderate gains in personal wages and salaries, increasing 0.3% after being flat in November. While wages had a moderate increase personal consumption so a more robust increase of 0.5% from November, mostly for durable goods—especially autos. With higher consumption increasing more than wages it is not surprise that the personal savings rate dropped for the month. For the year the personal price index increased a modest 1.6%, well below the target for the Federal Reserve. Overall the news is neutral for mortgage rates.

The monthly employment data for January was released today and new jobs for the month strongly exceeded expectations, with 227,000 jobs added for the month. The total exceed the monthly average of 187,000 for 2016. The best news in the report was that the private sector added 237,000—which means government employment decreased—and the participation rate increased. Hourly earnings increased only 0.1% for the month and the unemployment rate increased 0.1% to 4.8% as more people sought work. The news is somewhat mixed in that the number of new hires is good news but not keeping up with new job seekers tempers the positive. Overall the news is somewhat positive for rates as the data would suggest the Fed may not increase the Fed Funds rate at its March meeting.

Rates for Friday February 3, 2017: Still some inter-day instability in rates as investors try to process all the information and possible ramifications coming out of Washington, but a little less than in prior week(s). Week to week we are flat from last Friday as rates show resistance at the 4.125% level we have bounced off of three times in the past seven weeks. Looking ahead I maintain my advice to lock in your rate when you can through your rate period.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS
30 year conforming 4.00% Flat
30 year high-balance conforming 4.125% Flat
30 year FHA 3.50% Flat
30 year FHA high-balance 4.00% 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.



Very busy weekend for the Smith family that should be a lot of fun. As many of you know our family moved to Brussels, Belgium after my freshman year in high school and I spent my sophomore through senior years in Belgium graduating from the International School of Brussels. Tonight Leslie and I are hosting a gathering of other ISB alumni in the Southern California region. We are expecting to have Mr.Vantieghen, the Belgian Consul General in Los Angeles make an appreance along with ISB Raiders who attended the school from the 1960s to more recent years. We have plenty of excellent Belgian beer on ice and look for to reminiscing about our years in Brussels.

Tomorrow we welcome to our home a student from a town outside of Paris who will be with us for the next two weeks. Our French visitor is about the same age as our oldest daughter, and no surprise they have been texting and Snapchatting each other with regularity. We look forward to sharing our home, city and region with her and learning about her life in France—as well as dusting off our French vocabulary and ability to coherently communicate.

Our Super Bowl will be a teenage affair as our daughters have invited several friends to our home to ostensibly watch the game, but more importantly to meet Mallory so she is more comfortable when she starts walking the halls of Poly High on Monday. No word yet on whether she is a Patriots or Falcons fan!

So the Super Bowl will be a bit of a background component to our Sunday, and not having any significant affinity for either team that is just fine by me.

I hope you have a great weekend and are entertained as much as you desire by the game on Sunday. My predictions have not been great so I’ll make one more—the Patriots in a very high scoring game (over 70 total points) and covering the 3 point spread Vegas has put out.

Have a great week,

Dennis

Missed a Weekly Rate & Market Update? You can catch up as all the updates are posted on my website at http://www.denniscsmith.com/MyBlog .


Posted in:General
Posted by Dennis C. Smith on February 3rd, 2017 12:23 PMLeave a Comment

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January 27th, 2017 12:49 PM


Question: I have a low balance loan, should I refinance?

Answer: This was a question that came up last week from a friend and financial planner who has a client with a low balance mortgage with a rate higher than the current market. It is a great question because one would assume that if a homeowner has a loan with an interest rate of around 5% and rates are lower by three-quarters of a percent then they should refinance.

Don’t assume.

There are several factors involved here besides just lowering an interest rate, the most important factor being what is the cost to lower the rate and does that cost provide a benefit greater than the cost.

When the question was raised I said that there are a few questions that the client would need to answer before analyzing the cost-benefit of refinancing for a lower rate:

What is their purpose? To lower the rate, lower the payment or lower the term remaining on their mortgage?

Let’s take an example of a homeowner who has a $100,000 loan balance with a 5% rate, they funded the loan in 2009 for $125,000 with scheduled payments of about $670 per month. They see rates are near 4% and want to refinance. Should they?

It costs money to refinance, there are fixed costs for appraisal, processing, underwriting, escrow, title, county recorders, notary and if condo the Homeowners Association to complete a certification form. For a $100,000 mortgage the fixed costs are about $3300, and that is before any costs for your friendly and helpful lender, many lenders have a minimum fee of $2500 bringing the total to $5800 for $100,000 mortgage. The costs to refinance are 5.5% of the loan amount, which can be paid in cash, added to the loan amount or put into the interest rate.

When would this refinance make sense? To just lower the rate and keep the remaining term the same? Assume the costs are added to the loan for a loan amount of $105,800, the property is single family residence with approximately $400,000 value a 20 year mortgage would have a rate of 3.75% leading to a payment of $627 per month. With the refinance you will lower your payment by $43 per month for a cost of $5800—it will take you almost eleven years to pay for the refinance. The math says do not refinance.

If you were to refinance to a 30 year mortgage the rate would be 4%, your payment drops to $505 per month, saving you $122 per month for the $5800 cost. It will take you four years of savings to repay the cost of the loan, but in the meantime you have extended your mortgage nine years. Over the life of the loan you will spend $37,000 more due to the extending of the mortgage term. You save more per month but you are spending money to spend more money.

What if you refinance and shorted the term, refinanced to 15 year mortgage cutting your remaining 22 years on your mortgage by six years, or 72 monthly payments. The rate would be 3.25% and your payment would be $743, an increase of $116 per month. In this instance after cost of the refinance you save about $18,500 by paying off the loan early. This make sense for many families, especially if they have retirement looming.

Does it make sense to refinance a lower balance mortgage? It depends on your purpose for refinancing and how the numbers add up to meet that purpose. For most people however the math is a bit challenging to show that refinancing makes sense.

For refinancing or any mortgage decision I have always said, “Do the math.” This is especially important for refinances of lower balanced mortgages.

Call me and let me do your math.

Have a question? Ask me!

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

Two weeks ago I wrote that FHA had lowered its Monthly Mortgage Insurance effective with mortgages that close today, January 27th, and later. Last Friday, after I had written the Weekly Rate & Market Update and right after Donald Trump took the oath of office, the Department of Housing and Urban Development announced it was suspending the MMI premium reduction immediately. Citing the need to protect the taxpayers who guarantee the mortgages if there is not enough money in the insurance pool, FHA indicated in its announcement that “more analysis and research are deemed necessary to assess future adjustments…”

Some very important economic data this week. Since this communication is focused mostly on mortgages and real estate we’ll start the economic roundup with home sales. Nationally both existing and new home sales fell in December from November—not too surprising given the jump in rates starting in early November into December. Nationally the median price was down from November. Closer to home the median price state wide for detached single family homes was $509,060, up 3.9% from last Decembers $489,770. In Southern California median prices for LA County $519,280 (up from $502,750, 3.3% from 12/2015), Orange County $745,000 (from $700,000, 6.4%) and Riverside County $360,000 (from $314,000 up 2.1%). With prices and rates up sales have slowed down to end the year, the news is somewhat rate friendly.

Some major news this morning with the initial reporting of 4th Quarter GDP for the economy. The news was not very good, and is somewhat supportive of my statement in the October 21st Weekly Rate & Market Update that our economy will enter a recession in late spring or early summer (at the time I noted regardless of who won the election—essentially a recession that soon after an election is not impacted buy someone sworn in 2-5 months earlier; just as the Stimulus package passed in Washington right after Obama took office had no impact on country coming out of recession five months later).

In the 4th Quarter the economy grew 1.9%, looking into the numbers there is concern. Much of the increase in GDP was due to an increase in inventories, which will remain on the books for companies unless there is a build in demand. Despite the heavy buying that usually occurs in the 4th Quarter, personal consumption spending while up 2.5% was down from 3.0% and 4.3% in 2nd and 3rd Quarters. Prices were up 2.1% in the final quarter, pretty decent, however much of the increase was volatile energy prices. Overall the report is mortgage rate friendly as the declining overall growth, slower growth in consumer spending coupled with slowing home prices raise some concerns about future economic growth. Personal consumption accounts for 65-70% of economic activity in America and much of our economic growth the past several years has been led (carried?) by the housing markets. With some sluggishness in these areas plus global economic concerns there is a reason to be a bit wary about what the economy will look like as we move further into the year.

Rates for Friday January 27, 2017: Rates dip a little this week on the economic news and some technical trading. There is going to be some volatility moving forward as investors try to discern the impact on markets and sectors of the new Administration in Washington. Don’t gamble with your housing payment, lock through close of escrow when you are able to do so.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS
30 year conforming 4.00% Down 0.125%
30 year high-balance conforming 4.125% Down 0.125%
30 year FHA 3.50% Flat
30 year FHA high-balance 4.00% 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.



Leslie and I try to make Tuesday night our date night, usually successfully, and we really like going to the movies. So far we have seen almost half of the best picture nominees for the Oscar (I liked it better when there were only five nominees for each category), in the order we have seen them Arrival, La La Land, Hidden Figures and Lion. I can recommend all of them as they are all very good to excellent movies. If I had a vote my vote for best picture would be a very difficult decision but I would give my vote to Lion but a mane over Arrival. Very different movies and each excellent productions, acting, writing, etc but give the edge to Lion for overall impact and “moviness” (a DC Smith rating factor—don’t ask me to define). After Arrival for second I would put Hidden Figures in at third; a “perfect” movie for all aspects there is not a flaw and like Lion an excellent story that is told with excellence. I have it in 3rd because I found the other two more impactful and creative in telling their stories. Finally I would put La La Land fourth—not because I do not think it is a great movie, because I feel it is, but because the others are even greater. Of the five that are left I am not sure how many we will get to but if you are interested I’ll let you know if my top movie(s) are knocked down a peg or two when/if we see them.

Have a great week,

Dennis

Missed a Weekly Rate & Market Update? You can catch up as all the updates are posted on my website at http://www.denniscsmith.com/MyBlog .


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Posted by Dennis C. Smith on January 27th, 2017 12:49 PMLeave a Comment

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