CNC Mortgage Blog

By Carlos Gutierrez

This past weekend I visited mostly larger houses that would probably qualify for a jumbo loan. Those are loans that are over $417,000 and where the property would need to be worth more than $560,000. A couple of years ago there weren’t any loans available for this market.

Now several lenders are offering these loans at very attractive rates. The 30 year fixed jumbo loan is available at 5.125% while a 7/1 Jumbo ARM is quoted today at 3.75%.

Several of the realtors I spoke to were pleasantly surprised to hear that we can offer these loans as they were feeling hostage to some of their in house loan officers.

Dear friends,

I just wanted to let you know where mortgage rates are today should you know of someone who is thing of buying a home or is considering refinancing.

I think it is dangerous to stick out my neck making predictions, however I believe rates will continue to rise once the situation in the Middle East settles down.

7/1 ARM 3.25% ( APR 3.327%) Principal and interest payment on $250,000 loan $1,088.02 per month

30 year fixed mortgage 4.75% ( APR 4.907%) Principal and interest payment on $250,000 loan $1,304.12 per month

15 year fixed mortgage 4.125% ( APR $.393%) Principal and interest payment on $250,000 loan $1,864.92 per month

To these payments must be added monthly payments for real estate taxes and homeowner’s insurance.

Disclosure

Rates, points and APRs shown are for a 45-day lock, single family residence, loan to value 80% or less, purchase or refinance and fully documented income. Conforming APRs based on $250,000 loan in Minnesota. Jumbo loans are calculated with a value of $450,000 and an appraised value of at least $600,000. Adjustable Rate Mortgages (ARMs) have 30-year terms, with rate fixed for initial 3, 5, 7 or 10 years. State and other conditions and restrictions may apply. These rates are available today for purchase or refinance loans of $250,000 with a single family residence with an appraised value of at least $312,500. The borrower must show sufficient income to pay for this mortgage. Loans may be locked after we receive the loan application. Borrowers must have a mid credit score of at least 720 points. Borrowers will be escrowing for taxes and insurance. Closing costs are estimated at $5,740 to which prepaid expenses for taxes and insurance must be added for a refinance transaction. These closing costs include a 1% mortgage broker fee.

Thank you,

By Carlos Gutiérrez

Reducing debt on a mortgage is a very safe investment. On a $200,000 mortgage refinance a borrower can expect a return on investment of 12.9% just by dropping the rate less than 0.5%. A drop of 0.86% will give you a 25% return on investment. Depending on the returns your other investments are getting in the market, this is one to consider. On a $300,000 mortgage the interest rate differential is even smaller.

The risks that you incur when you decide to invest in refinancing a property are:

1) The cost of the appraisal if the property is worth less than your estimate (between $405 for a single family residence to $625 for a rental property.)

2) The closing costs if you sell or refinance the property before you have recovered your money.

Aside from those uncertainties, you can easily determine how profitable refinancing will be.

I will present two scenarios each with two different returns on investment.

SCENARIO # 1

Current debt on your home $291,000

Estimated new debt rolling in the closing costs $300,000

Estimated value of your property $375,000 (80% loan to value)

Closing costs $6,602.95

At a rate of 4.75% (APR 4.895%) on a new 30 year fixed mortgage your new payment will be $1,564.94 for principle and interest. If your present loan has a payment of $1,635 per month you will be saving $70 per month, $840 per year. $840 per year divided by closing costs of $6,602.95 gives you a 12.7% return on your investment. You will recover your investment in 7.86 years. A $300,000 30 year loan with a payment of $1,635 per month is obtained with an interest rate of 5.13%.

If your payment is now $1,703 per month for principle and interest on the same $300,000 at a rate of 5.5% you will be saving $138 per month, $1,656 per year, a 25% return on investment, an investment that will be recovered in four years.

SCENARIO # 2

Current debt on your home $193,000

Estimated new debt rolling in the closing costs $200,000

Estimated value of your property $250,000 (80% loan to value)

Closing costs $5,113.95

At a rate of 4.75% (APR 5.027%) on a new 30 year fixed mortgage your new payment will be $1,043.29 for principle and interest. If your present loan has a payment of $1,099 per month you will be saving $55 per month, $660 per year. $660 per year divided by closing costs of $5,113.95 gives you a 12.9% return on your investment. You will recover your investment in 7.75 years. A $200,000 30 year loan with a payment of $1,099 per month is obtained with an interest rate of 5.21%.

If your payment is now $1,150 per month for principle and interest on the same $200,000 at a rate of 5.6% you will be saving $107 per month, $1,284 per year, a 25% return on investment, an investment that will be recovered in four years.

By Carlos Gutiérrez

I certainly don’t have the crystal ball that allows me to see what will happen to mortgage interest rates. This week the situation in Egypt is affecting interest rates for US bonds. All countries issue bonds to finance their debt. The future of the Egyptian government is uncertain so investors are unwilling to buy bonds that are emitted by that government and investors who already have those bonds are nervous and sell them. Not only are Egyptian bonds affected, Egypt is considered an “emerging market” by the investing community so all “emerging market” bonds are affected. Those emerging markets include Korea, India, Brazil, Mexico and many other nations. Although many investors are selective, others just have all bonds in one single pocket.

So people do not invest their money in emerging markets plus they have the cash from the sale emerging market bonds. They are sitting on cash. Idle cash looses value. Their portfolio guidelines indicate that they should invest in bonds not other type of financial instruments. What is the safest immediate alternative? Bonds emitted by the government of the United States.

And what happens when people want to buy bonds that are perceived to be safer? They are willing to pay a higher price for the bonds. The price of bonds and the yield (interest rate) on bonds move inversely, so as the price of the bond goes up, the interest rate goes down.

A few weeks ago unrest in the European markets drove interest rates down because investors worried about Ireland, Greece, Portugal and generally the Euro as a safe currency.

Economist s have grouped countries by acronyms that help people to remember. The group of European countries that have been in financial difficulties have been called the PIIGS for Portugal, Ireland, Italy, Greece and Spain. One tier of emerging markets is the BRIK for Brazil, Russia, India and Korea. A lower tier of the emerging markets have been grouped into the CIVETS for Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa.

Until the situation in Egypt is settled I would expect mortgage interest rates to remain low. I dare to predict that as the world economy improves, the US housing market bottoms out and US industry speeds up interest rates for mortgages will go up over the next few months.

Dear Rick,

I agree with your interview with Rep Murry (?) from Arizona.

I think there are some differences that we see with the illegal immigrant workers in Minnesota.

The IRS provides an ITIN ( Individual Tax Identification Number ) so that the illegal immigrants can prepare their Federal tax returns. That same ITIN is given to foreign investors (in London, Frankfurt, Sao Paulo, etc) when they have investments in the US that produce interest or dividends.

That way they declare their taxes and sometimes have taxes returned to them when they have been withheld in excess. The government still collects some income taxes from them.

The ITIN cannot be used to obtain employment. To obtain employment the illegals have been using either an invented social security number or someone else's (yes, identity theft.) So the employer sent the Social Security contributions to either someone else's account or nobody's. The SSA black hole you spoke about.

I did not see too many cases of ID theft (by illegals) that resulted hurting the original customer. Sometimes they were able to obtain a mortgage with the fake social security number.

Some banks gave mortgages based on the ITIN and the income reported on the tax returns. This was a legal mortgage because the customer presented legal documents.

If you consider that the 12,000,000 million illegal immigrants could buy 3,000,000 houses, you might think that it could make a good dent in the housing glut.

On Anderson Cooper’s show where they showed grape pickers and spoke of the percentage of illegals in the construction business you can appreciate the benefits these people bring to the US. They help to keep down farm prices and the cost of construction.

Saludos,

Last week I was at a dinner with a friend and he was opposed to the US helping to support the Euro so that the value does not fall. I tried to counter his arguments but didn’t have all my numbers ready.

Now I think I have come up with a good explanation of why the US should help to prop up the Euro.

Assume you need to buy a nice new car and you have been looking at four options, Cadillac, Continental, Mercedes and BMW. They are all pretty similar except for the price; the two European cars are running at around US$60,000, the US built cars are costing US$45,000 each. At an exchange rate of US$1.55 = e1.00 the European cars have a price of e38,709.

If the Euro drops to US$1.20 = e1.00 the price of the European cars would drop to US$46,451.

If the price of the Euro goes to US1.10, those foreign cars would cost $42,580.

At that point you would decide between the US built cars at $45,000 or the European cars. If you decide to go for the European cars it will probably cost some jobs in Detroit.

Home buyers, both first time homebuyers are reaching a small milestone at the end of April this year. On that day purchase agreements need to be signed to qualify the tax credit offer for buyers from the Federal government. That is $8,000 for first time buyers and $6,500 for repeat buyers.

We don’t know if that tax credit is going to be extended. It was already extended in November. I heard MN Senator Amy Kloubichar this week on the radio saying that it might be extended. Some people feel that it has not helped enough to promote purchases. Of course it has been in place during the slow home buying season. An $8,000 tax credit should not be the driving force to invest $200,000 in a new home but it is an incentive to be considered.

More important are two considerations. One is that housing prices I believe are close to the bottom so they will probably stabilize or start to go up. That house could cost you more soon. The second is that we have seen mortgage rates creep up in the last few months. One pundit predicted 6% on 30 year mortgages by the end of this year. That 1% is $45,165 in additional interest over 30 years when you compare a $200,000 loan at 5% and 6%.

Keep in mind that the purchase agreement needs to be signed by April 30 and that the closing must take place by June 30, 2010.

Happy house hungting!

By Carlos Gutierrez March 29, 2010

I am not a realtor so I don’t have my ear to the ground to get a really good feeling for the state of the real estate market. Business on the refinance side of mortgages has been slow in February and March of 2010.

I don’t think the $8,000 and $6,500 tax credit for buyers is moving too many people to invest in real estate so I don’t think it is going to be extended after April 30, 2010.

I assume that some home owners will be pressured to drop their asking price after April 30 because they did not sign the purchase agreement by that magical date.

On some weekends I go visit open houses to offer our loans to realtors and maybe snag a buyer. A year ago the realtors were really happy to see me because no one else had shown up. Yesterday I concentrated on the area around Lake Minnetonka. Those were more expensive homes ($600,000 to $3,000,000.) I was happy to see potential customers at most of the open houses. I don’t know if they were serious buyers, low ballers or just tire kickers, at least they were looking at houses.

Maybe housing will soon rebound.

Over the weekend I found myself trying to put a purchase by a first time home buyer in perspective. I find that sometimes I am a bad salesman because I don’t want to rush things. Here is a summary of my advise to all involved, with some changes to protect privacy. The buyers and the loan officer are in a hurry to get the appraisal done.

Hi everybody,

I had the privilege of talking to almost involved in this purchase today. I just missed Jodie.

Buying a house is a stressful experience, for everyone, with tax credit deadlines looming, it only makes it worse.

I wanted to summarize what I see now after my chats with all of you.

Jodie and David have found a house that they really like and want to buy.

The sellers have agreed to this sale, but they are underwater. They owe more on the house than the buyers are offering (maybe close to $100,000.) So this is considered a short sale which means that the bank that is holding the mortgage has to agree to receive less money than is owed on the house. In addition to the bank there is also a mortgage insurance company involved that has to agree to the short sale.

Banks are slow to look at and accept short sales, and we on the buyer’s side have very little leverage to make them speed up.

A purchase agreement has been signed by the sellers but not by the financial institutions involved.

I see two advantages to ordering the appraisal soon:

1. Appraisers at Bank of Sometown are slow these days

2. The loan application can move to manual underwriting to approve David and jodie as soon as the appraisal is received

There are 10 reasons to delay the appraisal:

1. We don’t know if the banks will approve the short sale at that price in a timely manner

2. David and Jodie cannot offer more money for the property

3. The listing agent might not allow the appraiser to go into the house until we have bank’s acceptance

4. $400 are at risk, if the appraisal is done and the banks don’t accept, the money for the appraisal will be lost

5. Another $400 will have to be spent for an appraisal on another house

6. There are many other houses on the market

7. With the April 30 deadline looming for purchase agreements to be signed, if this deal falls through there is very little time left to take advantage of the $8,000 credit.

8. There is no guarantee that the bank will sign the purchase agreement by April 30. Yes it could take that long!

9. David and Jodie should have two or three back up houses so that they can take advantage of the tax credit.

10. This house is still in the redemption period. Although it appears abandoned we are not sure of that status for the closing date.

11. We are not sure when the redemption period is over.

I am sure I will think of other reasons to add to both sides of the argument, but for now let’s take the weekend and think things over calmly.

Good luck

In our role as mortgage brokers we want to make this loan process as painless and streamlined as possible for our customers.

Although we try to get as many documents from our customers as possible at the beginning of the process in order to not bother them anymore than necessary, the banks always find that we need to provide more “stuff.”

I just groan every time I need to get more information from my customer. It can be updated bank statements, new paystubs, clearer W2 forms, a better copy of a driver’s license because the state seal covers part of the birth date. It goes on and on.

I can tell that the customers are talking to their friends about these stumbling blocks because often they tell me something to the effect “I heard that no matter how clean a customer is, the banks are being very careful.”

Yes, the banks want their files to be squeaky clean. We are delighted to have you as customers. Please be patient and bear with us.

Have a Happy New Year!!