What is APR on a Mortgage?

Caller:  “Can you tell me what your APR is?”

Me:  “Sure.  Can you tell me what APR is?”

Caller:  “Uhhhh…”

So this really happened.  Many times, in fact.  This is your garden variety, otherwise-intelligent consumer trying to shop for a mortgage.  This is someone earnestly trying to figure out the best deal on a home loan.  And yet, most often, they have absolutely no idea what they are doing when it comes to the annual percentage rate, or APR, on a mortgage.  But I don’t blame them.  The point of this blog is not to make anyone look or feel stupid.  In fact, it’s the opposite.  APR was meant to help, but I have experienced that our regulators and our industry have done a poor job of explaining how it works and how one calculates it.  If we reduce it to plain language and easy examples, APR starts to makes sense and, most importantly, can be put in its rightful place in the shopping process.  Spoiler alert — APR is not the be all, end all of mortgage research.  As we’ll see, it’s just a numeric representation of costs —- costs hat can be deduced elsewhere in the loan documentation you’ll receive.  But let’s get started on APR.  It is worth understanding.

Tip #1

APR is the “price per pound” (PPP) of the money you are borrowing.  If you go into a supermarket with the lofty objective of buying sugared breakfast cereal at the lowest price possible, you might just come across boxes of different sizes (and prices).  How will you determine the best deal?  You will reduce the cereal to “price per pound,” or in this case, the price per ounce.  If a 32oz. box costs $5.99 and a 24oz. box costs $4.99, some basic math tells us that the per ounce cost for the 32oz. box is $.19,  For the 24oz. box it is $.21 per ounce.  You’d be better off buying the larger box.

Now let’s say that you’ve decided to step up your game from frosted flakes to four bedrooms.  You need a mortgage and Lender A tells you that you can get $400K 30-year fixed rate mortgage at a rate of 4.000% with a cost of $3000.  Lender B says you can get a loan of the same size for 3.875% at a cost of $7000.  How do you determine the better deal?

Tip #2

APR is a lot like triangles.  Remember in high school algebra (sorry for the flashback…) we learned that the angles of a triangle must always equal 180 degrees?  Remember how we were told that if one angle decreases, so too must another increase?  Well, this is APR.  Let’s go back to our example above:

  • Note Rate:  4.000%
  • Loan Amount:  $400,000
  • Payment:  $1910

Follow me so far?  Good.  Now let’s introduce cost.  If it costs you $3000 to get $400K, then the “net” funds that change hands will really be $397K (yes, you still get a loan of $400K…).  But since you have a fixed rate loan and a payment of $1910 that cannot change, what would your rate need to be to produce a payment of $1910 at a loan amount of $397K?  The answer is your APR, and in this case it is about 4.07%.  Now, what about our other option from Lender B?  Will APR be higher or lower?

  • Note Rate:  3.875%
  • Loan Amount:  $400,000
  • Payment:  $1881

Again, let’s do our “net” math.  You have $393K changing hands ($400K – $7000) and a fixed payment of $1881, so your APR is 4.02%.  If you are looking for the lower APR, you found it.  But if you are looking for the loan with less costs, the 4.000% Note Rate is perhaps the better fit.

Tip #3

You always make your mortgage payment based on your Note Rate (the actual rate) and not the APR.  I think this one confuses a lot of would-be borrowers.  APR is an aid in the shopping process.  It is never the basis for your monthly payment.

Tip #4

Trying to determine the APR on an ARM loan is an exercise in futility.  By definition, ARM loans will have a period of time where the interest rate is subject to a combination of the index plus a margin.  The index will change during that time.  Because of this, creating a static APR calculation with accuracy is impossible.  If you are weighing an ARM loan versus a fixed program, you will have to review a cost itemization or Loan Estimate to calculate total costs for each option.  There is no shortcut.  While on the topic of things that can skew APR, PMI is another one.  If you’re weighing two loans with PMI, or one with and one without, know that PMI can wildly increase APR to the point where it ceases to be an effective shopping tool.

Tip #5

Don’t lose sight of what you’re attempting to do with APR.  Namely, seeking to determine how much it costs to get any interest rate on any loan.  If you review all of the above and still don’t feel confident, you are not alone.  To make matters worse, there is no real uniformity in what costs and fees get included in APR.  One lender to the next, you’ll see some variation.  But here too, a rule of thumb should be that a lender should include any fee in the APR that could not otherwise be avoided if the borrower paid cash for the home.  For example, an appraisal.  You need that for a mortgage process, you do not if you pay cash.  So an appraisal fee should be included in APR, etc.

We’re here to help with any questions about Note Rates, APR and the costs and components that impact your mortgage pricing.  Smart shopping is always a good idea.  Thinking that APR accomplishes that goal alone is not.

Don’t know much about algebra, 

 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office:  324 Sir Francis Drake Blvd., San Anselmo, CA  94960
Berkeley Office:  1400 Shattuck Ave., Suite 1, Berkeley, CA  94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate.  In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283

Can You Add Remodel Costs to Your Mortgage?

One homebuyer niche I know extremely well is 10% down payment jumbo mortgage financing.  We have a good number of prospective homeowners in California, especially here in the San Francisco Bay Area, who earn strong income, who have an excellent credit profile but who just do not yet have the full 20% down payment saved for home prices that are, compared to the rest of the country, very high.  These buyers have certainly not failed and they are not out of luck either.  Once they understand just how competitive an 80/10/10 or other 10% down solution can be, they are often back out on the market in no time, and with renewed optimism.

It is here that they will sometimes find their next challenge, though it is not one that is limited to just a 10% down payment structure.  Several of these buyers will come across a property that will need immediate renovation, remodeling or repair — assuming they are able to have their offer accepted.  Their next question to me will be “Can you add the cost of remodeling or renovation into the mortgage?”  The answer involves several concepts so let’s address them one by one.

Lenders use the lesser of the appraised value or the purchase price to determine loan-to-value (LTV).

If we take our “cosmetic fixer” and have an appraiser give it the ol’ once over, will the appraised value match or exceed the price the buyer is paying for the home?  If the answer is “yes,” we don’t have any issue, but if the answer is “no,” we, as the lender, are going to use the smaller number to determine the loan-to-value (LTV).  Let’s say the buyer is in contract to buy the home for $1MM.  The buyer is financing 90% of that price, or $900,000. Now let’s say the property appraises for $950K.  Again, we can finance 90% of the lesser amount so in this case that’s $855,000.  Remember that if the buyer was planning to “put down” $100K in the original example, and if the contract price does not change, the buyer can ONLY finance $855K but is still buying at $1MM.  This now implies a down payment of $145K. More on this next…

You cannot finance more than your loan program’s LTV threshold.

In our example just above, we are forced to increase the down payment because we would otherwise have an LTV (or “combined loan-to-value”) of more than 90% and our program guidelines may not allow for that.  I’m not saying that no loan program can exceed that threshold, just that our buyers were presuming their financing would meet a 90% limit.  When the appraised value comes in lower than the purchase price AND an LTV threshold is crossed, like at 20% down or 10% down, the buyer’s financing will need to be adjusted.  Sellers often recognize this and may be concerned about accepting an offer if they feel a low appraisal would tank the buyer’s loan approval.  This is the logic behind a 30% down payment appearing more attractive than a 20% down payment, for example.  If a buyer puts down 30% and the appraisal comes in low, chances are that buyer can still keep the existing terms of his/her loan (maybe the LTV goes to 72% or 73% — but that doesn’t blow anything up).  On the other hand, if a buyer is getting a loan with 20% down and the property doesn’t appraise, now that buyer either needs to bridge the difference in cash, get a small second mortgage (if permissible by the first mortgage guidelines) or take PMI (if available).  You can see why this might tip the seller’s scales in favor of larger down payment offers.

The property must appraise “as is.”

Both of our examples above assume that the property is in sufficient condition to appraise “as is” and not subject to repairs and completion.  The status of the report is indicated via checkbox.  If the property’s condition requires extensive rehabilitation or has obvious health and safety deficiencies, a conventional loan may not be an option at this time.  That brings us to our next point…

 

There are programs that may specifically address remodel and/or construction.

This is the province of the construction loan, the rehab loan, the FHA 203K, etc.  We’re not going to cover those here but know that when you’re dealing with a construction loan, the approach to financing is fundamentally different.  Whereas an “end loan” or a “conventional” loan will work off of the appraised value, a construction-type loan will look to completed, repaired or rebuilt value to set LTV.  But here, understand that you’re not just getting a larger loan and a “get out of jail” card.  The lender needs to know the plans, the scope of work, the schedule of completion, etc.  In other words, you’ve got not only a loan on your hands, but a project too.  For the average buyer just looking to purchase a home, a construction loan comes with an additional, and serious, set of considerations.

So getting back to our original question, “Can you finance the cost of renovation or remodeling into your purchase money mortgage?”, the short answer is “No.”  The better answer is that “it depends,” but we must recognize that what we’re really doing in most cases is preserving the buyer’s cash.  Where a construction loan program is not being used, this is often the best outcome to which we can aspire.  But remember, for any home loan program you select, you cannot finance more than your maximum loan-to-value or combined loan-to-value (LTV or CLTV) and your loan officer can guide you on these.

This is a simple concept that is often confusing and difficult to grasp in the real world, so don’t be embarrassed to ask questions and drill down (no pun intended) on the math.  Just because you may not be able to finance future improvements now does not mean that the home is not a great fit for your family, your future needs and your budget.  And like always, a sound understanding of concepts will go a long way towards helping you make the best decision.

Sleeves rolled up, 

 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate. In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283

How Can I Make My Home Appraise Higher?

Whether buying or refinancing a home, when obtaining a mortgage it can be expected that an appraisal will be required. I talked in a previous post about how we are able to use appraisal waivers in certain instances, but still, most residential real estate transactions that involve a mortgage also involve an appraisal. An appraisal is a professional opinion of value, completed on a standardized report by a licensed appraiser. Are there steps the buyer or homeowner can take to assure that this value comes in as favorable as possible? Here are a few tips from the experts:

  • Choose a lender that uses an appraisal management company (AMC) with access to local appraisers. At Guaranteed Rate we place a high degree of importance on contracting with appraisers that know any area first-hand. This has the obvious advantage of bringing “boots on the ground” perspective to the property being appraised. But let’s not forget too that local appraisers are also often well-known appraisers to local real estate agents and these relationships are valuable.
  • Clean the house and yard. The cleaner the home the better it shows, and the higher value you will get.
  • Prepare a list, including cost estimates, of improvements completed to the property in the last year. If any updates have been done to the kitchen and/or bath within the past 15 years, include them on this list as well.
  • If you, or your Realtor, know of a good sale (or two) in the area within the last six months, you can give the address and sales price to the appraiser.
  • If refinancing, tell the appraiser the predominant feature of your home — the reason you bought it and the characteristic a future buyer may find most important and desirable. This may seem everyday obvious to you, but could easily be lost on even the best appraiser — who doesn’t live in the home each day.
  • Be mindful of “health and safety” issues, regardless of how minor. An opening in a wall, water stains on the ceiling, a disconnected faucet, peeling paint or a missing handrail on a staircase may all seem trivial, but they could require further notation in the report, potentially stalling your transaction. Make the small repairs in advance (or have the seller do so), even if it means hiring a handyman.
  • Install smoke and carbon monoxide detectors because in many areas (if not all!) it’s the law. Also, here in California, if you have a water heater, it must be double-strapped for earthquake safety.

Stacking the deck in your favor using the tips above, and working together with us before and after the appraisal is complete, you can maximize your potential to attain the highest value. This can then open up financing options and opportunities, and even factor into the interest rate you’re able to obtain. When you are refinancing a home, the home’s value relative to your existing loan balance determines your eligibility. When you are buying a home, you and your Realtor will want to know the appraised value supports the contract price. In both instances, if you have questions about the appraisal process, and especially if you have concerns about the subject property’s value, we are here to help.

I spy, 

 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate. In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283

How Long Do I Have to Wait After a Foreclosure to Get a Mortgage?

When economic war ravaged the real estate market a decade ago, statistics show that peak foreclosure activity in the US occurred somewhere in 2010.  We continued to experience an elevated level through at least 2013, which means that as I write this post in late 2019, almost the entire rat is through the seven-year snake.   That waiting period — 7 years —  is the gold standard after a foreclosure.  So what do those looking to reenter the housing market need to know?  What about if they need something other than an FHA mortgage?  Let’s look.

What is a Foreclosure?

When it comes to “letting a house go” we could say that a foreclosure is the equivalent of the homeowner’s “nuclear option.”  Basically, an atom bomb is dropped on the owner’s credit and when the dust settles, which could take months if not years, there’s not a trace of the home he once owned.  Though the legal foreclosure proceedings vary from state to state, a foreclosure is ultimately what happens when the owner of a mortgaged property stops paying and takes no other legal or financial steps.  Ultimately, a notice of default will be filed on the property and absent drastic measures to restore payment on any lien attached to the title, the lender will end up selling the property via a foreclosure sale.

What Happens After a Foreclosure?

With a history of foreclosure (or “deed in lieu”) on one’s credit report, conforming loan guidelines state that a buyer re-entering the market must wait seven years before obtaining a new mortgage. If using an FHA loan program, that waiting period is cut to three years. In the case of jumbo mortgages, however, the waiting period will be established by the actual investor — the entity that provides the loan. Because of this, the institution/investor can set its own rules about the seasoning required. They can also set rules about how a foreclosure is qualified. Was it due to financial mismanagement? Strategically done to avoid consequences of the market falling further? Or, was it done due to a legitimate hardship on the part of the borrower? Each of these might be viewed differently by any investor and the waiting period might change accordingly.  The best advice I can give is that if you experienced extenuating circumstances (death, loss of job, etc.), ask how this could impact your options because several of our best-priced investors will reduce the typical 7-year wait in these cases.

Sorting Out Second Chances

At Guaranteed Rate, one of our strongest suits is that we have multiple jumbo investors available for most scenarios. We will see our strongest-priced jumbo investors re-enter the market for the buyer with a foreclosure also at the 7-year mark — identical to conforming. But below you’ll find some of the other tiers of available as the loan-to-value (LTV) increases or decreases, the loan amount goes up in size, and the FICO score factors into the picture:

5% Down Payment

We require a three-year seasoning period and will go to a loan amount of $1.5MM (purchase price of $1.58MM). For this program, we’ll need a 720 FICO and 9 months of reserves.

10% Down Payment

We require a three-year seasoning period and will go to a loan amount of $2MM (purchase price of $2.23MM).  Like with the 5% down program above, we’ll need a 720 FICO and 9 months of reserves.  If both your FICO score is lower (to 680) and your loan size is smaller (to $1MM), we’ll then permit a 4-year seasoning on the foreclosure but require 6 months of reserves.

20% Down Payment

All of the investors above are in, plus several others with varying FICO and reserve requirements, even down to a 661 credit score with a maximum loan amount of $1.5MM (purchase price of $1.875MM).

The jumbo mortgage market is inherently more complex than conforming or FHA and because of this, your jumbo lender needs to have the options and expertise that will accommodate the demands of getting a new home loan post-foreclosure.  But purchasing a home with a history of a foreclosure is indeed possible. We understand the requirements, restrictions and tips of the trade that facilitate many of the best second chance options in existence. Maybe more importantly, my experience as a loan advisor covers a time period before, during and after the real estate recession.  I reserve no judgment for what happened in that very different market. Instead of looking back and telling buyers what they can’t do, I see it as my responsibility to look forward and help them do what they can to realize the benefits of ownership again.

Bombs away,

 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
rob.spinosa@rate.com

Marin Office:  324 Sir Francis Drake Blvd., San Anselmo, CA  94960
Berkeley Office:  1400 Shattuck Ave., Suite 1, Berkeley, CA  94709
*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate.  In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283

Do You Need a New Appraisal When You Refinance?

It’s September of 2019 and interest rates are again approaching historic lows. This means that many homeowners are considering a refinance — and for good reasons. If there is a hurdle for some, it’s the cost and risk of getting an appraisal on their property. What happens if the appraised value doesn’t support the loan amount, loan-to-value or the transaction itself? Are these clients then out the money for the appraisal report, typically anywhere from $500 to $1200?

Earlier in the year, we introduced an appraisal tool that allows us to determine, in advance and with a very high degree of accuracy, if a refinance transaction will be eligible for an appraisal waiver. This all happens before a client even makes a loan application, so we don’t require any personal information. How does it work? We need three pieces of information:

  1. The address of the property.
  2. The estimated value of the home.
  3. A good idea of the loan balance being refinanced.

With the above, we can assess the probability of getting an appraisal waiver and if we do, we can be off to the races and closed on a refinance with less time and less expense. It’s really that easy and it’s a huge edge for the homeowner looking to save money on their housing expense.

Oh, and one of the best things about our appraisal waiver platform? It works for purchases too! If you’re considering making an offer on a property, run it by us. We can put in the address of the property and the intended offer price and we’ll know in advance if you’ll need an appraisal. In cases where you don’t, you can offer without an appraisal contingency, possibly further strengthening your offer.

Appraise be to God, 

 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate. In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283

Can You Still Get a Stated Income Mortgage?

Believe it or not, the calls come in. “Do you guys still do stated income loans?” Still? Seriously, a lot has changed in ten years, but in the home lending building perhaps there has not been a more pronounced departure than the Elvis of all mortgages, the stated income loan.

Basically, these creatures roamed the earth and skies during the pre-real-estate-downturn era and allowed a borrower to state what he made in income per month. To state the amount of money he had available for a down payment. And even to state what he did for a living. All of this changed with the Dodd-Frank Wall Street Financial Reform Act (Dodd-Frank), and without getting technical, the core provision in this law is “ability to repay,” or ATR. Today, if lenders don’t prove that a borrower can repay the loan they are making, then a lot of bad things can happen to the lender. And if bad things can happen to a lender, then you know that’s gonna flow downhill to the person looking to purchase or refinance — namely, you, the borrower.

So, no. Stated income loans don’t still exist.  At least not in the traditional sense. But in the new world, lenders do have some very viable and attractive ways to determine ATR by alternative measures and I’ve outlined the three most common below. These programs address the reality of the borrowing public, especially the self-employed, who often file their tax returns in a manner that reduces income and maximizes expenses — for good reason and within the letter of the IRS law. To prevent these otherwise creditworthy borrowers from being shut out, today’s substitutes for stated income loans might involve some or all of the following characteristics:

Asset Depletion

An asset depletion loan allows a buyer or borrower to leverage his/her cash equivalents, investments and sometimes even retirement accounts to derive a hypothetical income stream that can be used for qualifying. These assets do not need to be moved or liquidated, just documented. For those who have sufficient net worth but insufficient traditional qualifying income, an asset depletion loan (also known as asset-backed, asset utilization, asset amortization, etc.) can prove an ideal solution.

Bank Statement Qualification

Business owners who show strong income into their business may want to consider a bank statement loan as an alternative to a stated income loan. For a bank statement qualification, we will typically examine 12 months of business bank statements. We’ll total all of the legitimate business deposits and we’ll apply an expense ratio to that sum. The resulting figure is the qualifying income. For those who “write off” a lot of business income on tax returns, a bank statement loan may circumvent that age-old challenge, because for these programs, no tax returns are required.

Debt Service Coverage Ratio (DSCR)

For the real estate investor who will struggle with a conventional mortgage qualification, we now have the debt service coverage ratio, or DSCR, home loan option. This program looks at the property’s income and nets out the housing payment on it. As long as the ratio is positive (and all other qualifying criteria are met), we have a deal.

While the sun may have set on the Wild West days of stated income, the home lending industry has come a long way back to offering attractive alternatives to the alternative borrower. Not all loan professionals have access to these options and fewer of those are fluent in the approval parameters. If you need help with a bank statement loan, an asset qualifying mortgage or a DSCR program, get in touch at any time. We are experts in these and look forward to being of service.

In a new loan state of mind, 

 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate. In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283

Do Any Mortgage Lenders Work on the Weekend?

The fact of the matter is that a lot of real estate business gets done on Saturdays and Sundays. Prospective buyers go to open houses and buyers’ real estate agents often need to structure offers for their clients. Unfortunately, not all banks are open on the weekend even those that may take deposits and cash checks often do not have a home loan professional available to pre-approve a buyer or answer a complicated home loan question in an instant.

I’m different. Even though I’m generally not in the office on the weekend, I can always be reached and I have the full capacity to work through your scenario and give you an edge over your competition — those other bankers, brokers or lenders that may wait until Monday morning to get underway.

Let us know if we can help you today, whether that day is during the work week or the two days that follow, and that everybody’s been waiting for.

C’mon let it go! 

 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate. In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283

How a Refinance Can Drive Down Your Monthly Expenses

While all real estate may be local, so too is it true that one homeowner, confronted with the opportunity to save $250 per month through refinancing, for example, may view that as a significant financial relief while another may feel it’s not even worth it to get off the couch to consider going through the hassle of the loan process. As we work into the second half of 2019, there is no mistake that the low rate environment we are enjoying again is providing opportunities for homeowners to refinance. Often in these cases, having an open mind about any level of savings can help us determine whether or not a refi is “worth it.”  Here in the San Francisco Bay Area, if we take an average loan size and make some assumptions on monthly savings through a refinance at today’s rates, we see that it’s not unreasonable to think that our clients can save between $150 and $350 per month. When you look at this in relation to the most significant household budget expenses; auto loans, student loans and credit car payments, it’s easy to see why a careful review is a great idea. Need more proof?

  • As of 2018, it is estimated that 44% of American adults have a car payment. On average these individuals owe over $30K on their auto loan and they pay over $500 per month on their payment. Interest rates vary but with an average FICO score of 695, you can bet your bottom dollar that some of these merry motorists are not enjoying 1% interest rates on their auto debt. It’s possible today’s refinance could cut your auto payment in half — or at least that’s the way it would feel until the car is paid off.
  • The average student graduates (or not…) college with about $25,000 in student loan debt. It’s estimated that the payment on this would hover around $280 per month. Owning a home is a big financial responsibility. Owning it alongside student loan debt can turn it into a financial burden that refinancing might ease.
  • Depending on what stats you review, it’s estimated that the average American carries between $4000 and $7000 per month in credit card balances that roll from month to month. And you can be sure that as this revolving debt ages, the interest rate on it does not suddenly get better. To break this cycle, a refinance can provide needed monthly budget space to slash the credit card balances and get off the minimum payment treadmill.

Bear in mind that in each case above, I am not advocating that our clients take on more debt! We are not suggesting that they do a cash-out refinance and pay off these other obligations. That may prove to be a good strategy and might warrant further examination. But even in cases where a borrower simply does a “rate and term” refinance and lowers the rate and payment on an existing mortgage, the savings that result can go a long way to comprehensively addressing the other components of any household budget.

We’re here to help when you’re ready to look under the hood, roll up your sleeves and do the work.

My uncle has a country place, 

 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate. In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283

Should I Refinance into a 15-Year Fixed Rate Mortgage?

With the Federal Reserve tongue-tied and twisted and an easy trade war time-tripping into the future, we find ourselves the beneficiaries of another very appealing low interest rate environment here in the second half of 2019. This stands to benefit many who have mortgages at higher rates and even some who may not fit that exact bill, but who are focused primarily on reducing the term of their loan and perhaps paying their entire balance off at a faster rate. We are seeing a number of homeowners who are seeking to determine if they should abandon their 30-year amortized loans and refinance into a 15-year fixed. What are the key concepts these individuals need to know before they make this leap?

  1. For the vast majority, the mortgage payment will go up.  A while back I did the research on this and came up with my “10 and 2” rule. Namely, if you are in a 30-year loan now and have been paying it down for 10 years, then you refinance into a 15-year fixed rate loan with at least a 2% rate reduction over your present loan, only then would you have a new payment that is the same or lower than your current payment. And that’s a reach. So for most, refinancing into a 15-year fixed means a higher monthly payment, safe in the knowledge that the additional amount is going to reduce your principal balance and not to additional interest.
  2. You save big long-term. The total finance charge (aka, interest) on a 15-year loan versus a 30-year loan is dramatic. For example, on a $400K loan at 4%, you will pay a total of $287,478 in interest over 30 years. On a 15-year fixed at 4%, you will pay $132,575. But there’s a silver lining for the 15. Often the rate on a 15-year fixed will be lower than for a 30, so not only do you save on interest because of the term, but you save on interest additionally because of the lower rate. The rich get richer.
  3. Be mindful of your credit capacity. If you refinance into a 15, you’ll have a higher payment reporting on your credit report. Other creditors who may examine your debt-to-income (DTI) as a function of your creditworthiness could limit your access to credit due to the higher payment. This may or may not be a factor for your financial future, but do take it into consideration before you take the 15-year plunge.
  4. It’s possible to be debt free but wealth poor. I realize this sounds funny, and paying off a home is a commendable financial goal, but realize that while you are doing it, most of us also need to meet concurrent objectives when it comes to our money. Having a “rainy day” fund, paying off any tax-disadvantaged higher-rate consumer debt, saving for college and retirement and investing outside of real estate are important and worthy objectives and if all of your discretionary income goes into a higher mortgage payment, you could find yourself debt-free but savings poor down the road. That would almost certainly force you to look into refinancing the home again and accessing the equity, likely with a 30-year loan or a HELOC. Don’t laugh, we’ve seen this movie before…

With rates lower, it might indeed be worth looking into a 15-year fixed rate mortgage. But keep the above points in mind as you do. Like in physics, all actions have opposite reactions and finance is no different. Getting a lower rate, paying less interest over term and paying off your home quicker are all enticing objectives. There is a price to entry, however, and any true loan professional can help you assess that cost. Let me know if you need my help at any point in your journey.

Free and clear, 

 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate. In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283

What’s the Point of Points?

Let’s get right to the point. What point? Points. I don’t get it. What’s your point? The point is points — what are they, how do they work and should I pay them when I get a mortgage? There’s a lot of confusion about points and when a borrower researches his or her best mortgage options, inevitably there will be an element of points in the debate. So in order to help ourselves find the best terms on any home loan, we need to get this point thing under our belt.

Point One (One Point)

Simply, one point equals 1 percent of the loan amount. If you have a $500,000 mortgage, 1% of it is $5000. Similarly, fractions of a point work the same. In our example, 1/2 point on $500K is $2500. If a lender says you can get any certain rate by paying 3/4 of a point, simply take your loan amount and multiply it by .75%. This rule never changes, despite loan size, type, borrower profile, etc. One point is one percent of the loan amount.

Point Two

Let’s put a finer point on points. We’re going to focus on “discount points” and not “origination points.” Discount points are meant to have a direct impact on the rate that the borrower obtains. “Origination points” are a cost to get the loan itself — independent of the rate provided. An important concept to know here is that on any given day, a mortgage lender can offer the public a range of rates. Let’s say a borrower qualifies for a 4.000% rate with “zero points.” This means that without paying any discount cost, the borrower’s rate would be 4.000%. Easy, right? OK. So what happens if the borrower wants a rate of 3.75%? Is that possible? Yes. But in order to get the lower rate, the borrower will need to “pay” the lender what it would cost to bring the 3.75% rate to “par,” meaning to level equal with the cost of the money at 4.000%. On the lender side, there is more cost associated with lower rates and an “inverse cost” (aka, lender credit) associated with higher rates. So on the scale of, say, 3.500% to 4.500%, the lowest rate would have the highest cost to obtain and the highest rate would have the highest “rebate” or lender credit. Due to regulation, lenders cannot profit any more or less depending on the rate chosen, so the cost or credit to obtain any rate must come from, or go to, the consumer.

Point Three

Does it make sense to pay points when you get a mortgage? Now I must tell you that as a veteran loan originator, many borrowers pay points to get a “sexy” rate. Let’s say a 4.000% rate is available with zero points, but that a 3.875% rate can be bought for a half point. Some will make that investment just to have the ‘3’ handle on their “water cooler rate.” OK, fine. It happens. But the decision to pay points should always include a math calculation and fortunately, it is a simple one. Let’s use our example again and say that 4.000% is available on a $400K loan at 0 points, or “par.” The payment on this loan would be $1910. Now let’s say this borrower hopes to get a rate of 3.750%. The lender comes back and says that 3.750% will cost .75% (3/4 of a point) to obtain. So, we have an investment of $3000 that will be paid at close as discount points, but in return, this borrower will get a 3.750% rate instead of 4.000% for the life of the loan. The payment savings per month in this case would be $58. Remember that the borrower is “investing” $3000 at close to get the $58/M savings, so we divide the cost by the savings to determine the number of months it will take to recover the investment. In this case, it will take 52 months, or a little over four years. If this borrower plans to be in the home and not replace the mortgage within the that time, the choice to pay points may indeed be a good one. However, if the borrower does sell or refinance in that initial window, the investment (or part of it) really will not return. Yes, the borrower got the better cash flow per month, but he/she never realized the true savings the lower rate would provide.

The decision to pay points is a personal one. This is not a “right or wrong” choice and is highly individualized to the scenario and the borrower’s financial plans and goals. Helping a buyer or someone looking to refinance understand how points work, and if paying them is worthwhile, is a conversation we are always happy to have. Call any time if I can be of service!

In the right direction, 

 

Robert J. Spinosa
Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com

Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate. In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 – (866) 934-7283