Unusual Spread in Pricing Mortgage Rates
I first noticed the spread in the conforming jumbo/high balance markets…it’s currently impacting conforming loans, too. Typically the difference between paying a point or not paying a point has been about 0.25% to interest rate. For example, if 5.500 is at 0 points, then paying 1 point (1 percent of the loan amount) would buy the rate down to 5.250%. Currently, this is not the case…the spread is significant.
At this moment, a 30 year fixed rate purchase at $400,000 loan amount, 80% loan to value and 720-739 credit scores, I would quote the following for a 35 day closing:
- 5.000% @ 1 point (apr 5.138) ~ $4000 in orig/discount fee for $2,147.29 PITI
- 5.250% @ 0.5 point (apr 5.345) ~ $2000 in fee for $2,208.81 PITI
- 5.750% @ 0 points (apr 5.803) ~ $0 in orig/discount fee for $2,334.29 PITI
Would you pay a point to save $187 a month? You’ll break even in 21 months on the cost (based on this example). Before this huge spread when 1 point bought you 0.25 in rate, it takes just over 5 years to break even on this cost. A point is looking like a bargain!
Why such a difference now with pricing? There’s plenty of speculation in the Mortgage Originator community. Including that banks/lenders are not wanting LO’s to have the ability to price mortgages where it’s make sense to do a no cost refi at this time only to have the mortgages easily refinanced when/if rates drop further. There’s no skin in the game for the home owner to refi again if they didn’t pay for the refi. This is actually in some ways protecting Mortgage Originators as most lenders have a “recapture fee” if a mortgage is paid off earlier than the lender expected (after receiving 2-6 mortgage payments, for example)…although I’m sure most would rather chance it and have the zero cost refinance now! 
Some mortgage brokers are grumbling that this is an attempt to eliminate YSP (the rebate that is paid on the back end of a transaction, often used to help pay closing costs or compensate the LO if the mortgage is priced without origination fees). However I understand this is impacting mortgage brokers, mortgage bankers and correspondent lenders.
There’s also an usual difference between some rates at 30 day locks and 45 day locks. Here’s an example from one rate sheet I’m looking at:
- 5.500% 30 day lock vs. 45 day lock = 0.215% difference in fee.
- 6.000% 30 day lock vs. 45 day lock = 0.512% difference in fee.
Note: with locks, your loan needs to close before the lock period is over in order to avoid paying an extenstion fee (which are also more costly than they used to be, which is why it’s important to price your loan correctly to begin with).
Facinating times, for sure!
About the Author: Rhonda Porter
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I think you nailed it!! the banks are tired of eating ysp to refis
Could be a good time for Sellers to offer to pay a point since it buys way more for your buck these days.
interesting.
I assume it’s not linear, but what does 2pts do for you?
…and is there a difference in purchase vs refi?
Makes sense. If we’re turning back time to when mortgage lending had a sounder basis…the norm was 3 points.
biliruben, rate term refi and purchase would be the same at that loan to value/loan amount. Credit scores 740 and higher or below 720 would have different rates/cost.
2 points (based on the above scenario) would be 4.75% (apr 4.974)…only the typical 0.25% gap between 1 point and 2.
In this market, getting a seller to pay the point(s) would be relatively easy, and per IRS, points paid by the seller are deductible by the buyer. In the year of purchase for origination points and over the life of the loan for disount points, as I recall. (check with your accountant)
Ardell, are you seeing Sellers offering more towards closing costs/points?
I’m trying to price out a refi right now and the spread between 45 days and 30 days along w/little no rebate being available convinces me that bank/lenders are not wanting refis…they don’t want to be hanging out to have LO’s not honor lock commitments.
Are they counting on Obama to follow through with what the media and our officials have leaked with the (teaser) low rates?
Rhonda:
I’ve been noticing this phenomena for several months. In the past, I often did no-cost refis (paying for closing costs with the rebate).
With current pricing, they do not make much sense.
Dividing the points paid by the PITI differential is incorrect to calculate the break even point.
The break even point calculation includes the following points, monthly payments, investment rate, tax treatment, and principal reduction. If we skip the opportunity cost investment rate and tax treatment we are left with the principal reduction. In this example, the break even occurs in month 17.
Rhonda,
Sorry, didn’t see that Question #8. Recently – Camwest – doing 10% financing and buying the 1st mortgage way down as to rate. I don’t want to quote the numbers here, as it may be different from one buyer to the next, depending on the house and the negotiations. These were in the Jumbo price range.
Michael,
Doesn’t seem appropriate for someone in Rhonda’s field to use that method. They don’t factor in tax benefit in APR, and being parallel as to method is likely more expected from a residential home buyer. Though I agree for commercial real estate and investors, their accountant would use your method, not the average home buyer.
To really factor in tax benefit, you have to factor in the tax benefit of the borrower, which would be different from one borrower to the next. For a blog post…Rhonda’s method is more accurate.
Can you imagine a lender saying the “effective interest rate is 3.5%” and then at closing when the “real” rate appears, saying “oh, I was adjusting for tax benefit”. Would look pretty scammy.
Stick to your method, Rhonda, it’s more “transparent”
Michael, I like to offer a method that anyone can quickly (and easily) figure out. I believe we had this discussion before (about a year ago) where you wound up providing an excel spread sheet. I prefer a method where consumers can use a calculator (any) or even a piece of scratch paper.
Thanks, Ardell! Merry Christmas to all!
Rhonda
I noticed this too. In fact, I had a client get mad at me because I had him locked at 5.25% with about $1000 in closing costs. he decided he wanted a no cost refi and wanted me to bump the rate to 5.375%. In most circumstances I could do it with no problem. In this case, the YSP difference between 5.25% and 5.375% was $125 bucks total. 5.25 was paying about 1.210 and 5.375% at the same lender was paying 1.25.
It is almost impossible to do no cost refis on smaller loans at competitive rates due to the pricing. Folks like Lennox Financial are going to be screwed advertising no cost refi’s right now. It ain’t a big no brainer anymore. lol
I believe the banks are trying to protect themselves from early payoffs as they believe there is a high potential for rates to come down lower. With no skin in the game, consumers will refinance again if they can.
Merry Christmas to you and yours, Rhonda!
Ardell,
I have no idea what you are talking about as my post didn’t say anything about APR or effective interest. I was commenting on break even point. Since you brought it up I’ll comment. Tax treatment isn’t taken into account when calculating APR or effective interest rate because tax treatment has nothing to do with APR or effective interest rate. Effective interest rate and APR are essentially calculated the same way. APR is the finance (lending industry) term for the finance (academic discipline) concept of effective interest rate.
Financial analysis is financial analysis and it doesn’t change. The formulas are the same for residential, commercial, stocks, bonds, franchises. It is appropriate for a lender to use that method I described because that is the correct method and the method taught in business school. Any financial analysis requires accounting for all necessary cash flows. Failing to account for all the cash flows results incorrect answers which can lead to incorrect decisions. It isn’t a matter of opinion. Rhonda’s method is not appropriate as it leaves out the principal loan reduction and fails fundamental finance theory. Her method is widely used in the lending industry, but that doesn’t make it correct. Preaching 2 + 4 = 5 doesn’t make it so. I left out the borrower specifics such as tax treatment to generalize and the result is 17 months. Rhonda’s answer misses the mark by 4 months or about 25%.
Sticking to the incorrect “transparent” method failing to account for all necessary cash flows is the same as calculating APR or effective interest rate without accounting for points. It is incorrect.
Rhonda,
I understand you are trying to make it easy, but it is still incorrect and in this instance it is incorrect to 25%. Short cuts in math lead to wrong answers. A year ago we had the discussion regarding the need to account for all the necessary cash flows to correctly evaluate a rent vs buy scenario.
Michael,
Here’s the simple math of it:
1 point = 5%
0 points = 5.75%
$500,000 loan at one point costs $5,000 for the point and the monthly payment is $2,684.11
Same loan with zero points would be a payment of $2,917.86
$2,917.86 minus $2,684.11 = $233.75 difference per month
Cost of $5,000 for the point divided by $233.75 equals 21.39 months.
Pretty simple stuff.
Couple that with the fact that anyone who is NOT planning to be in their house for at least two years, should not likely be buying a house at all right now, and the homebuyer has a quick and simple answer to “why pay a point to buy down the rate?”.
It really IS that simple for most people, Michael. You don’t apply after tax consequence to the point paid, if you are not going to do the same to the payment itself. That would not be “parallel construction” of the equation.
As Rhonda said, most people can do this with a pencil and paper and maybe a calculator. Life really can be simple enough for people to make reasonable choices.
The complex version would require the lender to know the extent of a borrowers other deductions. That is generally not practical in the world of residential mortgage lending.
To add to your message, Ardell, I think it’s a fine line when Mortgage Originator’s morph over into tax and financial planning. Yes, your mortgage is part of one’s financial plan…and knowing a borrower’s financial goals is very helpful so LO’s can help provide useful advice.
I sort of agree with both sides of this argument, and think the best answer is to tell people that there are tax consequences to paying points and interest, and refer them to their tax adviser to determine the effect of those tax consequences.
I haven’t studied or practiced tax for over 20 years, but I can see a lot of complicating factors here. For example, I believe that often the points themselves are a deduction in the year of purchase, so the $4,000 in points might be $3,000 assuming a 25% marginal tax rate. But if the house purchase was near the end of the year, with no prior house or mortgage debt, the buyer might not be able to itemize. So on a purchase, it’s possible that the tax treatment of paying the points could greatly reduce the payoff period, but it also might not. On a refinance, on the other hand, you’re most likely not looking at any significant deduction from paying points.
But the tax treatment can also extend the payoff. For example, assuming a 25% tax bracket, the monthly savings would only be about $120 a month net of taxes, not $187 a month (at least after the first tax year).
Also, I’m somewhat surprised by the differences I’m seeing when I run the numbers, but seemingly the principal reduction is much faster at the lower rate. That is not dependent on tax treatment, so I don’t see any reason to not take that into account. If I’m running the numbers right, at two years it’s approximately $1,500 less. That too would shorten the payoff. I don’t see any reason why what wouldn’t be mentioned by a mortgage person when discussing points.
Let’s just look at those factors, and ignore things like income on money invested from the savings. If the points could be deducted, then the net payment would be only $3,000, and the savings per month would be $120 per month or $2,880 after 24 months. But the balance owed on the loan would be $1,500 less, so the break even point would have been much earlier than 24 months. If on the other hand the points couldn’t be deducted, and maybe the first 3 months of interest, then you’d be comparing paying $4,000 to $3,081 in net of tax savings in payments after 24 months, but you’d still have the $1,500 less owing on the loan, so again you would break even before 24 months.
Which gets me back to my original point of referring people out to their tax adviser. One thing I don’t like about mortgage people giving tax advise is they often over-simplify it, or don’t account for individual circumstances. For example, if you pay $20,000 of interest and have a 25% tax bracket, that is not paying only $15,000 of interest after taxes, because not all of that interest paid results in a tax benefit. (On the other hand, the savings we discussed above would be at a 25% savings, except for perhaps the payments made the first tax year of the loan). On the other hand, not everyone has a tax adviser, especially in this day of Turbotax.
“But if the house purchase was near the end of the year, with no prior house or mortgage debt, the buyer might not be able to itemize.”
Kary,
I pulled that out for emphasis to readers. There was a time when accountants advised first time buyers to close as early as possible in a year for this reason. The cut-off was June 30. Not as relevant for people who are both selling and buying, as for 1st time buyers.
Here’s a link to deducting points…clear as mud though
http://www.irs.gov/taxtopics/tc504.html
Primary issues being can you deduct the points in the year paid, or do you have to spread them over the life of the loan. If you spread them over the life of the loan, then do you deduct the balance in the year of sale. The limitations on the buyer deducting points paid by the seller, depending on how much money the buyer brought to the table, etc…
Hindsight will not be of much guidance if most lenders up the points on most loans, as a requirement of the loan, since deductibility is attached to the area “norm”. If that norm changes, so does the tax treatment.
Still, a first time buyer closing in December and paying points, is almost never as good as closing after the first of the year.
Think of “discount points” or “buydown points” as non-refundable pre-paid interest.
The discussion being, why are lenders making it more attractive to do this, and at what point does the borrower benefit if they choose this route. There is a point at which it benefits the lender more, and a point at which it benefits the borrower more, and there is a “break-even point” where neither party benefitted (21.39 months into the loan in the example).
One thing’s for sure, if lenders are making it more attractive for the borrower to pay points up front, it’s a sure sign that they are banking on interest rates getting lower than they are now. So understanding and studying the spread, and keeping track of when it narrows back again, will give you a clue about where interest rates are likely heading.
Even if you aren’t thinking about whether or not to pay points, studying the spread will tell you a lot about whether or not you should wait for rates to go down. When lenders make it less worthwhile to buy down the rate…that’s the same as their saying they think current rates are hitting bottom. Doesn’t mean they are right; but it’s a signal worth noting.
Ardell,
Yes, that is simple. The formula is simply wrong.
Would you calculate the APR or effective interest rate for 5% @ 1 point leaving out the points? No, the math is wrong and leaves out a key component which leads to a misleading answer and violates finance fundamentals. Why would you leave out a key component in the break even point analysis? You wouldn’t because the math is wrong and violates finance fundamentals. The formula is incorrect because if fails to property account for all cash flows.
The correct formula is more a lot more complicated. This has nothing to do with tax planning or financial planning. I’ll summarize key points and I’ll leave out tax treatment to make the break even point analysis generic. The break even point month is the month in which the higher cost loan becomes the lower cost loan.
5% @ 1 point
Total cost for 17 months is $32,055 = $36,504 principal and interest + $4,000 points – $8,449 principal reduction.
5.75% @ 0 points
Total cost for 17 months is $32,305 = $36,504 principal and interest + $0 points – $7,379 principal reduction.
The total costs will never equal. Month 17 is when they are closest to each other and that is the break even point.
Michael,
It depends on how you view the role of lender and agent. Neither should attempt to replace the need for a lawyer or an accountant.
When the answer is obvious, using simple math, no need to check further. The agent and lender role is to make sure the borrower is focusing on the key aspects, and then pass off to the ancillary professionals WHEN NEEDED, not always. Increasing the client’s costs unnecessarily is not in the client’s best interest.
Example: If a seller wants to price a house too high, you have to point out that even if a buyer is found who is willing to pay that price, RED FLAG, the property may not appraise. If the agent can’t support that price with comps, neither will the appraiser.
Determining that does not replace the need for an appraiser, if and when the situation arrises, it simply gives good advices from agent to client on the broader parameters involved.
Sharpening the pencil too finely, might cause the borrower to rely on the agent or lender opinion, vs. seeking the appropriate advises from their accountant. There is a point of going too far…
Another example:
You look at a house when you are listing it and the roof looks iffy. You ask the seller how old the roof is and they say 23 years, but it’s not leaking. You advise the seller that it is highly likely in this market that the buyer may want a new roof, the lender may want a new roof, and the inspector will likely call for a new roof. You don’t go up on the roof and in the attic, as the agent, and you do not need to do that to put up the appropriate RED FLAGS for your client.
There is no way for anyone to do the calculation of points accurately, without making some general assumptions. The borrower could change jobs, have more medical expenses or other outside deductions in year 2, many unknown factors no matter how complicated you make the equations. The IRS could come back and challenge deducting the points in the year of purchase, and throw the whole equation out of whack. There is no way to do this calculation “accurately”, as it involves future events not yet in play.
Still, a lender and an agent can be very helpful in assisting a buyer in determining whether or not buying down the rate is of value. Very often that decision involves personal issues MORE SO than the financial aspects. The propensity for household income to increase or decrease, for example. It’s not all about the math.
Say a couple has a working wife and lots of cash, but they are buying a house so that they can start having children, and wife intends to stop working after having a baby. Then buying down the rate is about spending money in hand today, and reducing the long term payment, so they can more readily afford the payment when the wife quits working.
An agent is an extension of the client…helping them make the best decisions ALL things considered. Residential real estate and commerical real estate have very different “issues” to consider. That you primarily work in commercial real estate (or so you have said) will give you a different outlook. Using that different outlook to suggest the Rhonda is wrong or I am wrong, well…let’s just say it does not appear to be of value to the most people.
The simple answers offer great value to many people. The “complex” answers tend to suggest that people NEED to hire “professionals”, many and more of them…and always. As if every homebuyer needs a huge team of people behind them like that Verizon commercial. A lawyer, an accountant, an agent, an inspector, a lender, a soil specialist, a surveyer…the list could go on and on ad finitum. But as Kary said, how many people bring the accountant to the house? Being off by $50 on the point calculation is a whole lot better than being $10,000 off on the repairs needed within that same 21.39 month period.
Sharpening the pencil…is not nearly as important as engaging the brain and wrapping it around many and more issues, vs. OCDing in the nebulous minutiae.
another purpose for the simple “break even” calculations is for consumers to determine whether or not they should refi. 9 out of 10 LO’s may tell a homeowner that it’s a great time and rates are at a record low…yadda yadda…. a home owner needs to quickly determine how much time it will approx. take to break even on closing costs–points or not points (non-reoccuring/excluding the prepaids, taxes & insurance).
Michael’s formula:
“5% @ 1 point
Total cost for 17 months is $32,055 = $36,504 principal and interest + $4,000 points – $8,449 principal reduction.
5.75% @ 0 points
Total cost for 17 months is $32,305 = $36,504 principal and interest + $0 points – $7,379 principal reduction.”
I think you have a typo in there in that the 0 points should be $39,683 in P&I.
Also, I know you’re trying to keep it simple, but leaving out the tax consequences could be significant.
Ardell,
The break even point formula remains unchanged whether it is residential, commercial, homeowner, investor, corporation, LLC. The type of real estate is irrelevant. They type of owner is irrelevant. The math doesn’t change. It has nothing to do with being too detailed or hiring teams of people. It is black and white. There is a correct way to calculate the break event point. You version provides the wrong answer. It is off by 25%.
Michael,
Read my new post. You are not in my Tribe
and this is not my post.
Ciao!
I’d like to thank you, Ardell, for trying to help me keep this post on subject which was about the unusual spread in pricing… it seems that every post I do which may include the topic of points, Michael likes to interject his calculations. While the information is good, it may not be “street useful” for many.
Just entering “mortgage points calculator” into Google (without quotes) obtains a number of Internet sites that will do the calculation. The second one I looked at took taxes and savings interest into account. It also lets you choose whether you pay the points or borrow them.
http://www.decisionaide.com/mpcalculators/FRMBreakEvenCalculator/FRMBreakEven.asp
Using a .25 tax rate and .5% savings rate, the break even point on the assumed facts was 17 months.
Kary and Michael,
worse case scenario, a home owner may be better off using the simple method which would have them breaking even at 21 months (comment 18) than your examples of 17 months. I’d rather have a homeowner really consider if they’re going to retain the mortgage that long and error on the longer time span…we’re talking of a difference of 4 months!
Again, the intent of this post was about rebate pricing is off the shelf right now (essentially). If you want to beat up breaking even on points, you can visit the post I did here “What’s the Point” where you can see line by line, pretty much the same debate between Michael and I.
Kary might have jumped in too. If you Gentlemen do visit that post and carry on the conversation there, don’t forget to factor in whether or not the point financed (loan amount increased) which will also impact you calculations.
Cheers.
Kari, Good catch.
5.75% @ 0 points
Total cost for 17 months is $32,305 = $39,683 principal and interest + $0 points – $7,379 principal reduction.
Yes, tax treatment is important. The general calculation is well general. Tax treatment would need to be taken into account on an individual basis. This is similar to the general return on capital and the more specific after tax return on capital.
I think this web site is the best for providing the correct answers to just about any lending question. The answers are the same as the long hand pencil paper HP calculator answer Excel spreadsheet answers.
http://www.mtgprofessor.com/calculatorsOriginalMenu.htm
The user doesn’t have to understand finance fundamentals to use it. You won’t need attorneys, accountants, financial planners, or teams of experts. The author is a retired finance professor from Wharton. He is an expert on finance the discipline and lending. Here is the break even calculator.
http://www.mtgprofessor.com/mpcalculators/FRMBreakEvenCalculator/FRMBreakEven.asp
WA’s own Charles Freedenberg owns Decisionaide. Decisionaide is the calculation engine for Professor Guttentag’s website. both websites are great.
Rhonda, this is not my calculation. This is fundamental finance taught to students enrolled in an undergraduate business schools. How is a wrong answer “street useful”?
I don’t see how possibly making the wrong decision based on the wrong result makes someone better off. Also, I don’t see how the “simpler method” is easier than finding an Internet site off of Google (especially where that site can factor in whether you finance the points–in which case the break even point is apparently 24 months).
But you’re right the topic is a hijack since the piece was looking at the wider spread more from a cause/effect angle, rather than a decision making angle. My only thought on that is perhaps it’s viewed as an alternative to a pre-payment penalty. If the loan is paid off quickly, they effectively get something less than 1%.
Guys, I’d like to say “I’d love to debate this with you more…” but that’s just not the case. You’re both entirely missing the point of providing quick simple information to consumers like Ardell’s post about “Joe” a while back… Michael, I’d say a majority of my clients did not attend finance courses in an undergraduate business school…with that said, I’ve also worked with finance directors at major companies who, when it came to their personal mortgage, where (to my surprise) overwhelmed…I’m guessing because of the emotion involved with the transaction. They appreciated working with me because of how I simplied the terms to make things easier to understand.
We are all essentially discussing the same issue of breaking even and the importance of understanding that one should break even on cost at a certain point. We’re both using different formula’s to explain it.
What’s important is that consumers start somewhere and consider the cost involved with the mortgage (including closing costs–not just points). There’s nothing wrong with using a quick calculation to come up w/a ball park figure–if one needs to fine tune it to narrow it down further, that’s fine too.
Well, the debate is somewhat pointless if the spread is .75. The result being 24 months, 21 months or 17 months doesn’t really matter. At any of those numbers you are likely to do it, and if not, you’re probably not going to change your mind based on any one of those numbers being the result.
If the spread is only .25 then the difference in calculation methods is over one year (barely over 4 with the Internet site compared to over 5 for the simple method). That wider difference would be more likely to make a difference in the decision, but that’s apparently not the situation we’re in right now.
BTW, even with the Internet site I’d again recommend referring the people out to their own tax adviser, because the Internet site does seem to assume the items will be deductible, and they might not be.
Kary: BINGO!
BTW, one of the places this might have application is where you have either a difficult seller and/or a buyer in love with the property but with limited means. The seller paying a point might make all the difference. In the past I’ve not been a big fan of such schemes (from the buyer’s point of view), but where the payoff to the buyer is shorter because of the greater interest rate reduction, it makes more sense. Note, however, that the payoff there will not be less than 2 years. In that type of a situation the buyer could borrow almost $435,000 with the same monthly payment. If they went that high it would take forever to break even. A buyer certainly wouldn’t want to do that simply because they could. But some lesser number might be acceptable.
Interesting, that folks believe the post was hijacked. Rhonda brought up break even point in her post. Rhonda opened the door for comments.
A 25% miss from being correct may not seem like a lot. As the cost of buying down the interest rate increases, the percentage of wrong increases when using the simple street useful formula.
Rhonda, do you believe 5% @2% and 5.75% @0% is reasonable at some point in time?
The answer is 21.39
Merry Christmas Michael. As my mother would say, stop being what they call you.
Hijack might be too strong of a term, but clearly the article wasn’t a “How To Decide Whether to Pay Points” piece. Maybe “sidetrack” would be a better term.
This piece is actually the type of article I come here for. As an agent it’s impossible to notice everything, and this change in the spread is the type of thing that’s difficult for an agent to notice due to the lack of a direct source. And because blogs are sort of free flowing, learning that can allow people to learn other things, such as how to calculate the break even point, tax issues or even strategies for agents to use the change to their clients’ advantage.
Ardell wrote, way back in #21: “There was a time when accountants advised first time buyers to close as early as possible in a year for this reason. The cut-off was June 30. . . .. Still, a first time buyer closing in December and paying points, is almost never as good as closing after the first of the year.”
Maybe this is the reason for the decline in volume of almost 50% since June! It isn’t that the economy may be crumbling and that jobs might be lost! It’s that paying points now makes a lot of sense, but it doesn’t make sense to do that anywhere near the end of the year!
Thanks, Kary
I had to write it mainly because of refi request with rates priced at 0 pts or no-cost. Clients were amazed–everything we assume is fairly accurate for pricing doesn’t apply right now (1 point = 0.25% to rate).
Side-tracked is a better term. I would like to keep this post more “on track”…simply because I’ve all ready done one on points/no points and I’ve all ready done this dance with Michael. It gets old.
I don’t think it’s a good idea to assume the readers today are familiar with the past discussions. So while it might be old to you, it could be new and very useful to someone who comes across this piece today.
Micheal and Kary, I’ve answered comment 38 here: http://www.raincityguide.com/2007/03/03/whats-the-point/#comment-330739
This appears to be a debate pitting knowledge against pride.
If you are concerned that points may not be deductible because the borrower doesn’t itemize his/her deductions, the calculators listed above allow the user to enter a tax rate of zero. This eliminates the tax aspects of the calculation.
I wrote all of the calculators mentioned above. The reason they were created was to give people who didn’t have the requisite knowledge the ability to avail themselves of the expertise of people who have a substantial amount of expertise in this area.
The web is the repository for capturing intellectual capital and making it available to people who wish access this expertise without having to pay for it.
I have to come down on the side of Kary and Michael. There is no reason to use “simple” and incorrect answers when “complex” and correct answers are available at no cost on an almost instantaneous basis.
Charles, thanks for joining in. What would you suggest to a consumer who is sitting across the table from a Loan Originator at their office without the ability to use your calculators on the web?
I would say that people who make hasty decisions usually make poor decisions. Most loan originators have access to the web. I would ask the loan originator to run the numbers on a web calculator that performs the type of analysis required. It doesn’t have to be any of the ones I created. When the decision involves many thousands of dollars, I’d rather take the necessary time and get it right.
If you would like to know more about my site or me, we were written up in the Seattle Times. Here is the URL:
http://seattletimes.nwsource.com/html/realestate/2002827196_freedenberg26.html?syndication=rss
Charles,
In this market, where we’ve had significant swings in rates within hours, consumers need to be able to make a quick decision or risk losing a rate at the price/points they’re willing to pay. I’m averaging 3 different rate sheets (per lender) per day.
Ideally they would research upfront, possibly with using the tools you’re providing, but it’s not always that simple. I wish it were!
In the interest in making this kind of information available to real estate professionals and their clients, we now encourage anyone who wishes to do so to link to the calculators on our site. Instructions on how to do so are available to your webmasters on the home page of our site. There is no charge and no downside to doing so.
http://www.decisionaide.com
I am sympathetic to your real world concerns. I, too, wish people had the time and information to make good decisions. You may want to look at calculator 3f on our menu of calculators. With this calculator you could produce 1 – 3 pages of tables that you could give to your clients. It would allow them to come very close to being able to tell what the break-even period would be. The tables display a range of interest rate reductions and closing costs after the user inputs the points they are willing to pay. The output from this calculator might resolve the need to have access to the web or the time to do the analysis.
Thanks, Charles. I cannot select programs/pricing for consumers–the choice is theirs and I wish everyone took the selection of their mortgage and mortgage originator more seriously. I probably talk (or at least try to) out of refinancing than I originate because it often doesn’t make financial sense. With rates at lower levels, many homeowners think they must have “x” for a rate… .
Let me ask you this, do you have a calculator/formula that can solve this scenario:
A married couple with young children who have an interest only ARM that is fixed for 4.5 more years at 5.5% and one spouse has received a lay-off notice. The loan amount is currently $80k over conforming but they’re willing to dip into their savings to obtain a conforming loan.
Rhonda,
We do have a calculator that addresses this issue. It is calculator 3e on our menu. The URL is:
http://www.decisionaide.com/MPCalculators/RefiARMToFRM/RefiARMToFRM.asp
I am assuming the people in your scenario above want to move into a fixed rate mortgage.
Not only do we have calculators that address many of the issues to which your clients may need answers, we also have links to the wonderful articles written by The Mortgage Professor. Our site attempts to be an educational resource that provides both the information and the tools you need to answer many of your mortgage questions. I have been writing financial applications for the past 34 years. In addition to the over 50 calculators running on http://www.decisionaide.com I created 15 of the calculators running on the MSN Money website.
Charles, …I don’t see where it addresses the current employment situation (less one job w/a family that’s typically 2-income) and wanting to use up a significant chunk of savings to have their mortgage qualify as conforming.
This family does want to move to a fixed rate mortgage and to lower their payments. With an interest only ARM of 5.5%, based on their current balance, they would need a fixed rate of less than 3.5% in the “high balance” conforming market…which is not likely to happen. In this economy, I also feel it’s wiser to be more liquid than to plunk your cash towards equity since it’s more challenging (and costly) to get your cash out of your home after you put it in.
What would your calculator say?
I am not a real estate agent or a lender but it seems to me you are trying to qualify your clients for a fixed rate loan in spite of their reduced income. Since only the initial payment on the loan is used for qualifying purposes you may want to look into either a 3-2-1 buydown loan or a Graduated Payment Mortgage with a fixed rate. Either type of loan would make it much easier to stay within either the “front ratio” or the “back ratio” that lenders use to determine the amount of money they will loan – all the while permitting a larger loan to be made. Hope this helps.
Thanks, Charles.
I’m not trying to qualify my clients for anything actually. I’m listening to what their needs or wants are and seeing if I can help them with that.
They want lower payment–the buydown might only provide that temporarily.
Even with a buydown, Freddie Mac will allow the borrowers to qualify at a lower rate with 2-1 buydown (which is expensive BTW)…I don’t believe Fannie Mae will allow this at this time.
I think they’re better off retaining their existing mortgage and not refinancing at this time. They have about 4.5 years to find another job with the fixed period remaining on their ARM that provides them a much lower payment than a 30 year fixed current offers (even if it’s bought down).
Plus, the other factor is that their mortgage is above $417k and they’re willing to use a significant amount of money to put towards their equity to get the loan amount at $417k. I’d rather see folks keep their cash in this climate and not put it towards equity as it’s challenging to extract to cash out of your home once you put it in (with today’s guidelines)…not to mention expensive by having refinance cost (if paid out of pocket or finance by rate).
They have 2 young kids and the buydown would provide increased payments over the following 2 years with a higher payment for the remaining term (unless the refi). The mortgage they currently have as interest only 5.5% equals a 30 year fixed rate of 3.5%. With just under 5 years left on the fixed period term (I’m not their original LO btw) and two young kids, it’s also possible that they may be moving before their rate adjust…at least you can’t rule it out. But all of this type of stuff is what I (and fellow mortgage professionals) converse with our clients about to get them thinking about their mortgage as more than a monthly payment.
Believe it or not, I’d rather set folks up with a mortgage where they don’t have to refinance with me… unless we have an unusal low rate environment.
I think you are correct in recommending that they not refinance now based on all you have told me.
Thanks, Charles. Calculators are great (and necessary) for evaluating a clients needs…knowing their story and plans are equally so.
I’m getting ready for a short vacation (taking the rest of the week off) so that I can be ready for 2009! I was trying to work on an example of what I provide clients to post for you which does factor in amortization, additional principal payments, etc…but I’m running out of time!
Happy New Year.
[...] safe to assume that 1 point (1% of the loan amount) equals 0.25% to mortgage interest rate. Lenders are pricing rates with little to no rebate which not only makes pricing a rate at zero points unattractive or a no-cost mortgage impossible; [...]