Second mortgages – a refinance roadblock.

Certainly the new $75 billion foreclosure prevention program is big news from last week.  And, at first glance, it seems like the plan will do a good job to help people who are making their best efforts to pay their mortgages, but are struggling and headed for trouble.  Plans in the past only helped people that were behind on their mortgages — meaning you would have needed to train-wreck your credit before you could really get any help from your lender or loan servicer.   

The full details of the plan are set to be released on March 4th, so until then, you can search some other sites for speculation on who it is going to help and how it is going to help, but technically and mechanically speaking, I am not sure that anyone has a clear understanding of how to “sign me up” just quite yet.

One of the issues in the package has to do with helping people who could save hundreds of dollars per month by refinancing, but are not able to because they are upside down in their current loan to property value percentage (initial indications are up to 105% loan to value ratio).  With foreclosures and distressed sales continuing to be more and more too common, appraisers are required to use these as comparable sales, bringing appraised values down across the country.  Lower values = less equity = no room to finance in closing costs = no ability to refinance.

Interestingly, both Forbes and CNN Money have reported that homeowners must have 20% equity in their homes to refinance — this is absolutely FALSE.  I have emailed both publications and received strange responses from each (I’ll save that post for another day).  Assuming you have a high enough credit score, the income and the employment history to qualify for a conventional loan, you need 5% equity in your home in order to refinance.  (This also assumes that the county you live in is not currently designated as a declining market, in which case, the loan to value could be reduced — and in that case, you might need 10%, 15% or 20% equity).

For example, if your home’s current market value is $300,000, the maximum loan you can do is 95% of $300,000, or $285,000.  If you only owe $275,000 on a first mortgage on your house, then you can refinance.  And financing in the closing costs and the interest to payoff your old loan, your new loan amount of $280,500 would be less than the limit of $285,000 (notice that I said $275,000 on a FIRST mortgage).

Having a second mortgage complicates the situation.

Many home purchasers used a combination of a 1st and 2nd mortgage to avoid paying monthly PMI and even more consumers have second mortgages on their homes in the form of debt consolidation loans, home improvement loans, fixed rate 2nd mortgages and home equity lines of credit.  When you refinance your first mortgage, if you plan on leaving the second mortgage as-is, you have to get permission from them to refinance.  The 2nd mortgage company has to agree to remain a 2nd mortgage even once the new 1st mortgage is put in place.  The 2nd mortgage company has to agree to be a subordinate lien to the 1st — and, as part of the refinance process, we have to send off a request to the 2nd mortgage company for this subordination.  (The request usually involves a copy of the appraisal, credit, employment and income information and an administrative fee of $100 to $200.)

The 2nd mortgage company wants to make sure that they are not getting squeezed out of the deal.  And while the original terms of the 2nd mortgage (at the time of purchase) may have been 100% financing or 95% financing, this will not mean the second mortgage investor is willing to take a similar risk.  In most cases, 2nd mortgage investors are looking for 5% un-mortgaged equity (like the 1st mortgage guideline) but some have asked for 10% and some more than that.  And if the 2nd mortgage won’t agree to subordinate to the first mortgage, unless you have the cash to paydown the 2nd mortgage to their target preference, your refinance just got roadblocked.

Would the refinance help you make your mortgage payment?  Yes.  Would it save you hundreds of dollars per month and thousands of dollars each year?  Yes.  Does it mean that the 1st mortgage loan amount will go up slightly to cover the closing costs, putting the 2nd mortgage lender in an even worse position than they are already in?  Yes.  So is the time and energy spent trying to refinance (and the application and appraisal fee that you spent) all for naught?  Pretty much.

Maybe the new housing initiative will address this issue . . . my guess is that it unfortunately will not.

 

Jeffrey Pinkerton is a Mortgage Consultant and President of Hillside Lending, LLC and writer for “the Mortgage Blog.”  Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing.  For more information about available programs and interest rates, please visit www.hillsidelending.com.

Wait(ing) is in the past.

Have you heard that interest rates are going to go down to 4.0%?  Yeah, me too.  Although anyone who mentions it to me, can’t really figure out from where they heard it.  It is usually “some guys at work” or “some people around” or “something on the news, that I heard might be in the stimulus package.”   And while the stimulus package may provide some relief to homeowners in the form of lower mortgage rates, my opinion is that the relief will be only for those in trouble (behind on payments, loss of job, etc.) or for those who are purchasing a home, and probably at some financial cost (future equity, repayment over time, etc). 

For the past two weeks, I have been advising my clients to wait.  Because mortgage rates jumped up on inauguartion day to around 5.375% and 5.5%, and because rates had been below 5% previous to that, it was reasonable to expect them to go down to that level.  On Wednesday, late in the day, mortgage rates dipped below 5% again, and my advice has changed. 

No more waiting.  It’s time to lock-in and take advantage of the lowest rates in history.

“Wait . . . wait . . . I never had a chance to [lock my rate] . . . “

Sorry about that.   I couldn’t resist.

So, what about the government buying mortgage backed securities?  Good question.  The government has been purchasing mortgage backed securities directly (and plans to continue through July 2009), but most of these assets are slightly higher than today’s current rates (in the 6’s), proof that their action may be simply keeping interest rates where they are more so than the idea that the more they buy, the lower rates will go.

And just in case you needed one more reason NOT to wait, how about some straight-forward math:

Let’s say you have a $250,000 balance on your mortgage and you have had the mortgage for a couple of years.  And your current rate is at 6.25%.  To refinance at 4.75% would save you around $250 per month . . . and for every month that you wait for lower interest rates (while still paying 6.25%), you are spending an extra $250 per month that you don’t need to be spending.  Why?  In hopes of 4.5%?  To save an additional $39 per month?  With that plan, waiting three or four months, could cost you an additional $1,000, which at $39 per month (hoping that rates go down and not up) you are looking at about 2 years just to recoup what you lost in waiting. 

Mortgage rates are at the lowest level they have been in the history of the free-world.  Wait if you want.  But it could just make you look silly (see photo of 80’s rock band White Lion above for proof).

 

Jeffrey Pinkerton is a Mortgage Consultant and President of Hillside Lending, LLC and writer for “the Mortgage Blog.”  Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing.  For more information about available programs and interest rates, please visit www.hillsidelending.com.

Let’s get ready to refi.

“Let’s get ready to REEEEeeeeeeeeeeefffffffiiiiii.”

Despite the US Treasury continuing to purchase billions of dollars each week in to mortgage backed securities, mortgage rates have moved sideways (or gotten slightly worse) over the past six or seven trading days (until today, keep reading).   And while most of the media and a few congressmen have been speculating about rates in the low 4’s, mortgage rates have not been able to push that low. 

The reason interest rates have not moved lower has to do with the actual mortgage securities being purchased — the government funds being used to purchase mortgage backed securities are actually buying higher rate mortgage assets (in the 6% range), mortgages that will likely be paid off through refinancing — which will allow the Feds to get some of those funds back in the short term.

Today’s successful passing of the new Economic Stimulus Bill (while not necessarily providing for lower mortgage rates yet), have allowed for some stability in the mbs market, and mortgage rates — at least as of 4:40 PM on Tuesday, February 10th, are headed in the right direction — which means lower mortgage rates should be right around the corner (either by the end of the day or tomorrow, should this afternoon’s gains continue). 

Over the past two weeks, I have been advising my clients and new leads to wait and see what happens as the markets digest the Economic Stimulus Plan and what that means for the future of mortgage rates, the financial system, banks, etc.  But my advice has always been that if it makes sense to refinance your mortgage at today’s rate, then you should move forward.  As the combination of these two factors intersect (mortgage rates dip down today or tomorrow AND the current rate would make it advantageous for you to refinance based on closing costs, etc.), then I say . . .

Let’s get ready to refi. 

 

Jeffrey Pinkerton is a Mortgage Consultant and President of Hillside Lending, LLC and writer for “the Mortgage Blog.”  Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing.  For more information about available programs and interest rates, please visit www.hillsidelending.com.

What is UP with closing costs?

Does it smell funny in here?  Like upwithclosingcosts?

What is up-with-closing-costs?

It can be surprising for consumers to hear the total dollar amount needed to close on a refinance of their mortgage.  Granted, even though most borrowers finance the closing costs in to the new loan amount, the idea of increasing your loan amount by 4, 5, 6, or $7,000 can take the wind out of an otherwise exciting conversation.

So why so high?

Here is the short version — each process and cost that had to be completed when you purchased your house and got your original mortgage has to be completed again for the new mortgage (new credit report, appraisal report, new file to be underwritten, new flood cert, new closing attorney or title company, updated title search, mortgage fees, state and recording fees and title insurance fees, etc). 

Here is the longer version — a refinancing of your mortgage is not just a “re-do” of your mortgage.  It is obtaining a new mortgage for the purposes of paying off the old mortgage.  A lot of people mistakenly think that because mortgage rates are lower, that a quick phone call to their current loan services will allow them to redo a few pages with the lower rate, drop their monthly mortgage payment and move on.  But, because loans are sold in a secondary market, the new loan must conform to the current guidelines in the market.  And because guidelines change (loan to value ratios, combined loan to value ratios, debt to income restrictions, credit score requirements, etc.) and because personal variables change (your credit score, the value of your house, your income and monthly debt, etc.), these things have to be re-verified to confirm that you do, in fact, qualify for a new mortgage.

Does the current mortgage company understand they are going to lose your business?

Yes.  And in some cases (depending on the servicer), because of the current state of the economy, they are glad to be losing your business (your loan paid in full and coming off of their books).

But back to the closing costs . . . can anything be done to get the closing costs lower?  or what about a no closing cost option?

The closing costs are a direct product of the interest rate.  The lower the interest rate, the higher the closing costs.  The higher the interest rate, the lower the closing costs.  In the past (as recent as December 2008), mortgage originators could offer customers the option of doing a no-cost refinance.  By raising the rate on the mortgage above the current market rate, lenders would pay additional dollars to the originator, which in turn could be used to pay for part or all of your closing costs. 

Here is an example:  assume that you have a $250,000 mortgage at 6.5%.  You have no idea how long you might live in the house.  In the past, if today’s rate was 5.0%, I could offer my clients a rate of 5.75%, and at that rate, the lender might pay an additional $$6,000 in commission to Hillside Lending.  In that scenario, we would pay for the appraisal fee, the credit report fee, attorney fees, recording fees, title insurance, state tax, recording fees, etc. and still have enough left over to collect a commission on the closing.  So, the customer has moved their rate from 6.5% to 5.75% with $0 in closing costs (no costs out of pocket and no closing costs financed in to the new loan amount — essentially, no time to make up the closing costs, so it won’t matter if they move in 12 months). 

In December 2008, when mortgage rates took their first dip down, lenders stopped pricing their rate sheets to allow for this type of no-closing cost option.  Why?  For fear that the entire country would refinance (they be writing checks for $6,000 at each closing) and if interest rates continued to fall even lower, those same consumers might refinance again, never keeping the loans long enough for the lenders to recoup their $6,000 investment.  Similarly, the ability to raise the interest rate to get rid of the origination fee (points versus no points) has become difficult, and in most cases, because of the amount of increase in the rate, is cost prohibitive.

So, the best advice for closing costs?  Getting the best mortgage is not necessarily about getting the lowest closing costs.  It is about getting a great rate, with competitive closing costs, and great, professional service.  I have had leads and clients (who, in the name of good consumerism and in the hopes of saving $100 in closing costs) have worked to get additional information or quote from another mortgage source (or even their current loan servicer), only to have interest rates go up 0.25% or 0.5% in the process and miss out on the chance of savings hundreds and hundreds of dollars over the life of the loan.

 

Jeffrey Pinkerton is a Mortgage Consultant and President of Hillside Lending, LLC and writer for “the Mortgage Blog.”  Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing.  For more information about available programs and interest rates, please visit www.hillsidelending.com.