Saturday, March 31, 2012

House financing, refinancing? Hidden fees..

Let's be technical here, just a bit, to understand better what is in a loan "rate".

A hidden fee is set to rise
The guarantee fee – a hidden fee inside the interest rate quoted on a home mortgage – has been mandated by Congress to increase this spring, and other increases are likely later to take place later this year and next.

A little bit of background on the subject:
The guarantee fee has been charged by government sponsored entities like Fannie Mae and Freddie Mac for more than three decades. The fee does not show up in borrowers’ mortgage documents or good-faith estimates, and it is little known outside the industry. According to a Fannie Mae spokesman, the fee “gets incorporated into the underlying rate the borrower pays.”

An interest rate is usually made of up 3 parts: The largest goes to the bank or the investors who buy the loan; the smaller portion is for the mortgage servicer that collects monthly payments; and then there’s the guarantee fee. Fannie and Freddie charge guarantee fees as a form of insurance against default for the loans they acquire and resell to investors.

The guarantee fee will rise 10 basis points on April 1; the increase was included in the two-month extension of the payroll tax reduction last December. A basis point is equal to one one-hundredth of 1 percent, or 0.01 percent.

One way to avoid the guarantee fee is to use a lender that does not sell off its loans – for instance, a community bank or a credit union.

In addition to offsetting risks, the fees provide a primary source of revenue for Fannie Mae and Freddie Mac. Both organizations started raising fee rates in 2008 during the housing crisis, as foreclosure costs rose.

Read the full story in this New York Times article.


Current Mortgage rates

Thursday, March 15, 2012

Inspections before sale of property...

Just like home buying must start with a pre-approval, home selling really should start with some inspections.

I have been involved recently in a transaction where no inspections had been done before putting the property on the market.  The result was difficult to watch as the transaction unfolded, as problems started to show up after I ordered a termite inspection and a property inspection for my client, the buyer.

First we discovered the almost "usual" termite problems, as the recommendation was to tent the house, but we were also faced with a description of the problems that entailed opening up an area to see exactly how much damage was occuring.  The termite company knew there were problems in that area, but had to remove the heating ducts in order to know exactly how much it would cost to correct the termite infestation.

Then with the property inspection we learned that the foundation needed significant repairs, which we had priced by a foundation specialist.

The problem with this is that the seller did not know about these problems, and most likely these repairs would have to be done in order to sell the house.  Buyers and sellers entered into a contract without the information.  Then there is a catch 22: you can cancel the transaction, but then you are still faced with the necessity to address the issues with another buyer, or you continue and you have to pay for the unexpected repairs.

These were not the only problems discovered by the inspections, and I felt very sorry for the very nice people selling this house, and for the lovely client I had buying it.  Both were somewhat shaken up by the process.

I made a mental note to keep in mind this story to illustrate the definite need for inspections done ahead of time, for my clients sellers.
When time comes to negotiate, you want to negotiate with as many known facts as possible, and avoid very costly unknowns.

Thanks for reading, let me know your own experiences...

useful links

Current Mortgage rates

Friday, March 2, 2012

Refinancing: fixed rate, or ???

A fixed rate alternative

With interest rates at historically low levels, many borrowers are finding value with a reliable fixed-rate mortgage.
However, as clients often turn to me and ask me what they should do, I point out that borrowers who think they will be moving/ selling in the not-too-distant future have another alternative: an adjustable-rate mortgage that offers several years at a fixed interest rate.

Hybrid adjustable-rate mortgages, or ARMs, originated in the jumbo-loan marketplace at the end of the 1980s. They fell out of favor – along with the riskier ARMs that offered extremely low teaser rates and interest-only components – after the subprime mortgage market collapsed.

Some adjustable-rate mortgages have an interest rate that changed every year, but a hybrid – also known as a delayed first-adjustment ARM – has a fixed interest rate for a period of time. Most loan officers refer to a hybrid by the period during which the rate is fixed. A 5/1 loan, for example, has a fixed rate for five years, then adjusts annually for the remainder of the term; a 7/1 loan adjusts after seven years.

ARMs account for only a small segment of the overall mortgage nowadays, financing just slightly more than 10 percent of home purchases. However, market share for hybrid loans is expected to increase to 14 percent this year, according to an annual survey released last month by Freddie Mac. The 5/1 hybrid was the most popular adjustable-rate loan product in the market, according to the survey. The least popular was a 3/3 ARM, which adjusts once every three years.

A common reason for choosing a hybrid ARM is projected length of homeownership. It’s a nice option for buyers who don’t expect to stay in their home for longer than three to five years.

Rates on hybrid ARMs are also attractive. As of last week, the average rate on a 5/1 loan was 2.81 percent, compared with 3.88 percent for a 30-year fixed-rate loan, according to Freddie Mac.

Borrowers should be aware though that with rates starting at rock-bottom levels, there’s generally only one direction for them to go. And even though there are caps on the rate change amount, the jump could be as much as six percentage points, when it adjusts.

Here is an interesting article from the New York Times on the subject.  Food for thoughts....


useful links

Current Mortgage rates