Dennis' Mortgage Blog

May 5th, 2017 2:03 PM

Question of the week: We are thinking about putting in a pool, how can we finance and what will be the impact on our home’s value?

Answer: The answer to this question is somewhat similar to the answer I give when someone contacts me to discuss a major remodel or addition to their home: before you build explore the options of buy. In other words before you commit to tearing apart your home to add another bedroom, or your yard to add a pool, see what is on the market that would replicate what your end result will be and if it makes sense and you can qualify to purchase the end result instead of build it at your current home.

Like anything else, there are two ways to pay for a pool installation: pay cash or borrow the money. How you finance the installation depends on several factors, primarily how much equity you currently have in your home.

In order to pull equity out of your home to finance your new pool you have to have equity in your home to pull out. Depending on how much equity you have will determine the options for financing the operation.

There are two basic options, and they can be blended, when obtaining equity from your home, be it for building a pool, paying for kids’ college or leveraging a second home or investment property. First is a traditional refinance in which we refinance your current mortgage and increase the balance on the new mortgage to obtain the funds needed for your pool endeavor. The amount of equity you can access depends on the loan program, however in most instances we can go up to 80% of the current value of your home (i.e. without the pool installed); if your home is worth $750,000 we can do a cash-out refinance to $600,000.

The second option is with a second mortgage, or most commonly used a Home Equity Line of Credit (HELOC). The total loan to value available will vary depending on the lender and your ability to qualify, many will go to 85% loan to value and some to 90% loan to value.

Let’s use a $750,000 home that has a current balance of $550,000. You have met with a pool contractor and after the design has been agreed upon the total cost of the installation and all amenities will be $80,000. We have two options: use a HELOC for the entire $80,000 or refinance your existing mortgage to 80% loan to value, which will provide you $50,000, and then obtain a HELOC for the remaining $30,000. When the dust settles, or rather the loans have funded you, you will have $630,000 in loans against your $750,000 home for a total loan to value of 84% loan to value.

One advantage of the HELOC is you do not pay for all the money as soon as it funds but can use the equity line as you need cash, or you can use it as a “backstop” using cash you have saved and if you have an emergency or need cash in the future you can use the equity line.

The key to being able to finance a pool installation, or home construction, is the current value of your home and what you currently owe.

Regarding the second part of the question, what is the impact of a new pool on the value of your home, if you are going to install a pool at your home is that there is a very low return on investment—in fact it might be the lowest return for any feature you can add or improve on your property. Speaking from experience, and we did not install a new pool but extensively remodeled the pool in our home when we bought it that was at the end of its life, when you install a pool you are not just having someone dig a hole, line it and then fill it with water. You will also have plumbing, electrical, hardscape and landscape, and perhaps amenities such as entertainment area with grill, media, a spa, changing/shower room, etc. In the end your home will be transformed, as will your lifestyle at home, but not without considerable cost.

For the average home the market value of a pool is from about $15,000 to $25,000, against costs that can run from around $35,000 to $100,000 or more depending on your amenities, design etc. Regardless if you have the $35,000 pool installed or go full blown luxury hotel/spa backyard, the return is very low. If you are considering adding a pool to add value I strongly suggest you buy a home with a pool instead of trying to make money installing one in your yard.

If you wish to discuss options or go through what-ifs of putting a pool in your yard, or any other home remodel/improvement project that may need financing please give me a call, I’m happy to go through the various options.

Have a question? Ask me!

It is the first week of the month, which means jobs information. The week started with how much we make and what we do with it. Monday the Bureau of Economic Analysis released Personal Income and Consumer Spending data for the month of March, and the numbers were not celebrated. Personal income for the month rose an anemic 0.2% in April, following several months of good growth for incomes. While personal income was anemic consumer spending was flat-lined in April showing 0.0% growth (for those who didn’t pay attention when percentages were covered in math class, that is zero growth) from March’s spending—which was revised to also show no increase in spending. That would be two consecutive months with consumers earning more but not spending more. The result is a little positive as it means savings rate increased 0.2% to 5.9% savings from personal income. This new is positive for mortgage rates, meaning no upward pressure and perhaps a bit of downward pressure, on rates.

The third part of the report, the PCE price index (Personal Consumption Expenditures) was the opposite of positive. Whenever there is data for prices there are two components, the index and the “core” index. The index is everything consumers buy, food, clothing, energy, movie tickets, whiskey (a perfect gift for dedicated mortgage professionals in Long Beach), the “core” index takes out food and energy prices which tend to be volatile. In April the full index dropped 0.2% and the core index dropped 0.1% for the month. The drop in the core index presents the weakest prices in almost sixteen and a half years. Overall the news is not good and combined with other economic data presents a very weak first quarter for the economy—which is positive for lower mortgage rates.

On a much more positive note the Labor Department’s jobs report for April showed a strong gain of 211,000 jobs for the month, and a drop in the unemployment rate from 4.5% to 4.4% which is the lowest reading since May 2001. Adding to tightness in the labor market was the pool of eligible workers dropping 200,000 workers. More people are working, income is rising, albeit slowing in March, but the paychecks are not being converted to spending which is troublesome looking forward since consumer spending is 60-65% of our economic activity. Today’s Labor Department report supports higher rates, however it is more than dampened by the lack of consumer spending.

Rates for Friday May 5, 2017: Rates remain stable this Friday from last, and the week before and the week before, with not enough news to create momentum up or down for rates. The one thing our industry will never complain about is stable rates.

30 year conforming                                       3.875%               Flat
30 year high-balance conforming                 4.00%                 Flat
30 year FHA                                                 3.25%                 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.

This section of the Weekly Rate & Market Update is generally where I put in some personal information, this week I am going to brag about the Long Beach Unified School District. Recognized for many years as one of, if not the, best “urban” school district in America, this week and next shows one way this recognition is valid. Monday morning and yesterday afternoon I helped proctor for AP exams (advance placement college-level exams that many colleges will give class credit if certain scores are met). One matrix for measuring the quality of education being provided students is college readiness of graduates, and the biggest factor in college readiness is the availability of AP exams. This week and next well over 13,000 students across the district will take AP exams in almost 30 different subjects. What’s more is these exams cost about $100 per exam, so a student taking four APs can face a pretty hefty bill. However Long Beach Unified covers almost all the cost of the exams, a student pays a fee of $15 when registering for the exam and after completing the exam is refunded $10 so the total cost is only $5. By removing this cost barrier for many students in the district LBUSD has seen a tremendous jump in the number of students taking these exams and also taking AP classes—meaning more students are exposed to rigorous academic environments similar to what they will face in college.

Families in Long Beach are fortunate to have an excellent school district that not only prepares kids for college but because of the College Promise guarantees spots through four years of college for graduates in partnership with Long Beach City College and Cal State Long Beach. While there are other excellent schools and districts in California, some may meet but none exceed the quality of education our daughters are receiving. I am proud of our district and their continued commitment to quality education.

Good luck to those students with exams still to go!

Have a great week,


Posted in:General
Posted by Dennis C. Smith on May 5th, 2017 2:03 PMLeave a Comment

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April 7th, 2017 12:44 PM

Question of the week: I am confused on the appraisal process and what an AMC is, can you please explain it?

Answer: One of the first changes in the mortgage industry following the market meltdown was federal policy that prevented lenders from directly ordering appraisals, and to take it a step further preventing us from have any direct contact with an appraisal.

As a result Appraisal Management Companies (AMC) that had been around prior to 2007-8 became the source and conduit for all appraisals and communication. And while we cannot select appraisers directly we can in some instances select the AMC with whom we want to work.

How does an AMC work?

The appraisal process is designed to eliminate undue influence in property valuations, hence the inability of me to directly contact an appraiser, to further this policy appraisers are selected by what is known as “adverse selection.”

You have wisely chosen Stratis Financial for your mortgage to purchase your new home. We complete the application package and are ready to order the appraisal. We go to the AMC website and complete the property information, who to contact for access to the property, payment information etc and an order is created.

At this point the AMC needs to assign an appraisal. Most often this occurs by contacting the next appraiser on the list who is registered to work in the area where the property is located to see if they are available; if the appraiser is unavailable or non-responsive in a short period of time then the next appraiser on the list is contacted and so forth until the order is assigned.

When the appraisal report is completed it is sent to the AMC who completes an audit and quality control of the report—note this is for compliance and completion of report issues and not for valuation. Once the audit is completed and the report is found to be in compliance it is provided to us for your application package.

At this point we go through the appraisal to primarily check the value and then to see if there are any items that must be completed, for example that the property has smoke and carbon monoxide detectors per California state law, that there are no adverse physical conditions that the appraiser feels must be corrected for the value on the report to be valid.

After reviewing the report we provide you with a copy and let the real estate agents know if the value is sufficient for our transaction (meaning at or above sales price), if the value came in below sales price and if there are any corrective issues that need to be completed at the property before we will be able to get final loan approval.

Assuming all is correct with the appraisal we move on with our processing, approving and funding of your mortgage so you can move into your new home.

What if there is an issue with the property in regards to condition? If this is the case we let the agents know the issue, for instance missing smoke/CO detectors or no flooring in a kitchen that has not yet been remodeled* and work to find out when the work will be completed so we can take the next step. The next step is once the work is completed we have to contact the AMC to send the appraiser back out to the property to make sure the work has been completed and provide an updated report. This re-inspection comes with a fee (generally $150).

*Personal example: When Leslie and I sold our first home we had done some work in the kitchen and were getting ready to retile the floor. We left the tile off the floor and when our buyers came in we let them know they could select the tile we would put down, we had several samples that were in our budget. They selected the tile they wanted, we had the tile laid down and then signed off by the appraiser.

What if the appraisal is low? This is a question we have covered several times in the Weekly Rate & Market Update, most recently last month, today we will just cover the process with the AMC. If the appraisal report value is less than sales price, or what we feel value should be if our transaction is a refinance, we need to provide new and better comparable sales to the appraiser. In a purchase we notify the agents to see if they can provide us with better comps than what is in the report. We then write up a report with the comps providing our opinion as to why the comps we are providing are better to use than those used by the appraiser. We then submit the comps to the AMC who then provides them to the appraiser. If our appeal is not accepted by the appraiser we then work with the AMC to see if they agree with our argument in the appeal to see if they can convince the appraiser to take another look. If we feel very strongly that our case is strong we continue our dialogue with the AMC and if their management agrees we may have a new appraiser assigned to our property—this does not always happen but we have been successful many times in the past if we have what are evidently superior comparables to those in the report.

Ideally we would be able to go back to before the mortgage and housing market crisis and use appraisers with whom we had long standing professional relationships, but there is little chance that will be the case in the near or long term. As a result we must use the AMC process and make the best of it. Which we have at Stratis Financial.

At Stratis Financial because we fund approximately 90% of our applicants mortgages ourselves we have a relationship with one specific AMC that handles 90% of our appraisals. This allows us to have a strong relationship with the AMC for efficient appraisals and as or more importantly should there be any issues we need to have resolved.

Have a question? Ask me!

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

Numbers, words, action impacting rates this week. Working from least impactful to potentially most, today the employment report for March was released by the Labor Department and March saw an increase of only 98,000 jobs in March, a very low number. One explanation is the bad storms that hit the Northeast in March, another is that perhaps there is a slowing going on with employers. The bright spot on the report, that would have made headlines a year ago but not today, was the drop in the unemployment rate from 4.7% to 4.5%, the lowest level since the economic peak in 2007. The wage aspect of the report shows a lag in wage inflation, due to level of wages of many entering the job market. Overall the report is somewhat mortgage rate friendly.

Words have a big impact depending on who is saying them, and who is listening. This week the minutes of the Federal Open Market Committee were released and the most interesting part was the Fed announcing it would be unwinding its holding of U.S. Treasuries and Mortgage Backed Securities (MBS). To prop up the bond markets (inclusive of mortgages) the Fed purchased trillions of dollars of Treasury and mortgage debt after the financial crisis. Once markets stabilized and rates remained low the Fed continued to purchase bonds as holdings they had matured (i.e $10 million mortgage package paid off at maturity the Fed would reinvest the $10 million and purchase more mortgages). Currently the Fed has $4.5 trillion in bonds and mortgage debt on its balance sheet and the governors have decided the time has come to start to rid itself of the debt obligations. What this means is the primary buyer of bonds and mortgages is leaving the market. The impact on this should be higher interest rates as there will be a drop in demand, which will cause prices to drop (and rates increase) to attract investors. This will be a long term impact on rates, how big an impact depends on the private sector and other governments stepping in to pick up the Fed’s absence in the market.

As for actions, we turn to the Middle East. The Syrian governments use of chemical weapons and response from the United States, corresponding response, if any, from Russia and other nations can have a strong impact on interest rates. In times of unrest and international tensions investors undergo what is known as “flight to quality.” This means investors leave equity markets (stocks) which are uncertain and can fluctuate quickly, for stable and dependable markets and returns, which means bonds and mortgages. The safest investments for returns are U.S. Treasury debt followed closely by Mortgage Backed Securities from Fannie Mae and Freddie Mac which are backed by the U.S. government. While the returns are lower than potential returns in equities the returns are safe and better than sitting in cash. So world unrest, bad actions by international actors lead to lower interest rates in the United States.

Rates for Friday April 7, 2017: We start the 2nd Quarter with rates dipping to their lowest since November. There is plenty of news to suggest rates could/should go higher between economic news the past several weeks and the Fed pulling out of the markets. That said there is enough uncertainty that rates could be chased down depending on global events. Rates have dropped three-eighths of a percent since peaking the second week of March---perhaps it is time to take advantage.

30 year conforming                                 3.875%                Down 0.125%
30 year high-balance conforming           4.00%                   Down 0.125%
30 year FHA                                            3.25%                   Down 0.25%
30 year FHA high-balance                      4.75%                   Down 0.25%

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.

An interesting day today, it is my 20,000th day. Yes, 20,000 days ago I entered this life in Tulsa, Oklahoma. We are using the event as an excuse for some friends to come over for some of my favorite things, mainly barbecue, beer and whiskey. It is interesting we celebrate an annual trip around the sun and some milestones along the way (teenager, 18, 21, 30….50…75) but the days are ignored. We should celebrate the five thousand day milestones! My next milestone will be Saturday December 15, 2030 when I wake up to my 25,000th day—no doubt I’ll have some barbecue and a sip or two of something!

I hope you have a great weekend,


Posted in:General
Posted by Dennis C. Smith on April 7th, 2017 12:44 PMLeave a Comment

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March 31st, 2017 10:22 AM

Question of the week: Can we make a large payment down on our mortgage and lower the payment?

Answer: Yes, probably.

I have been getting this question a lot lately, or using the option as part of consultations with clients on long term strategy with their mortgage, retirement, etc.

You have/get a mortgage of say $400,000, you are 50 years old and want to retire in 15 years and will still have a balance on your mortgage. You have a large amount in the bank and are thinking about putting down on the mortgage and possibly lower the payment. Can you do this?

This is called recasting and most lenders will allow this with certain conditions. If you put a large payment down on your mortgage you can ask the lender to reamortize the mortgage for the new balance and remaining term of the mortgage. PLEASE NOTE Before you make the payment you must contact your lender to make sure they will recast the note and lower your payment and also what their process and possible fee for the process will cost.

Just because you can put a large amount of money into your mortgage to lower the payment, or term, does not necessarily mean you should---there are many factors you should consider before you do.

First, keep in mind that it costs money to get money out of your home. Depending on your situation you may find that you need some or all of the money you paid into your mortgage to have it recast, now you have to qualify, have costs and possibly a higher interest rate to get money you already had in cash.

Second, what is your current interest rate and what is the expectation of return on the money if you retain it until you need your home paid off, possibly when you retire? You may be net neutral and if that is the case you may want to keep your funds working where they are getting compounding returns rather than paying down your mortgage while you are still working and getting deduction for the interest.

Finally, if you are considering a major paydown of your mortgage I strongly suggest you consider obtaining and equity line of credit. Should you need a large amount of money in the future but it is not accessible since you have transferred liquid savings into illiquid equity a line of credit will enable you to access the needed funds.

A couple of things that are hard to do in life are lose and keep off weight, save money and pay off debt. When paying a large amount of your saved money into your mortgage you are faced with the dilemma of saving versus reducing debt. Before you do consider all the different options for the short, and especially the long, term and what your needs may be in the future.

If you need help with the decision please 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.

A good week for economic data geeks, with plenty of reports released for February’s economic data. The most surprising of the reports was the Consumer Confidence report released on Tuesday by the Conference Board which had the highest reading since December 2000—two economic cycles ago. The strongest support is in income expectations, over 20% see their income increasing in the next six months and only 7% see their income declining. The strong consumer confidence data is interesting as usually strong confidence leads to strong consumer spending, but spending has been lagging. Independent of other factors such a surge in confidence would be negative for mortgage rates since it usually predicts strong consumer spending, which is 60-70% of our economic activity and strong economic activity usually drives rates higher.

Data released today for Personal Income and Outlays is very interesting in light of the confidence report in that personal income in February maintained its strong 0.4% growth from January, but personal spending grew only 0.1%--indicating that Americans are earning more but spending less faster than their income is growing, especially on services which held back total consumer spending in February. Reflecting the slower growth in spending prices in February also increased only 0.1%, though year over year prices increased a healthy 2.1% largely due to lower prices last year than stronger prices this year. The data has mixed impact on interest rates as higher income should lead to higher income leading to higher rates, but….lower spending impacts rates to the downside.

Gross Domestic Product for the 4th Quarter had its final revision and the number crunchers increased the data upward from 1.9% to 2.1% growth in the final quarter of 2016. Leading the revision upward was consumer spending in the 4th quarter. This revision puts either a bit more confusion or a bit more clarity on the February spending data. Why the slow down after a fairly strong 4th quarter of spending? It’s evidently not income, it’s not confidence, what is it? Perhaps consumers buying the 4th quarter tapped them out going into the first quarter of 2017 and what we are seeing is a deep breath before they start buying again. The GDP revisions were expected so there is minimal impact on mortgage rates.

Rates for Friday March 31, 2017: As expected with the economic data this week there is some downward pressure on rates, not enough to break out downward but some softness. After a brief spike earlier in the week we saw mortgage rates drift back down to last Friday’s levels. We are in a market where it appears lenders are hanging on a bit to higher rates before moving down to where they should be to correspond with the pricing in the secondary markets. Rates are great for buying or refinancing!

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.

I often tell people that I love my job, especially when I tell people they just bought a new front door. Well we are looking for a new front door this weekend….literally. Leslie has wanted to replace our front door for some time and the time has come to visit the various stores to see what is happening in the door market. Between door shopping and the basketball tournament I think it’s time for my least favorite activity of the year—collecting all my information for tax preparation, blech.

I hope you have a great weekend,


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Posted by Dennis C. Smith on March 31st, 2017 10:22 AMLeave a Comment

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March 24th, 2017 3:05 PM

Question of the week: What exactly is mortgage insurance? Is it something that is mandatory for purchasing property or just the property I am buying?

Answer: With the increase in the purchase market and more first time buyers coming to market it is time to revisit mortgage insurance. Though making a comeback, piggy-back mortgages transactions which can avoid mortgage insurance are being evaluated differently in the current market than in years past—especially with the recent and future increases in the Prime Rate.

Mortgage insurance defrays some, perhaps all, of the cost to a lender if a loan goes into default and foreclosure. Depending on the loan type and initial loan-to-value (LTV) of the mortgage, the lender will require certain amount of coverage from mortgage insurance.

For FHA mortgages the full amount of the mortgage is covered and all FHA mortgages require two forms of insurance premium be paid, an upfront premium that is added to the loan amount and a monthly mortgage premium. Recently FHA changed it guidelines so all new FHA mortgages require the monthly premium be paid for the life of the loan. Keep in mind the minimum down payment for FHA is 3.5% for the maximum loan amount of $625,500. With that much leverage risk it is not surprising that FHA has mortgage insurance to off-set some of the costs should the loan go into foreclosure.

For Fannie Mae and Freddie Mac mortgages, also known as conventional or conforming mortgages, mortgage insurance is required on all mortgages that have a loan to value greater than 80% of the property value; i.e. if the value of the home is $400,000 and your mortgage is greater than $320,000 you will be required to have mortgage insurance. This is for all conforming mortgages, regardless of refinance or purchase, condo or single family detached home.

For conforming loans the vernacular is PMI, or Private Mortgage Insurance, as the insurance is made by a privately held company. For FHA the vernacular is MMI and/or UMIP for Mutual Mortgage Insurance or Upfront Mortgage Insurance Premium; FHA mortgage premiums are collected by the federal Department of Housing and Urban Development—it is a government insured mortgage.

For PMI the premium varies on the loan to value of the mortgage, type of mortgage and borrowers’ credit scores. The higher the LTV, i.e. the lower your equity or down payment on a purchase, the higher the coverage required by the lender and therefore your mortgage insurance premium. The coverage goes from 30% for loans with LTV between 90.01% to 95% to 25% for 85.01to 90% and 12% for 80.01% to 85%. The greater coverage required for your mortgage the higher your PMI premium will be.

As well the higher your credit score the lower your premium will be.

What does 25% coverage mean? If a mortgage is covered by PMI with 25% coverage then if the mortgage goes into default the PMI company will pay the lender up to 25% of the mortgage amount to cover costs and losses due to the foreclosure. Note that after missed interest payments, legal fees, filing fees, plus the potential loss in loan principal because of a foreclosure is often much greater than 25%, depending on current market conditions.

Other loans also may have mortgage insurance depending on the product and lender. Some banks are offering our clients on “jumbo” mortgages, greater than $625,500 conforming loan limit, with no mortgage insurance for loans with LTV greater than 80% up to 90%. They “self-insure” the loan by charging a much higher interest rate than a mortgage with 80% loan to value, but there is no separate underwriting or payment.

Veterans obtaining a VA mortgage also have a version of mortgage insurance, called a “funding fee” that is added to the mortgage amount.

For PMI borrowers there are a few options as to what type of premium to use to pay for the mortgage insurance requirement.

Have a question? Ask me!

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

A bit of a slow news week for market moving data, especially after last week with plenty of market moving data plus the Fed rate increase. Of importance this week is housing sale activity for February. Nationally sales dropped 3.7% in February, but were still up 5.4% from February 2016 and the median price nationally has 7.7% in the past year to $228,400. More locally the California Association of Realtors reports that statewide home sales dropped 4.7% in the month and are up 4.9% from last year with the median price dipping a bit in February from January to $478,790—though that is still up 7.6% from 2016. Even more locally, LA County saw sales drop 8.8% from January and prices decline 7.7% for the month as the median price dipped from January to $470,000 in February, which is 5.7% higher than last February’s median price. Orange County bucked the trend a bit with sales down only 0.9% from January (up 0.3% for the year) and a slight increase in the median price to $745,000, matching the 5.7% annual price increase seen in LA County. Overall the news is mortgage rate neutral.

Rates for Friday March 24, 2017: After all the excitement last week Mortgage Backed Securities (MBS) rebounded this week, moving inversely to the equity markets. When MBS prices rise mortgage rates drop—think of a see-saw with rates on one side and price on the other. As a result rates have slipped down a little more this week to where they were at the end of February.

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.

I really enjoy live theater and older musicals, give me a Rogers & Hammerstein show or soundtrack and I’m pretty happy (or almost anything with Doris Day, Fred Astaire, Gene Kelly…). This weekend we are going to see “An American In Paris” and I am looking forward to the music of the Gershwin’s wrapped around the story.

Our theater trip is a good diversion as well since with tonight’s games still to be played I have lost two Final Four teams (Duke, Arizona) and my winner (Duke) from the NCAA tournament—I have a feeling many other brackets are also a bit broken with four #1 and #2 seeds bounced and three more in action tonight, I know a lot of UCLA Bruin fans are hoping another two seed goes town tonight with they play Kentucky.

Have a great week, I hope your brackets are going stronger than mine,


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Posted by Dennis C. Smith on March 24th, 2017 3:05 PMLeave a Comment

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March 17th, 2017 12:26 PM

Question of the week: What happens if my appraisal comes in low?

Answer: This is a topic that has been covered before but needs revisiting from time to time, especially in the current environment where many homes are selling over their list price with multiple offers. (If you missed last Friday’s Weekly Rate & Market Update I covered what price you should offer, link here)

If an appraisal comes in below the value required our first action is to see if we have comparable sold properties we can use to appeal the value in the report. Most often for an appeal to be successful we will need to use comparables that the appraiser did not use and justify why the comparables we want to use are better than the comparables the appraiser did use. On rare occasions we have been successful in appealing the adjustments an appraiser made to the comparables in the report for condition, size, etc—but the adjustments the appraiser used must be very apparently wrong.

If our appeal is denied and the value stands, what are the options available?

If your transaction is a refinance with a low appraisal there can be many ramifications due to loan to value and available programs, mortgage insurance, pricing changes or inability to complete your transaction. Because there is no price point or other party to negotiate with your options are pretty much dictated by the program guidelines for the mortgage you are using. In other words your options are limited to the nature of the refinance and program requirements.

If your transaction is a purchase transaction and the appraisal comes in low you have four basic options. We will assume you have a purchase price of $425,000 and your appraisal comes in at $400,000, and our appeal was denied or there was insufficient data for an appeal.

One of the primary guidelines for pricing is the loan to value, what percentage of the value is the loan amount. For lending purposes the loan to value is based on the lower of the purchase price or the appraised value. In the instance above the loan to value will be based on $400,000 not $425,000. This means if you were putting down 20% on $425,000 you wrote your offer to purchase the property with a loan of $340,000.

When your appraisal comes back with a value of $400,000 you have gone from a loan to value (LTV) of 80% to a LTV of 85% if you retain the loan amount of $340,000.

Option 1: You agree to pay $425,000. If you retain your loan amount of $340,000 you will have the same down payment, $85,000; however you will now have a loan that requires mortgage insurance since it is greater than 80% LTV. This will add to your monthly payment, how much depends on the type of mortgage insurance you choose (next week our question of the week is about mortgage insurance). Or if you choose you can increase your down payment by $20,000 to $105,000; this will bring your loan amount down to $320,000 and 80% of the value of the appraisal. Note: If you were putting 25% down or more originally you would not have to worry about additional down payment in order to avoid the mortgage insurance as your loan to value would still be under 80%.

Option 2: Seller agrees to lower the price to the appraised value of $400,000, you put 20% down on the $400,000 ($80,000) and we adjust our loan amount to $320,000 and we move on with the transaction.

Option 3: You and the seller meet somewhere between the appraised value of $400,000 and the original sales price of $425,000. This option may require you to make some additional down payment to avoid mortgage insurance as your loan to value based on the appraisal would still be over 80%, or you would have mortgage insurance since the loan to value of your original loan amount of $340,000 is more than 80% of the appraised value.

Option 4: You refuse to pay more than the appraised price and the seller refuses to take less than the original sales price. Transaction is off, seller puts the property back on the market and you start looking at property again.

When the market is rising, there are multiple offers bidding prices over list price and a scarcity of comparable sales, i.e. the current market in many areas, appraisals values can lag the market. With sales setting new market highs in a neighborhood it is challenging for an appraiser to find comparables and be able to make the necessary adjustments from prior sold properties to the recently sold property being appraised. As a result low appraisals may be an issue on some transactions, if it becomes an issue on yours these are your options.

Have a question? Ask me!

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

One of the more active weeks for important economic data, little of which mattered since the Fed raised the Discount Rate on Wednesday. The rate increase was priced into mortgage rates and when the announcement was made Mortgage Backed Securities (MBS) staged a strong rally (lower rates). With the guess work finished, the rate going up 0.25% instead of 0.50% investors bought bonds and stopped the upward pressure on mortgage rates.

The other data that would normally be rate movers but had minimal impact this week in the shadow of the Fed announcement would normally push rates higher—strongly. Prices for producers and consumers climbed in February, with PPI up .3% for the month and 2.2% from last February, while CPI rose 0.1% for the month and 2.7% over the past year. The price increases are at the upper limit of the Fed’s desired inflation target, supporting not only the rate increase on Wednesday but also the projected two more Fed rate increases later this year.

Rates for Friday March 17, 2017: As mentioned the MBS market jumped after the Fed rate increase on Wednesday breaking the downward trend of the past few weeks. With the change in direction we look to see if this is a temporary correction or a trend that could provide slightly lower rates, or no movement for the near future. With a sudden break in direction the market has some instability—which is always a reason to lock in when you can.

30 year conforming                               4.125%           Down 0.125%
30 year high-balance conforming         4.25%             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.

For many years this update would be coming to you from Las Vegas where my friends and I spent the first days of the NCAA basketball tournament. While the same group is still in the same pool (I think we started it around 1984 my senior year in college), the annual pilgrimage to Vegas has been replaced by work, family and inability to handle three to four nights in Las Vegas—at least for me.

Thankfully technology has evolved for NetHeads like myself so we can stream games live on at our desks while looking like we are productive (the official NCAA streaming site has a “Boss Button” in the corner of the screen one can hit to take the game down and put up an innocuous page that looks like you are working).

I have Duke over North Carolina in the final, when there are a lot of teams that can win I default to teams that know how to win it all. Whoever wins I know we will have many exciting games and great stories the next few weeks.

Thank you to everyone for the kind words following last week’s update.

Happy St. Patrick’s Day and have a great week.,


Posted in:General
Posted by Dennis C. Smith on March 17th, 2017 12:26 PMLeave a Comment

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