Can You Get The Lowest Mortgage Rate?

Everyone wants the lowest mortgage rate.

If you’re buying a new home or refinancing your existing mortgage loan, you want the lowest possible mortgage rate.  And why not?  So do I.

So homeowners will do their due diligence and shop around to different mortgage companies and get mortgage rate quotes in search of the lowest mortgage rate.

Here’s the problem.

The lowest mortgage rate doesn’t exist.

Let’s say you’re buying a new home and you’re scheduled to close on or before a certain date.

You have a time constraint so you can’t shop and wait around indefinitely for “the mortgage rate bottom.”

However, if you’re refinancing your existing mortgage, there is no such time constraint.  So some homeowners will wait to find the lowest mortgage rate.

Here’s the problem: finding the lowest mortgage rate is like waiting for a stock price to reach a certain price point.

It might get there and it might not.  Or it might take 3 years to get there.

If you were to look at where mortgage rates and their associated costs have been over the past 3 years – for example – there was 1 day out of the past 3 years that the “mortgage rate” was the lowest.

To try and game mortgage rates in search of the “bottom” is foolish.

Here’s what to do.  Look at current mortgage rates and their associated costs.  Ask yourself, “Is there benefit to refinance into that market mortgage rate?”

Are you lowering your mortgage rate?  Are you lowering your mortgage payment?  Are you reducing your mortgage loan term?  Are you able to recover your closing costs in a reasonable amount of time?

If there is benefit, take it and lock it in.

To “game” mortgage rates in search of the mortgage rate bottom doesn’t work because the lowest rate doesn’t exist.

While mortgage rates change and you’re waiting for that elusive mortgage rate bottom to appear, you could be saving and benefiting now.

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I do a ton of mortgage loan refinance transactions.

It seems the main item homeowners are concerned with, in addition to the mortgage rate and fees, is whether they’ll have to bring money to the mortgage refinance closing.

Most homeowners don’t want to.

If there are costs and escrows that have to be collected at the mortgage refinance closing, then most people want that money included in the mortgage loan amount.

Sometimes, however, homeowners will get a copy of the HUD-1 Settlement Statement before the mortgage refinance closing and they see they have to write a check for $500 or $950 or what ever the figure may be.

They say, “Wait a minute, why am I writing a check at closing when I wanted the money included in the mortgage loan amount?”

Here’s the answer.

There are 2 things that can change whether the homeowner has to bring money to the refinance mortgage closing and can potentially disrupt or screw up the mortgage refinance closing.

The 2 things are:  the existing mortgage payoff figure and the escrow amount that the lender is collecting.

Let me explain.

Think of the money break down in terms of credits and debits.

Let’s start with the debits.

The first debit amount  would be the mortgage refinance closing costs.  The homeowner should have a very good idea what the mortgage closing fees are going to be prior to closing.

They received a Good Faith Estimate GFE showing the lender fees, title fees, appraisal fee and government recording fees.

Those numbers provided on the Good Faith Estimate GFE should not be off by more than 10% and the lender fees have to be 100% spot on.

Remember, the mortgage broker or loan officer that provided the Good Faith Estimate is estimating “third party” fees, such as title work, appraisal, and government recording fees.

So if the GFE says the third party fees are $2000, then they cannot be off by more than $200, which is 10%.

So the mortgage refinance costs are pretty well nailed down beforehand.

The second debit is the escrows that the lender is collecting.  (This only applies if the homeowner is setting up an escrow or impound account.)

The esrows are the annual property taxes and dwelling insurance premium.  In addition, there will be prepaid interest, but this figure will depend on what day the mortgage refinance funds on.

What the mortgage closer does first is determine the annual property taxes and dwelling insurance premium amounts, then they’ll look at when the taxes and insurance are due.

Based on that information, they will collect a certain amount to fund an escrow account at the mortgage closing.

If the mortgage broker of loan officer knows what they’re doing, they can provide a reasonable approximation to the homeowner to account for this debit when the new requested mortgage loan amount is figured out.

The third debit is the old mortgage payoff amount.

This is where people get screwed up.  They believe that the mortgage balance that they see on their mortgage statement is the mortgage amount that is actually owed.

In reality, mortgage interest accrues in arrears, so the mortgage payoff is usually higher than what is shown on the mortgage statement.

To recap, the 3 debits are the mortgage closing fees, escrows collected, and existing mortgage payoff amount.

The 2 things that can screw up the mortgage refiance closing are a poor estimation or calculation of the escrow amount to be collected and the old mortgage payoff amount.

The mortgage costs are fixed, so we know what they are.

It’s the mortgage escrows and payoff that may be different than what was originally calculated.

So the 3 debits are added up and then the credit is applied.

The credit would be the new mortgage loan amount.

If the debits are larger than the credit, then the homewoner will have to bring money to the mortgage closing table.

If the credit is larger, then the homeowner will get cash back.

In conclusion, the 2 things that can screw up a mortgage refinance closing would be if the existing mortgage payoff figure and the property tax and dwelling insurance escrow figures aren’t calculated correctly when the mortgage loan application is originally taken and as a result the new requested mortgage loan amount isn’t high enough, forcing the homeowner to bring money to the mortgage closing table.

The new mortgage loan amount can be increased at to cover the difference.  However, it’s best to get the new requested mortgage loan amount correct at the outset so there are no delays or hiccups at the mortgage refinance closing.

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Are You Getting Ripped Off By Using A Mortgage Broker?

This mortgage question is always at the top of a homeowners’ mind and that is “Am I overpaying by using a mortgage broker?”

Well, here’s the answer, “It depends.”

A lot of people are under the assumption that because the mortgage broker is a middleman, they are going to pay more for the mortgage refinance.

I’m always asked “Are you a mortgage broker or a direct lender?”

I’m a direct lender. However, I’ve worked as a mortgage broker for over 10 years.

Getting back to the question about whether the homeowner is overpaying by using a mortgage broker – the answer is maybe not.

Some mortgage brokers price their mortgages very competitively.

Just because the mortgage broker “brokers” the file to a mortgage wholesale lender, doesn’t necessarily mean the home owner is getting ripped off or overpaying for the mortgage.

I talk to many homeowners who are quoted mortgage rates from the big banks.  The mortgage loan rates that their being quoted aren’t competitive.  The big banks don’t always have to be competitive.

So just because it’s a big bank that’s quoting the mortgage rate, doesn’t mean it’s going to be a competitive mortgage quote.

As a homeowner looking to refinance their mortgage loan, you want to do your due diligence.

Get a mortgage quote from a mortgage broker.  Remember, don’t rely on the mortgage quote exclusively.

Ask the mortgage broker how much they are charging in TOTAL lender fees for the mortgage rate.

When pricing a mortgage, you price on mortgage rate AND total lender fees.

Don’t get confused about whether there are “no points” on the loan.  Sometimes there amy be no points but $1500 in “lender administration” fees.

It’s the bottom line lender fee figure you want to compare.

In addition to getting a quote from a mortgage broker, get a quote from a mortgage bank as well.

Again, compare the mortgage rate and lender fees.

In conclusion, just because you’re talking to a mortgage broker doesn’t mean your getting ripped off. 

Get the mortgage rate quote and lender fee total and compare!

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If you haven’t considered refinancing your mortgage, or if you haven’t refinanced your mortgage in the last 2 years, you really ought to consider refinancing now.

The top mortgage loan types to refinance into in 2012 are as follows:

1. 10 Year Fixed Mortgage

This mortgage rate is fixed for 10 years, after which time the mortgage loan will be paid off.  The mortgage rates for the 10 year fixed are remarkably low.

This mortgage type, although having a bigger principal and interest payment because of the short mortgage term, is the cheapest mortgage loan type available.

The net effective mortgage rate is exceedingly low, you’ll save money in total mortgage interest paid, and the mortgage loan will be paid off sooner, saving you thousands of dollars in mortgage payments that you WON’T be making!

It’s definitely worth looking into refinancing into the 10 year fixed mortgage.

2. 15 Year Fixed Mortgage

If the mortgage payment for the 10 year fixed mortgage is too high or exceeds your budget, consider the 15 year fixed mortgage.

Like the 10 year fixed mortgage, the 15 year fixed mortgage is an equity builder.

Beginning with your first mortgage payment, 50% of that principal and interest payment goes to lowering the principal balance of the mortgage loan.

The mortgage rate and mortgage payment are fixed for 15 years and the mortgage loan will be paid off in 15 years!  If you can swing the mortgage payment, you want to look at refinancing into the 15 year fixed mortgage.

Oh, by the way, the mortgage rates for the 15 year fixed, like the 10 year fixed are at historic lows!

3. 30 Year Fixed Mortgage

The 30 year fixed mortgage is the old stand by.

If you plan on keeping your home for the long term and if the mortgage payment for the 15 year fixed and 10 year fixed are outside your budget, then consider refinancing into a 30 year fixed mortgage.

The mortgage rate and mortgage payment are fixed for 30 years and the mortgage rates are also at historic lows!

You can prepay against the 30 year mortgage if you want to speed up equity buildup as well, so there is mortgage payment flexibility.

4.  7/1 Adjustable Rate Mortgage ARM

The 7/1 ARM is best if you plan on keeping your home for a period less than 7 years.

If that’s the case, and you don’t want to make a higher mortgage payment with a 15 year fixed mortgage or 10 year fixed mortgage, then the 7/1 ARM is a strong refinance contender.

The mortgage rates for the 7/1 ARM are very, very low and the mortgage rate and mortgage payment are fixed for 7 years.  The mortgage loan is amortized over a 30 year period so the mortgage payment will be low. 

You won’t build up a lot of home equity, but the mortgage payment and mortgage rate will be lower than the 30 year fixed mortgage.

Depending on your goals, these 4 mortgage loan types are the mortgage loans you want to consider if you haven’t refinanced your mortgage in the last 2 years.

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Five years ago there were so many different mortgage loan types, from the conventional fixed rate mortgages, to interest only mortgages, stated income loans, loans for people with poor credit, as well as negatively amortized loans, also called Option ARMs.

We all know what happened beginning in 2007.  The mortgage industry imploded and the housing crisis was full on!

Although the housing crisis isn’t completely over, the dust is beginning to settle now.

I wanted to review the types of mortgage loans that are still available in the market place in 2012.

Let me begin by saying what mortgage or home loan types are not available to you.

I am unaware of any stated income or no income verification loans available in the mortgage marketplace.  (If you’re a mortgage broker out there and are aware of a stated income or no doc loan program, let me know.)

Also, the sub prime mortgage market has been wiped out.  If your credit scores are below 620, I’m unaware where you can get a mortgage, even through FHA.

Now the mortgage loan types that are available.

All fully documented loans.  This means you have to verify your income and assets.

There are the 30 year, 25 year, 20, 15 year and 10 year fixed mortgages.  I’m unaware of any conventional mortgage types that have a shorter amortization period than 10 years.

There are the traditional adjustable rate mortgage, also called ARMs.

There are the 10/1, 7/1, 5/1, and 3/1 ARMS.

Someone the other day told me about a 5/5 ARM.

With this mortgage, the start rate is fixed for 5 years, then adjusts according to the index and margin, then is fixed for another 5 years, unlike a traditional 5/1 ARM, where the rate can adjust once a year after the initial 5 years is up.

I’m not aware of any 6 month or 1 month LIBOR ARMs available.

There are interest only mortgages still available; however, your credit has to be very good and you need 24 months principal, interest, taxes and insurance PITI saved as reserves.

Finally, FHA, USDA, and VA still offer fixed rate and adjustable rate mortgages.

So, in conclusion, the mortgage loan types that are available have scaled back considerably over the past 5 years.

However, as long as you can verify your income and your credit is good, you do have access to the full range of fixed rate and adjustable rate mortgages in the mortgage marketplace.

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Is Your Mortgage Rate Higher If You Do A Cash Out Refinance?

This mortgage question I get a lot from homeowners who are considering taking cash out of their home while refinancing – also known as a cash out refinance.

They want to know if the mortgage rate is higher for a cash out refinance.

The answer is “it depends.”

Like many answers about the mortgage process and mortgages in general, the answer isn’t always black or white, which is frustrating to a lot of homeowners.

The mortgage rate isn’t necessarily higher for a cash out refinance; however, the cost to get the mortgage rate may increase.

The reason why there is a qualifier in the answer is because the mortgage answer also depends on the loan to value LTV ratio.

If you’re doing a cash out refinance and if the loan to value ratio LTV is below 60%, there will be no difference in mortgage rate and mortgage lender fees.

If the loan to value LTV ratio is higher than 60%, then the cost to get the mortgage rate may increase, although the mortgage rate will still be the same.  (I’m trying not to be confusing!)

If the loan to value ratio is above 80%, then you’ll see the mortgage rate increase.

The reason is because taking cash out is seen as a greater risk to the mortgage investor, and as a result, there is a premium that the borrower may have to pay to take the cash out.

Now, if the homeowner is consolidating a first mortgage and a home equity line of credit that was put on at the time of home purchase, the refinance transaction will be priced as a rate and term or no cash out refinance.

This applies if the homeowner hasn’t drawn more than $2000 from the line of credit within the past 12 months.

If the homeowner is consolidating a home equity line of credit, also known as a HELOC, and a first mortgage, and the home equity line of credit was put on after the home was purchased, the transaction becomes a cash out refinance and the mortgage rate or cost to get the mortgage rate may be different.

In conclusion, is the mortgage rate higher if you’re doing a cash out refinance?

Not always, it just depends on the loan to value ratio.

The cost to get the mortgage rate may be more expensive if you’re doing a cash out refinance, however.

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Is A 7/1 ARM Better Than A 5/1 ARM?

When you’ve decided that an adjustable rate mortgage ARM makes sense for you, the next question is what type of adjustable rate mortgage ARM is best.

Naturally, you’re going to first consider how long you plan on keeping the home and then decide how tolerant you are of risk.

If you’re thinking that 5 to 7 years is your hold time for the mortgage, you then want to look at the mortgage rates for the 5/1 ARM and 7/1 ARM.

Assuming the lender fees for both mortgage types are the same, you want to look at and compare the mortgage rates.

You’ll notice that the mortgage rates and mortgage payments for the 5/1 ARM are going to be slightly lower than the mortgage rates and mortgage payments for the 7/1 ARM.

Don’t be lured by the siren of the low rate.

Strongly consider your mortgage hold time.  If it’s possible you can keep the mortgage beyond 5 years, it would make sense to pay the higher premium and take a slightly higher mortgage rate.

See the difference in monthly mortgage payment.

If there is a .25% or .375% difference in mortgage rate, the mortgage payment difference isn’t going to be dramatic, unless the loan amount is very large.

In my opinion, if you’re uncertain whether your mortgage hold time is 5 or 7 years, it makes more sense to take the slightly higher mortgage rate and mortgage payment with the 7/1 adjustable rate mortgage and be protected for the additional 2 years.

The ARM cap structure for the 5/1 and 7/1 ARMs is most commonly a 5/2/5 cap structure, which means that your mortgage rate can increase 5% after the first adjustment.

So after the 60th month on a 5/1 ARM, your mortgage rate can increase 5% over the mortgage rate you had for the first 5 years.

Given this, it would make more sense to secure the mortgage rate and mortgage payment for the additional 2 years and go with the 7/1 ARM.

In conclusion, if you’re unclear about your mortgage hold time and it can be around 5 to 7 years and as long as the mortgage rate and mortgage payment difference isn’t significant, it makes more sense to secure the 7 year fixed ARM and be safe.

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I get this mortgage question every now and then.

Here is ie: “when does it make sense to take out an adjustable rate mortgage?”

First, what is an adjustable rate mortgage also known as an ARM?

An adjustable rate mortgage ARM has a mortgage rate that is fixed for a certain amount of time, like 3 , 5 , 7 or 10 years after which time the mortgage rate and mortgage payment can change.

Note well that when the mortgage rate changes, the mortgage payment will change.

It makes sense to take out an adjustable rate mortgage ARM when you know that you’re going to hold the mortgage for a limited and short amount of time.

For example, if you know that you’ll only be keeping the home or mortgage for 5 years, then a 5 year or 7 year adjustable rate mortgage ARM would make sense.

The adjustable rate mortgage rate will be lower than the 30 year fixed mortgage rate.  The mortgage payment will be lower than a shorter term fixed mortgage, like a 15 year fixed or 10 year fixed mortgage.

If you’re interested in an adjustable rate mortgage ARM, you know your hold time is limited to a relatively short amount of time.

Your main goal is to keep the mortgage rate and mortgage payment low.

You’re not focused on building up home equity as you’re only holding the home for a short period of time.

In conclusion, it makes sense to take out an adjustable rate mortgage ARM when you know you’ll only be owning the home for a short period of time, you’re ok with some risk, and you know that by taking a out an adjustable rate mortgage you won’t be building home equity as fast as you would if the mortgage were a short term fixed mortgage like a 15 year or 10 year fixed mortgage.

Finally, if you do take out an adjustable rate mortgage, you want to keep your mortgage closing costs as low as you can, which means you don’t want to pay mortgage discount points to buy the mortgage rate down as your mortgage rate may change before you recover your upfront discount points!

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This mortgage question I get from time to time.

I got a call from a homeowner who was about to close on her mortgage refinance transaction.

She was looking at her HUD-1 Settlement statement and noticed that the mortgage company was collecting prepaid interest for 11 days.

At $37.52 per day, this amounted to $412.72.

She also noticed from the old mortgage payoff date that her old mortgage company was collecting a balance from a date about 12 days from when her new mortgage funded.

I think her new mortgage funds on January  19 but her mortgage company was collecting money through Feb 4.

She asked me,”Why am I paying prepaid mortgage interest from January 19th through January 30th and also paying my old mortgage company per diem mortgage interest through February 4th when they get paid off on January 19?”

Great mortgage question.

She believed the mortgage company was stealing her money.

Here’s the answer.

She paid prepaid interest from the time her new mortgage funded, which is January 19th through January 30th.

She won’t have a mortgage payment in February.

Her first mortgage payment is due March 1 as all mortgage payments are applied in arrears.

I explained that when the title company ordered the mortgage payoff for her existing mortgage, they don’t know exactly when the new mortgage will fund.

So the title company will request a mortgage payoff for a few weeks beyond what the target mortgage fund date is estimated to be.

They do this in the event there is a clich in the mortgage underwriting process and the mortgage closing is delayed and closes after the payoff date.  If this were to happen, the title company would have to order a new mortgage payoff, which would delay the mortgage closing even more.

What’s happening is that the old mortgage company is collecting 15 days of extra mortgage pre diem interest from her.

I think this amounted to around $550.

I explained that that money is hers and that the old mortgage company will refund any overage to her.

As the old mortgage company was fully paid on January 19, they’re not entitled to any mortgage payments or mortgage interest beyond that date.

Since they collected beyond that date, the difference between the fund date and the mortgage payoff date would be refunded to the borrower.

In conclusion, your mortgage company isn’t stealing from you if they collect more than what is owed to them.

If they do collect more than what is owed (which is common for mortgage refinance transactions), they will refund you the difference.

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Does It Make Sense To Prepay Your Mortgage?

I get this mortgage question a lot: “does it make sense to prepay my mortgage?’

The answer  is “yes.”  However, see my caveat at the end of this post.

If you can afford to prepay your mortgage – and by prepay – I mean pay more than the minimum monthly mortgage payment, do it.

Just make sure that extra mortgage payment is applied to lowering the mortgage principal and not routed into your escrow account.

Some of the benefits of prepaying your mortgage are that it lowers your net effective mortgage interest rate, lowers the amount of interest you’ll pay over the life of the loan, and save you in the back end by having your mortgage pay off early and as a result, you won’t be making mortgage payments.

Those mortgage payments that you won’t be making on the back end you could be saving.

If you really want to super charge and accelerate the payoff of your mortgage, then refinance into a shorter term mortgage, like a 20, 15 year fixed or 10 year fixed mortgage.

Your mortgage payment will go up; however, if you can swing that payment and add extra towards principal reduction, you’ll pay the mortgage off even sooner, enjoying the benefit of lowering the net effective mortgage interest rate, saving money in mortgage interest payments you’ll be making and pay your mortgage off sooner, saving even more money.

Now here’s my caveat.

You don’t want to prepay your mortgage if you could otherwise be saving that money you’ll be applying to principal reduction if your existing cash savings is limited.

You want to have a least 6 months of monthly income saved in the event of an emergency.

So if your savings is limited and you can afford to apply $300 per month – for example – to principal reduction, I would argue it would make more sense to take that $300 and save it.

Build up a cash nest egg.  Cash is king!

Your home equity isn’t liquid and you have to be qualified by a bank to turn it into cash!

In conclusion, does it make sense to prepay your mortgage?

Yes, if you have cash savings, take extra money and apply it to principal reduction.

Or refinance into a shorter term mortgage – like a 15 year fixed or 10 year fixed - and continue to prepay the mortgage.

If you don’t have any savings, it would make more sense to take that extra cash and save it.

Build the nest egg first, then apply the extra cash to prepay the mortgage.

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