What You Don't Know Can Cost You

Roger Schlesinger
Posted: Jan 20, 2009 9:50 AM
What You Don't Know Can Cost You

You don't have to check the calendar, the television, or the weather to see how things have changed. You only need to apply for a mortgage loan and VOILA, it will hit you smack in the face. Someone said pre-warned is pre-armed, so conside yourself "set for combat."

There are - and basically always have been - two catagories of loans: conforming and jumbo.

When we had a united group of states, it was the same for everyone. Then came Alaska and Hawaii, where it was the same for everyone on the mainland and different for Alaska and Hawaii (and to be technically correct, Guam and the Virgin Islands). Now it isn't the same for everyone in any given state, or at least in 21 of the 50 states. Those 21 states are the ones that have counties raised to the high cost limits or Hawaii and Alaska, $625,500. Just to complete the confunsion, four counties in Hawaii now have limits raised to over $700,000 for a single family residence.

I am going to try to explain the new rules, which could change before the proverbial ink dries, so you won't have a misconception of whether a loan is available for you or not.

The first (and maybe last) universal statement is: stated loans do not exist for either conforming or jumbo. There are some small exceptions which will not add anything to this discussion. There are also private lenders who will look only to the property and will charge a number of points and high interest rates as well, but we aren't discussing the off shoots of the industry.

Jumbo loans are now relegated, for the most part, to arms which are fixed for 3, 5, 7 or 10 years before becoming variables for the balance of the loan. They are at much lower loan to values than you would have gotten in the past and much more difficult to achieve as the conditions are both mindless and endless. If you have a forgiving personality, plenty of time and patience, you are a candidate for a jumbo loan. If not, just wait until the jumbo industry actually returns. The rates on the jumbo arms are generally in the 5% range to low 6% range with a point cost, or a much higher rate if you do not wish to pay the point. Loan to values are as low as 50%, although they generally start at 75% loan to value. As the loan size increases, the LTV falls quickly. Minimum credit scores are usually 650 for employed borrower minimum and 700 for self employed.

Conforming loans are much different. The rates, at this writing, for 10, 15, 20 and 30 year fixed loans are in the 4% range with a point cost. Without points the rates are in the high 4% to low 5% which are generally 1/2% higher than the rates you get paying the point. This, of course, doesn't make any sense because one point up front is far superior to a 1/2% higher in rate for the life of the loan. You now have the opportunity to refinance for life because of the historical low interest rates and be sure to plan for the future when you make up your mind on the loan and interest rate you wish.

People with 30 year fixed, existing loans can refinance to a new 30 year without starting over if they keep paying the old loan payment when they take the new loan. You will pay your loan off much quicker than if you don't refinance. Those with interest only loans can switch to a fixed loan and even take cash out for reserves or other reasons and find something very unusual. You most likely will have a higher monthly payment because your loan is larger, even though the rate is much lower (4% range). What you may find, however, is that your interest payment will be lower and you will be amortizing (paying down your mortgage) with the rest of the payment. This means you are paying less for your loan (interest) than you were and the cash you pulled out isn't costing you anything.

Many borrowers are now able to take their current loan and sharply reduce their amortization, moving from a 30 year to a 20 year fixed or even a 15 year fixed and making a lower payment. Low interest rates mean less interest and thus significantly lower payments which allow for shorter times to pay off the loan.

Fannie Mae and Freddie Mac are now under the government and as we know the government is good at one thing: taxing all of us. Therefore you must realize that we have new charges for these loans. All loans that are amortized over a period greater than 15 years have a charge for doing the loan. This charge depends on loan to value and credit score. High credit scores (generally over 740) and low loan to values (60% or lower) do not have these costs. When you go up from 60% and down from a 740 credit score the costs appear and increase as the loan to value increase and the credit score decreases.

The following is a list of the other costs associated with Fannie & Freddie's conforming loans:

1. Cash out: Becomes expensive at 75% loan to value and/or at a 679 credit score, or less.

2. Units: 2 to 4 units for any use, rental or owner occupied, cost 1% (point.)

3. Rentals: Loan to values up to 75% cost 1.75%; over 75% cost 3 points.

4. No impounds for taxes and insurance (escrows) cost 1/4% in most states (some states are exempt from this charge even if you don't take impounds).

All of the charges from the simple loan charge to the impounds are cumulative. There can be as little as zero or a 1/4% in additional fees up to 3 to 6 or 7% of the loan in additional fees. These costs are also added to the costs to buy down the interest rate with a point or more if you wish to lower the rate even further.

This column is getting too long and I am only warming up. There will be a second and maybe third column that will continue with the discussion. As per usual the pendulum has swung too far in one direction and people are being hurt,but hopefully it will stop going in the current direction and head back to the middle.