Can we refinance to settle our divorce?

Question of the week:  Can we refinance to settle our divorce?

 Answer:  Yes. No. Maybe.

One area of life that has been impacted by the pandemic has been marriage. Whether it is because couples discovered they were incompatible after being secluded together for 24-hours a day, 7-days a week, for more than a year, or couples knew before the pandemic and quarantine that they were not compatible but did not want to go through a divorce proceeding during the pandemic, or because their shared home has increased significantly in value, the number of marriage separations and divorces appears to be increasing after falling in 2019.

While I do not have any empirical evidence of the increase in divorces in 2021, I do have anecdotal evidence from our applications so far this year. For many years I have had up to four or five transactions a year that were part of a divorce settlement. So far this year that number has already been surpassed, with more on the way.  

For most families, their home is their primary asset, containing most of their wealth in the form of equity. As with other assets, when a couple divorces there must be a plan for the equity and how it is divided, if at all.

In a divorce all the couples’ assets and liabilities are accounted for, to the extent that we have seen settlements that divided houseplants, floor coverings and details on which set of flatware will be awarded to which spouse. While the settlement can get very detailed on asset separation the primary focus is on the higher monetary assets; equity in property, balances in checking and savings accounts, funds in retirement and pension accounts.

Depending on a few factors, a refinance may be the financial instrument that can be used to equitably divide assets.

First, the amount of equity in the home has to be determined, this is done by taking a close estimate of value of the property and subtracting the outstanding loan balance(s).

For instance, if the estimated value of the property is $800,000 and there is a primary mortgage of $375,000 and a Home Equity Line of Credit with a balance of $125,000, the equity is:

 $800,000 – $375,000 – $125,000 = $300,000.

The simple answer to how much equity does each party get is half of $300,000 or $150,000 apiece.

But is that equitable?

Consider if the couple has to sell the property to split equity. The property sells for $800,000, but would they net $300,000 to split? No, they would not because it costs from 7-8% to sell a property in Southern California using a licensed real estate agent.

Besides the real estate commissions there are escrow and title fees, transfer taxes, prorated interest on the current mortgage, perhaps work to clear items listed on a termite report, all these fees add up.

Back to our $800,000, subtract 8% in costs of sale and the net sales price is now $736,000. Pay-off the $500,000 in mortgage and HELOC balances and the proceeds of the sale are $236,000. Or $118,000 for each spouse.

We have a situation where one spouse will keep the house, but in order to do so must “cash-out” the other spouse for their share of the equity. Is the share of equity $150,000 or $118,000?

This makes a big difference if we are refinancing the house to pull funds out to pay off the existing mortgages and also transfer funds to the other spouse.

Primarily, if the amount is $150,000, the total loan amount will need to be $650,000, which is 81.25% of the value of the property. This can create an issue of whether we need mortgage insurance or not, and depending on how the funds and loan is structured if a loan is available over 80% loan to value.

For many of these cases the agreed upon amount is closer to the “net” equity split than the “gross” equity split. In this case extracting $118,000 to be paid to the non-occupying spouse in exchange for a spousal quit claim deed that transfers the property from joint tenancy of the married couple to the occupying spouse as sole owner.

The mechanics of the transaction are important as they impact the rate and costs of the loan. While we are pulling equity out of the property, underwriting guidelines do not consider the transaction as a “cashout” refinance but “limited cashout” refinance IF none of the proceeds go to the occupying spouse. This is important because if any proceeds at closing are paid to the occupying spouse the transaction is a “cashout” transaction which has higher rates and costs than a “limited cashout” transaction.

For example, in the above transaction, Linda and David are getting divorced, Linda wishes to remain in the home with their two children. They agree to David receiving $118,000 from the property and he will sign a spousal quitclaim deed removing himself from ownership, in exchange for the receipt of the funds as well as being removed from any liens on the property.

Linda qualifies for a $618,000 mortgage and we proceed. At the end of the transaction, when the loan funds, escrow pays of the primary mortgage, the HELOC and sends a check for $118,000 directly to David. To close the escrow, Linda had to wire $1100 to escrow to cover pro-rated interest on the new loan. This meets the requirements for a limited cashout refinance.

If pre-funding estimates show Linda receiving $1100 at the close of escrow due to the loan balances being paid off being lower than initial estimates, the transaction is a cashout refinance, it could not proceed until either the loan amount is adjusted downward, say to $616,000, or the loan would be repriced as cashout, a higher interest rate and underwriting re-reviewing the loan to ensure she qualifies with the higher payment.

As mentioned above, the occupying spouse, Linda, must qualify for the refinance mortgage, which may include joint debts that have not yet been separated and paid in full; for example, a credit card with a $25,000 balance or auto loan with a $600 per month payment for the car which David is retaining possession to after the divorce.

Where we run into issues are underwriting guidelines if there is spousal support being paid and received as part of the divorce. The guidelines state that if there is spousal or child support being paid by our borrower as listed in the settlement agreement, it is counted against the borrower.

However, if our borrower is receiving the support payments, they cannot be accepted as income unless the amount is agreed upon in a recorded settlement agreement for the divorce or a separation agreement. As well, and this can be the sticking point, the borrower must show that the full amount of the payments have been received in a timely manner each month for the past six months.

For example, Linda is to receive $2000 per month for spousal and child support payments* from David. They have been separated for three months and through their attorneys have a separation agreement showing this amount to be paid. David began payments in July and has an automatic deposit into Linda’s account on the 1st of each month. For qualifying the income, we must wait to receive final approval and clearance to clear the loan until after the December payment has been made and received.

If David missed the August payment and doubled up the payment in September, we must wait for closing until after the February payment has been made and received, presuming all payments were made on time.

*All support payments must be shown in the agreement to continue for at least three years. If there is a child of the married couple that is generating a payment of $700 per month until she is 18-years old, and will turn 18 four months before our transaction is to close, the $700 per month support payment will not count as income.

Back to our question of the week, yes, you can refinance your property to settle your divorce as part of the division of assets.

Do to the more moving parts than the standard mortgage transaction, the sooner a couple getting divorced begins conversations with us as to options and strategies for one of the spouses to retain the property after the divorce is complete the better. In some cases we have worked with a couple and their attorneys for several months providing different scenarios and options as they created their settlement.

If you know of someone who is considering terminating their marriage, or other relationship with shared property, please have them contact me to go their particular scenario and possible options.

Have a question? Ask me!

Rates for Friday September 10, 2021: No major economic news was released this week that could impact mortgage rates. The 30-year conforming rate is pretty locked in remaining flat for the 9th straight week, the high-balance conforming is unchanged for the 4th week in a row.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:

30 year conforming                                         2.625%  Flat

30 year high-balance conforming                   2.875%  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 with 740 FICO score for purchase mortgages.

As you are aware, tomorrow, 9/11, is the 20th anniversary of the terrorist attacks that changed our country and world in less than two hours. September 11, 2001 is one of the moments in our lives that seem so long ago, and so recent because the stark memories each of us holds.

The memory that seems to have faded the most for too many people is how close together our nation drew following the attacks. No red or blue, left or right, urban or rural, as we pondered what could be next. Not unpredictably, the further from 9/11 we moved, the more divisive the language, rhetoric and grandstanding became.

We are the most unique nation in world history. No country has, or has had, the vast spectrum of races, ethnicities, religions, and cultures united as on country. This naturally leads to conflicting ideals, values, and beliefs. It is these differences that enable us to explore other solutions, options and possibilities to improve our communities and country.

It is my hope that the respectful discourse and conversations that were prevalent following 9/11 once again return to our local, regional and national dialogues. My hope is the few on the extremes of parties and ideologies quit screaming and trying to whip up support for their positions by debasing those with whom they disagree and instead engage in respectful dialogues, to find common ground.

In the spirit of the almost 3,000 people who died as a result of the 9/11 attacks, work on respectful listening and speaking to understand those with whom you may not agree on certain issues and see if there are not one or two points you can agree upon. Shake hands, hug, smile, come together.

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog

Why is credit score in your report different than score I have from on-line report?

Question of the week:  Why is credit score in your report different than score I have from on-line report?

 Answer:  Many mortgage applicants are surprised when they receive a credit report from a lender and the score is lower than the score they received from a their credit card company or a free on-line service. Sometimes the score from the mortgage company is significantly lower than the free on-line score.

Why is this?

Credit scores are derived from models that use algorithms weighing five main factors:

  • Payment history, the most important factor, as missed payments, even one, will have a negative impact on a credit score. Payment history is approximately 35% of credit scoring.
  • Amounts owed, especially as a percentage of amount available, your credit utilization ratio, is the second biggest factor. Outstanding balances that are a high percentage of the amount of available credit have a negative impact on credit scores. This factor is approximately 30% of your score.
  • Length of credit history has about a 15% impact on your credit score. The credit history algorithm factors your oldest credit accounts as well as your newest, and the average age of the accounts. If you have a lot of very new accounts this can negatively impact your score.
  • Credit mix, having a mix of different types of credit can help your credit score. Having a mix of credit does not mean a Capital One Visa, a Delta Mastercard, an American Express card and a few department store cards. Credit mix is having credit in different categories such as auto, student loan, credit card, mortgage, installment loan accounts. The more categories of credit you have the better your credit score as credit mix is about 10% of scoring.
  • New credit, as mentioned above, can impact your credit score. One reason is because when you obtain new credit you typically have what are known as “hard inquiries” on your report. Too many hard inquiries, especially for revolving accounts, and new accounts has a negative impact on your credit score. This category is also about 10% of the scoring model.

The purpose of a credit score is to provide a credit provider with an assessment of potential risk. You can different scores from the report provided by your credit card company than from the report used for a mortgage application because the amount of risk to the credit card company compared to the mortgage company.

Using the scoring models above, a scoring model for a mortgage applicant will put a lot more weight on the missed payments and outstanding balances than the scoring model for a credit card.

Why? Because mortgage lenders have a lot more at risk than a credit card company, hundreds of thousands of dollars more at risk, higher monthly payments at risk, and considerably higher costs should a borrower default.

Regarding the latter, this is especially true in states, such as California, with non-recourse mortgages; states when mortgage lenders cannot sue borrowers for losses incurred when a loan goes into foreclosure. When a mortgage goes through the default and foreclosure process, the cost to the lender is about 25% of the balance. When a consumer defaults on a credit card balance the creditor often has recourse in small claims court to recover the balance. If the creditor does not choose to go to court to collect, the amount charged off remains on a credit report for up to seven years.

If you apply for a mortgage, an auto loan and a credit card on the same day, there is a good chance that your credit scores will be different for each application, likely going lowest to highest in the order listed above.

Not only do different categories of creditors have different scoring models, so do the different credit agencies, Experian, Trans Union and Equifax. Because of this the mortgage industry uses a “tri-merge” credit report, the report is a merging of information collected from all three of the major credit bureaus and their respective scores. It is not unusual for us to see a difference of up to 50 points between the lowest and the highest of the three scores.

For this reason, the industry uses the middle credit score for single applicants and the lowest middle score of multiple borrowers. For instance, if I have credit scores of 739, 719 and 745 and Leslie has scores of 775, 782 and 771, our file score will be 739, my middle score. This is the score that will be used for determining the rate and cost of the mortgage for which we are applying, which will be higher than if we could use Leslie’s middle score of 775.

A final note, many people with some challenging credit issues delay speaking to us about qualifying for a mortgage, “until we can get our credit cleared up.” When I hear this, I ask what needs to be cleared up and what is their intended process. My intention is to get the client to let me pull a credit report so I can analyze the report through the filter of mortgage underwriting guidelines. With a tri-merge report I can determine what steps can be taken and potentially shorten the path to homeownership. The analogy I use is that if you want to get in shape you can set your own exercise routine, but those who work with a trainer typically get into better shape faster than those doing it alone.

If you, or someone you know, would like to purchase a home but feel their current credit situation will prevent them from doing so, please contact me so we can obtain a credit report and determine the best steps to take to get their credit in shape.

Have a question? Ask me!

Maxwell Smart, that’s what is thought today when I read the August jobs data this morning. After over one million new jobs were added to the economy in July, the expectation was for approximately 720,000 new workers in July. Earlier today the Labor Department announced that 235,000 new jobs last month, even those not so great at math can see this is significantly lower than expectations. Also in the report was the unemployment rate, measured by those seeking employment, dropped from 5.4% to 5.2%, and that hourly earnings increased 0.6% in August and are up 4.3% from August 2020—keeping pace with inflation.

Now what? Last week in the economic section of the WR&MU, we discussed the Federal Reserve and the possibility it will taper its asset buying program (Quantitative Easing) before the end of the year. A primary factor in if the Fed will taper, thus putting more upward pressure on rates, is the strength of the labor market. Does today’s jobs report change the conversation as it shows slowing growth in jobs? Or…are there some extenuating circumstances to cause the August report to be somewhat discounted by the Fed? Two factors that may cause the jobs report to have less of an impact than expected. One, some experts feel the disappointing miss on the total number of new jobs is the result of many companies freezing new hires, especially for customer forward positions, due to the delta variant of Covid and the surge in late July and early August. While there are still hot-spots around the country with high positive test results and hospitalizations, many areas are showing these numbers plateauing and starting to decline, meaning hiring may resume in September. Another factor is the “August effect.” August is traditionally a vacation month and many small business owners, human resource directors, executives, and others who complete the government job surveys are not around to fill in the boxes. So not only is August a traditionally a vacation month, but it is also traditionally a bit of a squirrelly month when it comes to data collection. With many people not being able to vacation last summer, we have seen a tremendous jump in vacationers this summer.

Rates for Friday September 3, 2021: Ordinarily a big miss in a major economic report would have an impact on rates, in the case of the August employment numbers the miss to the down side would put downward pressure on rates. However, as we have seen over the past year, ordinary reactions to economic data have not impacted interest rates as expected in traditional economic models. Such is the case today at investors shrug off the data and speculation as to what the Fed may or may not due as a result. That said, our mortgage analysts are forecasting a potential bump in interest rates sometime next week based on the markets.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:

30 year conforming                                         2.625%  Flat

30 year high-balance conforming                   2.875%  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 with 740 FICO score for purchase mortgages.

No more wearing white and the pool is closing soon. Those were the traditions due to Labor Day when I was growing in areas of the country that experience four distinct seasons.

Since 1994, Labor Day weekend has signified another year for Leslie and I as that year, we were married on Sunday of the three-day weekend. Tomorrow will mark twenty-seven years,  that have seen two kids, three dogs, two homes, tens of thousands of miles on drive trips, and countless laughs. I won the lottery, not from a ticket bought at a liquor store, but from meeting a young lady who was drawing a sign for a charity event while sitting on the floor of an escrow company with a great sense of humor.

She’s needed it often over the past two plus decades.

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog

What is a jumbo loan?

Question of the week:  What is a jumbo loan?

 Answer:  With real estate prices jumping up significantly over the past eighteen plus months in Southern California, and across the country, many homebuyers are hearing, “you will need a jumbo loan for financing.” What is a jumbo loan?

Jumbo is a generic term for a mortgage that is over the Fannie Mae/Freddie Mac maximum loan limit, or as listed below the high-balance conforming loan. In most of our region the maximum loan limit is $822,375, if you need to borrow $822,376 to purchase your new home or refinance your current home, you will need “jumbo” financing.

The primary factor that makes jumbo loans different than conforming loans is that there is not a secondary market where the mortgages are bought and sold. As long-time readers of the WR&MU know, conforming loans are funded by a lender, packaged with many other loans into a bundle and that bundle of mortgages is sold to either Fannie or Freddie. Fannie and Freddie then package the mortgages they purchase from lenders across the country into bigger bundles and sold on the open market as Mortgage Backed Securities (MBS). The MBS market is fairly stable and secure in that all the mortgages in the MBS packages are underwritten, approved and funded under the same guidelines as established by Fannie or Freddie. Investors know also know that at this time MBS are backed by the United States Treasury, making their investment one of extremely low risk.

Jumbo loans are funded through mortgage banks, and then retained by the bank that funded the mortgage, or sold to investors. Investors in jumbo mortgages can be other banks, credit unions, equity funds or insurance companies.

One of our lending partners may have two, three or even four different jumbo mortgage programs for us to choose from for our clients. Each of the programs have different guidelines for underwriting, and different rates, typically the stricter the guidelines the lower the rates.

Some jumbo programs have looser guidelines than Fannie or Freddie have with their high-balance programs, for instance refinancing a property that has an equity line that will be paid off as part of the transaction. If the equity line has not been used in the past 12-months, some jumbo investors will consider the refinance a “rate and term” transaction, whereas if the equity line was not part of the purchase of the property conforming guidelines consider the transaction a “cash-out refinance.” Since cash-out refinances typically have higher rates than rate and term refinances, it may make sense to apply for a jumbo mortgage than a conforming mortgage.

This type of underwriting guideline tradeoff is important as many jumbo programs have a minimum loan amount that is one-dollar higher than the conforming loan amount of $548,250.

During the pandemic many jumbo investors pulled out, or pulled back with higher interest rates. In the past several months many have re-entered the market and for many clients and situations a jumbo loan product may be a better value than a high-balance conforming mortgage.

We need to reiterate that jumbo underwriting guidelines are not the same as conforming. While many jumbo guidelines are very close to conforming guidelines for much of the underwriting, there are differences that need to be considered. Differences such as required reserves, qualifying income and what is known as continuity of obligation.

What is the best mortgage solution for you? Until we have a detailed conversation regarding your financial situation and what your mortgage need is there is not set answer.

Have a question? Ask me!

You are doing well, better even. That is the news from this week’s economic data for the generic American. Second quarter GDP was revised up slightly to 6.6% growth from the original 6.5% estimate. The revision was mostly due to an upward revision of consumer spending in the quarter, increasing 11.9% from the first quarter.

With your income growing, resulting in more spending, the current estimate for 3rd quarter GDP growth is 7%. Due in some part to the child tax credit funds being transferred from the federal government, incomes spiked up 1.1% in July from June. While incomes jumped, growth in consumer spending was a bit relaxed from June, but still rose 0.3% in July. Despite steady month-over-month increases in spending, Americans are maintaining high savings rates and balances.

“I was of the view…” In a speech earlier today, Federal Reserve Chair Jerome Powell did something that is very rare for Fed Chairs, he gave a personal opinion. In this case in recapping conversations at the last meeting of the Fed’s Open Market Committee (the FOMC that sets the Fed’s rates), in which he, and most of the other members of the committee, felt the Fed could begin to taper its purchase of U.S. Treasuries (currently buying $80 billion per month) and Mortgage Backed Securities ($40 billion per month). Investors and markets have been waiting to see when the Fed will begin to taper its purchase of the two main financial instruments that determine interest rates for consumers and corporations. It appears the slow down of buying will occur in the next four months.

Rates for Friday August 27, 2021: All the economic data this week, and Powell’s comments, point to higher rates—I know I sound like a broken record the past several months. The $120 billion per month the Fed is using to influence rate-based instruments is the primary factor in rates not being a lot higher than they have been. Rates are set to jump once the artificial cap on the market is lifted by the Fed by allowing more Treasuries and mortgages to hit the open market. All of that said and analyzed, rates are flat from last Friday.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:

30 year conforming                                         2.625%  Flat

30 year high-balance conforming                   2.875%  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 with 740 FICO score for purchase mortgages.

Joy and pain this weekend for yours truly. The joy will be this evening as Leslie, our youngest and I travel up to Hollywood to see “Hamilton” at the Pantages Theater. The pain will be from 9:00 to 4:00 tomorrow as I sit in front of my computer to complete continuing education for my National Mortgage License.

The NMLS continuing education and testing is an annual event that I am actually glad to go through as the National Mortgage Licensing System that was the result of the SAFE Act that was enacted in 2008. For decades prior to that I was calling for more stringent license requirements for all mortgage lenders, whether they work for mortgage brokers, mortgage bankers or banks and credit unions. At this point those who originate mortgages for banks and credit unions are exempt from the licensing requirement, an exemption I hope will be eliminated in the future.

In the meantime, several hours of joy this evening, followed by a glassy-eyed eight hours tomorrow.

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog

Should we pay extra on our mortgage?

Question of the week:  Should we pay extra on our mortgage?

 Answer:  This is a question we answer every few years and it has come up recently from a few clients. The main reasons people say they want to pay down their mortgages are to get rid of the monthly payment, reduce the amount of interest they pay, and payoff the mortgage sooner.

But is paying off your mortgage early the best financial move for you? Here are several items to consider before you commit to paying off your mortgage ahead of schedule.

Are you maxing out your contributions to your retirement account? Most Americans are underfunded for their retirement, many of whom own homes. Instead of paying additional principal down on your mortgage I suggest putting those funds into your retirement account instead. Consider that the money you put into retirement is usually deducted from your taxes (an exception can be if you contribute to a Roth IRA account), whereas the money you pay down on your mortgage is not. Most homeowners in California will have combined state and federal tax rates around 33% of adjusted gross income. If you contribute the 19,500 maximum to a 401(k) ($26,000 if over 50) that is a tax savings of about $6400, pay the same amount down on your mortgage and there is zero tax savings—in fact you will have negative tax savings because…

The government pays for part of your mortgage due to the mortgage deduction allowed on state and federal income taxes. You can deduct the amount you pay on your mortgage interest directly from your income for both federal and California state income taxes (note depending on when you funded the loan your interest deduction may be capped on the interest up to a $750,000 balance). So, if you have a $500,000 mortgage with an interest rate of 3% you can deduct $15,000 from your income, saving approximately $5000 in taxes. If you pay down $15,000 on your mortgage you lose approximately $150 in tax savings since your interest payments are lower. Paying down $15,000 on your mortgage instead of putting it into your 401(k) can cost you over $5000 in tax savings.

If you are maxing out your retirement contributions, how are you on saving for your children’s college education? As the parent of college senior and a college freshman, and someone who has looked at thousands of clients financial statements, I can attest that college expenses have far outpaced most families abilities to save for those expenses. Putting additional money into a 529 College Savings account or other savings instead of paying down your mortgage might be a better allocation of funds. By doing this you are essentially “borrowing” at whatever your mortgage rate is today for use in the future instead of potentially borrowing in the future at what may/probably will be a higher rate. As well, with today’s very low mortgage rates, the rate to “borrow” by not paying down your mortgage will likely be lower than the return on the funds you are investing for future college costs over the long run.

Speaking of your mortgage’s interest rate, is it lower than other debt you have? Credit card debt, auto loans, your own student loans? If you are maxing out your retirement contributions, you do not have to worry about future college expenses but have consumer debt it makes more sense to pay off that higher interest, non-tax deductible debt before paying off your mortgage. It not only makes more sense but it is very good math.

Are you planning on selling your home in the future, before the current term of your mortgage is completed and before your over-payment plan would pay off the mortgage? If so, you should consider putting the additional funds into savings, investments, even cash. Your home is not worth more, or less, depending on your mortgage balance.

Your home’s value is determined by location, size, condition, etc, not by the amount of debt secured by the home. Paying $40,000 down on your mortgage over say five years and then selling it with a $400,000 mortgage balance was a loss of opportunity for those funds to work for you with compound interest and/or dividend reinvestment. There is no compound equity or equity reinvestment in your personal residence, it will be worth what the market dictates when it comes time to sell.

Yes, your net proceeds from the sale will be $40,000 more than if you have not paid down the mortgage. At a 4% return on the extra $666 per month you pay on the mortgage over five years would result in over $44,000, 10% more than your net proceeds gain from paying that money into the mortgage.

One final consideration, it costs money to get money back out of your home. If you have $100,000 equity and want to access some of it you will either need to refinance, obtain 2nd loan or HELOC, or sell the property, each of which has costs. What if you pay down your mortgage and need money in the future for home improvements, medical emergency or other unexpected life event?

All these are factors, and there are more, that you should consider before paying extra down on your mortgage. There are some factors that more strongly support paying off your mortgage early than other, primarily looking at your current income, your projected retirement date and your projected income during retirement. Or you have a property that is a rental with a low enough balance that you can use rental income to accelerate the payoff of the mortgage, again looking at some of the factors above, to have a free and clear investment that gives you more options in the future, such as selling and carrying a large mortgage to defer capital gains and continue to receive income.

As with most/all of our questions of the week, before we can answer the question we need answers to more questions—and this particularly the case this week. If you are considering accelerating the principal reduction on your mortgage, please do not hesitate to contact me to discuss your options.

Have a question? Ask me!

Retail sales are not leading economic growth. For the second time in three months retail sales dropped month over month, down 1.1% in July from June. While still up 16% from last July, the decline has many opinions coming forth as to why. Are consumers “spent out,” having gorged themselves at malls and Main Street shops when the local economies first opened back up? Did on-line retailers like Amazon, Walmart and Target create new buying habits that pulled even more shoppers out of stores and onto websites?

Pushing retail numbers down is the continuing stagnation of auto sales, or rather decline. Shortages in computer chips continue to slow production of new cars, pushing inventories down and prices up. Auto sales, which have already been sluggish, dropped 3.97% from June to July; removing auto sales from the overall retail sales data and the dip is .4% for the month instead of 1.1%.

What should concern retailers, besides the reduction in foot traffic and ringing registers, is that retail sales are calculated on dollars spent, not units moved. Those dollars spent are inflated around 4% from 2020, and up 0.5% from June. Sales dropped 0.4% while prices increased 0.5%.

Minutes released from the meeting of the Federal Reserve’s meeting in July show a shift in its view of inflation. Previously the Fed had maintained the stance that the spike in inflation is “transitional,” as the economy went from closed to open. The minutes show many feel that inflation will continue into 2022 due to shortages in labor and materials. It feels like the Fed is ready to announce in the near future a tapering of the Quantitative Easing policy to keep its rates near zero.

Rates for Friday August 20, 2021: The economic news is a bit choppy, higher prices, less consumption. The Fed seems poised to change course on rates. Uncertainty is typically not good for markets. This week we saw mortgages fairly flat, and conforming rates are flat Friday to Friday yet again. However, lenders are hedging a bit on high-balance rates and we see a bit of an uptick in those programs from last week.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:

30 year conforming                                         2.625%  Flat

30 year high-balance conforming                   2.875%  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 with 740 FICO score for purchase mortgages.

As many of you know I grew up moving around. When we moved from Tulsa to outside Philadelphia, my first friend became my best friend for our time there (leaving for New York after a little over five years). Greg and I spent a lot of time together, and thankfully for me his dad had season tickets to the Eagles and I was able to go to a few games each season.

Greg still lives in the same area and yesterday he contacted me that he is in San Diego visiting his daughter. “Come down, let’s see the Phillies play!” was the message I received.

Two tickets on the third baseline for the Phillies and Padres at PetCo Park for tomorrow night will get us together in person for the first time since sometime in the late 1970’s. Go Phillies! Ring the Bell!

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog

Are Seller rent-backs a good idea?

Question of the week: Are seller rent-backs a good idea?

Answer:  In March we wrote about different options buyers could use for their offers to increase the chance of getting their offers accepted.

One of the options was to put in your offer, or convey to the seller through your agent, your willingness to let the seller remain in the home after closing and rent the home from you until they purchased their next home.

In the past few months, almost every purchase transaction in which I was the lender has had a rent-back clause. On a recent transaction as we were nearing the close of escrow, the listing agent contacted the selling agent (represents the buyer) asking if the buyer would agree to let the seller rent back after the close of escrow as the home the seller was purchasing would not be closing soon after our escrow closed.

The buyer, who is an attorney, asked a very good question of her agent. “That creates a tenancy relationship. What if they do not leave after the rent-back period, then I would have to evict?”

She is correct. Once you own a home and someone else is living there you have created a tenancy relationship and the occupant has all the rights of a tenant. As many landlords can attest, since the pandemic local, state and the federal government have issued eviction moratoriums. Currently the State of California eviction moratorium goes to September 30th, and the federal moratorium was recently extended to October 3rd.

Looking for more information on the landlord-tenant relationship and the eviction moratoriums, I called my attorney friend (friend attorney?) and asked him for more information. What happens if you purchase a home, you and seller agree that the seller will rent back the home for a period of time and then does not vacate the property? Do the pandemic eviction moratoriums apply?

According to Matt, technically no, the moratorium does not apply as the purpose of the moratorium is to protect tenants who are experiencing financial difficulties due to the Covid-19 virus. In a rent-back situation, typically the seller agrees to pay the daily equivalent of the buyer’s housing payment (PITI – Principal, Interest on the loan, property Taxes, and Insurance).

There are a couple of different options for transferring the rent from the seller to the buyer. One, is at the close of escrow the amount of rent for the agreed upon period of time is credited from the seller to the buyer at close of escrow. Two, the escrow company withholds from the seller’s proceeds the amount of rent for the period of the rent-back, and perhaps more to cover extra days or damages. Three, the buyer and seller agree that the seller will pay the buyer outside of escrow the amount owed on a weekly, or monthly if that is the case, basis.

If the rent is pre-paid through escrow, or directly at time of closing, clearly the seller is not impacted financially by the Covid-19 virus and would be exempt from the eviction moratorium.

So, we are safe from having to go through an eviction, or waiting until the moratoriums are lifted and then can evict if the seller does not leave our new home.

Maybe.

Matt also told me that while the moratorium would not apply to the seller as a tenant, the courts in Southern California have tremendous backlogs of eviction cases, he mentioned Los Angeles County has a backlog of around 500,000 cases. Essentially, landlords with lawful eviction processes in place with tenants who are willing to be taken to court, will be waiting a very long time before the court can give them satisfaction and force an eviction.

Please note, the regulations and process also apply if you purchase a home with a tenant occupant. When you purchase the home the tenant’s lease becomes yours, as does collection of rent or termination of lease and eviction proceedings.

In almost thirty-five years I can recall only a few times where a tenant would not leave after a property has been sold, and once when a seller stayed beyond the agreed upon time limit. In the latter case the buyer was properly compensated, in the former the new owners resorted to trading cashier’s checks in the street for keys to the property.

If you are entering a rent-back situation you are entering a relationship that relies on a certain amount of trust that the seller will move out in the agreed upon time. But this is true when purchasing any home where the seller is still occupying the property on the date you obtain ownership. Many, most, purchase contracts for residential real estate have a possession clause where the buyer and seller agree that the buyer will get possession of the property at “close of escrow plus 3 days,” or some other short period of time. During those three days there is a tenancy relationship between buyer and seller. The buyer is trusting the seller that they will vacate as agreed. If not…there is a huge back up in the courts.

Have a question? Ask me!

Lower but still high is the short statement on July’s inflation numbers. The Consumer Price Indexed increased 0.5% in July, down from June’s 0.9% surge. Two big factors in the price increase were used car sales, up 0.2% for the month after rising 30% from March to June, and energy costs which were up 1.6% for the month. Year-over-year consumer prices are 5.4% higher from July 2020. The news was a bit mixed for rates, read on for why.

To ease or not to ease, that is the Fed’s question. Since last March the Fed has been purchasing $120 billion of U.S. Treasury securities and Mortgage-Backed Securities (MBS). This move is called “quantitative easing” and has kept mortgage rates very low. “Easing” is the term for the Fed to reduce the number of securities and MBS it purchases each month, which should result in interest rates slow increasing. There are some in the Fed who would like to announce in September that the Fed will begin easing in the near future, say by December or January and feel the year-over-year inflation numbers support such action. Others in the Fed feel the reduction in month-over-month price increases support the estimates made several months ago that current inflation is “transitory” and the current quantitative easing policy should continue. Which ever side wins the debate will determine where rates will move in the near future.

Rates for Friday August 13, 2021: Starting at the end of last week there was a slide in MBS prices (higher rates) until Wednesday of this week when prices rebounded. Historically when this happens lenders push rates higher and then are slow to lower them to hedge against another spike. This has not been the case in the recent changes in prices and rates remain stable from last Friday and the four before that.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:

30 year conforming                                         2.625%  Flat

30 year high-balance conforming                   2.75%  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 with 740 FICO score for purchase mortgages.

Today is pretty unique. According to my intensive search, the most time Friday the 13th can occur in any calendar year is three. Today is the only Friday the 13th in 2021.

Paraskevidekatriaphobians* let out a sigh of relief…

While triskaidekaphobia is the fear of the number 13, paraskevidekatriaphobia (please don’t ask me to pronounce it)is the fear of Friday the 13th. It is called friggatriskaidekaphobia, which is easier to pronounce and I feel could have been named by a still inebriated, or hungover, student in a psych class early in the 20th Century when the term may have been coined.

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog

Do we have to show our appraisal to the seller or seller’s agent?

Question of the week: Do we have to show our appraisal to the seller or their agent?

Answer:  No.

One of our periodic questions of the week is what if the appraised value is less than the purchase price. That certainly is a very large concern and can cause issues, depending on how the buyer and seller decide to work to solve the problem.

However, what if the appraisal is higher than the purchase price? Can that be an issue? Potentially.

You are in escrow to purchase a home for $875,000. After your inspection (click here for difference between an inspection and an appraisal), you present the seller with a list of items that need to be repaired or replaced, estimated costs for the repairs is about $10,000.

It is fairly common that instead of making repairs sellers offer a credit towards the buyers’ closing costs so the buyer has the funds to make the repairs themselves after they purchase the property.

Before the seller makes the counter-offer to your request that repairs be made to the property, the appraisal report is delivered with a value of $910,000.

Before replying to your request for repairs, the seller, and the sellers’ agent (the listing agent), want to see the appraisal report. If the seller learns the appraisal come in with a value $35,000 above the sales price they may be less willing to make the repairs, or provide a credit.

To our question, do you need to show the appraisal to the seller, or the listing agent?

Because you paid for the appraisal, you own the appraisal and do not need to release the report to anyone other than the lender. From our standpoint, as the lender, we cannot release to report to anyone, including your agent, without your consent.

As a matter of practice, when we receive an appraisal report, we immediately notify you of the value and any comments in the report that may cause concern (such as “noticeable water stains on living room ceiling”). For a purchase we will communicate to the agents that we have receive the report with one of two notifications. Either, the report is in with “value sufficient for our transaction,” or “value lower than sales price.”

If the listing agent contacts us to reveal the value, we inform her/him that we cannot give them the value, they must get permission from the buyer for us to do so. This is not always well received, however our client, and duty, is to you and not the seller or the agents.

Not all lenders follow similar protocols, it is important if you are working with another lender, and your appraised value is higher than your sales price that you tell the lender not to release the value or the report to the seller or listing agent. The statement, “value sufficient for our transaction” is sufficient.

There is always concern an appraisal may have a value lower than sales price, but sometimes a value that is higher can also create an issue for you if not handled properly.

Have a question? Ask me!

More paychecks are being issued, 943,000 more in July than June as new hiring soared nationally. With over 700,000 of the new jobs created in the private sector, mostly in the hospitality, leisure and entertainment sectors, the summer has seen Americans making up for last year’s lost summer by travelling, dining out and going to concerts. The only sector that shrank in July was retail, losing 5500 jobs. The total number of new hires is somewhat skewed by the addition of 240,000 government jobs, mostly in the seasonal education sector, which has seen up and down employment through the pandemic. Reflecting more hires, and fewer people actively looking for work, the unemployment rate dropped from 5.9% to 5.4%. Year over year wages are rising at about 4%, keeping up with inflation. Overall, the news is not positive for interest rates.

Rates for Friday August 6, 2021: Prices for Mortgage Backed Securities (MBS) peaked early in the week (higher prices = lower rates) and have been falling since, putting upward pressure on rates. The lower MBS prices have not transferred to rate sheets, yet, but it would not be a surprise if next Friday rates are higher after five weeks of stable rates and prices.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:

30 year conforming                                         2.625%  Flat

30 year high-balance conforming                   2.75%  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 with 740 FICO score for purchase mortgages.

I like that the number of sports with competitions in the Olympics has expanded from the number competing when I was a kid. It enables more athletes to compete in the premier international sports event and spend time in the Olympic Village meeting athletes, coaches, judges from other nations.

Every day there is a great story of an inspiring competitor, whose story and performance we would never know about except for the Olympics. Seeing a competition where someone misses the medal podium by an instant, yet had their personal best time in the event—sad for not medaling but proud of doing their absolute best at the exact moment it needed to be done. Competitors helping each other, such as when two runners fall, lift each other up and run to the finish line together to complete their Olympic experience.

For as long as I can remember I have loved sports, participating (not that well) and watching. The unscripted outcomes and chances of seeing some incredible displays of athleticism are what draw me to sports the most. The Olympics, with so many sports and athletes who are at the pinnacles of their sports is a wonderful buffet for hard-core and casual sports fans.

I hope you have enjoyed the games!

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog

Should we put our rental property into an LLC?

Question of the week: Should we put our rental property into an LLC?

Answer:  As many of you know, LLC stands for Limited Liability Company, which is a legal entity has some components of a corporation, a partnership and sole proprietorship. Like each of those entities, LLCs have plusses and minuses depending on the purpose of creating an entity for ownership.

For real estate, properties are broadly divided into two main categories, residential and commercial. In general terms residential real estate is considered properties that are 1-4 units (inclusive studios, condos, own-your-owns, etc). Commercial property is considered as commercial business properties, and residential properties with five units or more, or residential properties that also have a commercial entity in place. An example of the latter may be a building with retail stores on the street level and apartments above the store.

For our discussion today, we will concentrate on whether or not to put residential rental properties into LLCs.

For the past few years, we have seen more and more clients with residential rental properties in LLCs, almost always having purchased the property as individuals, either as sole owner or with spouse or significant other, and then transferring the property into an LLC they created for the purpose of owning the property.

Why?

There are several benefits for owning property in an LLC, primarily is the liability shield they create to protect you from personal liability. Another is the LLC has pass-through taxation, meaning there is no separate tax return for the LLC, it is reported directly on your personal tax returns.

The primary benefit that most of my clients who have transferred their residential investment properties to LLCs has been the liability protection afford them to protect their current assets and future income from lawsuits.

One less tax return and personal protection should someone become injured on your property, sounds like an easy decision.

The biggest downside to have residential property in an LLC is when it comes to obtaining a mortgage for the property as loans to LLCs are not as available as loans to individuals and general have different terms and rates. The biggest factor being that Fannie Mae and Freddie Mac do not fund loans to LLCs, therefore taking out the biggest mortgage market for residential real estate with the longest terms and lowest rates.

This issue arises when refinancing a property in an LLC, or if selling the property and purchasing another property under the guidelines of an IRS 1031 exchange to avoid paying capital gains taxes on the appreciation of the property being sold.

In a 1031 exchange, a property owner sells a rental property and purchases another property by transferring the net proceeds from the sale. There are several rules to the 1031 exchange. A few are, that the new property has to be of equal or greater value to the sales price of the property being sold (the “downleg”), all of the proceeds from the sale (the “boot”) must be invested in the new property, and the owner(s) of the new property must be the same as the property being sold.

The last regulation is where LLCs come into play. Let’s look at a realistic scenario. You purchased a new home on 1st Street in 2012 for $450,000. After living there for five years you purchased a new home on 2nd Street in 2017 and converted the 1st Street property to an investment property, at the time the value had increased to $550,000.

In 2019 you transferred the property to 1st Street LLC, with you and your spouse as the managers/members of the LLC.

Today the home is worth $975,000 and you only owe $250,000 on the mortgage. There is an opportunity to purchase a 3-unit property for $1.3 million that by transferring your equity in 1st Street to purchasing the new property will greatly increase your monthly positive cash flow. To avoid taxes, you need to sell 1st Street, have all the funds go directly to the new purchase, and buy the new home with 1st Street LLC being the new owner.

Because the LLC is purchasing the property, any lender will be funding the loan for a business entity as owner and requiring members of the LLC to be personal guarantors of the loan. Instead of a relatively low 30-year fixed rate mortgage from Fannie Mae or Freddie Mac, you are likely looking at getting a hybrid-ARM mortgage that will have a fixed rate for a period (3, 5, 7, 10 years) and then become an adjustable mortgage.

The trade-off for the personal liability protection and pass-through taxation you receive from having your residential investment properties in an LLC is that you have fewer mortgage options, that will be less desirable in terms of rates and fees than if you own the property as individuals (or in your family trust).

For some investors the financing is more important than the personal liability protection and they prefer to keep their properties out of LLCs, for others the risk of a potential lawsuit outweighs the reduced financing options and put their properties in LLCs.

Which is best for you? There is no pat answer. The mechanics and regulations are more complex than the broad overview above when it comes to tax deferred exchanges and transfers. As well, the legal obligations and tax benefits of LLCs.

Before making the decision I strongly suggest you consult your tax preparer to determine how an LLC may impact you and your property ownership, an attorney to learn about the protections are and are not afforded to you, and finally, your insurance agent to see what products are available that can protect you from personal liability and what the cost is for the protection. Weigh all these factors with against the costs associated with an LLC, from filing fees to mortgage options, and then determine which method of ownership is best for you and your family.

Have a question? Ask me!

Flying. That describes our economy in the 2nd quarter as GDP grew at a 6.5% rate, resulting in our nation’s economy being larger as we entered July than it was pre-pandemic. Consumers are driving the growth, and in June increased their spending by 1%. Despite declining federal supplement checks for unemployment as many states have ceased the bonus funds, personal incomes rose 0.1% in June. Half of the increase in consumer spending was the result of higher prices in the economy as inflation rose 0.5% for the month and prices for goods and services are 4% higher than June 2020. With inflation outpacing wage increases, and the potential of the Delta variant impacting the economy and whether some shutdowns return there is concern for the sustainability of growth in spending and economic activity. The economic news today has little impact on rates, while historically the data would push rates up.

The big reason for the lack of impact is the Federal Reserve is still purchasing $120 billion every month in mortgages and U.S. Treasuries. The end of the purchasing program may appear on the horizon soon as Fed news this week indicates that “progress” is being made to the goal of lower unemployment and stable inflation. When the Fed feels this goal has been met it will begin to taper its purchase of financial instruments that impact interest rates.

Rates for Friday July 30, 2021: Despite the economic news that would normally push rates up, the market has been flat all week, as a result, rates are flat for the fourth Friday in a row.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:

30 year conforming                                         2.625%  Flat

30 year high-balance conforming                   2.75%  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 with 740 FICO score for purchase mortgages.

Like hundreds of thousands of other families in our country, ours was impacted by Covid-19 as Leslie’s father passed away from the virus in January. Also, like hundreds of thousands of families, an appropriate service and remembrance were delayed until family and friends were allowed to remember a father, grandfather, uncle, brother and friend.

This evening, rosary service, and tomorrow, funeral and reception, we will remember Don-Pa, as our children called him, with some tears and laughs. He grew up as one of eleven children on a farm in Iowa, and his midwestern values, humor and wisdom were cause for all who knew him to admire him and call him “friend.”

When I married Leslie, I gained a wonderful father in-law with whom I was able to share some rounds of gold and rounds of whiskey through the years. He will be missed, but never forgotten. Cheers, DonPa!

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog

What happened to your solar project?

Question of the week: What happened to your solar project?

Answer:  Some WR&MU readers may recall that last September are question of the week was, “Should we get solar?” In the response I stated that Leslie and I were meeting that afternoon with a representative from a company Southern California Edison contracted with to work with customers interested in installing solar panels. Essentially a solar-broker who would shop our solar plan to contractors for the best bid for installation.

We did meet with the representative and she was excellent in explaining the process. They did an analysis of our electricity usage, sent out someone with a drone to look at our roof, drew up a plan with the size of our roof and in which direction various parts sloped (we have an odd roof with about 45% being flat from an addition in the ‘70’s, the original roof line having three ridges with sloped facing East-West or North-South).

From this they drew up a schematic plan for the number of panels we would need to meet our goal* and how they would be placed on the roof. *Those with great memories, or who clicked the link above, will recall our home has no air conditioning. One reason we added solar panels was to offset the energy cost of adding air conditioning to our home. As a result, we insisted on more panels than our electrical usage at the time merited.

Once the plan was presented and approved by us, the solar broker sent the it to several contractors and came back to us with three bids. The timing from initial information meeting to receiving the bids to review was about ten days.

After the initial bids we made some changes so that we would not have to install a new electrical panel, and new bids were presented. About fifteen days after our initial contact, we signed a contract and the process of installation began.

As part of the starting process, we were provided with some options for financing the project with an eight-year loan with a local credit union with terms that matched the average of our prior monthly electric bills. The contractor was on hold until they received word that our loan was approved so they could get paid directly from the credit union.*

Later, we opted instead to obtain a Home Equity Line of Credit for more flexibility and ability to reuse for future home remodeling/maintenance projects.

Once the loan was approved, we were presented with our first invoice and the contractor sent an engineer to inspect our property and electrical panel and capacity.

The contractor returned with a new bid that included replacing the electrical panel. I asked why we would need a new panel and the explanation was if we want to add more service later, such as adding air conditioning, we would need a larger panel. The change in cost added about 5% to the project; a new contract was sent out the we signed.

At this point they requested an inspection from SCE to sign off on the plan. Low and behold, SCE wanted our panel to remain where it was it would require moving our wire from the main and it would take four months for them to do so, if we moved the panel to another location on the same wall it would have no delays. By now we are six weeks from our starting the process. The contractor has spoken to SCE and were “working with our engineer to come up with plan and cost.”

Three weeks later the contractor returned with a new bid, and added trimming trees to their costs. The new bid added more to the cost, now about 7% higher than originally provided, adding about one-year to the cost to repay the project based on using average monthly bill for payments.

At the beginning of these three weeks, I was playing golf, I mean networking. I was telling the group about my woes with the changes and delays and one of them said, “call my friend, I’ve known him since high school and he has a solar company that does commercial and residential installations.”

I am not one to change service providers very easily, I try to stay with who I am comfortable with and have built some trust. In this instance my trust was with our representative, and not with the contractor. When the bid was issued, I called my friend’s friend and explained the situation. He said in our call, he would take a look but he has done plenty of installations and knows what SCE was suggesting, but said that it does not have to be done.

I was getting pressured to sign the new bid and contract and told the solar broker I was getting a second bid from another contractor. At this time we were coming up on Thanksgiving and I said if they wanted to cancel the contract that was fine but I would not be making any decisions for at least a week.

The bid came in from the new contractor, it provided slightly more energy, no moving of panels, and the cost was about 10-12% lower. He was a local business, in Long Beach, and had very good communication. I informed the SCE solar broker I would not be moving forward with them and the contractor they put us in touch with for the project.

The day after I informed the broker I was not signing the contract the contractor called and was pretty aggressive and nasty. Long story short he was trying to get me to sign saying I would have to pay cancellation charges, which would have applied had I signed and cancelled; however they changed the contract so the old contract was void—he tried to argue the point. For those who are wondering, this contractor was Ameco Solar. I relayed the conversation to my broker representative, who had been very nice and helpful, who relayed it upstairs and after a few conversations it was confirmed we were under no obligation for anything.

Our project with the new contractor, Jarrod the owner of Solar Source, began at the end of November when after an inspection and bid we signed a contract to begin the project. At the time Jarrod told me that it will take a while for permits…

Did I mention we live in Long Beach? Since many years before the pandemic the building department for the City of Long Beach has been a black hole for permits and inspections. Our permit application was submitted in early December.

In mid-March we received our permit and installation was completed in three days. At which time SCE was notified and we were put in line for the installation of a “GMA” for the panel—which bypassed getting a new panel or moving it. In mid-June SCE sent out an inspector, the same one who came for the prior contactor, and said we needed to move the panel….

Our contactor immediately contacted the inspector, told him the installation with the GMA did not require movement, he agreed and out paperwork went back into line for installation.

Finally, our installation with SCE was scheduled for late June and we needed to wait for another inspection from the City of Long Beach. The inspection was a week later, which put us in line for SCE to finalize the project and put us online.

I am not saying SCE was dragging it out to ensure more sales of electricity to the Smith household, but there were not fewer than five changes to the application they requested from the contractor, not at once but one at a time, before the project was fully approved.

On July 13th, ten months almost to the day that we started our process, our project was live, producing energy for our home and selling excess production back to SCE. We will not see the full impact until our August billing, which will have one full month of solar production impacting our usage of electricity from SCE.

Project approved, completed and active on budget with excellent communication through the stages, and the waiting.

The actual process of getting plans, installing the panels and hooking them up was about ten days. From the start of our initial call to Jarrod, to completion about six and a half months. Our project was delayed several months by the City of Long Beach and SCE not providing permits and inspections, making a ten-day project about twenty times longer than that.

Now, time to start calling air and heating contractors for bids. Since we will have to go through the City of Long Beach building department for permits, I will assume we should have air conditioning by the end of next summer…

Have a question? Ask me!

Rates for Friday July 23, 2021: Very little economic news this week, next week are several announcements that may move markets. Rates are flat for the third Friday in a row.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:

30 year conforming                                         2.625%  Flat

30 year high-balance conforming                   2.75%  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 with 740 FICO score for purchase mortgages.

Are you a fan of the Olympics? I have been since the first Olympics I can recall, 1972 in Munich. Those games were very emotional, especially for a ten-year-old kid. I remember how exciting it was to see Mark Spitz win gold after gold after gold…seven in all! And little Olga Korbut flying around the gymnastics events. And of course, the tragedy of the Black September terrorist group taking nine Israeli athletes and coaches hostage in the Olympic Village and the subsequent tragedy at the airport when commandos tried to free them.

Every four years, five this time, we learn about amazing athletes from around the world. Home-grown competitors who are famous in their one events and unknown to the population at large become superstars, Katie Ledecky comes to mind as she stacked up four gold medals in Rio in 2016.

One of my favorite stories from the Rio Olympics is Michael Phelps, winner of twenty-three gold medals (plus three silver and two bronze) showing Ledecky how to drape her medals for a photo shoot.

Who will be the big story in the Tokyo games? What athletes will have incredible performances that will grab the headlines?

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog

What are points and do I have to pay them?

Question of the week: What are points and do I have to pay them?

Answer:  Before we answer what points are let’s answer if you have to pay them. No, you do not, but read on to see if it is better to pay points or not pay points.

This question has come up more frequently over the past year as we have more first-time buyers entering the market, or buyers who have not purchased a home in some time and either do not remember having points in their transaction, or they did not pay them.

Points are the upfront cost of a loan. One point is equal to one-percent of the loan amount. For a $500,000 mortgage, one point is $5,000, one and one-half points is $7,500. Points are paid at closing as part of the funds needed in escrow for your purchase to be complete.

Calling the cost points instead of percentage of loan is helpful to avoid confusing as the cost of repaying the loan is based on the interest rate.

To clarify, points are the upfront cost of a loan and the rate is the factor determining payment.

Points and rates have an inverse relationship, like a teeter-totter. The higher the points the lower the rate, the lower the points the higher the rate.

You are purchasing a new home and getting a $500,000 mortgage. You call to lock in your interest rate for 45 days your closing date in on August 25th*. Based on the points teeter-totter you may have the following options:

1.875 points for a rate of 2.5%

1.25 points for a rate of 2.625%

0.5 points for a rate of 2.75%

No points for a rate of 2.875%

As you can see the higher the rate the lower the points, and if you do not want to pay points you can avoid them by taking the highest rate shown.

“Thank you for the explanation, which of the options should we choose?”

There are several variables that may come into choosing the points-rate combination that is best for you. In some instances, we the decision may be based on if we need the lowest rate for qualifying, in others we may need the no point option as you are a bit tight on funds for closing. In most instances we do the math.

This chart shows the cost in points for each of the rates above and the monthly payment. The final column, “Months to recapture,” is dividing the difference between the no-point option payment and the payment for that point and interest rate option and dividing it into the cost in points. Example below chart.

Points/Rate Cost in Points Monthly PaymentMonths to recapture
1.875 / 2.50% $        9,375.00 $        1,976.0096
1.25 / 2.625% $        6,250.00 $        2,008.0095
0.5 / 2.75% $        2,500.00 $        2,041.0076
0 / 2.875% $                     –   $        2,074.00 

At a cost of 1.875 points for a rate of 2.5% the months to recapture is 96, or eight years. What does this mean. Here is the example I always give clients when explaining the recapture figure.

Leslie and I purchase the home next door to you. We close on the same day, at the same price, with the same loan amount. Leslie and I decided to purchase our home with a the zero-point option and the higher payment, you decided to purchase our home with the lowest rate and highest point option.

On the first Friday evening of every month we get together for a cocktail. We do what neighbors do, complain about the dog down the street that always barks, the new restaurant that has opened, what we are doing for the PTA fundraiser at the kids’ school.

Also every month when we get together, you put $98 into a coffee can, this is the amount you saved on your mortgage payment that month compared to the mortgage payment you would have had if you had also chosen the zero-point option with the higher rate.

After we have had 96 First-Friday-Of-The-Month cocktail gatherings you will have $9408. You will have saved a little bit more money over that time frame as we saved up front by not paying points. From that month on our home will “cost” more as our total of payments plus points as closing will be greater than yours by $98 each month.

As you can see by the chart, the recapture difference between the 2.5% rate and the 2.625% rate is only one-month, so for $32 per month in savings per month you only gain one-month in savings. To delve further into this cost-payment comparison, the actual difference between the 2.5% rate and cost and the 2.625% rate and cost is actually 98 months ($3125 upfront savings for $32 more per month).

At this pricing the lowest rate makes very little sense mathematically since it will take about 8-years to recoup your cost of the loan no matter which rate option you select.

Please note that the cost difference between different rates is changing every day, some days the difference between rates is compressed making the lower rates “cheaper,” other days the difference is higher making the higher rates more of a long-term value.

One other way to avoid paying points is to put in your offer to purchase that you would like a credit from the seller for closing costs, which can include the points and more. In the current market this option is not very viable due to the number of offers on most listings for the seller to choose from. However, when the market becomes more level between supply and demand, or tilts in the buyer’s favor, this option is a good one for buyers to save cash at closing on their purchase.

As you can see, there is no clear cut answer to whether to pay points, or how many points, or not. The decision is situational depending on your needs, the timing in the market, and most importantly what you feel most comfortable doing.

As I always tell my clients, I am not paying for your home, I am not making your mortgage payment and I am not sleeping there—you are, so you need to make the decision based on what you feel is best for you. I just provide the options and the math.

*Rate lock terms are typically price in 15-day increments, 15, 30, 45 and 60 days. Longer terms are also available but after 60 days the increments are in 30-day periods. The longer the rate lock the longer the rate lock period the higher to cost in terms of points.)

Have a question? Ask me!

Thirteen years, and twenty-nine years, that was the last time, respectively that month-to-month and year-to-year inflation has been as high as it was in June. Consumer prices were 0.9% higher in June than May, and 5.4% higher than in June 2020. The “core” rate (food and energy prices stripped from data) is 4.5% higher than last year, the biggest jump since 1992. Inflation almost always leads to higher interest rates and the numbers released this week certainly add to upward pressure on rates.

Pushing prices higher were used car prices, up 10.5% in June, accounting for about one-third of the total increase in prices. New car production is slowly increasing as more computer chips needed for auto makers are finding their way into factories; as more new cars are available in showrooms and lots used car prices will soften. Also pushing inflation is the price at the pump, gasoline is 45% higher in June 2021 than June 2020.

A bit of a change in tone from the Fed, as a result of the surprising data on inflation. Still calling the spike in prices over the past several months “transitory,” it appears that many members of the Federal Reserve feel there is a “risk” that inflation will be higher and longer than initially estimated. As the kids used to say, “ya think?”

In part due to inflation, but more the result of opening wallets, retail sales saw another large increase last month, up 0.6% from May and 18% from last June. Retail sales exceeded in June exceed pre-pandemic levels. Retail sales are based on dollar spent, so part of the increase is due to inflation, with many states still providing additional funds in unemployment compensation there is additional support for consumer spending. Adding to the pool of funds for consumers to spend is the federal child-tax credit checks that start hitting bank accounts this week.

Rates for Friday July 16, 2021: Rates started heading up later in the day last Friday and continued rising Monday and Tuesday of this week. A bit of a rally on Wednesday and early yesterday has resulted in another flat week. At some point the Fed will need to act on inflation instead of analyzing it, when that occurs, and it will likely not be announced beforehand, rates will start to move higher.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:

30 year conforming                                         2.625%  Flat

30 year high-balance conforming                   2.75%  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 with 740 FICO score for purchase mortgages.

We did something unusual yesterday evening; we went to the movie theater. Unusual in that the last time we saw a movie in a theater was Christmas break 2019, where our tradition is to go to Scottsdale for a week and see several movies while we are there.

We saw “Black Widow,” and it was wonderful to see the action on a huge screen and have big sound…especially when something blow up or crashed unexpectedly causing me to jump a bit in my seat. The movie was pretty good, I am not a huge follower of the Marvel genre of movies, but it was easy to follow along without the backstory and the stunt driving in some of the scenes were terrific. Better than the story was enjoying a movie the way it was made to be enjoyed!

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog

If we purchase our new home with cash, how soon can we get a mortgage and get some of it back?

Question of the week: If we purchase our new home with cash, how soon can we get a mortgage and get some of it back?

Answer:  You can start the process as soon as you close.

Since early in the pandemic homebuyers have been challenged to get offers accepted due to the surge in home seekers due to historically low interest rates. I have no actual data on this, however there has probably been a higher percentage of all cash sales in the previous 14-months than any 14-month period since FHA loans were created enabling long term mortgages with low down payments.

As a result, many buyers have leveraged themselves to produce cash for their purchases. Borrowing funds from 401(k) accounts, taking out equity lines on their current homes or properties, parents taking out funds using equity lines or from their savings and providing for the purchase. Whatever the means, a not insignificant number of new homeowners own their homes free and clear and would like much of the cash they put into their homes returned to them.

When obtaining cash from your home after purchasing, the transaction is a “cashout refinance.” If you are refinancing an existing mortgage and not obtaining any cash from the transaction, nor paying off a mortgage or lien taken out after the purchase, it is a “rate and term refinance.”

This distinction is important as there are different guidelines for cashout refinances than rate and term refinances. Most importantly are the loan-to-value limits; as well for most cashout transactions the rates and costs can be higher.

Because you are pulling cash out of your home, even if it was just put in a day, a week, a month, before your purchase, the loan is considered a cashout refinance.

There are several factors that go into structuring a post-purchase refinance, among them are:

Loan Limits There are three loan limits that we consider

  • Conforming (Fannie/Freddie) $548,250
    • High-balance conforming $822,375
    • Jumbo generally above $822,375

These are important as they determine many of the following guidelines and pricing. As loan amounts go higher, rates go higher, loan-to-value limits may go lower, and underwriting guidelines may get stricter.

Loan-To-Value (LTV) Loan-to-value is the percentage of the property value being covered by the mortgage. If the value is $700,000 then 80% is $560,000, if the LTV is 75% the loan amount would be $525,000.

For conforming, and high-balance, cashout refinances the maximum LTV is 80% of the value (see below). For jumbo loans, the maximum LTV depends on the lender. Some lenders will fund cashout refinances to 75% LTV, others cap their LTVs at 60%.

From the LTV example above, for a property valued at $700,000, an 80% LTV loan is a high-balance conforming mortgage, at 75% LTV the loan becomes a conforming mortgage.

Determining Value The general rule of thumb for the value used for underwriting for a property that sold within the past 12-months is the lesser of the appraised value or purchase price; keep reading for exceptions.

If you purchased your home for $700,000 in April, are applying for a refinance in July and the appraisal comes in at $690,000, the LTV of the mortgage will be based on the $690,000 value in the appraisal report. If the appraisal has a value of $725,000, the LTV will be based on your purchase price of $700,000 (keep reading).

The primary exception to this guideline is if you can show you have made significant improvements or upgrades to the property. For instance, we are in process on a post-purchase cashout refinance where the purchase closed in April. The value on the appraisal report is $15,000 over the purchase price because the buyer/borrower added air conditioning and showed the costs of the units. The appraiser then used comparable sales that had air condition to reach the value.

Because of the upgrade and availability of other sales with similar size, bed/bath count, and air conditioning, the appraiser can show the home is worth more than it was purchased for three months ago and our lender should accept this higher value.

Another factor that can result in a higher appraised value being used for loan-to-value calculations is if the purchase has due to distress, for example in a divorce where lower price to ensure a quick sale, or to bail out a seller from foreclosure or default. These circumstances are a bit more difficult to get an exception to the lesser of purchase price or appraised value, but if well documented the exception may be granted.

Rate/cost For the same LTV, at the same cost in points (upfront cost of the loan), rates for cashout refinances are higher for a jumbo loan than a high-balance conforming loan which is higher than a conforming loan.

Because of this, when looking at a cashout refinance we take into consideration the loan-to-value and loan type and the lower rate that may be available if we are able to use a conforming loan instead of a high-balance loan, or high-balance instead of jumbo. Depending on the spread in the dollar amount to the next level down of loan limits, and the LTV, different strategies may apply.

Take our example above where for a property valued at $700,000.

At 80% LTV the loan amount is $560,000, is a high-balance mortgage and the rate may be 3.5%, and the payment is $2515 per month.

However, by taking $11,750 less from the property the loan amount becomes a conforming loan of $548,250 with a rate, at the same cost in points, of 3.00% and a monthly payment of $2310 per month. Do you need the additional $11,750 for $205 per month?

The spread between the high-balance and jumbo loans can be even greater, in which case we often council clients to fund the maximum high-balance loan of $822,375 and after closing the refinance obtain a HELOC for the ability to access additional funds if needed.

Documenting Funds Long time readers of the WR&MU know that documenting deposits into bank accounts is a primary sticking point in loan approvals. Large deposits into bank accounts that are not sourced from an employer or another bank account you have that we have verified as your own and without large deposits in the past few months, require documentation as to source and that the funds are not the result of any new credit and therefore payments.

Consider your free and clear home you purchased a few months ago with all cash and no loan to be similar to a new bank account opened with a very large cash deposit. Where did the money come from for the purchase?

As part of the post-close refinance, we will need to source and document the funds used for purchasing your home. If some, or all, of the funds were borrowed from another source, that is fine, however we will need to document the terms of the loan, how much will be paid back as part of our refinance transaction, will there still be a balance and payment we need to consider for our transaction?

Note that the guidelines above are for owner-occupied single-family residences, other restrictions and guidelines are in place for investment and multi-family properties, and other loan types such as FHA and VA.

If you have purchased a home in the recent past with cash, or a significant amount of cash down payment, and would like to look at options for pull some of that cash back out please contact me to assist you.

If you are considering purchasing a home and accumulating funds from different sources for the purchase with the intention of a post-close refinance after closing, please contact me so I can help you structure the cash transactions so that the post-close refinance goes smoother.

Have a question? Ask me!

What the heck? Over the past week U.S. Treasury yields have fallen somewhat significantly, putting downward pressure on mortgage rates. Why? Reading ten different analysts provides ten different responses. All signs point, as usual when it comes to rates, to the Federal Reserve. Minutes released from the June meeting indicated some officials, no numbers given just vague references to “various,” or “several,” slowing the purchase of U.S. Treasuries and mortgages, slowing the purchase of mortgages sooner than later due to higher home prices, keeping the course on rates and purchases until “significant progress” is made in employment and inflation. It appears there is no consensus one way or the other, but those experienced at reading Fed minutes, akin to reading tea leaves, feel that some of the more powerful members are for the status quo and therefore not much change. The minutes did appear to open up more conversation, and perhaps action, at their July meeting.

What the heck? Long time readers of the WR&MU know that I have felt rates should have risen some time ago and today should be at least one-half of one percent higher than they are. Talking to others and reading from several different sources, I am not the only who feels this way. Seeing another dip in rates this week has me scratching my head and wondering what I am missing and why investors are buying into such low rates for long-term investments.

Rates for Friday July 16, 2021: After climbing all week (lower rates), the Mortgage Backed Securities market reversed today with a decent drop in prices (higher rates). This either indicates that the MBS price climb was technical in nature, or that after completely digesting the Fed minutes overnight and looking ahead to possible (likely?) changes by the Fed in the near future, investors are anticipating higher rates. Rates this week dip from last Friday.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:

30 year conforming                                         2.625% Down 0.125%

30 year high-balance conforming                   2.75%   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 with 740 FICO score for purchase mortgages.

Many of you know that I have been a member of the Rotary Club of Long Beach for many years. Rotary is an international organization with clubs around the world who are helping build better communities in their hometowns and across the globe. Rotary is not just for “older people,” but also for students and young adults.

Our Long Beach club has recently re-started two “Rotaract” clubs, so labelled as they are for younger generations and are meant to be an entry into Rotary and stepping stones for their members to become Rotarians when the timing is right for them.

Our community Rotaract club is for young adults, generally between 21-35 years of age, who are looking to create new relationships and work with others on projects that benefit our community, network professionally and receive support and opportunities from Rotarians. If you are, or know someone, who may be interested in learning more about our community Rotaract club please contact me.

After being off campus for many years, several students at Cal State Long Beach, with assistance from members of Long Beach Rotary, have certified a new Rotaract club on the campus. This is an opportunity for CSULB students to become part of Rotary International and come together with a common purpose of expanding their network of friends and connections all with a common goal of community centered projects on their campus and region. If you have a son, daughter, niece, nephew, grandchildren, neighbors who are enrolled at CSULB and are looking for a meaningful extra-curricular activity, have them contact me and I can put them in touch with the leadership of the CSULB Rotaract.

From paying for water wells in Mozambique, to providing polio vaccinations in Mexico, to reading to elementary students in Long Beach schools, to purchasing hundreds of thousands of books for Long Beach schools and pre-K programs, to running a camp for high school students teaching business principles and practices, to installing a program in local middle schools that teach ethics to students, our Rotary club is engaged and active. All while members have a good time working together. Young adults can become of this worldwide network of men and women who like to say, “we have fun with a purpose.” 

Please contact me for more information on our Rotaract clubs for young adults, or if you are interested in a Rotary club in Long Beach, or where every you may live or work, I am happy to make and introduction for you.

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog