CNC Mortgage Blog

I sent this note to a possible customer who has a high interest on his mortgages and could save money with a 5/1 ARM.

August 11, 2009

RE: REFINANCING INTO A 5/1 ARM

I don’t want to convince you to refinance into an Adjustable Rate Mortgage (ARM). I just want to present you with the conditions for that loan so that you can decide what is best for your situation.

The ARM will save you money over the next five years.

FACTS that I have or can infer

First mortgage $77,000 at 7% with a monthly payment of $512.28 principle and interest (PI)

Second mortgage of $619,000 at 6.75% with a monthly payment of $4,014.82 principle and interest

Total principle and interest now $4,527.10 with a blended interest rate of 6.777%.

NEW MORTGAGE

To pay off the two mortgages and add closing costs of $11,658 and prepaid interest of $1,053 you would need a new mortgage of $709,000. The bank’s rate on the jumbo 5/1 ARM today is at 5.35% without mortgage insurance. The maximum loan to value ratio accepted is 90% so we would need your home to appraise at least $788,000. If the home does not appraise at that value you would need to bring money to the closing to be at the 90% value.

BENEFITS

Your monthly payment on $709,000 at 5.35% would be $3,959.15 for principle and interest saving you $567.95 per month, $34,077 over the next 60 months. In terms of pure interest you now pay 6.777% and would be paying 5.35%. On $709,000 that is a yearly savings of $10,067 in interest, $50,339 over five years. To be fair you would have to subtract the $11,658 in closing costs to determine your benefit.

This bank lets us choose the appraiser still, so we could get a verbal estimate before you spend money on the appraisal.

The rate is fixed for five years.

This bank does not force you to escrow taxes and insurance with them and does not charge a fee for not escrowing.

This would be the rate for a jumbo loan over $417,000 with no additional rates.

THINGS TO WORRY ABOUT

The appraised value of your property will be very important.

The rate could change in month 61. When the rate starts to change it can change once a year. The change would be the value of the One year London Inter-bank Offered Rate ( LIBOR) plus the margin charged by the bank which is 2.65%. Today the LIBOR is at 1.48%, if you add the margin of 2.65% your rate would be 4.13% and if your loan were adjusting today your PI on $709,000 would be $3,438.28 per month, $1,088.87 less than you are paying now.

However the rate could adjust 5% over the initial rate in month 61 and a maximum of 6% over the initial rate as a maximum over the life of the loan. So in month 61 your rate could go to 10.35% with a payment of $6,406.13 for PI and if it reaches the maximum rate of 11.35% your payment would be $6,940.14 for PI per month.

To reach those rates the LIBOR would have to be at 7.7% and 8.7% respectively. If you look at the attached chart for LIBOR since 1999 the highest rate for LIBOR was 7.453% in May of 2000. After that the highest LIBOR was 5.766% in June of 2006.

You now have a blended rate of 6.777%. To have that rate on the ARM after it adjusts, LIBOR would have to be above 4.127%.Since January of 1999, LIBOR has been above 4.127% 60 months and below that rate 68 months. During the next year it appears that the rate will remain low. I have no idea how to predict the rate in 2014.

To get the best rates your credit score needs to be over 720 and your debt to income ratio below 45%.

I look forward to working with you and answering any doubts you might have

Best regards,

Carlos Gutierrez

One of the biggest concerns we had as brokers with the new Home Valuation Code of Conduct (HVCC) has come to haunt us. In the last weeks several lenders have announced that they will not accept appraisals done for other banks to be used with their system. The main implication is that if a borrower has paid for and appraisal and is denied a loan at one bank or might benefit at another bank, that appraisal that cost them close to $400 cannot be used at another bank.

The new government regulations put into effect this year have been designed to put distance between mortgage brokers and appraisers. The banks have several Appraisal Management Companies (AMCs) who in turn have several appraisers. The bank randomly assigns the appraisal to an AMC who in turn randomly assigns an appraisal to an appraiser.

Before the HVCC the appraisal was made for the mortgage broker who could reassign the appraisal to any of the banks we worked with. Now the banks order the appraisal but many banks won’t accept the appraisal if it is transferred from another bank; even if it is certified to conform with HVCC rules.

So, the customer has to spend another $400??