Dennis' Mortgage Blog

September 19th, 2014 1:18 PM

Question of the week:  We have written a few offers that we felt were very strong but each time the seller has taken an all cash offer. What can we do so that the next seller will accept our offer instead of a cash offer?


Answer:  This is not an uncommon issue with many homebuyers the last several years. They have done their due diligence, provided all their financial documentation and are pre-approved for a price range and mortgage. Then they go out in the marketplace, find a home they want to buy, write a strong offer only to be told by their agent that the seller took an all price offer---not infrequently for less than their offer.  How to counter act this and have your offer accepted?


Unfortunately there is only so much you can do, many sellers and their agents feel that a lower cash offer is better than a higher offer that requires financing. With a cash offer there is no appraisal concern and if an older home or one that is not in great shape that means as well no conditions from an underwriter to provide corrections for physical defects noted by an appraiser. The primary concern being taking the property off the market and losing the opportunity for the cash buyer who may not want to wait to see if you are able to get your financing.


My advice in these situations is make your initial offer your highest and best offer, do not offer below what you are willing to pay and hope for a counter offer. Yes the seller may issue a counter offer at a higher price but you can reject that counter-offer, or counter back at your original offer.


A big challenge is obviously the appraisal required for you new loan. While difficult to eliminate the concern from the seller, or the seller’s agent who may be the one recommending which offer to accept, you may be able to alleviate some of the concerns f as part of your offer you are able to state that if appraisal comes in X thousand dollars below agreed upon sales price you will agree to continue with the transaction.


Prior to submitting your offer go through the options if the appraisal does come in low and the seller will not budge on price. Do you have the funds to bridge the gap between sales price and new loan amount? Do you qualify for a higher loan to value loan if loan amount remains the same (i.e. if sales price is $400,000 and you were putting 10% down for a $360,000 and property appraises for $390,000 the 90% loan to value of $360,000 is now 92% loan to value with different mortgage insurance rate and other possible restrictions)? Is your down payment sufficient enough that a lower appraisal will have no impact on the loan? (Click here to see Question of the Week: Options if appraisal is low)


Finally, write a personal letter to the seller. While it may be some dispassionate third party making the decision, a trustee for an estate for example, it may be the son or daughter of the prior owner who remembers growing up in the home. A letter indicating how much you want the home and raise your children in the neighborhood, desire to have your children walk to the local school, or other reasons that caused you to write an offer on this home may have impact. Last year I had a situation where the buyers said they were not looking to simply purchase the home, fix it and sell it for a profit but wanted to raise a family. There were cash offers from investors but our clients’ offer was accepted because that appealed to the family selling their mother’s home of thirty plus years.


Approximately 30% of the market is all cash buyers and many traditional buyers with down payments and new mortgages needed to buy homes are feeling squeezed out of the market. In this market it takes a bit more to find a way to connect with a seller and have your offer taken seriously—and realistically in many cases it may not matter.


One final note on the subject. I tell many buyers and agents—especially listing agents I am speaking with pitching the strength of my clients who say they have a cash offer. In August 1998 Leslie and I purchased our current home that was in escrow with an all cash buyer who did not come up with funds and backed out. It happens.


Keep writing offers and know that your new home is out there looking for you while you are looking for it and when you find each other we will work hard to fund your mortgage and put you into that home.


Have a question? Ask me!  


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


Follow the money. Most issues can be explained using that simple bit of advice. Why did a politician vote a certain way? Follow the money from campaign contributions. Why did a business suddenly decide to change direction? Follow the money it was losing on prior direction or money in the new market it expects to capture in revenue with the change. Why did mortgages rates suddenly spike up? Follow the investor’s money and you will know mostly why.


As a rule lending interest rates follow a simple principle, bad economic news means lower rates and conversely positive economic news means higher interest rates. This week had several key pieces of economic data that were not positive, not necessarily all were negative but overall not positive. Industrial production in August dropped, not good news should mean lower rates. Producer Price Index for August was flat, not good news and should mean at least no change in rates but generally lower rates. Consumer Price Index for August dropped 0.2%, not good news and in fact bad news for overall economic growth, should mean lower interest rates. Housing starts in August declined, not good news and should lead to lower rates.


Not looking at data but rather words, the Federal Reserve Open Market Committee (FOMC) released minutes and comments from its recent meeting and Fed Chief Yellen had a press conference. Heading into Wednesday when the reports were released and Yellen hosted the media speculation was heavy as to when the Fed would begin to raise rates, naturally this expectation causes some investors to try to outguess the news and sell interest bearing investments (i.e. bonds and mortgages) to protect profits.


But there was no news. Essentially the word from the Fed is “no change.” Going deeper the news for the Fed should have caused rates to drop. Most of the comments were “dovish,” meaning Fed Governors overall favored sticking to extremely low rates for a considerable period of time. The Fed’s economic forecast was revised downward showing slower growthing in the coming year and beyond than its June forecast, this should lead to lower rates. It expressed concern that Europe is a risk to the global economy, this should lead to lower rates. It expressed concern for “significant underutilization of the labor market” and the economy expanding at a “moderate pace” which…yes you said it, lead to lower rates.


Follow the money. Seeing the Fed is going to continue offering free money by keeping its Federal Funds rate between 0-0.25% (that is zero percent interest to zero point two-five percent) for a considerable time, investors have reacted by ignoring the bond markets, or selling their bond holdings. What are they doing with their money? Not holding it in cash, they are buying stocks. This week the stock markets have continued their climb and are at historic highs, fueled not by strength in the economy and robust profits and company news but instead by cheap, free?, money policy of the Federal Reserve. And this why despite the preponderance of data and world news that should have us seeing lower rates we are seeing higher rates.


Rates for Friday September 19, 2014: Courtesy of a bit of a bounce off the floor today rates have come back some from their highs on Wednesday and Thursday showing an incremental increase from last Friday. We will see if this bounce is the beginning of a climb back up for mortgages (higher prices mean lower rates) or if a short term blip on the way to higher rates. We should know by next week after existing and new homes sales and GDP data are released.



30 year conforming                               4.110%             UP 0.065%

30 year high-balance conforming           4.250%             UP 0.079%

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.


Big day for the Smith family as our oldest turns 15 today—one more year of being driving dependent on Mom and Dad. She shares her birthday with Leslie’s wonderful sister Kelly and it is a lot of fun having birthday buddies in the house. I told her this morning, Blaire not Kelly, that she was born at halftime of the Jets and the Bills and tonight she’ll be celebrating while playing flute in the Long Beach Poly marching band as Poly travels to Corona to play Centennial. Let’s hope this game is better than that NFL game in 1999 and that at the end of the day the Poly Jackrabbits are on the same side of the score as the Bills were and not the Jets.



Have a great week,



Posted by Dennis C. Smith on September 19th, 2014 1:18 PMPost a Comment (0)

September 12th, 2014 11:18 AM

Question of the week:  We are spending a lot of money on our child’s dorm room, does it make sense to buy something near campus?


Answer:  It is the beginning of the school year and many parents have sent their kids off to college. With dorm rents at $1,000 per month or higher for half a two hundred square foot room with a bathroom down the hall, many parents may find purchasing a small house or condominium unit near campus is a better value, and environment, for their kids in college.


There are two approaches to purchasing off campus housing for your kids. One is to put a large down payment and purchase as an investment property using non-owner occupied financing.  A very popular method is to use FHA financing.  FHA has the advantage of a smaller down payment requirement and that if you put your child on the loan and title it qualifies as an owner-occupied mortgage. A third option is to use Freddie Mac’s program that allows “non-occupied co-borrowers,” in other words parents who live in their home and co-sign with their college student on their college home. Freddie Mac has a similar program to FHA with parents able to co-sign with their children, with the advantage of considerably lower mortgage insurance and still having a low down payment available.


Keep in mind this is college housing so there is a very good chance your son or daughter will be able to gather a roommate or two that can pay rent and help out with the monthly housing payment. The rent cannot be used for qualifying but can ease the pressure on mom and dad’s pocketbook.


This scenario is not right for every family, but it is very right for many, especially those with more than one child attending the same college over a period of years.


If you have a son or daughter going to college and you are tired of paying rent to the college for a loud dorm with communal bathrooms contact me and we can explore other housing options for your children and family.


Have a question? Ask me!  


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


A lot of momentum in mortgage rates this week, in the wrong direction. There has been little economic news this week to support the drop in Mortgage Backed Security (MBS) prices which determine interest rates (MBS prices down rates up, MBS prices up rates down). Weekly filings for initial unemployment insurance climbed again to 315,000 and continuing claims continue to increase. This data on top of last week’s August employment data supports the Fed’s rate “doves” who favor lower rates and should have resulted in a drop in rates but downward momentum for MBS prices that started last Friday after I sent out the Weekly Rate and Market Update continued.


Today retail sales for August were released, and the data was right at expectations, which usually has minor impact on rates as the expected data is typically priced into the market. We have seen a continued drop in MBS prices today despite the expected increase in sales by 0.6% from July to August. Despite the drop in employment and earnings discretionary spending in August rose 0.6%, whether this is a trend or consumers engaging in some final summer fun before school returns won’t be known until next month. Strong retail sales indicates consumer confidence is strong and usually results in higher mortgage rates, today’s reaction however is stronger than what should be expected.


All indicators are for lower mortgage rates. We have some positive economic news scattered among much more negative or non-positive economic news. We have an international crisis leading to armed conflict as the U.S. leads a coalition to engage the entrenched terror group ISIS. We have Ukraine and Russia conflict still brewing. According to economic fundamentals the aggregate news should support lower rates not higher rates. Investors however have reacted differently since last Wednesday selling off bonds pushing rates up.


Rates for Friday September 12, 2014: I feel like I may have jinxed mortgage rates with my commentary the past two weeks on mortgage rate float downs and extensions, if only I had the power to have such an impact. Rates are up from last Friday with momentum to climb higher. When we hit resistance and any bounce back down there will be a lag between the investor side of the market and the consumer side as lenders will be slow to lower rates. One of my many sayings is that rates go up like a rocket and come down like a parachute. Lock your rate when you can through your escrow period.



30 year conforming                               4.045%             UP 0.170%

30 year high-balance conforming           4.171%             UP 0.171%

30 year FHA                                         3.375%             Flat

30 year FHA high-balance                     3.75%               UP 0.125%


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.


Looks like another hot weekend here in Southern California that could get hotter, and more humid, as another tropical storm (Odile) is formed off Mexico and tracking towards Baja with the strong possibility it could become a hurricane. If it turns towards land that would trigger hotter, wetter weather for our region—oh boy!


Leslie and I are hoping it moves off to sea and we have clear, and cooler, weather next week as we are scheduled to have our new roof installed. We initially looked into replacing our worn out roof last year and put it off. Getting our quotes this year they are significantly lower than a year ago—evidently the surge in replacing roofs from 2012 and 2013 has abated and roofing companies and suppliers have adjusted their prices to the market. That is good for home owners needing to replace their roofs.


Have a great week,



Posted by Dennis C. Smith on September 12th, 2014 11:18 AMPost a Comment (0)

September 5th, 2014 9:48 AM

Question: What is a rate extension and how does it work?


Answer:  Last week we covered mortgage rate float-downs, this week we will look at another option with mortgage rates, rate lock extensions.


When you are eligible to lock in the interest rate and terms there are options for the time frame the rate can be locked, typically 15, 30, 45, 60 or 90 days. The longer the lock period the more expensive the cost for the same interest rate, usually by 0.125 (one-eighth of one percent) points. For example a $400,000 loan locked at 4.00% for 30 days at 1.00 point ($4000) would cost 1.125 points ($4500) to be locked for 45 days.


Most frequently borrowers mortgage rates are locked for 30 days, though when the industry is especially busy or if the escrow calls for it 45 day locks are sometimes used. Fifteen day locks are used only when a borrower’s loan is fully approved and ready for loan documents. Regarding 90 day or longer rate locks, many lenders may require an upfront fee to lock the rate for that period of time.


So what does a “rate-lock” mean? It means if your rate is locked at a particular time for a particular mortgage you have to fund the mortgage in that time frame to be guaranteed the rate. Taking the example above, if you locked in the $400,000 mortgage at 4% today for 30 days you would have to fund the mortgage on or before October 4th or lose the rate. That raises a few questions, primarily what happens if you have not funded the loan but need more time to close? If rates have dropped perhaps let the rate lock expire then re-lock at a lower rate? We covered that last week, if the rate has dropped you may have the opportunity for a float-down. However if you were unable to float down and your rate lock expires lenders are not going to let you re-lock at the current rate if it is lower.


If your rate lock expires and you re-lock the loan lenders will offer you whichever is higher the same rate or the new market rate. The lender protected you against higher rates but locking in your rate several weeks ago, they have a policy to split lower rates with you if rates drop, but they are not going to let your rate lock commitment expire then give you a lower rate.


If you know you are not going to close your loan by the time your rate lock expires then it is time to explore a rate lock extension. Just as at the beginning of the loan when you can buy a longer period to lock in your loan, when your rate lock is about to expire most lenders will offer a rate lock extension for a fee. The fee will differ from lender to lender, as a rule the extension fee will be the same cost or more expensive than the original cost to lock for fifteen extra days at the beginning of your transaction.


Lenders will protect your rate against increases in rates, and may allow you to lower your rate if they drop, however the protection only lasts so long---as long as your rate is locked unless you pay to extend that protection. With that in mind when pricing your mortgage keep in mind the period of time you wish to lock in the rate—and compare 30 day locks to 30 day locks (some lenders may be quoting 15 day locks to try to get a lower quote on the market).


Have a question? Ask me!  


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


Not a lot of data this week on the economy but whenever we have the first Friday of the  month there is significant data as the monthly employment numbers are released. Before those numbers are released we get the weekly unemployment claims which this week came in at 302,000 new filings last week, the number has been hovering around 300,000 new claims for weeks.


Perhaps the most important piece of data the past few years has been the monthly employment report from the Labor Department. It has become the bell-weather for interest rates since both the current and prior Fed Chairs have focused on employment as a (the?) primary factor in when the Federal Reserve will raise the discount rate, and therefore other interest rates across the economy will follow. Investors watch the employment numbers and then use as a guide to probable Fed action and invest accordingly. Poor employment figures push stock prices higher on probability of continued cheap money and interest rates lower on probability of lower investment returns from bonds.


This morning the Labor Department released disappointing data on August employment. Following a drop in the number of new jobs created in the economy in July from June (down 55,000 jobs created), August continued the downward trend with 70,000 fewer jobs created in the month for a total of only 142,000. More damaging than the total number of jobs created was that only 134,000 were in the private sector. Some media outlets may lead with the headline number of total unemployment dropping to 6.1%, but this number is misleading as the decline was due to more individuals quitting their job searches. The labor participation rate, the percentage of eligible workers actually working is at 62.7% of the workforce, the lowest number since 1978. With 37.3% of the workforce not working it is no wonder the rate doves at the Fed are concerned about “slack” in the labor market.


Rates for Friday September 5, 2014: Today’s Labor Department report helped mortgage rates rebound after spiking Wednesday and Thursday on news that the European Central Bank was cutting rates and starting its version of Quantitative Easing—just as our Federal Reserve is unwinding its QE program. The bounce in the market has caused rates to barely hang onto last week’s numbers for mortgage rates.



30 year conforming                               3.875%             Flat

30 year high-balance conforming           4.00%               Flat

30 year FHA                                         3.375%             Flat***

30 year FHA high-balance                     3.625%             Down 0.125%***


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.


So how was your week? Ours was pretty exciting starting by celebrating a significant birthday for my lovely sister in-law Diane, then the first day of school for both kids with the oldest starting high school, and then a very special day on Thursday as Leslie and I celebrated our 20th anniversary.


As I told her it seems like yesterday and forever ago that we got married, in a good way. Our wedding was a small affair in the backyard of our first home. We loved that home and while it was our home for four years we still look back on many memories of our early marriage before kids. When I think of that home, and our current home, I recognize how blessed I am to have such a wonderful partner in life, great kids and to work in an industry that enables other families to own their own homes and create their own lifetime of memories.


Thank you for twenty wonderful years Leslie!


Have a great week,



Posted by Dennis C. Smith on September 5th, 2014 9:48 AMPost a Comment (0)

August 29th, 2014 11:37 AM

Question: What is a “float-down?”


Answer:  Last week we covered mortgage vocabulary, here is one we missed that comes up with loan transactions, “float-downs.”


Most lenders have a policy that if interest rates drop after you have locked in your mortgage rate and cost that you may under certain conditions be able to relock your mortgage at a lower rate and/or cost, this is known as a “float-down” of your rate.


When you lock in your rate the lender will honor the rate and terms as long as you receive loan approval and are able to fund the mortgage on or before the lock expiration date, regardless of how high the mortgage rates may have climbed in the open market. For instance in May 2013 when rates climbed a half of a percent or more, those borrowers who were locked in prior to the rates spiking funded their loans at the rate and terms where they had locked in.


When you lock in that interest rate the lender pre-sells your mortgage in the market, making a delivery commitment to investors—be it through Fannie Mae, Freddie Mac or a jumbo mortgage investor. If those commitments are broken the lender is penalized and usually there is a trickle-down effect to the originating entity that broke the lock. So if the commitment is made and then rates drop lenders recognize they need to have a mechanism in place to present a lower rate to the locked in client or risk having borrowers go to other lenders for lower rates and therefore burning their commitments.


As a result most lenders have a float-down policy that does not transfer the entire drop in interest rates to their clients in a down rate environment but usually splits the difference between the current market and the lock in rate and terms.


As mentioned above every lender has different terms and conditions for floating down and interest rate, and some mortgage types may not even be eligible. Typically the conditions for a float down are:


    • Loan must be approved and ready to close within 14-15 days, generally this means your loan is ready for loan documents with no outstanding conditions
    • Market rate must have dropped 0.25% or more for float down to occur of 0.125% or possibly more
    • You must float down, if eligible, before your original rate lock date expires
    • Float downs can only occur one-time


These conditions may vary, some jumbo loans for instance require a greater spread than the 0.25% that is required for most conventional mortgages, some lenders will only float down on the date that loan docs are drawn.


As a matter of the process on every mortgage before ordering loan documents I check the lock in rate for the mortgage and compare it to the current market to see if eligible for a float down. There have been times when the float down opportunity is close enough that we may delay loan docs for a day or two to see if market momentum will carry us to a lower rate, or perhaps adjusting the price or credit on a loan just a little bit can provide a decrease in rate that makes sense for the cost.


Regardless of a rate float down policy or practice in most instances it is wise to lock in your interest rate and terms as soon as possible in your transaction to hedge against interest rate increases. As the many people who were floating into the first week of May 2013 can attest, rates can go up like a rocket and usually come down like a parachute.


Hedge against your rate increasing while in escrow, and with some down side opportunity if rates do drop significantly while you are in escrow it is the financially wise and responsible move to make almost always.


Next week we will cover rate extensions.


Have a question? Ask me!  


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


Last week we had data on new housing starts in July, this week we find out how those homes are selling. And the data shows not as much as expected. Following upward revisions to new home sales the prior two months July’s total came in below expectations and below June’s sales. Interestingly the South is dragging the sector up with more new home sales than all other sectors combined. Year over year total sales are up 12.3% and the median price has edged up just under 3%. The news is positive for the economy given the number of units sold and any positive news is typically negative for lower mortgage rates.


Another key indicator for the economy is durable goods orders, described as “factory hard goods,” or things that last a while. The total number saw a huge increase from June, up 22.6% let by new aircraft orders (of which Boeing had an increase of 318% from June—yes more than triple the orders, some salesman is getting a nice bonus for the month) and by motor vehicle orders which climbed over 10% after dropping more than 1% in June. What does this mean? Durable goods orders lead to durable goods sales lead to increased employment in manufacturing leads to increased consumer income leads to increased consumer spending leads to higher economic growth leads to higher inflation should lead to higher mortgage rates.


Estimate number two for the economy was released on Thursday and the revised Gross Domestic Product for the second quarter was higher by 0.2% than the initial estimate. It is now estimated the economy had an annualized growth of 4.2% in the second quarter following the 2.1% decline in the first quarter. This is a pretty strong number and is a basis for the Fed to complete its unwinding of purchasing Treasury debt and mortgages and give the rate hawks more evidence that the Fed needs to increase rates sooner rather than later.


Final economic data for the month ended the positive news from the early part of the week and most of the month. Personal income in July saw lower growth than the prior two months increasing only 0.2%. More important to markets and forecasting was a surprising drop in consumer spending in July from June and May. Not just a slow down in spending but a drop as consumer spending decreased 0.1% for the month putting concern into the market as to second half growth for 2014. Consumer spending is 65-70% of total economic activity and a decline in spending impacts the total economy. This data is positive for lower rates and supports the arguments of those who feel rates should remain at extremely low levels for a prolonged period of time.


Rates for Friday August 29, 2014: By all economic fundamentals the news this week should have pushed rates higher from last Friday. We are not alone in this world however, and events abroad have investors worried heading into a long weekend causing a flight to safety as they purchase mortgages and other U.S. bonds. Russia’s invasion of the Ukraine with tank columns, Europe’s sharp decline in retail prices and continued escalation of the situation with ISIS in Syria and Iraq has led to a large move into mortgages late on a holiday Friday. As a result rates dip a bit from last Friday to where we were the prior week. The last few weeks have seen a little bounce back and forth on the conforming rate between 3.85% and 3.99% at the same cost.



30 year conforming                               3.875%             Down 0.115%

30 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.


No more white shoes or slacks to those cocktail parties, end of the summer pool closing parties in those areas of the country where pools will need to be emptied for winter and the unofficial end of summer are wrapped up with our Labor Day weekend. Officially signifying the end of summer and the start of the academic year is the start of the college football season, and of course those whose kids like mine are starting their new grades this coming week.


That long arc of forever summer has finally touched down for the kids, one is not so happy and the other is excited to get going—into high school. Leslie and I are now officially parents to a Long Beach Polytechnic student and member of the marching band. Our autumn Friday nights for the next several years will be spent cheering on the Jackrabbits and of course admiring the band. At least I’m going to see some of the best high school football and athletes during this period.


I better go buy some green and gold gear.


Have a great week,



Posted by Dennis C. Smith on August 29th, 2014 11:37 AMPost a Comment (0)

August 21st, 2014 9:27 PM

Question: What does _______ mean?


Answer:  Last weekend Leslie went to a writer’s conference and in telling me about one of the presenters she said the speaker spoke about a writer’s device of using a minor character to illicit information from central characters---essentially letting the central character define something without looking obvious. Think of a reporter interviewing a police officer to get information on a crime scene and explain certain cop lingo and phrases.


Leslie’s comments regarding this device caused a light bulb to go off in my head, “aha! I get a question every week about what does this word or phrase mean, what is this abbreviation…” This week’s question of the week section, courtesy of my lovely wife, is a glossary of sorts for common terms and words in our industry.


LTV or Loan To Value is perhaps the most important factor in a mortgage application package. Every loan is defined first by its loan to value, or LTV, and then other guidelines and policies for the program are applied. The percentage of your property’s value that is covered by the mortgage is your loan to value. If your LTV is 80% then your loan balance is 80% of the value of the property, and you have 20% equity. On a $400,000 home a 90% LTV would be $360,000.


Equity is the portion of your home that is free of any liens, or the portion of your value that you don’t owe to the lender. As seen above your equity is the difference between your home’s value and what you owe. If you had no closing costs and sold your home for $425,000 and your outstanding mortgage balance is $350,000 then you would receive $75,000 in equity.


Net Equity is what you would receive after you sold your home and paid your closing costs, realtor commissions, transfer tax, escrow and title fees, termite inspection and repairs, etc. As a rule of thumb when you are selling your home if your listing contract has a 6% commission for the realtors then your costs of sale should be around 8%, if the commission is 5% then your costs will be around 7%. So your net equity is going to be your sales price less the 6% less your loan balance. If you owe $400,000 on your home and sell it for $500,000 with a 6% commission then your net equity will be: $500,000 less $40,000 (8% for closing costs) is $460,000 less your $400,000 loan balance results in net equity to you of $40,000.


PMI or Private Mortgage Insurance is required on conventional mortgages with a LTV of 81% or higher. PMI is insurance that you pay for that protects the lender, and allows you to purchase your new home with less than 20% down payment. The purpose of PMI is to compensate the lender if you go into default and the lender foreclosures. The lower your down payment the higher your PMI premium.


Conventional Mortgage, also known as a conforming mortgage, is used to define mortgages underwritten with the guidelines of Fannie Mae or Freddie Mac and eventually purchased by one of the mortgage conduits. Conforming mortgages are the most common mortgage in the United States and have loan limits based on geographic location of the property. After the housing and mortgage markets melted-down Congress, which charters Fannie and Freddie, created a dual market for conventional mortgages with split loan limits. In most of coastal Southern California the loan limits are $417,000 for conforming single family residence mortgages and $625,500 for “high-balance” mortgages. Lenders sell their conventional mortgages to Fannie Mae and Freddie Mac who then sell them as bonds in what is known as the secondary market.


FHA is the Federal Housing Authority, a government agency under the Department of Housing and Urban Development. FHA insures mortgages, FHA does not fund mortgages. Mortgages funded by lenders using FHA guidelines are eligible for mortgage insurance coverage from FHA and these mortgages can then be sold to Ginnie Mae (similar to Fannie or Freddie but only sells government insured mortgages in the secondary market). FHA has loan limits similar to Fannie and Freddie, though the maximum loan is $729,000. FHA mortgages have lower down payment requirements, 3.5% is the minimum, and have much higher mortgage insurance premiums than PMI. Generally FHA mortgages have easier qualifying standards than conventional mortgages, part of the reason the mortgage insurance costs to the borrower are higher.


Debt-to-Income Ratio, or DTI, is used to qualify borrowers and calculates percentage of your gross income that goes to paying your debt, or credit payments, including your new housing payment. The higher your DTI the larger percentage of your income is being used to make your debt payments. As part of the creation of the Consumer Financial Protection Bureau were certain requirements that would have to be enacted for the mortgage industry to follow when funding mortgages. One of the newer requirements is a DTI limit of 43% for loans that are not conforming or FHA. This means that if your monthly gross income is $6000 then you can qualify for a new mortgage if your new housing payment, including taxes and insurance, plus your other debts, car and student loans, credit cards, cannot exceed $2580 per month. Higher DTIs can sometimes be mitigated with what are known as compensating factors, such as high post-closing cash reserves or low LTV.


PITI, pronounced Pee-Eye-Tee-Eye not Pity, is the term used to define your total monthly housing payment covering your Principal, Interesting, Taxes and Insurance.


MBS or Mortgage Backed Securities are mortgages that have been pooled by Fannie Mae, Freddie Mac or other conduit and sold as bonds in the secondary market. The price MBS get on the open market determines the interest rates you pay on your mortgage. As MBS prices go higher interest rates go lower and vice-versa. So you can get a Fannie Mae mortgage on your home and buy Fannie Mae Mortgage Backed Securities for your retirement account and pay yourself interest.


Like any industry the mortgage industry has its own language and lexicon and at times can be confusing. When discussing mortgage options if there are terms or words you are not sure what they mean stop the conversation and ask what they mean. You are engaging in a process to contract for a very high amount of debt, it is important that you understand fully what your options are and the results of those options. This includes understanding the vocabulary and terminology being used to lay out those options.


Treat your mortgage process like kindergarten, don’t be afraid to ask any questions.


Have a question? Ask me!  


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


Some key economic data this week starting with the release of the Consumer Price Index for July. Tracking the Producer Price Index data for July CPI showed little growth for the month, with consumer prices up only 0.1% for the month and up 2.0% since last July. The increase in prices is below what the Fed considers ideal and could point to a slowing in economic growth. Slow growth in CPI favors lower mortgage rates as it indicates a slow economy and reduced pressure on the Federal Reserve to raise rates.


New housing starts in July were a surprise jumping significantly from June up over 15% from the prior month after June saw housing starts decline 4% from May. The news had many pundits say housing markets are coming back from a slow spring, however one month a market does not make and for new housing starts so far we have one month. In general strength in growth of new housing starts would be impetus for higher rates as it signals a strengthening economy.


Following the new home data on Tuesday, Thursday data for existing home sales for July was released and the slow climb in sales continues. July homes sales exceeded expectations and grew from the prior month for the fourth month in a row. Total sales for July were down 4.3% from July 2013 but the median price is up 4.9% from last July. The news should be negative for lower interest rates as stronger housing sales reflects a stronger economy.


Also released this week were the minutes from the Federal Reserve Open Market Committee meeting three weeks ago. Nothing new to report, Fed policy makers are still eyeing a fairly soft labor market and speculation is that sometime in the next six to eight months they will begin to slowly raise the discount rate—which will ripple through to other interest rates such as mortgages, autos and credit cards. The news was met with a yawn by investors who heard nothing new and have already priced into their strategies rate increases from the Fed.


Rates for Friday August 22, 2014: In what is becoming a pattern, a very strong increase in Mortgage Backed Security (MBS) prices last Friday was followed by a drop on Monday on opening. The fall continued on Tuesday as investors took profits from the higher prices in the market and moved into equities over the week. Showing the strength of the trading range we have been in for a few months MBS prices after falling off the top of the range then bounced off the bottom late in the week and pushed back into what has been the comfort zone for mortgage investors. The result is after last week’s dip in rates the market has rebounded back to where there have been the prior six weeks.



30 year conforming                               3.99%               Up 0.115%

30 year high-balance conforming           4.125%             Up 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.


As you read this I am in Minnesota for a quick weekend trip for a memorial service. In the early 1950’s my dad left Tulsa one summer to attend camp in Minnesota. An only child he bonded with his counselor, Jim Bredemus and a lifelong friendship began. Later in the decade my dad married Nancy Kennedy and his pal Jim married his own Nancy and they started their own camp on the shores of Steamboat Lake in Minnesota. While the Smith’s were in Oklahoma having and raising babies, the Bredemuses spent their summers in Minnesota running a camp and the rest of the year in Kansas. Over many years our families would meet in Kansas, Oklahoma, Arkansas for camping trips and in the summers in Minnesota. Jim and Nancy’s camp grew and they grew from a girls camp on Steamboat Lake to adding a boys camp adjacent to the Boundary Waters Canoe Area at the end of the Gunflint Trail near the Canadian border. The older Bredemus kids became the counselors for my sister, brother and I and a second generation of Bredemus and Smith counselors and campers spent summers together.


The past seven years my nephew Jack has spent summers at Camp Gunflint, his counselor and director of the camp Dan Bredemus, son of Jim and Nancy’s oldest son Terry, and for the past five years my girls, Blaire and Jenna, have spent summers at Camp Birchwood where Terry is director, Nancy runs the store and Terry’s daughter Molly has been a counselor for my girls. The third generation of Smith and Bredemus campers and counselors.


This spring Nancy passed away. Tomorrow at Camp Birchwood Jenna, my brother Michael and I will be at Nancy’s memorial service. As these happens due to divine intervention, happenstance or just coincidence depending on your belief, tomorrow is also my mother’s birthday. My mom passed away in 1980, my dad this past March, Jim Bredemus several years ago and now Nancy Bredemus is gone as well. The first generation has left us physically but the legacy they have left behind that is lasting through two more generations of love and friendship bind our families together. I am grateful for the camps that Jim and Nancy built and the friendship of Jim Bredemus and Dana Smith that started over sixty years ago in the woods in Minnesota that we will celebrate with their children and grandchildren tomorrow.


We’ll be back on Monday.


Have a great week,



Posted by Dennis C. Smith on August 21st, 2014 9:27 PMPost a Comment (0)


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