Mortgage outlook for ‘08
Mortgage shoppers will find a more difficult landscape to navigate in 2008 than in recent years. Borrowers will find loan standards have been tightened for many products and costs are going up for other. Some mortgage products have vanished entirely, along with many lenders.  In fact, in the wake of a turbulent year, you may not find your previous mortgage specialist under the same banner, as many have relocated… however, Choice Finance® is still here for you.   As a  lender, we have new products that are only available in-house.  

You may have also noticed the continuation of historically low mortgage rates, especially this week and last.  Thirty-year conforming fixed-rate mortgages actually dipped the first week of December.  Rates had not been lower since September 2005.  A week later they were again higher, but that was almost exactly where they were at the same time in 2006.  What do these rate differences really mean?  For each $100,000 of loan amount, a 5-year ARM would save about $14 and a 1-year ARM about $38 (for one year, anyway).  The lower interest rate for the 15-year mortgage will require that you make a payment $225 higher than with the 30-year mortgage.  To calculate the effect for a higher loan amount, just multiply. For a $250,000 loan amount, you would multiply by 2.5, giving you a savings of $35 for the 5-year ARM, $95 for the one-year ARM and a $562 payment increase for the 15-year fixed. 

The 2007 conforming limit of $417,000 will stay the same in 2008, the third year in a row at that level.  Conforming loans are eligible for purchase by Fannie Mae and Freddie Mac, which makes them more marketable and thus cheaper and more widely available than “jumbo” loans that exceed the conforming limit.  Good credit scores, always important, will be even more so for homebuyers in 2008. Likewise, downpayment money from your own pocket is once again highly valued. Fannie and Freddie are, in general, demanding higher scores and bigger downpayments. 

What is a good credit score?  That has gotten stricter. A score of 620 used to demarcate subprime territory, but that dividing line is getting muddied.  Scores into the upper 600’s now can carry significant penalties versus those closer to 700 and up.  One example of the new credit score inflation is that Fannie Mae and Freddie Mac are adding new fees to the pricing of mortgages in which the credit score is less than 680 with a downpayment of less than 30%. Fannie Mae and Freddie Mac both posted losses for their last quarter and are looking to this “risk-based” pricing to help get them back in the black. The fees take effect on March 1st, but most lenders are already charging them. 

Similarly, some private mortgage insurance companies are also raising premiums on borrowers making low downpayments who have credit scores in the mid- to upper-600s. Again, the companies have suffered losses on just these types of loans, they say, so higher premium prices are their answer.  It has long been understood that having little downpayment money in a home creates a situation where the homeowner has less commitment to working things out if problems arise.  For that reason, FHA has sought to end a practice by which sellers could make a contribution to a nonprofit group, which then grants the money to the homebuyer for a downpayment, technically bypassing rules that prohibit direct seller downpayment assistance.  A federal court blocked the FHA move temporarily, keeping the program in place for now, but FHA is a good bet to get its way eventually, either winning in a higher court or through other administrative action. If you intend on using this program to purchase this year, understand that it is vulnerable.
© 2007, Real Estate Information Services, Capitol Assets, Choice Real Estate, Inc. & Choice Real Estate of VA, Inc., & Choice Finance®
  John Burley of Choice Finance®

What is Mortgage insurance?
Why am I paying mortgage insurance?  If you originally mortgaged more than 80% of the purchase price of your home, you are either paying mortgage insurance (PMI), or you used a combination of two mortgages.

What is mortgage insurance?  It is an insurance policy to protect your lender in the event you default on your loan and force the lender to foreclose.  Through foreclosure, the lender will seize your property and sell it at auction in an attempt to recoup their money.  Foreclosure is an expensive legal process, and by the time the lender can actually sell your home at auction, there are legal fees, past-due fees, and accrued interest added onto the principal balance of your loan.  Based on national sales, the average amount the bank will receive is 80% of the value.  If the balance owed is greater than the amount the house is sold for, the lender takes a loss.  This loss can be quite substantial and, when such losses are compounded nationwide, will drive up the cost of mortgage transaction for lenders.

In order to off-set such costs, lenders require mortgage insurance on any mortgage over 80% of the home value.  Mortgage Insurance reimburses the lender for their losses, should it become necessary.  Since the risk comes from the homeowner in the form of payment default, the cost of the insurance is passed along to them, as well.

The cost of mortgage insurance is determined by your Loan to Value – how much you owe as a percentage of your home value.  The higher this percentage, the higher the lender’s risk that they will experience a loss in the event of a foreclosure.  As with any insurance, the higher the risk, the higher the premium.  The loss risk and insurance premiums are pooled nationwide by the mortgage insurance companies.  So, the money you pay each month with your timely payments is used to pay for the losses caused by the delinquency of others.  Furthermore, this portion of your mortgage payment is not deductible on your taxes.

There are ways to avoid paying Mortgage Insurance.  The most obvious way is to have 20% equity in your home.  The other way is to take out a first and second mortgage, where the first mortgage is equal to or less than 80% of your home value.  Unlike Mortgage Insurance, the interest you pay on your first and second mortgages is tax deductible.  The interest rate on a second mortgage is usually higher because of the increased risk to the lender, but the lower overall cost of a two-piece mortgage makes them attractive.

If you currently have two mortgages or you are paying PMI, it is a good idea to consider refinancing.  Many homes have appreciated to the point that they have at least 20% equity.  By consolidating a first and a second mortgage and/or by getting rid of Mortgage Insurance, you may find significant monthly savings. 

12/19/07
President Bush is expected to sign legislation that will continue to allow low and moderate income homeowners to deduct their private mortgage insurance premiums from their taxes through 2010.  All homebuyers with adjusted gross incomes below $100,000 will be able to deduct 100% of their mortgage insurance costs. 

This is great news for home buyers who plan to put less than 20% down when they buy.  It makes the 1 loan with PMI option a more viable one… in the not so distant past, the majority of financing was being broken into 2 loans.  For instance, an 80% first, and then a higher rate 10 or 15% second mortgage BUT there was no mortgage insurance.  Home buyers should now compare this option with the 1 loan option and see what makes the most sense.