Behind The Eight Ball
Well, mortgage rates officially topped 8% last week. I’ll bet there are quite a few folks that didn’t want a 6% mortgage earlier in the year, only to be kicking themselves for not taking it when they could. Predicting interest rates in the future seems foolish to me, since no one has gotten it right that I know of. We need to operate in the here and now—here are a few techniques to ease the payment shock to home buyers.
- First time home buyer pricing
- Pay a point program
- 2-1 Buydown
- Single payment mortgage insurance
First time home buyers (no borrower in the transaction may have had an ownership interest in real property in the last 36 months), have a pricing advantage. Fannie and Freddie home loans typically have a risk premium built into their pricing that we call loan level price adjustors (LLPAs). The lower the down payment and the lower the credit score, the worse the hit to pricing. First timers get the benefit of having the LLPAs eliminated. This alone can drop the financing costs dramatically and help make the loan far more palatable to the buyer versus nationally advertised pricing. No additional costs to buyer or seller.
Next, the “pay a point” program. With this one, I adjust our mark up on a loan to $0. The borrower effectively gets our “employee” pricing, which will kick the rate down quite a bit. It’s a good mix and match with the first-time buyer program listed above. One point = 1% of the loan amount in cost. Can be paid by the seller.
Third, I’m certain most know about the 2-1 buydown by now, but most folks do not understand how it is calculated. As an example, let’s say the note rate is 8% on a new mortgage. The first-year payment using this tool will be calculated using 6%–the next year will be 7%. Beginning on the first month of year 3 through year 30, the payment will be based on the original note rate of 8%. The cost upfront is the amount of the payments that the investor in the mortgage did not receive for the first two years. Think of this as a mortgage prepayment which is why it must be paid for by the seller, since it would make no sense for the buyer to prepay their own mortgage upfront. The cost is calculated using the amount of the loan and the note rate. I have a handy worksheet that calculates the exact cost for this program—if you’d like a copy, please send me an email with the request: firstname.lastname@example.org.
Finally, there’s single-payment mortgage insurance. This is a handy option to reduce the monthly total housing expense to the borrower. This is for conventional financing only (VA and jumbo loans have no mortgage insurance. FHA loans are typically stuck with the extra MI payment for the life of the loan). It’s simply an upfront, one-time payment that is made at close of escrow and that’s it—no additional MI payments. The premium will depend heavily on the borrower’s credit score and down payment—there is no simple equation to calculate it. Example: $700,000 purchase with a 15% down payment–$595,000 loan and an 800 FICO score. The single payment premium would be $1,900–reducing the monthly total housing expense by $54.54—every little bit helps (source: Radian Group Inc). Can be paid by the seller.
You may notice how I am emphasizing that getting seller credits is critical for making these options work. I believe the market shifted dramatically in the last week and it will take some time for sellers to realize that this is how real estate deal-making will function in an 8%+ interest rate environment. Selling agents, listing agents and buyers must learn about the tools that are available to them. Most folks will not want an 8% mortgage but may find a start rate in the low 5s something that will be tolerable, or even attractive. I just wrote one @ 5.375% in Petaluma. I suspect we’ll be able to get them to start with a 4 before long.
Fund fact (I’ll include these from time to time):
Did you know that rate locks do not exist? Yep, you read that correctly. Lock desks provide a forward commitment to fund a loan within a specified time period, but the rate is by no means “locked.” Lenders utilize complex hedging strategies that cost them money daily while the commitment is in process—which is why extensions cost the client additional money and why longer locks (30-day, 45-day etc.) are more expensive as they go further out. The lock desk will analyze the likelihood of the bond market moving against the “lock” over the lock period and build that into their pricing model. Rarely, but it does happen, a huge sudden move in the interest rate markets can destroy a lender overnight—I’ve seen it happen. When we get into a strange rate environment (like now), a massive move in either direction can trigger a lender implosion. That’s certainly not a prediction, but something to watch for.
I hope some of this helps. Please drop me an email if you have any real estate financing questions that I can answer.
Scott Lawson – America’s Home Loans – (707) 763-7900
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